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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-20943
INTELLIGROUP, INC.
(Name of Small Business Issuer in Its Charter)
New Jersey 11-2880025
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
517 Route One South, Iselin, New Jersey 08830
(Address of Principal Executive Offices) (Zip Code)
(908) 750-1600
(Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes: X No:
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State Issuer's revenues for fiscal year ended December 31, 1996:
$47,189,000.
State the aggregate market value of the voting stock held by
non-affiliates of the Issuer: $36,289,688 at February 28, 1997 based on the last
sales price on that date.
State the number of shares outstanding of each of the Issuer's classes
of common stock, as of February 28, 1997:
Class Number of Shares
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Common Stock, $.01 par value 10,735,600
Transitional Small Business Disclosure Format
Yes: No: X
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The following documents are incorporated by reference into the Annual
Report on Form 10-KSB: Portions of the Issuer's definitive Proxy Statement for
its 1997 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
Item Page
PART I 1. Business ................................................... 1
2. Properties ................................................. 9
3. Legal Proceedings .......................................... 9
4. Submission of Matters to a Vote of Security Holders ........ 11
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters ........................................ 12
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 13
7. Financial Statements ....................................... 19
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 19
PART III 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the
Exchange Act ............................................... 20
10. Executive Compensation ..................................... 20
11. Security Ownership of Certain Beneficial Owners
and Management ............................................. 20
12. Certain Relationships and Related Transactions ............. 20
PART IV 13. Exhibits, List and Reports on Form 8-K ..................... 21
SIGNATURES ............................................................... 22
EXHIBIT INDEX ............................................................ 24
FINANCIAL STATEMENTS ..................................................... F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Intelligroup, Inc. ("Intelligroup" or the "Company") provides a wide
range of information technology services, including enterprise-wide business
process solutions, systems integration and custom software development based on
leading technologies. The Company has grown rapidly since 1994 when it made a
strategic decision to diversify its customer base by expanding the scope of its
integration and development services, and to utilize SAP America, Inc. ("SAP")
software as a primary tool to implement enterprise-wide business process
solutions. In 1995, the Company became a SAP National Implementation Partner and
also began to utilize Oracle products to diversify its service offerings. The
Company's current agreement with SAP, which is awarded on an annual basis,
expires on December 31, 1997. In February 1997, the Company achieved a National
Logo Partner relationship with SAP, SAP's highest consulting alliance
partnership status, and will begin operating under the terms of such
partnership agreement pending partnership agreement negotiations. The Company's
custom software development services are enhanced by its exclusive access to
qualified and experienced programmers at its affiliated Advanced Development
Center ("ADC") located in Hyderabad, India and connected to the Company's
headquarters in the United States and to certain customer sites by dedicated,
high speed satellite links. The Company provides its services directly to
end-user organizations or as a member of consulting teams assembled by other
information technology consulting firms. The number of customers billed by the
Company has grown substantially from three customers in 1993 to 117 customers
in 1996. The Company's customers are Fortune 1000 and other large and mid-sized
companies, as well as other information technology consulting firms, and
include AT&T, American Cyanamid, Bristol-Myers Squibb, Citibank, Ernst & Young
LLP, IBM, ICS Deloitte and Touche LLP and Price Waterhouse LLP.
The Company was incorporated in New Jersey in October 1987 under the
name Intellicorp, Inc. to provide systems integration and custom software
development. The Company's name was changed to Intelligroup, Inc. in July 1992.
In March 1994, the Company acquired Oxford Systems Inc. ("Oxford") in a
pooling-of-interests transaction. On December 31, 1996, Oxford was merged into
the Company and ceased to exist as an independent entity. The Company's
executive offices are located at 517 Route One South, Iselin, New Jersey 08830
and its telephone number is (908) 750-1600.
"Intelligroup," "4SIGHT," "4SIGHTplus" and the Company's logo are
service marks of the Company and "4SIGHT," "4SIGHTplus," "OPMS" and "OIM" are
trademarks of the Company. All other trade names, trademarks or service marks
referenced herein are the property of their respective owners and are not the
property of the Company.
This Form 10-KSB contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements regarding the Company's intention to
shift to higher margin turnkey management assignments and more complex projects
and to utilize its proprietary implementation methodology in an increasing
number of projects. Such forward-looking statements include risks and
uncertainties, including, but not limited to: (i) the substantial variability
of the Company's quarterly operating results caused by a variety of factors,
many of which are not within the Company's control,
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including (a) seasonal patterns of hardware and software capital spending by
customers, (b) information technology outsourcing trends, (c) the timing, size
and stage of projects, (d) new service introductions by the Company or its
competitors, (e) levels of market acceptance for the Company's services or (f)
the hiring of additional staff; (ii) changes in the Company's billing and
employee utilization rates; (iii) the Company's ability to manage its growth
effectively which will require the Company (a) to continue developing and
improving its operational, financial and other internal systems, as well as its
business development capabilities, (b) to attract, train, retain, motivate and
manage its employees, (c) to continue to maintain high rates of employee
utilization at profitable billing rates and, (d) to maintain project quality,
particularly if the size and scope of the Company's projects increase; (iv) the
Company's ability to maintain an effective internal control structure; (v) the
Company's limited operating history within its current line of business; (vi)
the Company's reliance on a continued relationship with SAP America and the
Company's present status as a SAP National Implementation Partner and its
status as a SAP National Logo Partner, pending partnership agreement
negotiations; (vii) the Company's substantial reliance on key customers and
large projects; (viii) the highly competitive nature of the markets for the
Company's services; (ix) the Company's ability to successfully address the
continuing changes in information technology, evolving industry standards and
changing customer objectives and preferences; (x) the Company's reliance on the
continued services of its key executive officers and leading technical
personnel; (xi) the Company's ability to attract and retain a sufficient number
of highly skilled employees in the future; (xii) uncertainties resulting from
pending litigation matters and from certain pending and potential
administrative and regulatory immigration and tax law matters; and (xiii) the
Company's ability to protect its intellectual property rights. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements.
INDUSTRY BACKGROUND
Many large and mid-sized businesses face a rapidly changing business
environment, intense global competition and accelerating technological change.
To remain competitive, such businesses continually seek to improve the quality
of products and services, lower costs, reduce cycle times and increase value to
customers. Businesses are implementing and utilizing advanced information
technology solutions that enable them to redesign their business processes in
such areas as product development, service delivery, manufacturing, sales and
human resources. The ability of an organization to integrate and deploy
redesigned business processes and related information technologies timely and
cost effectively is critical in the changing business environment.
Concurrently, businesses are migrating from legacy systems running
proprietary software to open systems and client/server architectures based on
personal computers, LANs/WANs, shared databases and packaged software
applications. Such client/server systems, when developed and implemented
appropriately, enable the creation and utilization of more functional and
flexible applications which are critical to the competitive needs of businesses.
Organizations often acquire packaged enterprise-wide business software
applications for client/server systems, including those offered by leading
vendors, such as SAP, Oracle, PeopleSoft or Baan, and
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implement or customize these applications to match their needs. Organizations
also may develop customized software applications designed for their specific
business needs.
Despite the advantages of client/server systems, the complex task of
developing and implementing enterprise-wide, mission-critical, client/server
solutions presents significant challenges for most organizations and often is a
time consuming and costly undertaking. Implementing client/server solutions
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage open systems and
distributed computing environments consisting of multiple computing platforms,
operating systems, databases and networking protocols, and implement packaged
enterprise software applications to support business objectives. Companies also
must continually keep pace with new technological developments which can render
internal information technology skills outmoded. Professionals with the
requisite technology skills often are in short supply and many organizations are
reluctant to expand their internal information systems department for particular
projects. At the same time, external economic factors encourage organizations to
focus on their core competencies and trim workforces in the information
technology management area. Accordingly, organizations often lack sufficient
technical resources necessary to design, develop and implement emerging
information technology solutions on a timely basis.
To support their information technology needs, many businesses
increasingly engage experienced outside specialists to develop and implement
solutions, in shorter timeframes and at lower costs, while reducing
implementation risks. As a result, demand for information technology services
has grown significantly.
THE INTELLIGROUP SOLUTION
Intelligroup provides information technology services to develop and
implement cost-effective client/server business solutions on a timely basis by
combining its expertise in a wide range of technologies and business processes
with its proprietary implementation methodology and development tools. The
Company believes it offers the following advantages:
Expertise in a Wide Range of Technologies: The Company's consultants
have expertise with SAP, Oracle and Baan products and with a wide variety of
leading computing technologies, including client/server architectures,
object-oriented technologies, CASE, distributed database management systems,
micro-to-mainframe connectivity, LAN/WAN and telecommunications technologies.
Since many of the Company's customers have invested in a variety of
technologies, including legacy systems, the Company also develops solutions for
these environments.
Accelerated Implementation Methodology and Toolset: The Company has
developed a proprietary implementation methodology, 4SIGHT, as well as a
software-based implementation toolset, 4SIGHTplus, which are designed to
minimize the time required to develop and implement SAP, Oracle and Baan
solutions for its customers. 4SIGHT and 4SIGHTplus are designed to be technology
independent and modular so that they may be utilized by the Company's
consultants and project managers in other packaged applications development or
software customization projects. The Company only recently began marketing its
new implementation capability, which currently is being utilized in three
projects, each of which
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involves implementation of a SAP solution for a Fortune 500 company in which the
Company has been retained directly by the end-user organization.
Value-Oriented Implementation: The Company provides experienced project
managers and consultants to its customers. The Company believes that its
personnel are effective because of their industry experience. In addition, the
Company has the ability to develop and implement business solutions through its
affiliated offshore ADC in India which gives the Company access to qualified and
experienced programmers at a reduced labor cost.
Customer-Driven Approach: The Company's project managers and
consultants maintain on-going communication and close interaction with customers
to ensure that they are involved in all facets of a project and that the
solutions designed and implemented by the Company meet the customer's needs. The
Company's goal is to provide training to its customers during a project to
achieve high levels of self-sufficiency among its customers' end users and
internal information technology personnel. The Company believes that its ability
to deliver the requisite knowledge base to its customers is critical to
fostering long-term relationships with, and generating referrals from, existing
customers.
INTELLIGROUP SERVICES
Intelligroup provides a wide range of information technology services,
including (i) enterprise-wide business process solutions utilizing SAP R/3, as
well as Oracle and Baan products, which are leading software applications; and
(ii) systems integration and custom software development solutions in a wide
variety of computing environments utilizing leading technologies, including
client/server architectures, object-oriented technologies, CASE, distributed
database management systems, LAN/WAN and telecommunications technologies. The
Company's services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to agreements
which are terminable upon relatively short notice. The Company's custom software
development services are enhanced by its exclusive access to qualified and
experienced programmers at the ADC and connected to the Company's headquarters
in the United States and to certain customer sites by dedicated, high speed
satellite links.
ENTERPRISE-WIDE BUSINESS PROCESS SOLUTIONS
The Company designs, develops, integrates and implements sophisticated
business process solutions utilizing SAP R/3, as well as Oracle and Baan
products, and incorporating best business practices and methods. The Company
builds business solutions for its customers by focusing on each customer's
business objectives and by providing business process re-engineering,
information systems strategic planning, technology implementation, comprehensive
training and organizational change management services. The Company believes
that its expertise in a wide variety of technologies, coupled with its ability
to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
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On-line Project Management System ("OPMS"): The Company utilizes its
OPMS to monitor enterprise-wide business process solutions development projects.
The Company designed OPMS as a SAP subsystem developed in R/3 and installable on
customers' SAP systems. OPMS provides real-time information relating to: the
current stage of development of each program; the number of man-hours spent at
each stage of development; total man-hours spent on development during any
interval of time; programs developed by each programmer; analysis of time spent
on the development project; and technical information, including source code,
documentation and tables used in the system. The Company believes that OPMS also
shortens the turn-around time for program development as it streamlines the
information flow between the Company's offices and customer sites.
Accelerated Implementation Methodology and Software-Based
Implementation Toolset: As a result of its experience in implementing SAP
software, the Company has developed a proprietary methodology, 4SIGHT, for
implementing enterprise business software applications, and 4SIGHTplus, a
software-based implementation toolset. 4SIGHT and 4SIGHTplus, used by the
Company to date solely in projects implementing SAP R/3 are designed to be
portable to other packaged software applications, including those offered by
Oracle, PeopleSoft and Baan, and to be adaptable to the scope of a particular
project. 4SIGHT and 4SIGHTplus have been adapted for Oracle and Baan
implementations. The Company believes that the use of 4SIGHT and 4SIGHTplus
throughout an implementation project may enable its customers to realize
significant savings in time and resources.
SYSTEMS INTEGRATION AND CUSTOM SOFTWARE DEVELOPMENT
The Company provides a broad range of systems integration and
customized application solutions to customers in a wide variety of industries.
The Company is engaged by customers to undertake feasibility studies, systems
engineering, custom software development and tailoring, migration strategies,
systems design, development, testing, integration, implementation, training and
support in a wide variety of computing environments. The Company, in providing
such services, utilizes leading technologies, including client/server
architectures, object-oriented technologies, CASE, distributed database
management systems, LAN/WAN and telecommunications technologies.
ADVANCED DEVELOPMENT CENTER
The Company provides cost-effective, timely custom software development
and tailoring in the United States, at customer sites and through the ADC. The
ADC is connected to the Company's headquarters in the United States and to
certain customer sites by dedicated, high speed satellite links. The ADC is
staffed by 65 consultants as of December 31, 1996. The ADC is owned by
Intelligroup Asia Private Limited ("Intelligroup Asia"), a corporation
organized pursuant to the laws of India and wholly owned by Messrs. Pandey,
Koneru and Valluripalli, three of the principal shareholders of the Company.
The Company and such shareholders have entered into an agreement pursuant to
which the Company will, subject to necessary Indian government approvals,
acquire all of the issued and outstanding shares of Intelligroup Asia for
nominal consideration when such shares may be transferred in accordance with
the laws of India. The ADC is operated for the sole and exclusive use and
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benefit of the Company and all contracts and commercial arrangements of
Intelligroup Asia are subject to prior approval by the Company. The Company has
agreed to provide all of the necessary support and assistance to Intelligroup
Asia, including technical and financial support, subject to certain financial
restrictions set forth in the Company's credit agreement with PNC Bank,
National Association. The ADC is staffed with qualified and experienced
programmers, including those with SAP configuration expertise and SAP's ABAP/4
programming capability. The Company utilizes the programmers at the ADC, in
conjunction with its consultants in the United States who are on site at
customer locations, to provide its customers with savings in development and
implementation costs and time to project completion. All development projects
undertaken by the ADC are monitored by the Company's OPMS. OPMS also minimizes
the turn-around time for program development as it streamlines the information
flow between customer sites and the ADC. The Company intends to utilize the ADC
to provide similar development services to customers that utilize software
applications other than SAP software.
SALES AND MARKETING
The Company historically has generated new sales leads from referrals
from existing customers, and from introductions to potential customers by SAP or
Oracle, which often need to recommend qualified systems integrators to implement
their software products. In addition, the Company has been introduced to
customers by certain of its competitors, such as "Big Six" accounting firms,
which at times require the Company's expertise and ability to deliver qualified
personnel for complex projects. To date, the Company has been able to grow its
customer base without allocating significant resources to its sales and
marketing effort. The Company believes, however, that in order to continue its
growth, it must dedicate an increased level of resources to more focused sales
and marketing efforts. The Company will continue to market to potential
customers with demonstrated needs for the Company's expertise in core
information technologies and solutions such as SAP. To implement this plan, the
Company intends to expand its dedicated sales and marketing force by hiring
several individuals with experience in the industry sectors in which the Company
has prior experience. Toward this end, the Company hired Anthony Knight, its
Vice President, Sales and Marketing, in December 1996.
Among its sales and marketing efforts, the Company's sales force has
presented the Company's expertise at SAPPHIRE, the annual SAP conference for SAP
service providers and end-users, and uses direct marketing techniques. The
Company intends to increase its participation in industry-recognized programs
and trade shows. Most importantly, however, the Company believes that satisfying
customer expectations within budgets and time schedules is critical to gaining
repeat business and obtaining new business from referrals. The Company believes
that it has consistently met customer expectations with respect to budgets and
time schedules.
As of December 31, 1996, the Company's sales and marketing group
consisted of 13 employees in the United States and three in the United Kingdom.
The Company markets and delivers its services to customers on an international
basis through its network of offices. The Company's headquarters in New Jersey
and its branch office in San Jose, California serve the United States market.
Intelligroup Asia serves as the Company's sales agent in Asia and in the Middle
East. In addition, the Company also has established operations in New Zealand
and
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currently has information technology consultants on-site at a customer location.
The Company intends to add sales and marketing capabilities in New Zealand. The
Company also established operations in the United Kingdom in June 1996. In
November 1996, the Company commenced operations in Singapore with the
incorporation of Intelligroup Singapore Private, Ltd. Each of the Company and
Rajkumar Koneru, an Executive Vice President and Director of the Company, own
50% of such company.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company initially meets with a prospective customer until the customer decides
whether to authorize commencement of an engagement.
CUSTOMERS
The Company provides its services directly to Fortune 1000 and other
large and mid-sized companies, many of which have information-intensive,
multinational operations, or as a member of a consulting team assembled by other
information technology consultants, such as "Big Six" accounting firms. The
number of customers billed by the Company has grown substantially from three
customers in 1993 to 117 customers in the year ended December 31, 1996.
The Company's ten largest customers accounted for, in the aggregate,
approximately 61%, 56% and 66% of its revenue in 1994, 1995 and 1996,
respectively. During 1994, AT&T accounted for more than 10% of revenue, while in
1995, Ernst & Young LLP and Price Waterhouse LLP each accounted for more than
10% of revenue. During 1996, Price Waterhouse LLP and Bristol-Myers Squibb each
accounted for more than 10% of revenue. Currently, the Company is engaged in ten
projects for Price Waterhouse LLP. In 1994, 1995 and 1996, 64%, 50% and 44%,
respectively, of the Company's revenue was generated by serving as a member of
consulting teams assembled by leading information technology consulting firms
retained by organizations to manage projects to provide enterprise-wide business
process solutions.
Although the Company has contracts with many of its large customers to
provide its services, in general, such contracts are terminable upon relatively
short notice, typically not more 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.
COMPETITION
The markets for the Company's services are highly competitive. The
Company believes that its principal competitors include the internal information
systems groups of its prospective customers, as well as consulting and software
integration firms, including the "Big Six"
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accounting firms, IBM Global Services, Cambridge Technology Partners, SHL
Systemhouse (a subsidiary of MCI), and Computer Sciences Corporation, and with
software applications vendors, some of which are also customers of the Company.
Many of the Company's competitors have longer operating histories, possess
greater industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into the Company's markets and the Company has
faced, and expects to continue to face, additional competition from new
entrants into its markets.
The Company believes that the principal competitive factors in its
markets include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of services that are competitive with
the Company's services and the extent of its competitors' responsiveness to
customer needs.
The Company believes that it competes based on its expertise in SAP,
Oracle and Baan products and a wide variety of other technologies.
EMPLOYEES
As of December 31, 1996, the Company employed 369 full-time employees,
of whom 321 were engaged as consultants, 16 were engaged in sales and marketing,
and 32 were engaged in finance, administration, and management. Of the total
number of employees, 348 were based in the United States, 11 were based in New
Zealand, 6 were based in the United Kingdom and 4 were based in South Africa,
which office was closed by the Company in January 1997. In addition, the Company
engaged 27 independent contractors to perform information technology services
and has exclusive access to all of the employees of Intelligroup Asia, which
consisted of 65 software developers and 4 administrative personnel at December
31, 1996.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed a
non-competition, non-disclosure and non-solicitation assignment. In addition,
the Company requires that all new employees execute such agreement as a
condition of employment by the Company. The Company believes that it has been
successful in attracting and retaining skilled and experienced personnel. There
is increasing competition for experienced sales and marketing personnel and
technical professionals. The Company's future success will depend in part on its
ability to continue to attract, retain, train and motivate highly qualified
personnel. The Company considers relations with its employees to be good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
accelerated implementation methodology, development tools and other intellectual
property rights. The Company relies upon a combination of trade secret,
nondisclosure and other contractual
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arrangements, and copyright and trademark laws, to protect its proprietary
rights. The Company generally enters into confidentiality agreements with its
employees, consultants and customers, and limits access to and distribution of
its proprietary information. The Company also requires that substantially all of
its employees and consultants assign to the Company their rights in intellectual
property developed while employed or engaged by the Company. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
deter misappropriation of its proprietary information or that the Company will
be able to detect unauthorized use of and take appropriate steps to enforce its
intellectual property rights.
"Intelligroup," "4SIGHT," "4SIGHTplus" and the Company's logo are
service marks of the Company and "4SIGHT," "4SIGHTplus," "OPMS" and "OIM" are
trademarks of the Company. All other trade names, trademarks or service marks
referenced herein are the property of their respective owners and are not the
property of the Company.
ITEM 2. PROPERTIES.
The Company owns no real property and currently leases or subleases
all of its office space. The Company subleases its headquarters in Iselin, New
Jersey, totaling approximately 13,200 square feet. The sublease expires in
November 1999. The Company believes that such headquarters has sufficient space
for its current and anticipated near-term needs. The Company uses such facility
for certain technical and support personnel, sales and marketing,
administrative, finance and management personnel. The Company also leases or
subleases offices for its operations in San Jose, California, and operations in
New Zealand, Singapore and the United Kingdom. In addition, the Company
provides funds to Intelligroup Asia which Intelligroup Asia uses to satisfy its
lease obligations for its offices in India.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently is being investigated by the Immigration and
Naturalization Service (the "INS") concerning possible violations of the
Immigration Reform and Control Act of 1990. Specifically, the INS is
investigating whether the Company improperly employed certain foreign national
individuals prior to their obtaining appropriate work authorization and failed
to complete properly employment eligibility verification forms for all
employees. The Company has and will continue to cooperate fully with the INS. A
notice of intent to fine has not been served upon the Company, and, therefore,
the potential for fines is not known at this time. Upon review of the fines
generally assessed in similar matters, the Company believes, however, that
fines, if any, will not exceed $150,000. The Company anticipates that the INS
investigation may continue for six months or more. There can be no assurance,
however, as to the ultimate amount of fines which may be assessed or the length
of time it may take to conclude the INS investigation. The Company employs many
foreign national individuals and has implemented procedures and controls which
it believes will ensure full compliance with the Immigration Reform and Control
Act of 1990 and related regulations. Toward this end, the Company now employs
in-house counsel to oversee this function.
On February 16, 1996, the Company, as plaintiff, filed a complaint in
the Superior Court of New Jersey, Chancery Division, Middlesex County, against a
former consultant to the
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Company, seven former employees of the Company and Pegasus Systems, Inc.
("Pegasus"), a corporation which currently employs such individuals
(collectively, the "Defendants"). The complaint, which seeks damages and
injunctive relief against the Defendants, alleges, among other things,
misappropriation of proprietary information, unfair competition, tortious
interference, breach of employment agreements, breach of a consulting agreement
between the Company and Pegasus, and breach of duty of loyalty, good faith and
fair dealing. Upon the filing of its complaint, the Company obtained a temporary
restraining order and in May 1996 obtained a preliminary injunction prohibiting
the Defendants from using or disclosing the Company's proprietary information,
prohibiting the Defendants from contacting or soliciting certain of the
Company's customers and prohibiting the Defendants from recruiting or attempting
to recruit the Company's employees, agents or contractors. The preliminary
injunction remains in effect and the Company intends to pursue vigorously
enforcement of the injunction against the Defendants. The Defendants have filed
an answer and counterclaim. Pegasus has asserted a breach of contract
counterclaim against the Company alleging that the Company owes it $129,000 for
consulting services. Pegasus and two of the individual Defendants also asserted
claims against the Company and two of its officers for tortious interference and
defamation. In addition, one of the individual Defendants has asserted that the
Company owes him $70,000 in commissions. In addition to monetary damages the
Defendants seek injunctive relief. The Defendants unsuccessfully sought a
temporary restraining order against the Company. The Company denies the
allegations made and intends to defend vigorously the counterclaims. The Company
does not believe that the outcome of these claims and counterclaims will have a
material effect upon the Company's business, financial condition or results of
operations.
In a related matter, on August 21, 1996, the Company was named as
defendant in a complaint filed in the Delaware Chancery Court, New Castle
County, by plaintiff, Systems America, Inc. ("Systems America"), a computer and
technology consulting firm. Systems America alleged that it subcontracted
Pegasus consultants to perform SAP consulting services for two companies which
are also customers of the Company, and alleged that the Company has interfered
with Systems America's customer relationships, and as a result thereof, Systems
America sustained damages. The complaint sought unspecified monetary damages,
treble damages, attorney fees and injunctive relief against the Company and
alleged deceptive trade practices, defamation and tortious interference with
prospective business or contractual relations by the Company. In September 1996,
the case was removed to Federal District Court in Delaware. The Company denied
the allegations made and filed a motion to dismiss the Systems America
complaint. On November 16, 1996, Systems America and the Company reached an
agreement in principle to settle Systems America's claims against the Company
for an immaterial cash payment by the Company to Systems America. A settlement
in accordance with such agreement in principle was subsequently executed by each
of the Company and Systems America. Systems America's complaint was subsequently
dismissed with prejudice and mutual releases were executed by the parties.
Oxford Systems Inc., a New Jersey corporation and a wholly-owned
subsidiary of the Company until December 31, 1996 ("Oxford"), on which date
Oxford was merged into the Company and ceased to exist as an independent entity,
is named as a defendant in a civil complaint that was filed on June 8, 1995 by
Design Strategy Corp. ("Design Strategy"), in New
-10-
<PAGE> 14
York State Supreme Court in the County of New York. Design Strategy alleges that
another named defendant, Citibank, N.A. ("Citibank"), contracted with Design
Strategy for database administration services. Design Strategy, which is
currently seeking monetary relief, claims that Citibank and Oxford conspired to
deprive it of commissions, tortiously interfered with contract, engaged in
unfair competition, damaged its reputation and misappropriated services. Design
Strategy settled its claims against Citibank. The Company denies the allegations
made and intends to continue to defend vigorously such action. The Company does
not believe that the outcome of the action will have a material effect upon the
Company's business, financial condition or results of operations.
There is no other material litigation pending to which the Company is a
party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-11-
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Common Stock has been quoted on the Nasdaq National Market (the
"NNM") under the symbol "ITIG" since September 27, 1996 when the Company
conducted its initial public offering. The following table sets forth, for each
of the quarters ended September 30, 1996 and December 31, 1996, respectively,
the high and low sale prices per share of Common Stock as quoted on the NNM.
The prices shown represent quotations among securities dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
September 30, 1996 $13 7/8 $12 5/8
December 31, 1996 $19 3/4 $11
</TABLE>
As of February 28, 1997, the approximate number of holders of record of
the Common Stock was 90 and the approximate number of beneficial holders of the
Common Stock was 700.
The Company has never declared or paid any dividends on its capital
stock. The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
Furthermore, the Company's credit arrangement with PNC Bank, National
Association, which expires on January 22, 1999, contains, among other
provisions, a covenant which prohibits the Company from paying cash dividends or
making other distributions of assets to shareholders.
All information relating to the Common Stock of the Company in this
Annual Report on Form 10-KSB reflects a 81,351.1111-for-1 stock split of the
Common Stock effected July 12, 1996, prior to the Company's initial public
offering of its Common Stock in September 1996. Within the past three years,
the Company issued and sold certain unregistered securities as follows: (i) on
March 31, 1994, the Company issued an aggregate of 8,135,111 shares of Common
Stock to Messrs. Koneru and Valluripalli in exchange for all of the issued and
outstanding shares of Oxford; and (ii) on April 19, 1996, the Company issued
and sold five-year 9.0% subordinated debentures in the aggregate principal
amount of $6.0 million to Summit Ventures IV, L.P. and Summit Investors III,
L.P. with warrants to purchase up to 20.8% of the Common Stock of the Company.
Such warrants were exercised for an aggregate of 1,364,000 shares of Common
Stock upon effectiveness of the Company's registration statement relating to
its initial public offering on September 26, 1996. No underwriter was employed
by the Company in connection with the issuance and sale of the restricted
securities described in clauses (i) and (ii) above. The Company claims that the
issuance and sale of all of such securities were exempt from registration under
Section 4(2) of the Securities Act as transactions not involving a public
offering. Appropriate legends were affixed to the certificates evidencing such
securities. All recipients had adequate access to information relating to the
Company. There were no other unregistered securities sold by the Company within
the past three years.
-12-
<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company provides a wide range of information technology services,
including enterprise-wide business process solutions, systems integration and
custom software development based on leading technologies. The Company has grown
rapidly since 1994 when it made a strategic decision to diversify its customer
base by expanding the scope of its integration and development services and to
utilize SAP software as a primary tool to implement enterprise-wide business
process solutions. In 1995, the Company became a SAP National Implementation
Partner and also began to utilize Oracle products to diversify its service
offerings. To achieve SAP National Implementation Partner status, the Company
was required to demonstrate: (1) customer satisfaction with the Company's
SAP-related services; (2) its capabilities and expertise with SAP software; and
(3) that its employee base included an appropriate number of SAP-experienced
consultants. SAP National Implementation Partner status is awarded by SAP on an
annual basis pursuant to contract. The Company's current contract expires on
December 31, 1997. Contract renewal is within SAP's discretion and is expected
to be based on, among other things, the following subjective criteria set forth
in the Company's contract: (1) customer satisfaction with the Company's
performance and ability to deliver services in a timely and cost-effective
manner; (2) the quality of the Company's personnel performing SAP-related
services; (3) the number and scope, without assigning any dollar amounts in the
contract, of SAP R/3 projects; (4) the thoroughness of the Company's training
programs for its employees; (5) achievement of mutually agreed upon goals; and
(6) the level of effective communication between the Company and SAP. The
contract may be terminated at any time, upon a determination by SAP that the
Company is offering potential customers of SAP R/3 products other products that
are in competition with such SAP R/3 products. Such termination provision,
however, does not preclude the Company from implementing competing or
potentially competing products that have been purchased by the Company's
customers from other suppliers. The contract contains no minimum revenue
requirements or cost sharing arrangements and does not provide for commissions
or royalties to either party. In February 1997, the Company achieved a National
Logo Partner relationship with SAP, SAP's highest consulting alliance
partnership status, and will begin operating under the terms of such
partnership agreement pending partnership agreement negotiations.
The Company generates revenue from professional services rendered to
customers and revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants
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<PAGE> 17
at contracted rates. Where contractual provisions permit, customers also are
billed for reimbursement of expenses incurred by the Company on the customers'
behalf.
The Company has derived and believes that it will continue to derive a
significant portion of its revenue from a limited number of customers and
projects. For the years ended December 31, 1995 and 1996, the Company's ten
largest customers accounted for approximately 56% and 66% of its revenue,
respectively. In 1995, Ernst & Young LLP and Price Waterhouse LLP each accounted
for more than 10% of revenue. During 1996, Price Waterhouse LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. For the years
ended December 31, 1995 and 1996, 50% and 44%, respectively, of the Company's
revenue was generated by serving as a member of consulting teams assembled by
other information technology consulting firms. There can be no assurance that
such information technology consulting firms will continue to engage the Company
in the future at current levels of retention, if at all. During the years ended
December 31, 1995 and 1996, 69% and 74%, respectively, of the Company's total
revenue was derived from projects in which the Company implemented software
developed by SAP.
The Company's most significant cost is project personnel expenses,
which consist of consultant salaries, benefits and payroll-related expenses.
Thus, the Company's financial performance is based primarily upon billing margin
(billable hourly rate less the cost to the Company of a consultant on an hourly
basis) and personnel utilization rates (billable hours divided by paid hours).
The Company believes that turnkey project management assignments typically carry
higher margins. The Company intends to accelerate a shift to such higher-margin
turnkey management assignments and more complex projects by leveraging its
reputation, existing capabilities, proprietary implementation methodology,
development tools and offshore development capabilities with expanded sales and
marketing efforts and new service offerings to develop turnkey project sales
opportunities with existing customers and to expand its market to new customers.
The Company's inability to accelerate a shift to higher-margin turnkey
management assignments and more complex projects may adversely impact the
Company's future growth. Although the Company expects that it will utilize its
proprietary implementation methodology in an increasing number of projects,
there can be no assurance that the Company will be engaged to do so.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an affiliated operation in India, the ADC, and
in 1995, established a sales office in California. In addition, from 1994 to
date, the Company has incurred significant expenses to develop proprietary
development tools and 4SIGHT, its proprietary accelerated implementation
methodology. Commencing in 1995, the Company has been increasing its sales
force and its marketing, finance, accounting and administrative staff. The
Company employed 48 such personnel as of December 31, 1996 as compared to eight
such personnel as of January 1, 1995.
-14-
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
<S> <C> <C>
Revenue...................................................................... 100.0% 100.0%
Cost of sales................................................................ 71.2 81.4
------- -------
Gross profit............................................................. 28.8 18.6
Selling, general and administrative expenses................................. 21.0 18.1
------- -------
Operating income......................................................... 7.8 0.5
Factor fees / Interest expense............................................... 2.6 4.8
------- -------
Income (loss) before provision for income taxes and extraordinary charge..... 5.2 (4.3)
Provision for income taxes................................................... 1.1 --
------- -------
Income (loss) before extraordinary charge.................................... 4.1 (4.3)
Extraordinary charge, net of income tax benefit.............................. 2.4 --
------- -------
Net income (loss)............................................................ 1.7% (4.3)%
======= =======
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased by 91.9%, or $22.6 million, from $24.6
million in 1995 to $47.2 million in 1996. This increase was attributable
primarily to increased demand for the Company's SAP-related consulting services
and, to a lesser extent, to increased demand for the Company's systems
integration and custom software development services.
Gross profit. The Company's cost of sales includes primarily the cost
of salaries to consultants and related employee benefits and payroll taxes. The
Company's cost of sales increased by 67.8%, or $13.6 million, from $20.0 million
in 1995 to $33.6 million in 1996. The increase was due to increased personnel
costs resulting from the hiring of additional consultants to support the
Company's significant increase in demand for the Company's services. The
Company's gross profit increased by 197.4%, or $9.0 million, from $4.6 million
in 1995 to $13.6 million in 1996. Gross profit margin increased from 18.6% of
revenue in 1995 to 28.8% of revenue in 1996. The increase in such gross profit
margin was attributable primarily to the fact that revenue increased at a faster
rate than cost of sales which resulted from a combination of improved billing
margins and greater consultant utilization.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, sales
person compensation, travel and entertainment, the costs associated with the ADC
and related development costs and professional fees. Selling, general and
administrative expenses increased by 122.6%, or $5.4 million, from $4.5 million
in 1995 to $9.9 million in 1996, and increased as a percentage of revenue from
18.1% to 21.0% of revenue in 1995 and 1996, respectively. The increases in such
expenses in absolute dollars and as a percentage of revenue were due primarily
to the expansion of the Company's sales and marketing activities in 1995 and
1996, the additional accounting and financial personnel added in 1996 and
increased travel and entertainment expenses due to the
-15-
<PAGE> 19
growth of the business and the employee base. These expenses were incurred to
support the continued revenue growth of the Company. In 1996, selling, general
and administrative expenses also included the Company's operations in the United
Kingdom which were established during the year.
Factor fees/Interest expense. Factor fees were the charges incurred by
the Company to finance its accounts receivable. The rapid increase in the
Company's business and revenue resulted in working capital requirements and the
Company utilized its increasing accounts receivable base as a source of
liquidity to obtain financing because the Company was unable to obtain more
traditional financing. See "--Liquidity and Capital Resources." The Company also
incurred interest expense in connection with subordinated debentures beginning
in April 1996. Factor fees and interest expense increased by 5.1%, or $60,000,
from 1995 to 1996 but decreased as a percentage of revenue from 4.8% to 2.6% in
1995 and 1996, respectively. Although the volume of accounts receivable financed
increased as a result of the revenue increase, the Company was able to fund much
of its working capital requirements during 1996 with the proceeds from the
subordinated debentures, which debentures carried an interest rate lower than
that charged by the factor. In addition, the Company established a collections
department in the first quarter of 1996. Slow accounts receivable turnover in
1995 contributed to increased factor fees in that year. On October 10, 1996, the
Company repaid the factor with a portion of the proceeds from the initial public
offering, approximately $4.4 million, consisting of all amounts outstanding
under the agreement with its factor and terminated its factor agreement.
BACKLOG
The Company generally enters into written contracts with its customers
at the time it commences work on a project. These written contracts contain
varying terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
LIQUIDITY AND CAPITAL RESOURCES
On October 2, 1996, the Company consummated an initial public offering
(the "Offering") of 2,846,250 shares of its Common Stock (which includes 371,250
additional shares to cover over-allotments) at a price of $10.00 per share, of
which 2,050,000 shares were issued and sold by the Company and 796,250 shares,
including the additional shares to cover over-allotments, were sold by certain
selling shareholders (the "Selling Shareholders"). The net proceeds to the
Company from such Offering, after underwriting discounts and commissions and
other expenses of the Offering, were approximately $17.8 million. The Company
did not receive any proceeds from the sale of shares sold by the Selling
Shareholders.
Prior to the Offering, the Company had funded its operations primarily
from factoring of accounts receivable. Cash used in operating activities was
$2.3 million and $4.3 million in 1995
-16-
<PAGE> 20
and 1996, respectively, and resulted primarily from the growth in accounts
receivable and unbilled services.
The Company had working capital of $15.7 million at December 31, 1996.
In accordance with investment guidelines approved by the Company's
Board of Directors, cash balances in excess of those required to fund operations
have been invested in short-term U.S. Treasury securities and commercial paper
with a credit rating no lower than A1/P1.
The Company invested $142,000 and $1.1 million in computer equipment
and furniture in 1995 and 1996, respectively. Although there are no material
commitments for capital expenditures currently outstanding, the Company expects
to have capital expenditures in 1997 in an amount approximating the 1996 level.
The Company's factoring agreement with Access Capital, Inc. (the
"Factor") required that the Company offer all of its trade accounts receivable
to the Factor for financing; however, the Factor was under no obligation to
accept any or all of such receivables. Due to a combination of factors,
including the rapid growth of the Company, the lack of available tangible
security to utilize as collateral and the absence of historical operating
profits prior to 1996, the Company was unable to obtain more traditional
financing. On October 10, 1996, the Company repaid approximately $4.4 million,
consisting of all amounts outstanding under the agreement with the Factor and
terminated the Factor agreement.
In March 1996, in anticipation of the debenture financing described
below, the Company obtained a $750,000 line of credit, payable on demand, from a
bank. The line of credit carried interest at the federal funds rate plus 1%.
Borrowings under the line totaled $300,000 in April 1996, when the Company
repaid all amounts outstanding under such line in connection with the debenture
financing described below. The line of credit was terminated in accordance with
the terms of such debenture financing.
In April 1996, the Company issued and sold five-year 9% subordinated
debentures in the aggregate principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated debentures were issued
to raise money for working capital and general corporate purposes, to repurchase
from the then-current shareholders, Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066 shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under the $750,000 credit facility
described above and to satisfy approximately $358,000 of cash overdrafts. Upon
receipt of the net proceeds from the Offering in October 1996, the Company
prepaid approximately $6.3 million, representing all amounts outstanding under
such debentures, including interest. As a result of such prepayment, the
Company incurred an extraordinary charge of $1,148,000, net of an income tax
benefit of $296,000.
Subsequent to December 31, 1995, the Company determined that it had
unrecorded and unpaid federal and state payroll-related taxes for certain
employees. As a result of the Company's voluntary disclosure to the Internal
Revenue Service of certain unpaid tax liabilities, on June 5, 1996, the Company
received an audit assessment from the Internal Revenue Service
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<PAGE> 21
for unpaid 1994 and 1995 federal income tax withholding, FICA and FUTA taxes in
the aggregate amount of $814,000, of which approximately $800,000 was paid in
August 1996. No interest or penalties were assessed. Reserves, aggregating $1.0
million, including the amount of the Internal Revenue Service audit assessment,
were recorded at December 31, 1995. No assurance may be given, however, that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal shareholders, Messrs. Pandey, Koneru and
Valluripalli, have agreed to indemnify the Company for any and all losses which
the Company may sustain, in excess of the $1.0 million reserve, net of any tax
benefits realized by the Company, arising from or relating to federal or state
tax, interest or penalty payment obligations resulting from the subject matter.
The Company believes that its failure to record and pay 1994 and 1995 federal
and state payroll-related taxes for certain employees resulted from a
combination of factors, including lack of internal controls, lack of financial
expertise and oversight, and the Company's reliance on outside professional
advice. The Company hired a Chief Financial Officer in January 1996 who has
implemented accounting and financial controls to ensure the Company's compliance
with payroll tax regulations.
In January 1997, the Company entered into a two-year credit agreement
with PNC Bank, National Association (the "Bank"). The credit facility with the
Bank has two components comprised of (i) a revolving line of credit pursuant to
which the Company may borrow up to $7.5 million (at the Bank's prime rate plus
1/4 of 1% per annum) to finance the working capital needs of the Company and
(ii) equipment term loans pursuant to which the Company may borrow up to an
aggregate of $350,000 (at the Bank's prime rate plus 3/4 of 1% per annum) to
purchase equipment. The credit limit of the revolving line of credit is the
lesser of $7.5 million or the Company's borrowing base. Such borrowing base is
70% of the net face amount of the Company's eligible accounts receivable at the
time of any loan under the revolving line of credit. The credit agreement
contains covenants which require the Company to (i) maintain its working capital
during the year at no less than 90% of the working capital at the end of the
immediately preceding fiscal year and at the end of each fiscal year at no less
than 105% of its working capital at the end of the immediately preceding fiscal
year; and (ii) maintain its tangible net worth during the year at no less than
95% of its tangible net worth at the end of the immediately preceding fiscal
year and at the end of each fiscal year at no less than 108% of tangible net
worth at the end of the immediately preceding fiscal year. The Company's
obligations under the credit agreement are collateralized by substantially all
of the Company's assets, including its accounts receivable and intellectual
property. The Company's obligations under the credit facility are payable at the
expiration of such facility on January 22, 1999. As of February 28, 1997, there
were no amounts outstanding under the revolving line of credit and no equipment
term loans outstanding. The foregoing information relating to the Company's
credit facility with the Bank is qualified in its entirety by reference to the
complete text of the related documents which are filed as exhibits hereto.
The Company believes that its available funds, together with current
credit arrangements and the cash flow expected to be generated from operations,
will be adequate to satisfy its current and planned operations for at least the
next 24 months.
-18-
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required to be filed pursuant to this Item 7
are included in this Annual Report on Form 10-KSB. A list of the financial
statements filed herewith is found at "Item 13. Exhibits, List, and Reports on
Form 8-K."
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 15, 1995, the Company retained Arthur Andersen LLP to act
as its independent public accountants and informed the prior auditors, Amper,
Politziner & Mattia, the Company's independent accountants since January 1995,
of its decision. The former auditor's report on the Company's financial
statements for the year ended December 31, 1994 does not cover the financial
statements of the Company included in this Annual Report on Form 10-KSB. In
connection with its audit of the consolidated financial statements for the year
ended December 31, 1994, there were no disagreements with the prior auditors on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. The prior auditors' report on the
Company's consolidated financial statements for the year ended December 31, 1994
contained no adverse opinion or disclaimer of opinion and was not modified or
qualified as to uncertainty, audit scope, or accounting principles. The decision
to change accountants was approved by the Board of Directors of the Company. The
prior auditors furnished the Company with a letter addressed to the Securities
and Exchange Commission (the "SEC") stating their agreement with the above
statements. Such letter appeared as Exhibit 16 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-5981), declared effective by the
SEC on September 26, 1996. Prior to retaining Arthur Andersen LLP, the Company
had not consulted with Arthur Andersen LLP regarding accounting principles.
-19-
<PAGE> 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information relating to the Company's directors, nominees for
election as directors and executive officers under the headings "Election of
Directors" and "Executive Officers" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 10. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the
Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders
is incorporated herein by reference to such proxy statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
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<PAGE> 24
PART IV
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 24.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's fourth fiscal
quarter.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 28th day of
March, 1997.
INTELLIGROUP, INC.
By:/s/ Ashok Pandey
------------------------
Ashok Pandey, President
and Chief Executive Officer
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<PAGE> 26
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ashok Pandey President and Chief Executive Officer and March 28, 1997
- ------------------------------- Director (principal executive officer)
Ashok Pandey
/s/ Rajkumar Koneru Executive Vice President and Director March 28, 1997
- -------------------------------
Rajkumar Koneru
/s/ Nagarjun Valluripalli Executive Vice President and Director March 28, 1997
- -------------------------------
Nagarjun Valluripalli
/s/ Robert M. Olanoff Chief Financial Officer, Secretary and March 28, 1997
- ------------------------------- Treasurer (principal financial and
Robert M. Olanoff accounting officer)
/s/ Klaus Besier Director March 28, 1997
- -------------------------------
Klaus Besier
/s/ David Finley Director March 28, 1997
- -------------------------------
David Finley
/s/ Kevin P. Mohan Director March 28, 1997
- -------------------------------
Kevin P. Mohan
/s/ Thomas S. Roberts Director March 28, 1997
- -------------------------------
Thomas S. Roberts
</TABLE>
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<PAGE> 27
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Merger of the Company and its wholly owned
subsidiary Oxford Systems Inc.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Debenture and Warrant Purchase Agreement dated April 10, 1996 by
and between the Company, Messrs. Pandey, Koneru and Valluripalli
and Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.2* Warrant Agreement dated April 10, 1996 by and between the Company
and Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.3* Registration Rights Agreement dated April 10, 1996 by and between
the Company and Summit Ventures IV, L.P. and Summit Investors III,
L.P.
4.4* Redemption Agreement dated April 10, 1996 by and between the
Company and Summit Ventures IV, L.P. and Summit Investors III, L.P.
4.5* Shareholders Agreement dated April 10, 1996 by and between the
Company, Messrs. Pandey, Koneru and Valluripalli and Summit
Ventures IV, L.P. and Summit Investors III, L.P.
10.1*# 1996 Stock Plan of the Company.
10.2*# 1996 Non-Employee Director Stock Option Plan.
10.3*# Employment Agreement dated June 1, 1996 between the Company and
Ashok Pandey.
10.4*# Employment Agreement dated June 1, 1996 between the Company and
Rajkumar Koneru.
10.5*# Employment Agreement dated June 1, 1996 between the Company and
Nagarjun Valluripalli.
10.6*# Employment Agreement dated June 1, 1996 between the Company and
Robert M. Olanoff, together with Change in Control Severance Pay
Agreement dated June 1, 1996 between the Company and Robert M.
Olanoff.
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<PAGE> 28
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.7*# Employment Agreement dated June 1, 1996 between the Company and Paul
Coombs. (See Exhibit 10.21)
10.8* Form of Indemnification Agreement entered into by the Company and
each of its Directors and officers.
10.9* Sublease Agreement between Micrognosis, Inc., as sublessor, the
Company, as sublessee, with master lease.
10.10* Employee's Invention Assignment and Confidentiality Agreement.
10.11* R/3 National Implementation Partner Agreement between SAP America,
Inc. and the Company dated January 13, 1995. See Exhibit 10.19.
10.12* Services Provider Agreement by and between Oracle Corporation and
the Company dated July 26, 1994. See Exhibit 10.20.
10.13* Amended and Restated Agreement by Messrs. Pandey, Koneru and
Valluripalli dated July 16, 1996 to indemnify the Company for
certain losses.
10.14* Factoring Agreement by and between Access Capital, Inc. and the
Company dated as of October 20, 1995, with exhibits. See Exhibit
10.17.
10.15* Agreement of Waiver and Consent dated as of June 4, 1996 by and
among the Company, certain shareholders of the Company, and Summit
Ventures IV, L.P. and Summit Investors III, L.P., with Amendment
No. 1 thereto.
10.16* Agreement by and between the Company and Intelligroup Asia Private
Limited ("Intelligroup Asia") relating to operational control of
Intelligroup Asia, with related agreements.
10.17 Letter agreements terminating factoring arrangement by and between
each of the Company and Oxford Systems Inc., and Access Capital,
Inc. dated October 10, 1996.
10.18 Loan and Security Agreement between PNC Bank, National Association
and the Company dated as of January 22, 1997, and related documents.
-25-
<PAGE> 29
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.19 R/3 National Implementation Partner Agreement by and between SAP
America, Inc. and the Company dated March 26, 1996.
10.20 Amendment No. 1 to Services Provider Agreement by and between
Oracle Corporation and the Company dated December 30, 1996.
10.21# Amendment No. 1, dated February 18, 1997, to Employment Agreement
dated June 1, 1996, between the Company and Paul Coombs. (See
Exhibit 10.7)
11 Statement re: Computation of per share earnings.
16* Letter re: Change of Certifying Accountant.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule for the year ended December 31, 1996.
- ----------
* Incorporated by reference to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective by the Securities and
Exchange Commission on September 26, 1996.
# A management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 13(a) of Form 10-KSB.
All other exhibits filed herewith.
-26-
<PAGE> 30
INTELLIGROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 ............ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 ........................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1996 and 1995 ........................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 ........................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
F-1
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Intelligroup, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
February 5, 1997
F-2
<PAGE> 32
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................ $ 7,479,000 $ 71,000
Restricted cash held in escrow ....................................... -- 100,000
Accounts receivable, less allowance for doubtful accounts of $546,000
and $531,000 at December 31, 1996 and 1995, respectively ........... 8,538,000 4,729,000
Unbilled services .................................................... 2,916,000 1,569,000
Deferred income taxes ................................................ 331,000 --
Other current assets ................................................. 492,000 3,000
------------ ------------
Total current assets ............................................. 19,756,000 6,472,000
Property and equipment, less accumulated depreciation of $243,000 and
$99,000 at December 31, 1996 and 1995, respectively .................. 1,281,000 282,000
Other assets ............................................................ 225,000 30,000
------------ ------------
$ 21,262,000 $ 6,784,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ..................................................... $ 406,000 $ 1,480,000
Accrued payroll and related taxes .................................... 1,814,000 2,568,000
Accrued expenses and other liabilities ............................... 1,268,000 532,000
Income taxes payable ................................................. 535,000 --
Cash overdraft ....................................................... -- 83,000
Line of credit ....................................................... -- 45,000
Loans from factors ................................................... -- 3,343,000
Current portion of obligations under capital leases .................. 20,000 18,000
------------ ------------
Total current liabilities ........................................ 4,043,000 8,069,000
------------ ------------
Obligations under capital leases, less current portion .................. 57,000 81,000
------------ ------------
Commitments and contingencies
Shareholders' Equity (Deficit)
Preferred stock ...................................................... -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 10,735,600
and 12,202,666 issued and outstanding at December 31,
1996 and 1995, respectively ........................................ 107,000 122,000
Additional paid-in capital ........................................... 19,201,000 --
Accumulated deficit .................................................. (2,146,000) (1,488,000)
------------ ------------
Total shareholders' equity (deficit) ............................. 17,162,000 (1,366,000)
------------ ------------
$ 21,262,000 $ 6,784,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 33
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue ......................................................... $47,189,000 $24,589,000
Cost of sales ................................................... 33,605,000 20,021,000
----------- -----------
Gross profit ............................................. 13,584,000 4,568,000
Selling, general and administrative expenses .................... 9,908,000 4,452,000
----------- -----------
Operating income ......................................... 3,676,000 116,000
----------- -----------
Other expenses:
Interest expense, net ........................................ 236,000 4,000
Factor charges ............................................... 999,000 1,171,000
----------- -----------
1,235,000 1,175,000
----------- -----------
Income (loss) before provision for income taxes and extraordinary
charge ....................................................... 2,441,000 (1,059,000)
Provision for income taxes ...................................... 500,000 --
----------- -----------
Income (loss) before extraordinary charge ....................... 1,941,000 (1,059,000)
Extraordinary charge-Loss on early extinguishment of debt, net of
income tax benefit of $296,000 ............................... 1,148,000 --
----------- -----------
Net income (loss) ............................................... $ 793,000 $(1,059,000)
=========== ===========
Earnings (loss) per share:
Income (loss) before extraordinary charge .................... $ 0.18 $ (0.08)
Extraordinary charge, net of income tax benefit .............. (0.11) --
----------- -----------
Net income (loss) per share .............................. $ 0.07 $ (0.08)
=========== ===========
Shares used in per share calculation ......................... 10,989,000 13,737,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 34
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDERS'
COMMON STOCK PAID IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ...... 12,202,666 $ 122,000 $ -- $ (429,000) $ (307,000)
Net loss .......................... -- -- -- (1,059,000) (1,059,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ...... 12,202,666 122,000 -- (1,488,000) (1,366,000)
Net income ........................ -- -- -- 793,000 793,000
Repurchase and retirement of common
stock ............................. (4,881,066) (49,000) -- (1,451,000) (1,500,000)
Issuance of common stock, net of
related costs ..................... 2,050,000 20,000 17,815,000 -- 17,835,000
Exercise of warrants .............. 1,364,000 14,000 1,386,000 -- 1,400,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ...... 10,735,600 $ 107,000 $ 19,201,000 $ (2,146,000) $ 17,162,000
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 35
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 793,000 $ (1,059,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................ 214,000 51,000
Provision for doubtful accounts .......................... 590,000 411,000
Extraordinary charge ..................................... 1,444,000 --
Deferred income taxes .................................... (331,000) --
Changes in assets and liabilities:
Restricted cash deposited in escrow ...................... 100,000 (100,000)
Accounts receivable ...................................... (4,399,000) (3,339,000)
Unbilled services ........................................ (1,347,000) (1,386,000)
Other current assets ..................................... (489,000) 27,000
Other assets ............................................. (197,000) (30,000)
Cash overdraft ........................................... (83,000) 83,000
Accounts payable ......................................... (1,074,000) 1,480,000
Accrued payroll and related taxes ........................ (754,000) 1,035,000
Income taxes payable ..................................... 535,000 --
Accrued expenses and other liabilities ................... 736,000 478,000
------------ ------------
Net cash used in operating activities ................ (4,262,000) (2,349,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ........................... (1,143,000) (142,000)
------------ ------------
Cash flows from financing activities:
Proceeds from subordinated debentures and warrants, net of
issuance costs ............................................. 5,888,000 --
Repayment of subordinated debentures ......................... (6,000,000) --
Repurchase of common stock ................................... (1,500,000) --
Proceeds from issuance of common stock, net of issuance costs 17,835,000 --
Loans from (repayments to) factors, net ...................... (3,343,000) 2,349,000
Proceeds from (repayments of) lines of credit, net ........... (45,000) 6,000
Principal payments under capital leases ...................... (22,000) (2,000)
------------ ------------
Net cash provided by financing activities ............ 12,813,000 2,353,000
------------ ------------
Net increase (decrease) in cash and cash equivalents . 7,408,000 (138,000)
Cash and cash equivalents at beginning of period ................ 71,000 209,000
------------ ------------
Cash and cash equivalents at end of period ...................... $ 7,479,000 $ 71,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................... $ 1,264,000 $ 1,175,000
============ ============
Noncash transactions:
Capital lease obligations .................................... $ -- $ 102,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 36
INTELLIGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including enterprise-wide business
process solutions, systems integration and custom software development based on
leading technologies. The Company markets its services to a wide variety of
industries primarily in the United States. The majority of the Company's
business is with large established companies, including consulting firms,
serving numerous industries.
Principles of Consolidation and Use of Estimates
The accompanying financial statements include the accounts of
Intelligroup, Inc. and its majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets (five years). Costs of maintenance and
repairs are charged to expense as incurred.
Revenue Recognition
The Company generates revenue from professional services rendered.
Revenue is recognized as services are performed with the corresponding cost of
providing those services reflected as cost of sales. Substantially all customers
are billed on a per diem basis whereby actual time is charged directly to the
customer. Billings to customers for out-of-pocket expenses are recorded as a
reduction of expenses incurred. Unbilled services at December 31, 1996 and
F-7
<PAGE> 37
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
1995 represent services provided which are billed subsequent to year-end. All
such amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $590,000 and $411,000 in 1996 and 1995,
respectively. Credit is granted to substantially all customers on an unsecured
basis.
Recoverability of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its long-lived
assets from expected future cash flows from its operations on an undiscounted
basis.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which requires
companies to measure employee stock compensation plans based on the fair value
method using an option pricing model or to continue to apply APB No. 25,
"Accounting for Stock Issued to Employees," and provide pro forma footnote
disclosures under the fair value method. The Company continues to apply APB No.
25 and provides pro forma disclosures. (See Note 7).
Concentrations
For the years ended December 31, 1996 and 1995, approximately 74% and
69% of revenue, respectively, was derived from projects in which the Company's
personnel implemented software developed by SAP. The Company's future success in
its SAP-related consulting services depends largely on its continued
relationship with SAP and on its continued status as a SAP National
Implementation Partner, which was first obtained in 1995. The Company's
agreement with SAP (the "Agreement") is awarded on an annual basis. The
Company's current contract expires on December 31, 1997. The Agreement contains
no minimum revenue requirement or cost sharing arrangements and does not
provide for commissions or royalties to either party. In February 1997, the
Company achieved a National Logo Partner relationship with SAP, SAP's highest
consulting alliance partnership status, and will begin operating under the
terms of such partnership agreement pending partnership agreement negotiations.
F-8
<PAGE> 38
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
A substantial portion of the Company's revenue is derived from projects
in which an information technology consulting firm other than the Company has
been retained by the end-user organization to manage the overall project. For
years ended December 31, 1996 and 1995, 44% and 50%, respectively, of the
Company's revenue was generated by serving as a member of consulting teams
assembled by other information technology consulting firms.
One customer accounted for approximately 13% of revenue in 1996.
Accounts receivable due from this customer was $2,268,000 as of December 31,
1996. Another customer accounted for approximately 20% and 10% of revenue for
1996 and 1995, respectively. Accounts receivable due from this customer was
$988,000 and $611,000 as of December 31, 1996 and 1995, respectively. Another
customer accounted for approximately 12% of revenue for 1995. Accounts
receivable due from this customer was $1,400,000 as of December 31, 1995.
Foreign Operations
Revenues from foreign operations were not significant in 1996 and 1995.
Translation effects were not material.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which utilizes the liability method and results in the determination of
deferred taxes based on the estimated future tax effects of differences between
the financial statement and tax basis of assets and liabilities, using enacted
tax rates currently in effect. The principal differences arise from the
reporting of income and expenses under the accrual method for financial
statement purposes versus the cash basis method for income tax purposes. (See
Note 5).
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period after giving retroactive effect to the stock split. (See Note 8).
Pursuant to the requirements of the Securities and Exchange Commission, stock
options and warrants issued by the Company during the twelve months immediately
preceding its initial public offering (see Note 8) have been included in
computing net income (loss) per share as if they were outstanding for all
periods using the treasury stock method.
Financial Instruments
Financial instruments that potentially subject the Company to credit
risk consist principally of trade receivables and unbilled services. Management
of the Company believes the fair value of accounts receivable and unbilled
services approximates the carrying value.
F-9
<PAGE> 39
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Vehicles ............................... $ 26,000 $ 26,000
Furniture .............................. 98,000 98,000
Equipment .............................. 1,400,000 257,000
----------- -----------
1,524,000 381,000
Less - Accumulated depreciation ......... (243,000) (99,000)
----------- -----------
$ 1,281,000 $ 282,000
=========== ===========
</TABLE>
Included in the above is $102,000 of equipment held under capital
leases. Depreciation expense was $144,000 and $51,000 in 1996 and 1995,
respectively.
NOTE 3 - LINES OF CREDIT AND SUBORDINATED DEBENTURES
In January 1997, the Company entered into a two-year credit agreement
with a bank. The credit facility with the bank includes (i) a revolving line of
credit pursuant to which the Company may borrow up to $7,500,000 (at the bank's
prime rate plus 1/4 of 1% per annum) to finance the working capital needs of
the Company and (ii) equipment term loans pursuant to which the Company may
borrow up to an aggregate of $350,000 (at the bank's prime rate plus 3/4 of 1%
per annum) to purchase equipment. The credit limit of the revolving line of
credit is the lesser of $7,500,000 or the Company's borrowing base. Such
borrowing base is 70% of the Company's eligible accounts receivable at the time
of any loan under the revolving line of credit. The credit agreement contains
covenants which, among other things, require the maintenance of a minimum
working capital ratio and a minimum net worth, as defined, and prohibit
distribution of cash dividends. The Company's obligations under the credit
agreement are collateralized by substantially all of the Company's assets. The
Company's obligations under the credit facility are payable at the expiration
of such facility on January 22, 1999.
The Company had available, under an agreement with a bank, a $50,000
line of credit bearing interest at the bank's prime lending rate plus 2%, which
was collateralized by all Company assets and personally guaranteed by one of the
Company's shareholders. The line of credit expired May 26, 1996 and was repaid
in November 1996. The outstanding balance as of December 31, 1995 was $45,000.
In March 1996, in anticipation of the financing discussed below, the
Company obtained a $750,000 line of credit, payable on demand, from a bank.
Aggregate borrowings in the amount of $300,000 were repaid and the line of
credit was terminated by the Company in accordance with the financing described
below.
F-10
<PAGE> 40
NOTE 3 - LINES OF CREDIT AND SUBORDINATED DEBENTURES - (CONTINUED)
In April 1996, the Company issued $6,000,000 of five-year, 9%
subordinated debentures. All principal and interest was due at maturity (April
2001). The debentures were issued with detachable warrants to purchase Common
Stock of the Company. (See Note 7). Proceeds from the debentures were allocated
between the debentures and the warrants based on estimated fair value which
resulted in a discount on the debentures (based on a 15% interest rate) and a
value assigned to the warrants of $1,400,000. A portion of the net proceeds of
the Company's initial public offering (see Note 8) was used to repay the
subordinated debentures which resulted in an extraordinary charge of $1,148,000,
net of an income tax benefit of $296,000.
Subsequent to the issuance of the subordinated debentures, the Company
purchased and retired 4,881,066 shares of its Common Stock for $1,500,000 from
its shareholders.
NOTE 4 - LOANS PAYABLE TO FACTORS
On October 20, 1995, the Company entered into a factoring agreement
with a financing institution (the "Factor") under which the Company was required
to offer all its trade accounts receivable to the Factor for financing; however,
the Factor was not obligated to accept them. The agreement had a term of one
year with automatic one-year renewals unless the Company or the Factor gave
notice of cancellation. The Factor charged an administration fee of 0.75% on
each invoice plus an additional 0.75% for each 15-day increment the invoice
remained unpaid, to a maximum of 120 days, or 6.5%. If the amount of a factored
receivable was not paid by reason of financial inability of the customer, the
Company was not liable to reimburse the Factor. If, however, the Factor, through
legal action or otherwise, settled, compromised or assigned the claim for any
receivable, the amount of any reduction resulting from such settlement,
compromise or assignment reduced the balance due to the Company. The Company
used approximately $4.4 million of the net proceeds from the Company's initial
public offering to repay loans from the Factor. (See Note 8). The Factor
agreement was terminated in October 1996.
The Company had factoring agreements with a former financing
institution under which it could sell qualified trade accounts receivable, with
recourse provisions. The agreements, which were terminated in October 1995
required the Company to repurchase or replace any receivable remaining
uncollected for more than 120 days.
F-11
<PAGE> 41
NOTE 5 - INCOME TAXES
Income tax attributable to income from continuing operations consists
of the following:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Current:
Federal .......................................... $ 631,000
State ............................................ 200,000
---------
831,000
---------
Deferred:
Federal .......................................... (259,000)
State ............................................ (72,000)
---------
(331,000)
---------
Total .............................................. $ 500,000
=========
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory rate of 35% to income (loss) before income taxes. The
principal reasons for this difference are:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax at federal statutory rate ............................ 35% (35%)
Nondeductible expenses ................................... 1 --
State income tax, net of federal benefit ................. (3) --
Utilization of net operating loss carryforwards .......... (8) --
Foreign losses for which no benefit is available ......... 9 --
Changes in valuation allowance ........................... (14) 35
---- ----
Effective tax rate ....................................... 20% --%
==== ====
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities under SFAS No.
109 as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts .............. $ 224,000 $ 234,000
Certain accrued liabilities .................. 146,000 207,000
Net operating losses ......................... 131,000 227,000
Other ........................................ 37,000 --
--------- ---------
Total deferred tax assets ...................... 538,000 668,000
Valuation allowance for deferred tax assets .... (207,000) (668,000)
--------- ---------
Net deferred tax assets ........................ $ 331,000 $ --
========= =========
</TABLE>
F-12
<PAGE> 42
NOTE 5 - INCOME TAXES - (CONTINUED)
Realization of the net deferred tax assets is dependent on the timing
of the reversal of other temporary differences. Although realization is not
assured, management believes it is more likely than not, that the majority of
the 1996 net deferred tax assets will be realized. The Company reduced their
valuation allowance in 1996 as a result of current and anticipated future
profitability. The Company's 1996 valuation allowance relates primarily to the
net operating loss of a foreign subsidiary which is yet to be profitable.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
Commencing June 1, 1996, the Company entered into two year employment
agreements with five employees with aggregate annual compensation of $935,000.
Payroll and Related Taxes
As of December 31, 1995, the Company had $1,000,000 included in accrued
payroll and related taxes related to unpaid federal and state payroll related
taxes for certain employees. As a result of the Company's voluntary disclosure
to the Internal Revenue Service ("IRS") on June 5, 1996, the IRS issued an audit
assessment to the Company for $814,000 which had been included in the above
accrual. The assessment was paid in 1996. The Company's principal shareholders
have agreed to indemnify the Company for any and all losses which the Company
may sustain in excess of the amounts accrued as of December 31, 1995 arising
from or relating to federal or state tax, interest or penalty payment
obligations, net of any tax benefits realized by the Company, resulting from the
subject matter discussed above.
Leases
The Company leases office space and office equipment under capital and
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1996. Future minimum aggregate annual
lease payments are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31, CAPITAL OPERATING
--------------------------------- ------- ---------
<S> <C> <C>
1997 .................................... $ 37,000 $254,000
1998 .................................... 37,000 245,000
1999 .................................... 20,000 221,000
2000 .................................... 20,000 19,000
2001 .................................... -- 16,000
--------
114,000
Less- Interest .......................... (37,000)
--------
77,000
Less- Current portion ................... (20,000)
--------
$ 57,000
========
</TABLE>
F-13
<PAGE> 43
NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Rent expense for the years ended December 31, 1996 and 1995 was
$176,000 and $74,000, respectively.
Legal
The Company is being investigated by the Immigration and Naturalization
Service concerning possible violations of the Immigration Reform and Control Act
of 1990. Although a notice of intent to fine has not been served upon the
Company and therefore the potential for fines is not known, the Company believes
that fines, if any, would not have a material effect on the Company's results of
operations or financial condition.
The Company is engaged in certain other legal and administrative
proceedings. Management believes the outcome of these proceedings will not have
a material adverse effect on the Company's financial position or results of
operations.
NOTE 7 - STOCK OPTION PLANS AND WARRANTS
The Company's 1996 Stock Plan (the "Plan") permits the granting of
options to employees, non-employee directors and consultants. The Plan is
administered by the Option Committee of the Board of Directors, which generally
has the authority to select individuals who are to receive options and to
specify the terms and conditions of each option so granted, including the number
of shares covered by the option, the type of option (incentive stock option or
non-qualified stock option), the exercise price, vesting provisions, and the
overall option term. A total of 1,450,000 shares of Common Stock have been
reserved for issuance under the Plan. In June 1996, effective July 1996, the
Company granted options to purchase an aggregate of 500,000 shares of its Common
Stock to certain employees at an exercise price of $8.00 per share. One-third of
these options vest six months from date of grant with remaining options vesting
over the following two years. At December 31, 1996, 492,000 of these options
remain outstanding, none of which are exercisable. Eight thousand options were
forfeited in 1996. Subsequent to December 31, 1996, the Company granted options
to purchase an aggregate of 459,000 shares of its Common Stock to certain
employees at an exercise price of $11.00 per share. All of the options issued
pursuant to this Plan expire ten years from the date of grant.
The 1996 Non-Employee Director Stock Option Plan provides for the
granting of options to purchase a maximum of 140,000 shares of Common Stock of
the Company to non-employee directors. Each person who was a director of the
Company on the effective date of the Company's initial public offering or
becomes a director of the Company thereafter, and who is not also an employee
or officer of the Company, was or shall be granted, on the effective date of
such intitial public offering or on the date on which he or she becomes a
director, whichever is later, an option to purchase 20,000 shares of Common
Stock, at an exercise price per share equal to the then fair market value of
the shares. All options will vest in five equal installments, commencing one
year after grant and have a ten-year term. Options to purchase 80,000 shares of
the Company's Common Stock were granted in 1996 with exercise prices ranging
from $10 to $12.125 per share with a weighted average exercise price of $10.78.
At December 31, 1996 all of these options remain outstanding, none of which are
exercisable.
F-14
<PAGE> 44
NOTE 7 - STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 41%, risk-free interest rate of 5.6%; and
expected lives of three years. The weighted-average grant-date fair value of
options granted during the year was $2.93 per share.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has chosen to continue
accounting for stock options at their intrinsic value. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's two stock option plans been determined based
on the fair value option pricing method of accounting, the Company's net income
and earnings per share would have been reduced to $434,000 and $0.04,
respectively.
The subordinated debenture holders (see Note 3) received warrants for
the purchase of up to 20.8% of the fully diluted common stock of the Company, as
defined, at a nominal exercise price (less than $0.25 in the aggregate). The
warrants were exercised in September 1996 which resulted in the issuance of
1,364,000 shares of the Company's Common Stock.
NOTE 8 - INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
The Company's initial public offering for the sale of 2,050,000 shares
of its common stock became effective on September 26, 1996 and the net proceeds
of approximately $19,065,000 (before deducting expenses of the offering paid by
the Company) were received on October 2, 1996. A portion of the net proceeds was
used to prepay subordinated debentures and repay other debt. (See Notes 3 and
4).
In July 1996, the Company's Board of Directors recommended and
shareholders approved an amendment to the Company's Certificate of Incorporation
to effect an 81,351.1111-for-1 stock split. All common shares and per share
amounts in the accompanying financial statements have been adjusted
retroactively to give effect to the stock split. In addition, the Company's
Board of Directors authorized a change in the Company's authorized
capitalization to 25,000,000 shares of Common Stock, $0.01 par value per share,
and 5,000,000 shares of undesignated preferred stock, $0.01 par value per share.
F-15
<PAGE> 1
Exhibit 2
AGREEMENT AND PLAN OF MERGER
OF
INTELLIGROUP, INC.
(A NEW JERSEY CORPORATION)
AND
OXFORD SYSTEMS INC.
(A NEW JERSEY CORPORATION)
AGREEMENT AND PLAN OF MERGER dated the 2nd day of December, 1996
between Intelligroup, Inc. ("Intelligroup"), a New Jersey corporation and its
wholly-owned subsidiary, Oxford Systems Inc. ("Oxford"), a New Jersey
corporation.
WITNESSETH:
WHEREAS, Intelligroup is a corporation organized and existing under and
by virtue of the laws of the State of New Jersey and was incorporated therein on
October 15, 1987; and
WHEREAS, Oxford is a corporation organized and existing under the laws
of the State of New Jersey and was incorporated therein on May 28, 1993; and
WHEREAS, Intelligroup owns 100% of the issued and outstanding shares of
capital stock of Oxford; and
WHEREAS, the Board of Directors of Intelligroup, acting pursuant to
Section 14A:10-5.1, of the New Jersey Business Corporation Act (the "Act")
deems it desirable and in the best interests of the corporation and its
shareholders to effect a statutory subsidiary-parent merger so that Oxford shall
be merged into Intelligroup (the "Merger") upon the terms and conditions set
forth herein and in accordance with the Act.
NOW, THEREFORE, in consideration of the promises and of the mutual
agreement of the parties hereto, being thereunto duly entered into by
Intelligroup and approved by a resolution
<PAGE> 2
adopted by its Board of Directors and being thereunto duly entered into by
Oxford and intending to be legally bound, the Agreement and Plan of Merger and
the terms and conditions thereof and the mode of carrying the same into effect,
together with any provisions required or permitted to be set forth therein, are
hereby determined and agreed upon as hereinafter in this Agreement and Plan of
Merger set forth.
1. The names of the constituent corporations are Intelligroup and
Oxford (sometimes herein called the "Constituent Corporations"). The name of the
surviving corporation is Intelligroup, Inc. (sometimes herein called the
"Surviving Corporation") and following the merger its name shall remain
Intelligroup, Inc. as set forth in its Amended and Restated Certificate of
Incorporation. Upon the effective date of the Merger, the separate corporate
existence of Oxford shall cease and the Surviving Corporation shall possess all
the rights, privileges, powers, immunities, purposes and franchises, both public
and private, of the Constituent Corporations, and shall become the owner,
without other transfer, of all of the real and personal property, tangible and
intangible, of the Constituent Corporations, and the Surviving Corporation shall
become subject to all of the obligations and liabilities of the Constituent
Corporations.
2. The existing Amended and Restated Certificate of Incorporation of
Intelligroup, currently on file with the State of New Jersey and as in effect on
the effective date of the Merger, shall be the Amended and Restated Certificate
of Incorporation until the same shall be altered, amended, or restated, or until
a new Certificate of Incorporation is adopted as provided therein and in the
manner prescribed by the provisions of the Act.
2
<PAGE> 3
3. The By-Laws of Intelligroup, as in effect on the effective date of
the Merger, shall be the By-Laws of the Surviving Corporation until the same
shall be altered, amended or repealed, or until new By-Laws are adopted as
provided therein and in the manner prescribed by the provisions of the Act.
4. The directors and officers of the Surviving Corporation, in office
on the effective date of the Merger shall be the members of the Board of
Directors and the officers of the Surviving Corporation, respectively, all of
whom shall hold their respective directorships and offices until the election
and qualification of their respective successors or until their tenure is
otherwise terminated in accordance with the By-Laws of the Surviving
Corporation.
5. Upon the effective date of the Merger, the manner and basis of
converting the shares of the Constituent Corporations into shares of the
Surviving Corporation shall be as follows:
(a) All issued and outstanding shares of the capital stock of
Oxford shall automatically and by operation of law be canceled and all
certificates evidencing ownership of such shares shall be void and of no effect
and shall cease to exist on the effective date of the Merger; and
(b) All issued and outstanding shares of capital stock of the
Surviving Corporation shall remain issued and outstanding.
3
<PAGE> 4
6. Neither of the Constituent Corporations shall, prior to the
effective date of the Merger, engage in any activity or transaction, other than
in the ordinary course of business, except as contemplated by this Agreement and
Plan of Merger.
7. Pursuant to Section 14A:10-5.1 of the Act, this Agreement and Plan
of Merger and related matters shall not be submitted for approval to the
shareholders of the Constituent Corporations.
8. The Board of Directors of Intelligroup may, in its discretion,
abandon this Merger without further action or approval by the shareholders of
the Constituent Corporations, at any time before the effective date of the
Merger.
9. The Merger herein provided for shall be effective on December 31,
1996.
10. This Agreement and Plan of Merger shall be governed by and
construed in accordance with the laws of New Jersey.
11. This Agreement and Plan of Merger may be executed in any number of
counterparts, and all such counterparts and copies shall be and constitute an
original instrument.
**********
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Merger to be duly executed, acknowledged and certified as of the date
first above written.
INTELLIGROUP, INC.
Attest: (a New Jersey corporation)
/s/ Robert M. Olanoff By:/s/ Ashok Pandey
- ----------------------------- ---------------------------------
Robert M. Olanoff Ashok Pandey
Secretary President
OXFORD SYSTEMS INC.
Attest: (a New Jersey corporation)
/s/ Rajkumar Koneru By:/s/ Ashok Pandey
- ----------------------------- ---------------------------------
Rajkumar Koneru Ashok Pandey
Secretary President
5
<PAGE> 6
I, Robert Olanoff, being duly sworn do depose and say: I was
present, and did see Ashok Pandey, the President, and Robert M. Olanoff, the
Secretary, of Intelligroup, Inc. to me personally known to be the persons
described in and who executed the within document on behalf of the said company,
sign and execute the same and affix thereto the seal of the company. The
signatures are in the handwriting of the said President and Secretary and were
subscribed to and the seal of the said company was affixed to the within
document in my presence.
Sworn to before me on this 2nd day of December, 1996
/s/ Robert Olanoff, Secretary
-------------------------------------------------
Signature and Title of Officer Administering Oath
6
<PAGE> 7
I, Robert Olanoff, being duly sworn do depose and say: I was
present, and did see Ashok Pandey, the President, and Rajkumar Koneru, the
Secretary, of Oxford Systems Inc. to me personally known to be the persons
described in and who executed the within document on behalf of the said company,
sign and execute the same and affix thereto the seal of the company. The
signatures are in the handwriting of the said President and Secretary and were
subscribed to and the seal of the said company was affixed to the within
document in my presence.
Sworn to before me on this 2nd day of December, 1996
/s/ Robert Olanoff, Secretary
-------------------------------------------------
Signature and Title of Officer Administering Oath
7
<PAGE> 1
Exhibit 10.17
PAYOFF LETTER
DATE: October 10, 1996
Intelligroup, Inc.
517 Route 1 South
Iselin, New Jersey 08830
Attention: Mr. Ashok Pandey, President
Re: Intelligroup, Inc. ("Client")
Dear Mr. Pandey:
Reference is made to that certain Factoring Agreement by and between
Access Capital, Inc. ("Factor") and Client dated October 20, 1995 (the
"Factoring Agreement"). Factor has been advised by Client that Client shall
repay the total amount of obligations of Client to Factor. Based on Factor's
books and records, the total amount of obligations due Factor, if paid on
October 11, 1996 (herein, the "termination date") after giving effect to
confirmed collections of receivables through October 1, 1996 is $3,895,501.70
(the "Payoff Amount"), which amount includes an administrative fee for
non-tendered accounts receivable in an amount equal to $10,000 and all
outstanding initial payments, fees and costs as of the termination date. The
Payoff Amount should be wire transferred to Factor at:
Bank: Citibank, N.A.
153 East 53rd Street
New York, New York 10043 USA
ABA#: 021000089
Account Name: Access Capital, Inc.
Account No.: 3759-1924
In consideration of Client's payment in full of the Payoff Amount and
the agreements of Client contained herein, Factor hereby acknowledges that upon
Factor's receipt of the Payoff Amount in immediately available funds (a) Factor
shall and hereby does release, as of the termination date, any and all security
interests and liens which have heretofore been granted to Factor by Client, (b)
shall transfer to Client all accounts receivable open on the ledgers of Factor
on the termination date and (c) shall remit to Client any collections that
Factor may receive on any accounts receivable of Client open on the ledgers of
Factor on the termination date. The parties hereto agree that they shall use
proper due diligence in an expeditious manner to cooperate and settle any
outstanding items, including but not limited to the settlement and application
of any unidentified payments by Client's
<PAGE> 2
customers or any billing discrepancies with Client's customers in an
expeditious manner until such matters have been fully resolved. Factor hereby
undertakes to execute and deliver to Client UCC Termination Statements in all
jurisdictions in which UCC Financing Statements were filed in connection with
the Factoring Agreement.
Except as otherwise set forth herein, the Factoring Agreement, the
Security Agreement, the Anti-Fraud and Performance Agreements and guarantees of
Ashok Pandey, Rajkumar Koneru and Nagarjun Valluripalli are hereby terminated.
Factor, for itself and its affiliates, agents, employees, representatives,
officers, directors, administrators, successors and assigns, hereby releases,
acquits and forever discharges, to the fullest extent permitted by applicable
law, Client and its affiliates, agents, employees, representatives, officers,
directors, administrators, successors and assigns from all Claims (as
hereinafter defined), which Factor has ever had, now has or hereafter can,
shall or may have, for, upon, or by reason of or in respect of any matter,
cause or thing whatsoever from the beginning of the world to the date of this
Agreement arising out of, or in connection with, the Factoring Agreement.
Client hereby acknowledges that Factor hereby reserves all of its
rights with respect to any and all checks or similar instruments for payment of
money heretofore received by it prior to the termination date in connection
with its arrangements with Client, and all of its rights to any monies due or
to become due under said checks or similar instruments and/or all of its claims
thereon.
For and in consideration of Factor's agreements contained herein, Client
hereby (a) for itself and its affiliates, agents, employees, representatives,
officers, directors, administrators, successors and assigns (the "Releasor")
hereby releases, acquits and forever discharges, to the fullest extent permitted
by applicable law, Factor and its agents, employees, representatives, officers,
directors, administrators, successors and assigns (the "Releasee") from any and
all claims, demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses, damages,
judgments, orders and liabilities, whether known or unknown, contingent or
otherwise, of whatever kind or nature in law, equity or otherwise (collectively,
"Damages"), which Releasor has ever had, now has of hereafter can, shall or may
have, for, upon, or by reason of or in respect of any matter, cause or thing
whatsoever from the beginning of the world to the day of the date of this
Agreement, except for any Claims arising solely out of Factor's receipt prior to
the termination date of unidentified payments from certain account debtors of
Client or certain billing discrepancies of Client's account debtors arising
prior to the termination date and (b) indemnifies Factor from, and hold Factor
harmless against, all losses, liabilities, charges, expenses and fees which
Factor may incur as a result of any non-payment, claim or refund or charge back
of any checks or other items which have been credited by
-2-
<PAGE> 3
Factor to Client's accounts with Factor, together with all expenses and other
charges incident thereto. The amount of any such losses, charges, fees,
expenses or other liabilities for which Factor is hereinabove indemnified shall
be paid to Factor promptly upon Factor's demand therefor.
ACCESS CAPITAL, INC.
By: /s/ Paul Mehring
-------------------------------
Paul Mehring, Vice President
Acknowledged and Agreed to
this 10 day of October, 1996
INTELLIGROUP, INC.
By: /s/ A. Pandey
----------------------------
Its: President
---------------------------
-3-
<PAGE> 4
PAYOFF LETTER
DATE: October 10, 1996
Oxford Systems, Inc.
517 Route 1 South
Iselin, New Jersey 08830
Attention: Mr. Ashok Pandey, President
Re: Oxford Systems, Inc. ("Client")
Dear Mr. Pandey:
Reference is made to that certain Factoring Agreement by and between
Access Capital, Inc. ("Factor") and Client dated October 20, 1995 (the
"Factoring Agreement"). Factor has been advised by Client that Client shall
repay the total amount of obligations of Client to Factor. Based on Factor's
books and records, the total amount of obligations due Factor, if paid on
October 11, 1996 (herein, the "termination date") after giving effect to
confirmed collections of receivables through October 1, 1996 is $459,900.98
(the "Payoff Amount"), which amount includes all outstanding initial payments,
fees and costs as of the termination date. The Payoff Amount should be wire
transferred to Factor at:
Bank: Citibank, N.A.
153 East 53rd Street
New York, New York 10043 USA
ABA#: 021000089
Account Name: Access Capital, Inc.
Account No.: 3759-1924
In consideration of Client's payment in full of the Payoff Amount and
the agreements of Client contained herein, Factor hereby acknowledges that upon
Factor's receipt of the Payoff Amount in immediately available funds (a) Factor
shall and hereby does release, as of the termination date, any and all security
interests and liens which have heretofore been granted to Factor by Client, (b)
shall transfer to Client all accounts receivable open on the ledgers of Factor
on the termination date and (c) shall remit to Client any collections that
Factor may receive on any accounts receivable of Client open on the ledgers of
Factor on the termination date. The parties hereto agree that they shall use
proper due diligence in an expeditious manner to cooperate and settle any
outstanding items, including but not limited to the settlement and application
of any unidentified payments by Client's customers or any billing discrepancies
with Client's customers in
<PAGE> 5
an expeditious manner until such matters have been fully resolved. Factor hereby
undertakes to execute and deliver to Client UCC Termination Statements in all
jurisdictions in which UCC Financing Statements were filed in connection with
the Factoring Agreement.
Except as otherwise set forth herein, the Factoring Agreement, the
Security Agreement, the Anti-Fraud and Performance Agreements and guarantees of
Ashok Pandey, Rajkumar Koneru and Nagarjun Valluripalli are hereby terminated.
Factor, for itself and its affiliates, agents, employees, representatives,
officers, directors, administrators, successors and assigns, hereby releases,
acquits and forever discharges, to the fullest extent permitted by applicable
law, Client and its affiliates, agents, employees, representatives, officers,
directors, administrators, successors and assigns from all Claims (as
hereinafter defined), which Factor has ever had, now has or hereafter can,
shall or may have, for, upon, or by reason of or in respect of any matter,
cause or thing whatsoever from the beginning of the world to the date of this
Agreement arising out of, or in connection with, the Factoring Agreement.
Client hereby acknowledges that Factor hereby reserves all of its
rights with respect to any and all checks or similar instruments for payment of
money heretofore received by it prior to the termination date in connection
with its arrangements with Client, and all of its rights to any monies due or
to become due under said checks or similar instruments and/or all of its claims
thereon.
For and in consideration of Factor's agreements contained herein, Client
hereby (a) for itself and its affiliates, agents, employees, representatives,
officers, directors, administrators, successors and assigns (the "Releasor")
hereby releases, acquits and forever discharges, to the fullest extent permitted
by applicable law, Factor and its agents, employees, representatives, officers,
directors, administrators, successors and assigns (the "Releasee") from any and
all claims, demands, liens, agreements, contracts, covenants, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses, damages,
judgments, orders and liabilities, whether known or unknown, contingent or
otherwise, of whatever kind or nature in law, equity or otherwise (collectively,
"Claims"), which Releasor has ever had, now has or hereafter can, shall or may
have, for, upon, or by reason of or in respect of any matter, cause or thing
whatsoever from the beginning of the world to the day of the date of this
Agreement, except for any Claims arising solely out of Factor's receipt prior to
the termination date of unidentified payments from certain account debtors of
Client or certain billing discrepancies of Client's account debtors arising
prior to the termination date and (b) indemnifies Factor from, and hold Factor
harmless against, all losses, liabilities, charges, expenses and fees which
Factor may incur as a result of any non-payment, claim or refund or charge back
of any checks or other items which have been credited by Factor to Client's
accounts with Factor, together with all expenses
-2-
<PAGE> 6
and other charges incident thereto. The amount of any such losses, charges,
fees, expenses or other liabilities for which Factor is hereinabove indemnified
shall be paid to Factor promptly upon Factor's demand therefor.
ACCESS CAPITAL, INC.
By: /s/ Paul Mehring
-------------------------------
Paul Mehring, Vice President
Acknowledged and Agreed to
this 10 day of October, 1996
OXFORD SYSTEMS, INC.
By: /s/ A. Pandey
----------------------------
Its: President
---------------------------
-3-
<PAGE> 1
Exhibit 10.18
INTELLIGROUP, INC.
------------------------------
LOAN AND SECURITY AGREEMENT
dated as of January 22, 1997
------------------------------
PNC BANK, NATIONAL ASSOCIATION
<PAGE> 2
This LOAN AND SECURITY AGREEMENT (this "Agreement") made as of the
22nd day of January, 1997 between PNC BANK, National Association ("Lender"),
having an office at Two Tower Center Boulevard, East Brunswick, New Jersey
08816, and INTELLIGROUP, INC., a New Jersey corporation ("Borrower"), having an
office at 517 Route One South, Iselin, New Jersey 08830.
W I T N E S S E T H:
WHEREAS, to provide a source of funds for the purposes described in
Sections 2.5 and 3.8 hereof, Borrower has requested that Lender enter into this
Agreement, agree to make the Revolving Line of Credit (as defined herein)
available to Borrower and, in Lender's sole discretion, agree to make Equipment
Loans (as defined herein) to Borrower; and
WHEREAS, Lender has agreed to make the Revolving Line of Credit
available to Borrower and, in its sole discretion, Equipment Loans to Borrower
subject to and upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. DEFINITIONS
1.1 DEFINED TERMS. As used herein, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Account" - all items described or otherwise included in the UCC
definition thereof and all of the following, whether or not so described or
included and without limiting the generality of the foregoing (in all cases
whether now existing or hereafter created): all obligations of any kind or
nature at any time due or owing to Borrower and all rights of Borrower to
receive payment or any other consideration (whether classified under the UCC or
the law of any other state as accounts, accounts receivable, contract rights,
chattel paper, general intangibles, or otherwise) including, without limitation,
invoices, contract rights, accounts receivable, general intangibles,
choses-in-action, notes, drafts, acceptances, instruments and all other debts,
obligations and liabilities in whatever form owing to Borrower from any Person,
together with all security for any thereof, and all of Borrower's rights to
goods sold (whether delivered, undelivered, in transit or returns), represented
by any thereof.
"Affiliate" - any Person which, directly or indirectly, is in control
of, is controlled by, or is under common control with, such Person, including
any directors, officers or other management personnel of such Person. For
purposes of this definition, "control" means the power, direct or indirect, to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
"Agreement" - this Loan and Security Agreement, as amended,
supplemented, restated and otherwise modified from time to time.
"Balance Sheet" - as defined in Subsection 7.5(b) hereof.
<PAGE> 3
"Banking Day" - any day other than a Saturday, Sunday or legal
holiday for banks under the laws of the State of New Jersey.
"Borrowing Base" - 70% of the net face amount of Qualified Accounts
(excluding amounts representing contra accounts, bill and hold sales, reserves
determined by or acceptable to Lender for advertising allowances, warranty
claims, price adjustments, uncollectible items, volume rebates, price disputes
and other contingencies); provided that Lender may, in Lender's reasonable
discretion, increase or decrease such percentage from time to time.
"Borrowing Base Certificates" - the certificates delivered by
Borrower pursuant to Subsection 8.5(d) hereof.
"Capital Lease" - (a) any lease of property, real or personal, the
obligations under which are capitalized on a consolidated balance sheet of
Borrower, and (b) any other such lease to the extent that the then present value
of the minimum rental commitment thereunder should, in accordance with GAAP, be
capitalized on a balance sheet of the lessee.
"Code" - as defined in Section 7.17 hereof.
"Collateral" - all of the following, wherever located and whether now
existing or hereafter created or arising and whether now owned or hereafter
acquired by Borrower: (a) all Accounts; (b) all Equipment; (c) all Inventory;
(d) all fixtures; (e) all guaranties, security and liens for payment of any
Accounts; (f) all documents of title, policies or certificates of insurance,
insurance proceeds, proceeds of condemnation or other seizure, securities,
chattel paper and other documents and instruments evidencing or pertaining to
any thereof; (g) all claims of Borrower against third parties for loss of or
damage to, or otherwise relating to, any of the Collateral; (h) all files,
correspondence, customer lists, computer programs, tapes, discs and related data
processing software, general ledgers, information respecting Accounts
(including, without limitation, any identifying any Account debtor or the amount
owed by same), or any books and records owned by Borrower or in which Borrower
has an interest, which contains information identifying any of the Collateral or
which would or may otherwise be necessary or helpful in the actual and/or
potential realization on any of the Collateral; (i) all moneys, securities,
drafts, notes, items, Contracts and other contract rights, leases, documents of
title, licenses, goodwill, and all general or special deposits, balances, sums,
proceeds, tax refunds and credits of Borrower; (j) all patents and patent
applications (including all letters patent of the United States and all reissues
and extensions thereof, any thereof referred to in Schedule 8 hereto, and all
applications for letters patent of the United States and all divisions,
continuations and continuations-in-part thereof or any other country, including,
any thereof referred to in Schedule 8 hereto) (collectively, "Patents"), patent
and know-how licenses, trade secrets, copyrights, inventions, technology
permits, trademarks, trade names, corporate names, service marks, logos and
other source or business identifiers, and all applications in connection
therewith, including, any thereof referred to in Schedule 9 hereto
(collectively, "Trademarks"), the goodwill of the business associated therewith,
all franchises and licenses in which Borrower has an interest, and all other
intangible personal property similar to any of the foregoing; (k) all rights and
remedies which Borrower might exercise with respect to any of the foregoing but
for the execution of this Agreement (including, without limitation, the right to
sue for past, present or future infringements of Patents and Trademarks); (l)
all goodwill; (m) all general intangibles not listed in the preceding clauses in
this definition of Collateral and described or otherwise included in the UCC
definition thereof; (n) all other personal property of any kind or nature,
tangible or intangible, not listed in the preceding clauses in
2
<PAGE> 4
this definition of Collateral; and (o) all accessions and additions to,
replacements and substitutions for, and proceeds and products of, the items
described in the preceding clauses in this definition of Collateral.
"Contracts" - all contracts (including, without limitation, Capital
Leases) or other Documents in or under which Borrower may now or hereafter have
any right, title or interest, whether the same pertain to the acquisition,
lease, sale or other disposition of any Inventory, Equipment, fixtures, real
property or any interest in real property, or otherwise, as the same may be
amended, supplemented, restated or otherwise modified from time to time,
including, without limitation, (a) all rights of Borrower to receive moneys due
and to become due to it thereunder or otherwise in connection therewith, (b) all
rights of Borrower to damages arising out of, or for, any breach or other
default in respect thereof and (c) all rights of Borrower to perform and to
exercise all remedies thereunder.
"Default Rate" - a rate of interest equal to two percent (2%) per
annum in excess of the rate otherwise applicable at the time to a Loan.
"Document" - any agreement, instrument, undertaking, other paper or
writing or other document.
"Eligible Equipment" - Equipment to be purchased with the proceeds of
Equipment Loans to be used by Borrower in the ordinary course of business at any
of the locations identified on Schedule 1 hereto.
"Environmental Activity" - means any generation, processing,
abatement, manufacture, refining, transportation, treatment, storage, handling,
release, emission, discharge or disposal of any Hazardous Substances or any
threat of such activity.
"Environmental Complaint" - means any complaint, order, citation,
notice or other written or express oral communication from any Person with
respect to the existence or alleged existence of a violation of any
Environmental Law or legal liability resulting from any Hazardous Substance, any
Environmental Activity or any other environmental matter at, upon, under, within
or from any real property owned, leased or otherwise occupied by Borrower or
otherwise relating to such real property or the ownership, use, operation or
occupancy thereof, or any business, activity or other property of Borrower.
"Environmental Laws" - means all applicable federal, state and local
statutes, rules, regulations, orders, judgments, permits, licenses and other
provisions of law relating to any one or more of the following: air emissions,
water discharge, noise emissions, solid and liquid disposal, Hazardous
Substances, any Environmental Activity and other environmental, health and
safety matters.
"Equipment" - all items described or otherwise included in the UCC
definition thereof and all of the following, whether or not described or
included and without limiting the generality of the foregoing (in all cases
whether now owned or hereafter acquired by Borrower and wherever located): all
machinery, equipment, furnishing and fixtures, whether affixed to real property
or not, and all additions, substitutions for, replacements of or extensions to
any of such items and all attachments, components, parts (including spare parts)
and accessories whether installed thereon or affixed thereto.
"Equipment Credit Limit" - $350,000.
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"Equipment Loans" - as defined in Section 3.1 hereof.
"Equipment Manufacturer/Dealer" - as defined in Section 3.5 hereof.
"Equipment Notes" - as defined in Section 3.2 hereof.
"ERISA" - as defined in Section 7.17 hereof.
"ERISA Affiliate" - as defined in Section 7.17 hereof.
"Event of Default" - as defined in Article 11.
"GAAP" - United States generally accepted accounting principles
consistently applied as in effect in the from time to time.
"Governmental Authority" - any federal, state, local or foreign
governmental authority, agency, department or instrumentality or other
regulatory body of any kind or nature, including any court.
"Hazardous Substances" - means (a) any flammable, explosive,
radioactive material or friable asbestos, (b) any "hazardous substance" as such
term is presently defined in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, (c) any "hazardous material"
as such term is presently defined in the Hazardous Material Transportation Act,
as amended, (d) any "hazardous waste" as presently defined in the Resource
Conservation and Recovery Act of 1976, as amended, (e) any additional substances
or materials which are hereafter defined as, incorporated in or added to, the
definition of "hazardous substance", "hazardous material" or "hazardous waste"
pursuant to, or for the purposes of, any applicable Environmental Law
(including, without limitation, the New Jersey Industrial Site Recovery Act),
and (f) any additional substances or materials which are now or hereafter
regulated or considered to be hazardous or toxic under any applicable
Environmental Law relating to any real and/or personal property owned, leased,
used or, in the case of real property otherwise occupied by Borrower, the
ownership, use, operation or occupancy thereof or any business, activity or
other property of Borrower.
"Inventory" - all items described or otherwise included in the UCC
definition thereof and all of the following, whether or not so described or
included and without limiting the generality of the foregoing (in all cases
whether now owned or hereafter acquired by Borrower and wherever located): all
goods, merchandise or other personal property held by Borrower for sale, lease
or license, and all right, title and interest of Borrower therein and thereto;
all raw materials, work or goods in process; and all materials and supplies of
any kind or description used or usable in connection with the performance of
services by Borrower and/or the operation of the businesses operated by
Borrower.
"Lien" - any mortgage, security interest, assignment, pledge,
hypothecation, lien, conditional sale or other title retention agreement,
financing lease having substantially the same effect as any of the foregoing,
other preferential arrangement or other encumbrance of any kind or nature.
"Loan Documents" - this Agreement and any and all other agreements,
instruments and other Documents delivered to Lender pursuant or incident to this
Agreement, as each may be amended, supplemented, restated or otherwise modified
from time to time, between Borrower, any Affiliate of Borrower, any grantor of
any Lien securing any Obligations or any guarantor of any Obligations, on the
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one hand, and Lender, on the other, or executed by Borrower, any Affiliate of
Borrower, any such grantor or any such guarantor for the benefit of Lender.
"Loans" - the Revolving Loans and the Equipment Loans.
"Margin Stock" - as defined in Regulation U issued by the Board of
Governors of the Federal Reserve System as in effect from time to time.
"Material Adverse Effect" - material adverse effect on (a) the
validity or enforceability of this Agreement, the Notes or any other Loan
Document (including the rights and remedies of Lender hereunder and thereunder),
(b) the ability of Borrower to perform any of its Obligations, (c) the
Collateral, or (d) the condition (financial or otherwise), results of
operations, assets or operations of Borrower.
"Notes" - the Revolving Note and the Equipment Notes.
"Obligations" - (a) all principal of and interest on the Loans, and
all other sums payable by Borrower under the terms of this Agreement, the Notes
or any of the other Loan Documents; (b) all other indebtedness, liabilities,
obligations and agreements of every kind and nature, whether primary or
secondary, purchase money or nonpurchase money, regardless of form or purpose,
of Borrower to or with Lender or any affiliate of Lender, including, without
limitation, loans for consumer, agricultural or business purposes and credit
evidenced by promissory notes, open accounts, overdrafts or any other
contractual obligations; (c) all guaranties of any of Borrower's Obligations, if
any; and (d) any participation or interest of Lender or any affiliate of Lender
in any indebtedness, liabilities, obligations or agreements of Borrower or any
such guarantor to or with others, in each case whether now existing or hereafter
created, whether pursuant to this Agreement, any of the other Loan Documents or
otherwise, whether in the form of refinancing, bankers acceptances, guaranties,
loans, interest, charges, fees, expenses or otherwise, whether direct or
indirect, whether acquired outright, conditionally or as collateral security
from another, whether absolute or contingent, joint or several, liquidated or
unliquidated, secured or unsecured, whether due or to become due, whether on
account of principal, interest, reimbursement obligations, fees, indemnities,
costs, expenses (including, without limitation, all fees and disbursements of
counsel to Lender) or otherwise, and whether arising by operation of law or
otherwise, including, without limitation, any future advances, renewals,
extensions, modifications or changes in the form of, or substitutions for, any
of the items described in the preceding clauses (a) through (d). For purposes of
Section 9-204 of the UCC, all of the foregoing are contemplated by the parties
hereto.
"Order" - as defined in Section 11.10 hereof.
"Organizational Documents" - with respect to any entity, the
certificate of incorporation or articles of incorporation thereof, as
applicable, and the by-laws thereof, each as heretofore amended and/or restated
and now in effect.
"Oxford" - Oxford Systems Inc., a New Jersey corporation that was a
wholly-owned subsidiary of Borrower before it was merged with and into Borrower.
"PBGC" - as defined in Section 7.17 hereof.
"Permitted Liens" - as defined in Section 9.3 hereof.
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"Person" - an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, limited liability
company, joint venture, Governmental Authority or other entity of any kind or
nature.
"Plan" - as defined in Section 7.17 hereof.
"Portable Computer Equipment" - lap top computers and other portable
computer equipment that Borrower's employees carry with them when they visit
customers in the ordinary course of business.
"Prime Rate" - the rate of interest announced from time to time by
Lender as its "prime rate" or "prime lending rate," which rate is determined
from time to time by Lender as a means of pricing some loans to its customers
and is neither tied to any external rate of interest or index nor necessarily
reflects the lowest rate of interest actually charged by Lender to any
particular class or category of customers.
"Proceeding" - as defined in Section 11.10 hereof.
"Qualified Account" - an Account which has been identified and
described to Lender's satisfaction, at all times meets (and is represented by
either Borrower's acceptance of any Revolving Loan as meeting) all of the
following criteria, and is in all other respects acceptable to Lender, in its
sole and absolute discretion:
(i) Borrower is the sole owner of the Account and
has not sold, assigned or otherwise transferred it, and the Account
is not subject to any claim, Lien or other right of any Person (other
than Lender);
(ii) the Account is bona fide and legally
enforceable and owing to Borrower for the sale and delivery of goods
or performance of services in the ordinary course of business and the
Account does not require any further act on the part of Borrower to
make it owing by the Account debtor, and Borrower has delivered to
Lender, if required by Lender, invoices, billings, shipping
documents, timesheets, contracts and other Documents evidencing the
obligation to pay the Account;
(iii) Lender has a perfected first priority security
interest in the Account;
(iv) the Account does not represent a conditional
sale, consignment or other sale on a basis other than that of an
absolute sale, is not evidenced by any note, instrument, chattel
paper or like document, and does not arise out of a contract with the
United States or any other Governmental Authority;
(v) the Account has been invoiced by Borrower and
has not been outstanding for more than ninety (90) days from the
invoice date;
(vi) the amount of the Account, together with all
other Accounts of the same Account debtor and its affiliates, does
not exceed twenty percent (20%) of Borrower's total Qualified
Accounts at the time outstanding; provided that the amount of
Accounts from
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<PAGE> 8
such Account debtor below such twenty percent (20%) threshold may be
Qualified Accounts if they otherwise qualify in accordance herewith;
(vii) not more than fifty percent (50%) of the
amount owed by the Account debtor has been invoiced by Borrower and
been outstanding for more than ninety (90) days from the invoice date
(i.e. if this clause (vii) is violated, none of the Accounts owing
from such Account debtor shall be Qualified Accounts);
(viii) the Account is not subject to any defense,
offset, counterclaim, credit, allowance or adjustment except usual
and customary prompt payment discounts, nor has the Account debtor
returned the goods or indicated any dispute or complaint concerning
such goods or the performance of any services by Borrower, as
applicable;
(ix) Borrower has not received any notice of, nor
to Borrower's knowledge are there, any facts which adversely affect
the credit of the Account debtor in any material respect, and the
Account conforms in all respects to the representations and
warranties contained and/or deemed to be contained in this Agreement;
(x) the Account debtor is not an Affiliate of
Borrower nor a director or officer of Borrower nor an Affiliate of
any of Borrower's directors or officers;
(xi) Lender has not notified Borrower that either
the Account or the Account debtor is not qualified; and
(xii) the Account is denominated in U.S. Dollars and
is payable only in U.S. Dollars and payable only in the United
States.
"Revolving Credit Limit" - the lesser of $7,500,000 or the Borrowing
Base.
"Revolving Credit Termination Date" - as defined in Section 2.1
hereof.
"Revolving Line of Credit" - as defined in Section 2.1 hereof.
"Revolving Loans" - as defined in Section 2.1 hereof.
"Revolving Note" - as defined in Section 2.2 hereof.
"SEC" - the Securities and Exchange Commission.
"Tangible Net Worth" - at any particular date, all amounts which
would be included under shareholders' equity on a consolidated balance sheet of
Borrower as at such date, determined in accordance with GAAP, excluding,
however, (i) all goodwill, organizational expenses, research and development
expenses, trademarks, trade names, copyrights, patents, patent applications,
franchises, licenses and rights in any thereof and other similar intangibles,
(ii) all deferred charges, unamortized debt discount and expense, (iii) all
reserves carried and not deducted from assets, (iv) treasury stock and capital
stock, obligations or other securities of, or capital contributions to, or
investments in, any Affiliate of Borrower, (v) securities which are not readily
marketable, (vi) any write-up in the book value of any asset resulting from a
revaluation thereof subsequent to September 30, 1996, and (vii) any items not
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included in clauses (i) through (vi) above which would properly be treated as
intangibles in conformity with GAAP.
"Trademark Security Agreement" - the Trademark Assignment and
Security Agreement dated as of the date hereof, as amended, supplemented,
restated and otherwise modified from time to time.
"UCC" - the Uniform Commercial Code as in effect from time to time in
the State of New Jersey.
"Undismissed" - as defined in Section 11.10 hereof.
"Working Capital" - as of the date of any determination thereof, the
amount determined in accordance with GAAP, applied on a consistent basis, by
which the consolidated current assets of Borrower exceeds the consolidated
current liabilities of Borrower.
1.2 OTHER DEFINITIONAL PROVISIONS. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Article, Section, Subsection, Schedule and Exhibit references are to
this Agreement unless otherwise specified. "Including", "includes," and
"include" means "including, without limitation," "includes, without limitation,"
and "include, without limitation," whether or not specified herein. "To
Borrower's knowledge" or other words having similar effect means the actual
knowledge of any of the Chairman of the Board, the President, the Chief
Executive Officer, the Chief Financial Officer or any Vice President of
Borrower. "To the best of Borrower's knowledge" or other words having similar
effect means the actual knowledge of any of the Chairman of the Board, the
President, the Chief Executive Officer, the Chief Financial Officer or any Vice
President of Borrower, after due inquiry of the responsible officers and
employees of Borrower.
2. REVOLVING LOANS
2.1 AMOUNT OF REVOLVING LOANS. Subject to the terms and conditions
hereof, Lender agrees to make available to Borrower a line of credit pursuant to
which Lender will make loans to Borrower on a revolving loan basis (the
"Revolving Loans") from time to time during the term of this Agreement in an
aggregate principal amount at any one time outstanding not to exceed $7,500,000
(the "Revolving Line of Credit"); provided, that on the date of the making of
any Revolving Loans, and after giving effect to the making of such Revolving
Loans, the aggregate outstanding principal amount of Revolving Loans on such
date) shall not exceed the Revolving Credit Limit on such date. During the term
of this Agreement, Borrower may use the Revolving Line of Credit by requesting
Lender to make Revolving Loans, repaying Revolving Loans and reborrowing, all in
accordance with and subject to the terms and conditions hereof. The Revolving
Loans shall be payable (i) on January 22, 1999, or (ii) at such other time as is
provided in Article 4 or 11 hereof or elsewhere in this Agreement, whichever of
(i) or (ii) shall first occur (the "Revolving Credit Termination Date").
2.2 REVOLVING NOTE. The Revolving Loans shall be evidenced by a
promissory note (as amended, supplemented, restated and otherwise modified from
time to time, the "Revolving Note") in the form of Exhibit A hereto.
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2.3 PROCEDURE FOR REVOLVING LOAN BORROWINGS. Borrower may request to
borrow under the Revolving Line of Credit on any Banking Day prior to the
Revolving Credit Termination Date by giving Lender irrevocable notice prior to
12:30 p.m. (eastern standard time) on the Banking Day of the proposed borrowing
date, specifying (a) the amount to be borrowed and (b) the requested borrowing
date (which must be a Banking Day). Such notice may be by telephone (confirmed
immediately in writing). Not later than 3:00 p.m. (eastern standard time) on the
borrowing date specified in such notice, subject to the terms and conditions
hereof, Lender shall make the amount of such Revolving Loan available to
Borrower by depositing such amount in immediately available funds in the account
of Borrower with Lender. Each borrowing under the Revolving Line of Credit shall
be in a minimum amount of $50,000.
2.4 OVERDRAFTS. In the event Lender honors a check of Borrower
resulting in Borrower's checking account being overdrawn, then Lender shall be
deemed to have made a Revolving Loan to Borrower in the amount of such
overdraft, pursuant to the terms of this Article 2, on the Banking Day
immediately preceding the day on which Borrower's check is tendered to Lender
for collection. Lender shall not be obliged to honor any overdraft of Borrower
at any time, whether or not it has done so prior to such time.
2.5 USE OF PROCEEDS. The Revolving Loans shall be used to finance the
working capital needs of Borrower in the ordinary course of business.
3. EQUIPMENT LOANS
3.1 AMOUNT. Subject to the terms and conditions hereof, Lender, in
its sole and absolute discretion, may lend to Borrower on a term basis (the
"Equipment Loans"), in an aggregate principal amount of Equipment Loans at any
one time outstanding not to exceed $350,000; provided, that on the date of the
making of any Equipment Loan, and after giving effect to the making of such
Equipment Loan, the aggregate outstanding principal amount of all Equipment
Loans on such date shall not exceed the Equipment Credit Limit on such date.
BORROWER HEREBY ACKNOWLEDGES THAT LENDER HAS NO OBLIGATION TO MAKE ANY REQUESTED
EQUIPMENT LOAN. Notwithstanding anything to the contrary contained in this
Agreement, in no event shall the original principal amount of any Equipment Loan
exceed seventy-five percent (75%) of the invoice price of the Eligible Equipment
to be purchased by Borrower with the proceeds of such Equipment Loan (exclusive
of reasonable soft costs such as charges for delivery, installation and set-up).
3.2 EQUIPMENT NOTES. Each Equipment Loan shall be evidenced by
Borrower's promissory note in the form of Exhibit B hereto (as amended,
supplemented, restated and otherwise modified from time to time, the "Equipment
Notes"), with appropriate insertions thereon made by Lender.
3.3 PRINCIPAL PAYMENTS. The term of each Equipment Loan shall be the
number of months requested by Borrower and agreed to by Lender, provided that
the term of each Term Loan shall not be more than the lesser of (a) the expected
useful life of the Eligible Equipment to be purchased with the proceeds of such
Equipment Loan or (b) thirty-six (36) months. The principal of each Equipment
Loan shall be repaid in consecutive equal monthly principal payments over the
term of such Equipment Loan, together plus accrued interest, provided that the
final payment on the maturity date of such Equipment Loan shall be in an amount
equal to the entire unpaid principal balance of such Equipment
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Loan plus accrued interest and all unpaid fees, expenses and other sums, if any,
due and payable hereunder or under the Equipment Note relating thereto.
3.4 PROCEDURE FOR EQUIPMENT LOAN BORROWINGS. Borrower may request (at
any time prior to the Revolving Credit Termination Date) that Lender make an
Equipment Loan on any Banking Day prior to the Revolving Credit Termination Date
by giving Lender irrevocable notice prior to 12:30 p.m. (eastern standard time)
three (3) Banking Days prior to the proposed borrowing date, specifying (i) the
amount to be borrowed, and (ii) the requested borrowing date (which must be a
Banking Day). Such notice may be by telephone (confirmed immediately in
writing). Such notice shall be accompanied by the invoice or purchase order
relating to the Eligible Equipment to be purchased with the proceeds of such
Equipment Loan (which invoice shall indicate the cost thereof), and such other
related documents as Lender may reasonably request (including those referred to
in Subsection 3.5 hereof). In the event that Lender decides to make such
requested Equipment Loan, subject to the terms and conditions hereof, Lender
shall, at its option, (a) make the amount of such Equipment Loan available to
Borrower by depositing such amount in immediately available funds in the account
of Borrower with Lender not later than 3:00 p.m. (eastern standard time) on the
borrowing date specified in such notice, or (b) pay the amount of such Equipment
Loan by paying the purchase price of the Equipment directly to the Equipment
Manufacturer/Dealer. Each Equipment Loan shall be in a minimum principal amount
of $100,000.
3.5 CERTAIN CONDITIONS TO EQUIPMENT LOAN BORROWINGS. In addition to
the conditions set forth in Article 5 hereof, the obligation of Lender to
consider making any Equipment Loan is subject to Borrower providing to Lender
documents which evidence, to the Lender's reasonable satisfaction, that (a) the
Borrower has acquired title (or will acquire title upon the funding of such
Equipment Loan) to the Equipment from the manufacturer or authorized dealer
thereof, as provided in the invoice or purchase order relating thereto (the
"Equipment Manufacturer/Dealer"), which manufacturer or dealer is a seller of
such Equipment in the ordinary course; (b) such Equipment is free and clear of
all Liens, except Liens in favor of the Lender; (c) such Equipment shall be and
consist of new Equipment only and, except for Portable Computer Equipment, such
Equipment shall be used only in the existing premises located at the locations
listed on Schedule 1 hereto; (d) Borrower has obtained additional insurance in
accordance with Section 8.7(a) hereof relating to such Equipment in an amount
not less than the purchase price of the Equipment; and (e) Lender shall have
received such other documents and consents, including, without limitation,
updated Uniform Commercial Code and other searches with respect to Borrower,
corporate resolutions relating to such Equipment Loan and the Equipment to be
purchased with the proceeds thereof as Lender may reasonably request.
3.6 SHIPPED EQUIPMENT. When any Equipment is shipped from the place
of manufacture, Borrower shall deliver to Lender the bill of lading and other
shipping documents, other documents of title and other related documents to the
extent desirable to perfect Lender's security interest in such Collateral and
any other additional documents in connection therewith from time to time
reasonably requested by the Lender.
3.7 NOT A FIXTURE. Borrower does not intend the Equipment purchased
with the proceeds of any Equipment Loan to be, and shall not permit such
Equipment to become, a fixture to real estate under applicable law or an
accession to other property in which any Person other than Lender has a Lien and
such Equipment shall at all times remain personal property and not a fixture.
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3.8 USE OF PROCEEDS. Each Equipment Loan shall be used only to
purchase Eligible Equipment.
4. INTEREST RATE PROVISIONS, FEES, PAYMENTS, MONTHLY STATEMENTS
4.1 INTEREST RATES AND PAYMENT DATES.
(a) Interest shall accrue daily on the unpaid principal
amount of each of the Loans from time to time outstanding at the following
rates:
(i) Each Revolving Loan shall bear interest at a
fluctuating rate per annum equal to one-quarter of one percent (1/4
of 1%) per annum above the Prime Rate in effect from time to time,
each change in such fluctuating rate to take effect simultaneously
with the corresponding change in the Prime Rate, without notice to
Borrower.
(ii) Each Equipment Loan shall bear interest at a
fluctuating rate per annum equal to three-quarters of one percent
(3/4 of 1%) per annum above the Prime Rate in effect from time to
time, each change in such fluctuating rate to take effect
simultaneously with the corresponding change in the Prime Rate,
without notice to Borrower.
(b) Following the occurrence of an Event of Default, the
interest rate applicable to the Loans shall be increased to the Default Rate and
such interest shall be payable on demand.
(c) All accrued interest shall be payable as follows:
(i) Interest accruing on each Revolving Loan shall
be due and payable to Lender in arrears on the first (1st) Banking
Day of each calendar month, commencing on the first such date to
occur after such Revolving Loan is made, and on any Banking Day on
which any payment is made or such Revolving Loan is paid or payable
in full.
(ii) Interest on each Equipment Loan shall be due
and payable to Lender in arrears on the first (1st) Banking Day in
each calendar month, commencing on the first such date to occur after
such Equipment Loan is made, and on any Banking Day on which any
prepayment is made or such Equipment Loan is paid or payable in full.
4.2 PAYMENTS, CHARGES TO ACCOUNTS, AND COMPUTATIONS.
(a) All payments (including prepayments) to be made by
Borrower on account of principal, interest, fees or otherwise hereunder shall be
made without deduction, set-off or counterclaim to Lender, at Lender's office
specified in Section 15.2 hereof, in each case prior to 12:30 p.m. (eastern
standard time), in lawful money of the United States and in immediately
available funds. If any payment hereunder becomes due and payable on a day other
than a Banking Day, such payment may be made on the next succeeding Banking Day
and in each such case such extension of time shall be included in computation of
the interest or other payment due.
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(b) Lender, without demand, may charge and withdraw from
any checking, loan or other account that Borrower may then have with Lender or
with any affiliate of Lender, any amount that shall become due from Borrower to
Lender under this Agreement or any other Loan Document.
(c) Interest on the Loans shall be calculated on a daily
basis upon the unpaid principal balance, with each day representing 1/360th of a
year. If the interest rate calculated in accordance with any provision of this
Agreement for any Loan (including, without limitation, any application of the
Default Rate) would at any time exceed the maximum permitted by any law, then
for such period as such rate would exceed the maximum permitted by such law (and
no longer), the rate of interest payable on such Loan shall be reduced to the
maximum permitted by such law, and any excess amounts received by Lender shall
be treated as a partial payment or prepayment of principal, without premium or
penalty.
(d) In the event that any payment due and payable
hereunder is not received in full by Lender within ten (10) days of the date
such payment was due and payable, Borrower hereby agrees to pay to Lender, to
the extent not prohibited by applicable law and without demand and in addition
to any other amounts payable hereunder, a late charge equal to five percent (5%)
of the amount of such delinquent payment for the purpose of defraying the
expense incident to the handling of such delinquent payment.
(e) For the purpose of computing interest on the Loans and
other Obligations at any time when Borrower is required to take the actions set
forth in Section 6.4 hereof, interest shall continue to accrue on the amount of
any payment received by Lender's Commercial Finance Department for a period of
two (2) days following the day it is credited.
(f) In determining the outstanding balance of the Loans,
(i) domestic checks received by Lender's Commercial Finance Department before
12:30 p.m. of a Banking Day will be credited on that Banking Day, and thereafter
on the following Banking Day; (ii) any other form of funds received by Lender's
Commercial Finance Department will be credited on the Banking Day when that
Department has received notification of collection, if before 12:30 p.m., or on
the following Banking Day, if after 12:30 p.m.; and (iii) all credits shall be
conditional upon final payment to Lender in cash or solvent credits of the items
giving rise to them and, if any item is not so paid, the amount of any credit
given for it shall be charged to the balance of the Loans whether or not the
item is returned.
4.3 FACILITY FEE. Borrower shall pay to Lender a facility fee equal
to $75,000 as follows: (a) $56,250 shall be paid simultaneously with the
execution and delivery of this Agreement ($10,000 of which was paid prior to the
date hereof), and (b) $18,750 shall be paid on the first anniversary of this
Agreement.
4.4 REIMBURSEMENT OF INCREASED COST TO LENDER. If any law, regulation
or guideline, including, without limitation, any change in any law, regulation
or guideline and/or in the interpretation or application thereof, or any order
or ruling by any Governmental Authority, or compliance by Lender with any
request or directive (whether or not having the force of law) of any
Governmental Authority, shall impose, modify, or deem applicable to Lender any
reserve, capital, special deposit or other requirement or condition (including,
without limitation, under Regulation D issued by the Board of Governors of the
Federal Reserve System) in respect of this Agreement or any of the Loans which
results in an increased cost or reduced benefit to Lender in maintaining,
making, issuing or renewing any Loan (as determined by reasonable allocation of
the aggregate of such increased costs or reduced benefits to
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Lender resulting from such event), then Borrower shall pay to Lender from time
to time upon demand additional amounts sufficient to compensate Lender for such
increased costs or reduced benefits, together with interest on each such amount
from a date ten (10) days after the date of such demand until payment in full
thereof at the rate then applicable to such Loan. A certificate shall be
provided to Buyer setting forth in reasonable detail such increased cost
incurred or reduced benefit realized by Lender as a result of any such event and
such certificate shall be conclusive as to the amount thereof, absent manifest
error.
4.5 OPTIONAL PREPAYMENTS OF EQUIPMENT LOANS.
(a) Borrower may, at any time and from time to time,
prepay any Equipment Loan, in whole or in part, without premium or penalty, upon
at least three (3) Banking Days' notice to Lender, specifying the date and
amount of prepayment and which Equipment Loan(s), and if more than one, the
amount of payment allocable to each.
(b) If a notice of prepayment is given by Borrower
pursuant to Subsection 4.5(a) hereof, Borrower shall make such prepayment, and
the payment amount specified in such notice shall be due and payable on the date
specified therein, together with accrued interest to such date on the amount
prepaid. Partial prepayments pursuant to this Subsection 4.5(b) shall be in an
aggregate principal amount of $10,000 or a whole multiple of $10,000 in excess
thereof (or such lesser principal amount as may be outstanding with respect to
each Equipment Loan being prepaid). Optional prepayments of any Equipment Loan
shall be applied to installments of principal in the inverse order of the
scheduled maturity of such installments.
4.6 MANDATORY PREPAYMENTS OF LOANS.
(a) If the outstanding principal amount of Revolving Loans
on any date exceeds the Revolving Credit Limit on such date or if the
outstanding principal amount of Equipment Loans on any date exceeds the
Equipment Credit Limit on such date, (i) such excess shall nevertheless
constitute Obligations, be secured by the Collateral and be subject to the terms
of this Agreement and (to the extent applicable) the other Loan Documents, and
(ii) Borrower shall make a prepayment of Loans in an amount equal to such
excess.
(b) In the event that the Revolving Line of Credit is
terminated in accordance with this Agreement, Borrower shall prepay the
outstanding principal amount of all Equipment Loans.
(c) Each mandatory prepayment of a Loan shall be
accompanied by payment in full of all accrued interest thereon to and including
the date of such prepayment. Mandatory prepayments of any Equipment Loan shall
be applied to installments of principal in the inverse order of their scheduled
maturity.
4.7 TERMINATION OF REVOLVING LINE OF CREDIT.
(a) Borrower shall have the right to terminate the
Revolving Line of Credit only upon (i) giving thirty (30) days' prior written
notice to Lender of the intended termination date, (ii) paying to Lender in full
the principal and interest on the Loans and all other Obligations (which shall
become due and payable on the stated termination date without presentment,
demand, protest, or further notice of any kind, all of which are hereby
expressly waived by Borrower), and (iii) paying to Lender any
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amounts due hereunder or under the other Loan Documents in connection with the
prepayment of the Loans, including, without limitation, amounts due under
Subsection 4.7(b) hereof.
(b) If Borrower elects to terminate the Revolving Line of
Credit, Borrower shall pay to lender an additional fee equal to two percent
(2%), if the Revolving Line of Credit is terminated prior to the first
anniversary hereof, or one percent (1%), if the Revolving Line of Credit is
terminated after the first but prior to the second anniversary hereof, of the
average unpaid principal balance of the Revolving Loans during the six (6)
months preceding such termination.
4.8 MONTHLY STATEMENTS. Once each month Lender shall render a
statement of account to Borrower showing the current status of principal and
interest with respect to the outstanding Loans. The statement of account
rendered by Lender shall be considered correct, accepted by Borrower and
conclusively binding upon Borrower, unless Borrower gives Lender written notice
to the contrary within ten (10) Banking Days after the sending of the statement
by Lender. If Borrower disputes the correctness of Lender's statement,
Borrower's notice shall specify in reasonable detail the particulars of its
basis for contending that Lender's statement is incorrect.
5. CONDITIONS PRECEDENT
5.1 CONDITIONS TO INITIAL LOANS. The obligation of Lender to make the
first Revolving Loan and to consider making any Equipment Loan is subject to the
satisfaction of each of the conditions precedent listed on Exhibit C hereto.
5.2 CONDITIONS TO ALL LOANS. The obligation of Lender to make each
Revolving Loan after the first Revolving Loan and to make any Equipment Loan (in
the event that, in its sole discretion, it agrees to make such Equipment Loan),
is subject to the satisfaction of each of the following conditions precedent as
of the date of the making of such Loan:
(a) Representations and Warranties. The representations
and warranties made by Borrower in or pursuant to this Agreement or any other
Loan Document, including any contained in any certificate or financial or other
statement or other Document furnished at any time hereunder or thereunder or in
connection herewith or therewith, shall be true and correct in all material
respects on and as of the date such Loan is requested to be made and is to be
made (or if expressly applicable only to an earlier date, such as financial
statements, as of such date).
(b) No Event of Default or Default. No Event of Default or
event which, with the giving of notice, the lapse of time or both, would
constitute an Event of Default, shall have occurred and be continuing (after
giving effect to the Loans requested to be made) on the date such Loan is
requested to be made and is to be made.
(c) Equipment Loans. With respect to each Equipment Loan
that Lender has agreed to make, (i) Lender shall have received an Equipment
Note, payable to the order of Lender conforming to requirements hereof and
executed by a duly authorized officer of Borrower, and (ii) the other conditions
specified in Subsection 3.5 hereof shall have been satisfied.
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6. SECURITY INTERESTS; CROSS COLLATERALIZATION AND CROSS DEFAULT
6.1 GRANT OF SECURITY INTERESTS. As security for the full and
punctual payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of all of the Obligations, whether pursuant to this
Agreement or otherwise, Borrower hereby pledges, transfers and assigns to Lender
(and its successors and assigns), and grants to Lender (and its successors and
assigns) security interests in, (a) all of the Collateral now or hereafter owned
by Borrower, wherever located and whether now existing or hereafter created, and
(b) all accessions and additions thereto, replacements and substitutions
therefor, and all proceeds and products thereof. The security interest granted
hereby, and all remedies and other rights stated or referred to in this
Agreement or any other Loan Document, shall continue in full force and effect
until the later of (i) the termination of the Revolving Line of Credit or (ii)
the full, final and indefeasible payment and performance of the Obligations.
Upon the termination of the security interest granted hereby in accordance with
the terms hereof, Lender shall, promptly after requested in writing to do so by
Borrower, execute and deliver to Borrower UCC-3 Termination Statements
terminating all UCC-1 Financing Statements filed in connection with such
security interest.
6.2 CROSS DEFAULT; CROSS COLLATERALIZATION. Borrower hereby agrees
that (a) all other agreements between Borrower and Lender or any of its
affiliates are hereby amended so that a default under this Agreement is a
default under all such other agreements, and a default under any one of such
other agreements is a default under this Agreement, and (b) the Collateral under
this Agreement and the other Loan Documents secures the Obligations and all
other obligations now or hereafter outstanding under all other agreements
between Borrower and Lender or any of its affiliates, and the collateral pledged
under any such other agreement with Lender or any of its affiliates secures the
Obligations.
6.3 FURTHER ASSURANCES. Without limiting the generality of Section
8.14 hereof, Borrower shall execute and deliver such financing statements and
other Documents (in form and substance reasonably satisfactory to Lender) and
take such other actions as Lender may request from time to time in order to
create, perfect or continue the security interests and other Liens provided for
by this Agreement and the other Loan Documents under the UCC or other laws of
the State of New Jersey or under any other state or federal law, including,
without limitation, the filing of any financing or continuation statements under
the Uniform Commercial Code in effect in any jurisdiction with respect to the
Liens created hereby or thereby. Borrower also hereby authorizes Lender to file
any such financing or continuation statement, and all other types of Documents
required to be filed to perfect any of the Liens granted herein, without the
signature of Borrower to the extent permitted by applicable law. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
6.4 COLLECTION AND REMITTANCE. Borrower covenants and agrees that at
any time after being requested to do so by Lender (and at any time after the
occurrence and during the continuance of an Event of Default, whether or not
requested to do so by Lender), Borrower shall (a) receive in trust for and as
the property of Lender all payments on Accounts, whether for the sale of goods
or performance of services or otherwise, all other similar payments on
Inventory, and all similar payments, in each case whether cash, checks, drafts,
notes, acceptances or other forms of payment, and all chattel paper and (b)
deliver such payments and chattel paper to Lender forthwith in the identical
form in which received (except for its endorsement when required). Without
limiting the generality of the preceding sentence, Borrower agrees that at any
time after Lender requests Borrower to do so (and at any time after the
occurrence and during the continuance of an Event of Default, whether or not
requested to do so by Lender), Borrower shall deposit all cash, checks and other
instruments related to an Account or otherwise
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related to the sale of products or the performance of services by Borrower into
a blocked checking account at a branch of Lender local to Borrower on a daily
basis and such deposits shall be applied to the balance of the Loans in such
order as Lender elects.
7. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender, knowing and intending
that Lender will rely thereon in making the Loans, that the following statements
are true and accurate:
7.1 ORGANIZATION AND QUALIFICATION.
(a) Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of New Jersey.
(b) Borrower has the power and authority, and all
necessary licenses and other authorizations, to own, lease, operate and encumber
its properties and to carry on its business as now conducted or as reasonably
anticipated to be conducted, and is duly qualified and in good standing in each
jurisdiction wherein the nature of the property owned, leased or used or of the
business conducted by Borrower requires such qualification.
7.2 DUE AUTHORIZATION; NO DEFAULT.
(a) The execution, delivery and performance by Borrower of
this Agreement, the Notes and the other Loan Documents are within Borrower's
power and authority, have been duly authorized by all necessary action on the
part of Borrower, and do not and will not (i) violate Borrower's Organizational
Documents or any applicable regulation or law, or any judgment, order or decree
of any Governmental Authority, (ii) constitute a material breach of, or other
default under, any agreement or other Document to which Borrower is a party or
by which Borrower may be subject, affected or bound (any consents required
thereby having previously been obtained), or (iii) result in the imposition of
any Lien or restriction on any assets of Borrower (except in favor of Lender).
(b) Borrower has delivered to Lender true and complete
copies of Borrower's resolutions necessary to authorize the transactions
contemplated by this Agreement, and of Borrower's Organizational Documents in
effect on the date hereof, in each case certified by a duly authorized officer
of Borrower.
(c) This Agreement, the Notes and each other Loan Document
to which Borrower is a party have been duly executed and delivered on behalf of
Borrower. This Agreement, the Notes and the other Loan Documents to which
Borrower is a party are legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms.
7.3 NO GOVERNMENTAL CONSENT NECESSARY. Except as set forth on
Schedule 11 hereto and those which have been obtained or made and are in full
force and effect, no consent, authorization, approval or other action by, and no
notice to or filing with, any Governmental Authority is required for the due
execution, delivery and performance by Borrower of, or the validity or
enforceability of, this Agreement, the Notes or any other Loan Document.
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7.4 NO PROCEEDINGS. There are no pending or, to the best of
Borrower's knowledge, threatened, claims, actions, proceedings or investigations
before any arbitrator or Governmental Authority that may, singly or in the
aggregate, have a Material Adverse Effect.
7.5 FINANCIAL STATEMENTS.
(a) Each of the consolidated balance sheets (including
related notes and schedules, if any) of Borrower as of December 31, 1994,
December 31, 1995 and September 30, 1996, and the related statements of income,
changes in stockholders' equity and cash flows (including related notes and
schedules, if any) for the nine months ended September 30, 1996, and for each of
the two fiscal years ended December 31, 1994 and December 31, 1995, contained in
documents filed, or required to be filed, by Borrower with the SEC, complied as
to form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied consistently throughout the periods involved, and fairly presented
the consolidated financial position of Borrower and Oxford as at the respective
dates and the consolidated results of operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount or effect.
(b) Except as set forth in the consolidated balance sheet
of Borrower and Oxford as at September 30, 1996 (the "Balance Sheet"), Borrower
does not have any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) which would be required to be reflected on a
consolidated balance sheet of Borrower, or in the notes thereto, prepared in
accordance with GAAP, except for liabilities and obligations incurred in the
ordinary course of business since the date of the Balance Sheet which would not,
individually or in the aggregate, have a Material Adverse Effect.
(c) The one year projections of Borrower (copies of which
are to be delivered to Lender pursuant to Section 8.15 hereof) will be based
upon all information which is pertinent thereto, and to the best knowledge of
Borrower, no facts will exist at the date of delivery thereof which would result
in any material change in any of such projections or in any estimate reflected
therein. Such projections will be based upon reasonable estimates and
assumptions, all of which are fair in light of current conditions, and will
reflect the reasonable estimate of Borrower of the results of operations and
other information projected therein. Subject to Section 15.10 hereof, Lender
shall hold such projections confidential in accordance with its customary
procedures in respect of confidential information.
(d) All other financial information, reports and other
Documents furnished by Borrower to Lender prior to the date hereof are, and all
other financial information, reports and other Documents hereafter furnished
will be at the time the same are so furnished, true, accurate and complete in
all material respects.
7.6 NO CHANGE IN CONDITION; SOLVENCY.
(a) There has been no material adverse change in
Borrower's condition (financial or otherwise), results of operations, assets or
operations since September 30, 1996.
(b) After giving effect to the Loans to be made by Lender
on the date hereof, Borrower's assets, at a fair valuation, exceed Borrower's
liabilities (including, without limitation,
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contingent liabilities). Borrower is paying its debts as they become due and
Borrower has capital and assets sufficient to carry on its business as now
conducted and as reasonably anticipated to be conducted.
7.7 COMPLIANCE WITH LAWS. Except as set forth in Schedule 13 hereto,
Borrower is in compliance with all federal, state and local statutes, rules,
regulations, orders and other provisions or requirements of law applicable to
its ownership, lease or use of properties and its other assets, the conduct of
its business and otherwise; Borrower has not received any written notice of
violation of any of the foregoing; and Borrower is not in violation of any
judgment, order or decree of any Governmental Authority or any arbitrator.
7.8 NO OTHER VIOLATIONS. Borrower is not in violation of any term of
its Organizational Documents, and no event or condition has occurred and is
continuing which constitutes or results in (or would constitute or result in,
with the giving of notice, lapse of time or both, or the occurrence of any other
condition) (a) a breach of, or other default under, any agreement, undertaking,
instrument or other Document to which Borrower is a party or by which Borrower
or any of its property may be subject, affected or bound, except for failures
which individually or in the aggregate would not have a Material Adverse Effect,
or (b) the imposition of any Lien or restriction on any asset of Borrower.
7.9 TAXES AND ASSESSMENTS. Except as set forth in Schedule 13 hereto,
Borrower has filed all federal, state and local tax returns and other reports it
is required to file on or prior to the date hereof (or has obtained valid,
written extensions which are in full force and effect as to any not so filed).
Borrower has paid all taxes, assessments and other governmental charges due and
payable on or prior to the date hereof, and has made adequate provision for the
payment of taxes, assessments and charges accrued but not yet payable, which
provisions are reflected in the Balance Sheet. To the best of Borrower's
knowledge, there is no deficiency or additional assessment in connection with
any taxes, assessments or other governmental charges.
7.10 ACCOUNTS. The amount represented by Borrower to Lender from time
to time as owing by each Account debtor and by all Account debtors in respect of
the Accounts and the proper aging therefor was, and at such time as it is
hereafter given to Lender will be, the correct amount actually owing by each
such Account debtor or debtors thereunder, with the aging therefor accurate in
all material respects. No amount payable to Borrower under or in connection with
any of the Accounts is evidenced by an instrument or chattel paper which has not
been delivered to Lender and endorsed by Borrower in form and substance
satisfactory to Lender. Each of the Accounts listed on the list of Accounts
dated December 31, 1996, delivered to Lender meets the criteria for a Qualified
Account, except as set forth in such list.
7.11 BOOKS AND RECORDS. Borrower maintains its books and records
relative to its Accounts, its Inventory, its Equipment and all other Collateral
at the location listed on Schedule 1 hereto.
7.12 LOCATION OF COLLATERAL. The Equipment (other than Portable
Computer Equipment) and other tangible property constituting part of the
Collateral is kept at the locations listed on Schedule 1 hereto. None of the
Equipment or other tangible property constituting part of the Collateral is or
will be, (a) located in or on any premises other than those identified in
Schedule 1 hereto, except that Portable Computer Equipment may be temporarily
located in or on another premises, or (b) in the possession or under the control
of a warehouseman or other Person. Schedule 1 hereto contains an accurate record
of all landlords of premises leased by Borrower and of all mortgagees and
similar holders of Liens in or on such premises. Borrower owns no real property
except as set forth in Schedule 2 hereto.
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7.13 PLACES OF BUSINESS. The principal place of business and chief
executive office of Borrower is located at the location specified as such in
Schedule 2 hereto. Borrower has not at any time within the past six (6) months
preceding the execution of this Agreement maintained its principal place of
business and chief executive office at any other location. Schedule 2 hereto
lists all of the other offices or locations in or from which Borrower conducts
any of its business or operations.
7.14 OTHER NAME OR ENTITIES. Except as disclosed on Schedule 3
hereto, no part of Borrower's business is conducted through any corporate
subsidiary, unincorporated association or other entity and Borrower has not,
within the five (5) years preceding the date of this Agreement (a) changed its
name, (b) used any name other than the name stated at the beginning of this
Agreement, or (c) merged or consolidated with, or acquired the assets of, any
other Person or business.
7.15 TITLE AND LIENS. Borrower has good and marketable title to all
of the Collateral as sole owner thereof, free and clear of any Lien, except the
Liens created by this Agreement and any Liens identified on Schedule 4 hereto.
None of the Collateral is subject to any prohibition against encumbering,
pledging, hypothecating or assigning the same or requires notice or consent in
connection therewith (other than those which have been made or obtained prior to
the date hereof).
7.16 PERFECTED FIRST PRIORITY LIENS. Upon the (a) filing of UCC-1
financing statements in the jurisdictions and offices listed on Schedule 5
hereto and the filing of the Trademark Security Agreement in the United States
Patent and Trademark Office, the Liens granted in favor of Lender pursuant to
this Agreement and pursuant to the other Loan Documents shall constitute
perfected Liens on the Collateral in favor of Lender, which are prior to all
other Liens on such Collateral (other than Permitted Liens) and which are
enforceable as such against all creditors of and purchasers from Borrower,
against any owner or occupier of the real property (subject to state law) where
any of the Collateral is located and against any present or future creditor
obtaining a Lien on such real property or personal property.
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7.17 ERISA AND OSHA.
(a) Borrower is in compliance in all material respects
with the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the related provisions of the Internal Revenue Code, as
amended and/or recodified from time to time (the "Code") and with all
regulations and published interpretations issued thereunder by the United States
Treasury Department, the United States Department of Labor and the Pension
Benefit Guaranty Corporation ("PBGC"). Except for occurrences that individually
or in the aggregate would result in a liability of Borrower less than $25,000,
neither a "reportable event" as defined in Section 4043 of ERISA, nor a
non-exempt "prohibited transaction" as defined in Section 406 of ERISA or
Section 4975 of the Code, has occurred and is continuing with respect to any
employee benefit plan subject to ERISA established or maintained, or to which
contributions have been made, by Borrower or by any trade or business (whether
or not incorporated) which together with Borrower would be treated as a single
employer under Section 4001 of ERISA (any such trade or business being referred
to hereinafter as an "ERISA Affiliate," and any such employee benefit plan being
referred to hereinafter as a "Plan"). No notice of intention to terminate a Plan
has been filed nor has any Plan been terminated; the PBGC has not instituted
proceedings to terminate, or to appoint a trustee to administer, any Plan, nor
do circumstances exist that constitute grounds for any such proceedings; and
neither Borrower nor any ERISA Affiliate has completely or partially withdrawn
from any multiemployer Plan described in Section 4001(a)(3) of ERISA, which
withdrawal would result in a liability of Borrower in excess of $25,000.
Borrower and each ERISA Affiliate has met the minimum funding standards under
ERISA with respect to each of its Plans; no Plan of Borrower or of any ERISA
Affiliate has an accumulated funding deficiency or waived funding deficiency
within the meaning of ERISA; and no material unpaid liability to the PBGC under
ERISA has been incurred by Borrower or any ERISA Affiliate.
(b) Borrower has duly complied with, and its facilities,
business, leaseholds, equipment and other assets are in compliance with, in all
material respects, the provisions of the federal Occupational Safety and Health
Act and all rules and regulations thereunder and all similar state and local
laws, rules and regulations; and there are no outstanding citations, notices or
orders of non-compliance issued to Borrower or relating to its facilities,
business, leaseholds, equipment or other property under any such law, rule or
regulation.
7.18 INSURANCE. The information respecting insurance listed on
Schedule 6 hereto, consisting of the name of the insurer, the face amount of
such policy, the type of coverage provided for in such policy and the deductible
therefor, is true and complete in all material respects. Each such insurance
policy is in full force and effect and complies with the provisions of
Subsections 8.7(a)(ii), (iii) and (iv) hereof.
7.19 ENVIRONMENTAL MATTERS. Except as disclosed on Schedule 7 hereto,
neither Borrower nor, to the best knowledge of Borrower, any other Person has
ever caused or permitted any Hazardous Substance to be placed, held, located or
disposed of, or otherwise engaged in any Environmental Activity from, on, under
or at any real property owned, leased or otherwise occupied by Borrower, or any
part thereof, in violation of any applicable Environmental Law, and none of such
real property has been used (whether by Borrower or, to the best of Borrower's
knowledge, by any other Person) as a dump site or storage site (whether
permanent or temporary) for any Hazardous Substance or any other Environmental
Activity, except in compliance with applicable Environmental Laws. Except as
disclosed on Schedule 7 hereto, there are no pending claims or litigation or
other Environmental Complaints, and Borrower has not received any written
communication from any Person concerning the
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presence or possible presence of any Hazardous Substance or any other
Environmental Activity at any of such real property or concerning any violation
or alleged violation of any applicable Environmental Law.
7.20 FEDERAL REGULATIONS. No part of the proceeds of any Revolving
Loan or the Term Loan will be used, directly or indirectly, to purchase or carry
any "margin stock" (as defined in Regulation U issued by the Board of Governors
of the Federal Reserve System), to extend credit to others for the purpose of
purchasing or carrying any such margin stock, or for any purpose that violates
any provision of Regulations G, T, U or X issued by the Board of Governors of
the Federal Reserve System. Borrower is not an "investment company" registered
or required to be registered under the Investment Company Act of 1940, as
amended, nor is Borrower controlled by any such company.
7.21 PROPRIETARY RIGHTS. Borrower owns, or has a valid license or
sublicense in, all Patents, patent and know-how licenses, inventions, technology
permits, Trademarks, copyrights, product designs, applications, formulae,
processes and other intellectual property rights (collectively, "proprietary
rights") used or useful in the operation of its business in the manner in which
it is currently being or proposed to be conducted. Schedule 8 hereto lists all
Patents owned by Borrower in its own name as of the date hereof. Schedule 9
hereto lists all Trademarks owned by Borrower in its own name as of the date
hereof. To the best of Borrower's knowledge, there is no existing or threatened
infringement or misappropriation of any proprietary rights of others by Borrower
or of any proprietary rights of Borrower by others. Each Patent and Trademark of
Borrower has not been abandoned and is subsisting, unexpired, and, to Borrower's
knowledge, valid and enforceable. No Patent or Trademark is the subject of any
licensing or franchise agreement. To Borrower's knowledge, no holding, decision
or judgment has been rendered by any Governmental Authority which would, or
which seeks to, limit, cancel or question the validity of any of the Patents or
Trademarks, and no such action or proceeding is pending.
7.22 REPRESENTATIONS AND WARRANTIES TRUE, ACCURATE AND COMPLETE;
CONFIRMATION.
(a) None of the representations, warranties or statements
to Lender contained in this Agreement, in any of the other Loan Documents or in
any other Document delivered to Lender in connection with the Collateral, this
Agreement, any other Loan Document or any of the transactions contemplated
hereby and thereby (including, without limitation, all forms, reports, and
documents filed by Borrower with the SEC) contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make such representation, warranty or statement not misleading in
light of the circumstances under which it is made. All of such representations,
warranties and statements shall survive until full and final and indefeasible
payment and performance of the Obligations.
(b) Borrower's acceptance of each Loan under this
Agreement shall constitute a reaffirmation of the representations and warranties
set forth in this Article 7 as of the date of such Loan. If requested by Lender,
Borrower shall, as a precondition to such Loan, further confirm such matters by
delivery of a certificate dated the day of such Loan and signed by a duly
authorized officer of Borrower satisfactory to Lender.
7.23 STOCK; SUBSIDIARIES. Since September 30, 1996, Borrower has not
issued any other shares of its capital stock or any securities convertible into
shares of its capital stock or any options, warrants or other rights to acquire
such shares, except for options and stock purchase rights issued pursuant to and
in accordance with the Company's Non-Employee Director Stock Option Plan and the
Company's 1996 Stock Plan. Borrower has no subsidiaries except those listed in
Schedule 12 hereto.
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7.24 CONSUMMATION OF MERGER. The Merger of Oxford with and into
Borrower has been duly consummated in accordance with the merger agreement
executed in connection therewith and the plan of merger relating thereto, true
and complete copies of which have been delivered to Lender.
7.25 SEC FILINGS. Borrower has heretofore delivered to Lender true
and complete copies of (i) Amendment No. 3 to Form SB-2, as filed with the SEC
on August 30, 1996, Form SB-2, as filed with the SEC on November 21, 1996,
Amendment No. 1 to Form SB-2, as filed with the SEC on November 26, 1996, a
Prospectus dated September 27, 1996, and Form 10-QSB for the quarterly period
ended September 30, 1996, all filed by Borrower, and (ii) all other reports or
registration statements filed with the SEC, in each case as filed with the SEC.
Borrower has filed all required forms, reports and documents with the SEC, all
of which were prepared in accordance with the requirements of the Securities Act
of 1933, as amended and the Securities Exchange Act of 1934, as amended.
8. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until full and final payment and
performance of the Obligations and so long as the Revolving Line of Credit
remains in effect, Borrower shall:
8.1 MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Maintain and
preserve in full force and effect its existence and good standing and all other
rights, powers, franchises, licenses and qualifications (including proprietary
rights) necessary or desirable for its ownership, lease or use of properties or
the conduct of its business.
8.2 PAYMENT OF TAXES AND OTHER OBLIGATIONS.
(a) Pay before they become delinquent, all taxes,
assessments and governmental charges imposed upon it or any of its property or
required to be collected by it, other than taxes, assessments and governmental
charges being contested in good faith by appropriate proceedings and with
respect to which Borrower has maintained adequate reserves in accordance with
GAAP.
(b) Perform in all material respects all of its
obligations under the terms of each mortgage, security agreement, debt
instrument and other Contract by which it is bound or to which it is a party,
other than obligations for the payment of money under Contracts with
subcontractors of Borrower that are being contested in good faith and provided
that the failure to timely satisfy such payment obligations could not,
individually or in the aggregate, have a Material Adverse Effect.
8.3 MAINTENANCE OF PROPERTIES. Maintain its properties and other
assets in overall good working order and condition (ordinary wear and tear
excepted).
8.4 NOTICE OF ADVERSE EVENTS. Promptly notify Lender, in writing, of
the occurrence or existence of any of the following: (a) any Event of Default or
any event which, with the giving of notice, the lapse of time, or both, would
become an Event of Default, (b) any matter or event which has resulted in, or
may result in, a material adverse change in the condition (financial or
otherwise), results of operations, assets or operations of Borrower, (c) any
material claim, action, proceeding or investigation filed or instituted against,
or relating to the operations of, Borrower, or any adverse determination in any
material action, proceeding or investigation affecting Borrower, (d) any loss
from casualty or theft in
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excess of $50,000, whether or not insured, affecting the assets of Borrower, or
(e) if any of the representations and warranties made by Borrower contained in
this Agreement, or in any other Loan Document or any other Document delivered to
Lender by or on behalf of Borrower in connection with this Agreement or any of
the transactions contemplated hereby, ceases to be true, correct and complete.
8.5 INFORMATION AND DOCUMENTS TO BE FURNISHED TO LENDER. Furnish to
Lender in form and substance satisfactory to Lender:
(a) Annual Financial Statements. As soon as available, but
in no event later than ninety (90) days after the end of each fiscal year of
Borrower, a consolidated and consolidating balance sheet of Borrower as of the
end of such year, a consolidated and consolidating statement of income for such
year, and consolidated and consolidating statements of changes in cash flows and
changes in stockholders' equity for such year (all in reasonable detail and with
all notes and supporting schedules), audited by an independent certified public
accountant reasonably satisfactory to Lender and certified by such independent
certified public accountant, without qualification or exception, as presenting
fairly the financial condition of Borrower and its consolidated subsidiaries as
of the dates and the results of operations, changes in cash flow and changes in
stockholders equity for the periods indicated and as having been prepared in
accordance with GAAP. For purposes of this Agreement, Arthur Andersen LLP shall
be deemed to be a certified public accountant satisfactory to Lender.
(b) Quarterly Financial Statements. As soon as available,
but in no event later than forty-five (45) days after the end of the first three
fiscal quarters of each fiscal year of Borrower, a consolidated and
consolidating balance sheet of Borrower as of the end of such quarter,
consolidated and consolidating statements of income for the three-month period
and the portion of the fiscal year of Borrower ending at the end of such
quarter, and consolidated and consolidating statements of changes in cash flows
and changes in stockholders' equity for the three-month period and the portion
of the fiscal year of Borrower ending at the end of such quarter (all in
reasonable detail and with all notes and supporting schedules to the extent
required to be included in Borrower's Form 10-Q or 10-QSB, as applicable), to
the extent that they relate to dates or periods on or before June, 1998,
reviewed by an independent certified public accountant reasonably satisfactory
to Lender and in all cases prepared in accordance with GAAP.
(c) Monthly Financial Statements and Aging Schedules. As
soon as available, but in no event later than twenty (20) days after the end of
each month, (i) Borrower's monthly internally-generated balance sheet, income
statement and statement of changes in cash flows (all prepared in reasonable
detail and in accordance with GAAP); and (ii) Account and account payable aging
reports (all prepared in reasonable detail and on a form acceptable to Lender).
Subject to Section 15.10 hereof, Lender shall hold such monthly financial
statements and Account and account payable aging reports confidential in
accordance with its customary procedures in respect of confidential information.
(d) Borrowing Base Certificates. Within fifteen (15) days
after the end of each month, a Borrowing Base Certificate as of the last Banking
Day of such month, and at any time upon the request of Lender, a Borrowing Base
Certificate as of the most recent date that such Borrowing Base Certificate may
be calculated.
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(e) Certificates Regarding Financial Statements.
(i) Concurrently with the delivery of the
financial statements referred to in Subsection 8.5(a) and (b) hereof,
and any other financial statement, report, compilation, tax return or
other document with respect to which an independent certified public
accountant performed services and rendered an opinion, a certificate
of such independent certified public accountant in form and substance
satisfactory to Lender stating that such independent certified public
accountant acknowledges that Lender will rely on such financial
statement, report, compilation, tax return or other document and that
Borrower knows of the intended reliance by Lender.
(ii) Concurrently with the delivery of the
financial statements referred to in Subsections 8.5(a) through 8.5(c)
hereof, a certificate of the chief financial officer of Borrower (A)
stating that to the best of his knowledge (after due inquiry of the
responsible officers and employees of Borrower) no Event of Default
or no default or other event which, with the giving of notice, the
lapse of time, or both, would become an Event of Default has occurred
except as specified in such certificate, (B) stating that all such
financial statements (1) are complete and correct in all material
respects (subject, in the case of interim statements, to normal
year-end audit adjustments), (2) present fairly the financial
condition of Borrower as of the dates indicated and the results of
operations, changes in cash flow and changes in stockholders' equity
for the periods indicated, as appropriate, and (3) have been prepared
in accordance with GAAP, and (C) showing in detail the calculations
supporting compliance with the covenants contained in Sections 9.18
9.19 hereof and any other Section respecting financial covenants
requested by Lender.
(f) ERISA Documents. Upon the request of Lender, any ERISA
report, notice, return or other Documents filed as required by or in compliance
with ERISA, whether to the Internal Revenue Service, the Department of Labor,
the PBGC or any other appropriate Governmental Authority.
(g) Other Documents. Promptly after requested:
(i) a certificate executed by a the President or
the Chief Financial Officer of Borrower satisfactory to Lender
stating that to the best knowledge of such person (after due inquiry
of the responsible officers and employees of Borrower) there then
exists no Event of Default hereunder and no default or other event
which, with the giving of notice, or the lapse of time, or both,
would constitute an Event of Default;
(ii) all original and other Documents evidencing a
right to payment, including, but not limited to, invoices, original
orders, and shipping and delivery receipts;
(iii) at any time after requested to do so by Lender
(and at any time after the occurrence and during the continuance of
an Event of Default, whether or not requested to do so by Lender),
daily reports of all of Borrower's Accounts, sales and collections in
form satisfactory to Lender with such supporting Documents as Lender
may reasonably require; and
(iv) such other Documents or information as Lender
may reasonably request, including, without limitation, financial
projections and cash flow analysis
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(h) SEC Documents. As soon as available, true and complete
copies of any report or statement mailed by Borrower to its stockholders
generally or filed by Borrower with the SEC subsequent to the date hereof.
8.6 ACCESS TO RECORDS AND PROPERTY. At any time and from time to time
(and provided no Event of Default has occurred and is continuing, upon
reasonable prior notice from Lender), at the request of Lender, give Lender
and/or any representative of Lender access during normal business hours to
inspect any of Borrower's assets (including, without limitation, all Collateral)
and to examine, copy and make abstracts from any and all books, records and
Documents in the possession of Borrower or any independent contractor relating
to Borrower's affairs or the Collateral (including, without limitation, returns
for federal income tax and other taxes).
8.7 INSURANCE AT BORROWER'S EXPENSE.
(a) Liability and Property Insurance. Maintain at
Borrower's expense with financially sound and reputable insurers, insurance in
such amounts, with such deductibles and covering such risks (including, without
limitation, fire, theft, public liability, property damage, business
interruption, employee fidelity and workers' compensation insurance) as are
sufficient and as are usually carried by companies engaged in the same or a
similar business in the same general area; provided that the amount of such
insurance in effect from time to time shall in no event be less than the
replacement value of the insurable assets of Borrower. Such insurance shall be
evidenced by policies (i) in form and substance reasonably satisfactory to
Lender, (ii) designating Lender and its assigns as additional insureds or loss
payees, as their interests may appear from time to time, with acceptable
endorsements, (iii) containing a "breach of warranty clause" whereby the insurer
agrees that a breach of the insuring conditions or any warranties or any
negligence of Borrower or any other Person or any other action or omission shall
not invalidate the insurance as to Lender and its assigns and (iv) requiring at
least thirty (30) days' prior written notice to Lender and its assigns before
cancellation or any material change shall be effective.
(b) Copies of Policies. Upon demand, deliver to Lender the
original of each policy evidencing insurance required by this Section 8.7,
together with evidence of payment of all premiums therefor.
(c) Notice and Proof of Loss. In the event of loss or
damage, forthwith notify Lender and file proofs of loss satisfactory to Lender
with the appropriate insurer, but without limiting the rights of Lender pursuant
to Subsection 10.1(j) hereof.
(d) Use of Insurance Proceeds. Without limiting the rights
of Lender pursuant to Subsection 10.1(j) hereof, (i) if no Event of Default has
occurred and is continuing, forthwith upon receipt, endorse and deliver to
Lender insurance proceeds relating to a loss in excess of $50,000, and (ii) if
an Event of Default has occurred and is continuing, forthwith upon receipt,
endorse and deliver to Lender insurance proceeds relating to any loss.
(e) No Obligation to Verify Policies. In no event shall
Lender be required to ascertain the existence of or examine any insurance
policy.
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8.8 PROCEEDS OF COLLATERAL. At any time when Borrower is required to
take the actions set forth in Section 6.4 hereof, and subject to Lender's rights
under any insurance policies maintained by Borrower pursuant to Subsection
8.7(a) hereof or any other Loan Document, forthwith upon receipt, pay to Lender
all proceeds of Collateral, whereupon such proceeds shall become Lender's sole
property.
8.9 RECORDS. Maintain complete and accurate books and records of all
its operations and assets, including, without limitation, records of the
Collateral and the status of each of the Accounts.
8.10 MAINTENANCE OF ACCOUNT AND BANKING RELATIONSHIPS. Borrower shall
maintain a demand deposit account with Lender from which Lender shall be
authorized, at its election and without demand or notice, to charge and withdraw
all amounts that are then due to Lender as provided in Section 4.2 hereof.
Borrower agrees to maintain its primary local banking deposits, including
operating and/or checking accounts, with Lender for as long as a
borrowing/lending relationship exists between Borrower and Lender.
8.11 DELIVERY OF DOCUMENTS. If any proceeds of the Accounts shall
include, or any of the Accounts shall be evidenced by, notes, trade acceptances
or instruments or documents, or if any Inventory is covered by documents of
title or chattel paper, whether or not negotiable, immediately deliver them to
Lender appropriately endorsed in a manner satisfactory to Lender. Borrower
waives protest regardless of the form of the endorsement. If Borrower fails to
endorse any instrument or document, Lender is authorized to endorse it on
Borrower's behalf.
8.12 UNITED STATES CONTRACTS. If any of the Accounts arises out of a
contract with the United States or any of its departments, agencies or
instrumentalities, immediately notify Lender and if requested by Lender execute
any Documents reasonably required by Lender in order that all money due or to
become due under such contract shall be effectively assigned to Lender and
proper notice of the assignment shall be given under the Federal Assignment of
Claims Act.
8.13 COMPLIANCE WITH LAWS. Comply in all material respects with all
laws applicable to it and/or its assets.
8.14 FURTHER ASSURANCES. From time to time, execute and deliver such
further Documents and take such further actions as Lender may reasonably request
in order to carry out the purposes of this Agreement, the Notes and the other
Loan Documents.
8.15 PROJECTIONS. Borrower shall deliver to Lender, not later than
(a) January 31, 1997, consolidated income statement and cash flow projections
for Borrower with respect to Borrower's 1997 fiscal year, and (b) January 31,
1998, consolidated income statement and cash flow projections for Borrower with
respect to Borrower's 1998 fiscal year. Subject to Section 15.10 hereof, Lender
shall hold such projections confidential in accordance with its customary
procedures in respect of confidential information.
9. NEGATIVE COVENANTS
Borrower covenants and agrees that, until full and final payment and
performance of the Obligations and so long as the Revolving Line of Credit
remains in effect, Borrower shall not, directly or indirectly:
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9.1 NO CONSOLIDATION, MERGER, ACQUISITION, LIQUIDATION. Enter into
any merger, consolidation, reorganization or recapitalization; take any steps in
contemplation of dissolution or liquidation; conduct any part of Borrower's
business through any corporate subsidiary (other than the subsidiaries listed on
Schedule 12 hereto), unincorporated association or other entity; or acquire the
stock or assets of any Person, whether by merger, consolidation, purchase of
stock or otherwise. Notwithstanding the foregoing, Borrower may make investments
(by way of contributions to capital, acquisitions of stock (other than Margin
Stock) or other equity interests or transfers of property), including those
previously made (which Lender, based upon Borrower's representation,
acknowledges totalled $513,000 as of December 31, 1996), in the subsidiaries
listed on Schedule 12 hereto, in any new wholly-owned subsidiaries formed by
Borrower after the date hereof and in Intelligroup Asia Private Limited in an
aggregate amount not to exceed $2,000,000 (less the aggregate amount of loans
and advances made pursuant to Section 9.5 hereof) at any time.
9.2 DISPOSITION OF ASSETS OR COLLATERAL. Sell, lease, license, or
otherwise transfer or dispose of any or all of the Collateral or other assets of
Borrower other than (a) the sale or license of Inventory in the ordinary course
of business, and (b) the disposition of used, worn-out or surplus property in
the ordinary course of business.
9.3 OTHER LIENS. Incur, create or permit to exist any Lien upon or
with respect to any of the Collateral, whether now owned or hereafter acquired,
except (a) the Liens created by this Agreement and the other Loan Documents, (b)
Liens identified on Schedule 4 hereto; provided that no such Lien is extended to
cover any additional property after the date hereof and that the amount of
indebtedness secured thereby, if any, is not increased after the date hereof,
(c) Liens for taxes, assessments or governmental charges not yet due or which
are being contested in good faith by appropriate proceedings and with respect to
which Borrower has maintained adequate reserves in accordance with GAAP, (d)
pledges or deposits and liens under bonds required in connection with worker's
compensation, unemployment insurance and other social security legislation, and
(e) additional Liens securing indebtedness permitted by Subsection 9.4(d) hereof
(collectively, "Permitted Liens").
9.4 OTHER LIABILITIES. Incur, create, assume or permit to exist any
indebtedness or liability on account of either borrowed money or the deferred
purchase price of property or services, except (a) Obligations to Lender, (b)
indebtedness and liabilities existing on the date of this Agreement and
disclosed on Schedule 10 hereto, (c) trade and other accounts payable incurred
in the ordinary course of business in accordance with customary trade terms and
which are not overdue for a period of more than ninety (90) days, and (d)
additional indebtedness for borrowed money incurred in the ordinary course of
business and not exceeding $250,000 in an aggregate principal amount at any time
outstanding.
9.5 LOANS. Make loans, advances or other extensions of credit to any
Person except (a) extensions of trade credit in the ordinary course of business,
(b) loans or advances to officers and employees of Borrower in the ordinary
course of business in an aggregate amount not to exceed $250,000 at any time
outstanding, and (c) loans or advances to the subsidiaries listed on Schedule 12
hereto, any new wholly-owned subsidiaries formed by Borrower after the date
hereof or Intelligroup Asia Private Limited in the ordinary course of business
in an aggregate amount not to exceed $2,000,000 (less the aggregate amount of
investments made by Borrower pursuant to the last sentence of Section 9.1
hereof) at any time outstanding. For the avoidance of doubt, payment of amounts
due to any of the Persons described in clause (c) above on account of services
performed for Borrower or goods delivered to
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Borrower by such Persons in the ordinary course of business and otherwise in
compliance with Section 9.8 hereof shall not be deemed to be loans or advances.
9.6 GUARANTIES; CONTINGENT LIABILITIES. (a) assume, guarantee,
endorse, contingently agree to purchase or otherwise become liable upon the
obligation of any Person, except (i) by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business and (ii) that Borrower may guaranty, in accordance with
Borrower's past practice, the relocation and similar start-up obligations of new
employees of Borrower who have come to the United States to work for Borrower,
in an aggregate amount not to exceed $100,000 (including those guarantees
disclosed on Schedule 10 hereto), or (b) agree to maintain the working capital
or net worth of any Person or to make investments in any Person (except for
short-term investments of excess cash in instruments which are guaranteed in
full, directly or indirectly, by the United States Government or the FDIC, or in
United States government securities, which investments shall be made in
instruments maturing less than 90 days from the date of such investment).
9.7 DIVIDENDS AND OTHER DISTRIBUTIONS. Declare or pay any cash
dividend or make any distribution on, or redeem, retire or otherwise acquire
directly or indirectly, any share of its stock, or make any distribution of
assets to its stockholders.
9.8 TRANSACTIONS WITH AFFILIATES. Enter into any transactions,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any services, with any Affiliate of Borrower unless such
transactions are otherwise permitted under this Agreement, are in the ordinary
course of Borrower's business and are upon fair and reasonable terms no less
favorable to Borrower than it would obtain in a comparable arm's-length
transaction with a Person not an Affiliate of Borrower, or pay any fees or
expenses to, or reimburse or assume any obligation for the reimbursement of any
expenses incurred by, any Affiliate of Borrower (other than reimbursement of
travel and entertainment expenses incurred in the ordinary course of business to
directors, officers or employees of Borrower).
9.9 SALE OF INVENTORY. Sell any of the Inventory on a bill-and-hold,
guaranteed sale, sale-and-return, sale on approval or consignment basis, or any
other basis subject to a repurchase obligation or return right.
9.10 REMOVAL OF COLLATERAL. Remove, or cause or permit to be removed,
any of the Collateral or other assets from the premises identified on Schedule 1
hereto, except for sales of Inventory in the ordinary course of business or the
transfer of Collateral to another premises identified on Schedule 1 hereto.
9.11 RESTRICTIONS REGARDING NOTES AND ACCOUNTS. Sell, assign,
transfer, discount or otherwise dispose of any Accounts or any promissory note
or other instrument payable to it with or without recourse, except for
collection without recourse in the ordinary course of business, or, other than
in the ordinary course of business, grant any extension of the time of payment
of any of the Accounts, release, wholly or partially, any Person liable for the
payment thereof, or allow any credit or discount whatsoever thereon.
9.12 SETTLEMENTS. Compromise, settle or adjust any claim relating to
any of the Collateral in a material amount, except as permitted by Section 9.11
hereof.
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9.13 MODIFICATION OF ORGANIZATIONAL DOCUMENTS. Change, alter or
modify, or permit any change, alteration or modification of, its Organizational
Documents in any manner that would adversely affect the rights of Lender
hereunder and under the other Loan Documents or the ability of Borrower to
perform its obligations hereunder and thereunder. Borrower shall provide at
least five (5) days prior written notice to Lender of any change, alteration or
modification permitted by this Section 9.13.
9.14 CHANGE BUSINESS. Cause or permit a material change in the nature
of its business as conducted on the date of this Agreement.
9.15 CHANGE OF LOCATION OR NAME. Change any of the following prior to
giving Lender thirty (30) days written notice thereof: (a) the location stated
in Schedule 1 hereto for the maintenance of the books and records relative to
the Accounts and the other Collateral, (b) the location of the principal place
of business and chief executive office of Borrower as stated in Schedule 2
hereto, or (c) the name under which Borrower conducts any of its business or
operations.
9.16 CHANGE OF ACCOUNTING PRACTICES. Change its present accounting
principles or practices in any material respect, except as may be required by
changes in GAAP.
9.17 INCONSISTENT AGREEMENT. Enter into any agreement or other
Document containing any provision that would be violated by the performance of
any of Borrower's obligations under this Agreement or any other Loan Document.
9.18 WORKING CAPITAL. Cause or permit Borrower's Working Capital (a)
at each fiscal year end of Borrower subsequent to December 31, 1996 to be less
than one hundred five percent (105%) of Borrower's Working Capital at the end of
the previous fiscal year of Borrower, or (b) at any time to be less than ninety
percent (90%) of Borrower's Working Capital at the end of the previous fiscal
year of Borrower.
9.19 MINIMUM TANGIBLE NET WORTH. Cause or permit Borrower's Tangible
Net Worth (a) at the end of each fiscal year of Borrower to be less than one
hundred eight percent (108%) of Borrower's Tangible Net Worth at the end of the
previous fiscal year of Borrower, or (b) at any time to be less than ninety five
percent (95%) of Borrower's Tangible Net Worth at the end of the previous fiscal
year of Borrower.
9.20 CAPITAL EXPENDITURES. Enter into any agreement to purchase
and/or pay for, or become obligated to pay for, capital expenditures, long term
leases, Capital Leases or sale lease-backs, in an amount at any time outstanding
aggregating in excess of $750,000 (for Borrower, without its consolidated
subsidiaries) during any fiscal year of Borrower.
9.21 HAZARDOUS SUBSTANCES. Release, discharge or otherwise dispose
of, or permit the manufacture, storage, transmission or presence of, any
Hazardous Substances, or otherwise cause or permit any Environmental Activity to
be conducted or exist at, over or upon any real property owned, leased or
otherwise occupied by Borrower (a) which constitutes a violation of any
Environmental Law or (b) which may be harmful or create a foreseeable risk of
unreasonable harm to public health or welfare or to natural resources.
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10. ADDITIONAL POWERS OF LENDER
10.1 POWERS OF ATTORNEY. Borrower hereby constitutes and appoints
Lender (and any employee or agent of Lender), with full power of substitution,
its true and lawful attorney and agent in fact to take any or all of the actions
described below in Lender's or Borrower's name and at Borrower's expense:
(a) Evidence of Liens. Lender may execute such financing
statements and other documents and take such other actions as Lender deems
necessary or proper in order to create, perfect or continue the security
interests and other Liens provided for by this Agreement or any other Loan
Document, and Lender may file the same (or a photocopy of this Agreement or of
any financing statement signed by Borrower) in any appropriate governmental
office.
(b) Preservation of Collateral. Lender may take any and
all action that it deems necessary or proper to preserve its interest in the
Collateral, including, without limitation, the payment of debts of Borrower that
might impair any of the Collateral or Lender's security interest therein
(including the priority of Lender's security interest therein), the purchase of
insurance on any Collateral, any amounts paid to any landlord of Borrower
arising from or otherwise relating to any Document executed by any such landlord
in connection with this Agreement, the repair or safeguarding of any Collateral,
or the payment of taxes, assessments or other Liens thereon. All sums so
expended by Lender shall constitute Obligations, shall be secured by the
Collateral, and shall be payable on demand with interest at the Default Rate
from the respective dates such sums are expended.
(c) Lender's Right to Cure. In the event Borrower fails to
perform any of its Obligations, then Lender may perform the same but shall not
be obligated to do so. All sums expended by Lender under this Subsection 10.1(c)
shall constitute Obligations, shall be secured by the Collateral, and shall be
payable on demand with interest at the Default Rate from the respective dates
such sums are expended.
(d) Verification of Accounts. Lender may make test
verifications of any and all Accounts and Inventory in any manner and through
any medium Lender considers advisable, and Borrower shall render any assistance
reasonably requested by Lender.
(e) Collections; Modification of Terms. Upon the
occurrence and during the continuance of any Event of Default, Lender may
demand, sue for, collect and give receipts for any money, instruments or
property payable or receivable on account of or in exchange for any of the
Collateral, or make any compromises it deems necessary or proper, including,
without limitation, extending the time of payment, permitting payment in
installments, or otherwise modifying the terms or rights relating to any of the
Collateral, all of which may be effected without notice to or consent by
Borrower and without otherwise discharging or affecting the Obligations, the
Collateral or the Liens granted under any of the Loan Documents.
(f) Notification of Account Debtors. Borrower, at the
request of Lender, shall notify the Account debtors of Lender's security
interest in its Accounts. Upon the occurrence and during the continuance of any
Event of Default, Lender may notify the Account debtors on any of the Accounts
to make payment directly to Lender (including pursuant to the form of letter
delivered by Borrower to Lender), and Lender may endorse all items of payment
received by it that are payable to Borrower; until
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such time as Lender elects to exercise such right of notification (and subject
to Lender's rights under Section 6.4 hereof), Borrower is authorized to collect
and enforce the Accounts.
(g) Notification as to Inventory. Lender may notify any
bailee of any Inventory of Lender's security interest therein.
(h) Endorsements. Lender may endorse Borrower's name on
checks, notes, acceptances, drafts, invoices, bills of lading and any other
Documents requiring Borrower's endorsement.
(i) Mails. Upon the occurrence and during the continuance
of any Event of Default, Lender may notify the postal authorities to deliver all
mail, parcels, and other material addressed to Borrower to Lender at such
address as Lender may direct, and Lender may open and deal with same as it deems
necessary or proper.
(j) Insurance. Lender may file proofs of loss and claim
with respect to any of the Collateral with the appropriate insurer, and may
endorse its own name and Borrower's name on any checks or drafts constituting
insurance proceeds.
10.2 IRREVOCABILITY; LENDER'S DISCRETION. Borrower covenants and
agrees that any action described in Section 10.1 hereof may be taken at Lender's
sole and absolute discretion, at any time and from time to time, and (except as
may be stated specifically to the contrary in Section 10.1 hereof with respect
to any power) whether prior or subsequent to an Event of Default, and Borrower
hereby ratifies and confirms all actions so taken. Borrower further covenants
and agrees that the powers of attorney granted by Section 10.1 hereof are
coupled with an interest and shall be irrevocable until full and final payment
and performance of the Obligations and until the Line of Credit in no longer in
effect; that said powers are granted solely for the protection of Lender's
interest and Lender shall have no duty to exercise any thereof; that the
decision whether to exercise any of such powers, and the manner of exercise,
shall be solely within Lender's discretion; and that neither Lender nor any of
its directors, officers, employees or agents shall be liable for any act of
omission or commission, or for any mistake or error of judgment, in connection
with any such powers.
11. EVENTS OF DEFAULT
The occurrence of any of the following shall constitute an "Event of
Default":
11.1 FAILURE TO PAY. Borrower fails to pay when due (a) any principal
of or interest on any Loan, whether on any principal payment date, required
prepayment dates, by acceleration or otherwise and any fees and expenses, or (b)
any other Obligation, which failure to pay any other Obligation continues after
any applicable grace period.
11.2 FAILURE TO PERFORM OR OBSERVE COVENANTS. Borrower fails to
perform or observe any other covenant, term or condition contained in this
Agreement or any other Loan Document (other than those described in Section 11.1
hereof).
11.3 FALSE REPRESENTATION OR WARRANTY. Any representation, warranty
or statement by Borrower contained in this Agreement, any other Loan Document or
any other Document delivered to Lender in connection with the Collateral, this
Agreement or any of the transactions contemplated hereby
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or reaffirmed (or hereby deemed reaffirmed) is or was when made or reaffirmed
(or deemed reaffirmed) incorrect in any material respect.
11.4 SECURITY. Lender shall not have as of the date hereof or shall
at any time hereafter cease to have a valid and perfected first priority Lien in
all of the Collateral (subject, as to first priority, to the Permitted Liens),
including, without limitation, that the grant of the security interests in this
Agreement or the Trademark Security Agreement shall never have been effective or
shall cease to be effective to grant to Lender (or Lender shall otherwise not
have obtained or cease to have) a first priority lien in all of the Collateral
(subject, as to first priority, to the Permitted Liens).
11.5 LOAN DOCUMENTS. Any of the following occurs: (a) this Agreement
or any other Loan Document shall not have been, as of the date hereof or ceases
to be, valid, effective and enforceable in any material respect, as reasonably
determined by Lender; or (b) Borrower asserts that this Agreement or any other
Loan Document shall not have been as of the date hereof, or shall have ceased to
be, valid, effective and enforceable in any material respect.
11.6 CROSS DEFAULT; DEFAULT ON OTHER DEBT. (a) Any other default
(which has not been waived) by any other Person on or with respect to any of the
Obligations (other than under the Loan Documents) occurs, or (b) any default
(which has not been waived) occurs under any other indebtedness or other
obligation of Borrower, or of any guarantor of any of the Obligations, in an
aggregate principal amount of $250,000 or more to any one or more third parties,
that entitles any such third party to declare such indebtedness or other
obligation due prior to its date of maturity.
11.7 CESSATION OF BUSINESS. (a) Borrower ceases to do business as a
going concern; or (b) the termination, suspension or loss of any license or
leasehold interest which results in Borrower having to cease a substantial part
of its operations by reason of such termination, suspension or loss for a period
of more than thirty (30) consecutive days.
11.8 CHANGE IN CONDITION. There occurs any material change in the
condition or affairs, financial or otherwise, of Borrower or of any endorser,
guarantor or surety for any of the Obligations, which in the opinion of Lender
impairs Lender's security or materially and adversely affects its risks
(including, without limitation, the termination of any one or more material
Contracts with respect to Borrower's business).
11.9 LIQUIDATION OR DISSOLUTION. Without limiting the generality of
Section 11.10 hereof, Borrower takes any action to authorize its liquidation or
dissolution or suffers any liquidation or dissolution.
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<PAGE> 34
11.10 INABILITY TO PAY DEBTS; BANKRUPTCY OR INSOLVENCY. Any one or
more of the following occur: (a) Borrower shall commence any case, proceeding or
other action (collectively, "Proceeding") (i) under any existing or future law
of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition with creditors or other similar relief with respect to
it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets, or Borrower shall make a general assignment for the benefit of its
creditors or a bulk sale; (b) there shall be commenced against Borrower any
Proceeding of a nature referred to in clause (i) above which (A) results either
in the entry of an order for relief ("Order") or an appointment and any such
Order or appointment remains undismissed in a manner reasonably satisfactory to
Lender ("Undismissed") for a period of sixty (60) days; the foregoing shall
include the commencement against Borrower of any Proceeding seeking issuance of
a warrant of attachment, execution, distraint or similar process against all or
any substantial part of its assets which results in the entry of an Order for
any such relief which remains Undismissed in a manner reasonably satisfactory to
Lender for sixty (60) days; or (c) Borrower takes any action substantially in
furtherance of, or expressly authorizing or indicating its consent to, approval
of or acquiescence in or expressly proposes to take any of the acts set forth in
clause (a) or (b) above; or (d) Borrower shall generally not be able to or fail
to, or shall expressly admit in writing its inability to, pay its debts
generally as they become due.
11.11 JUDGMENTS. One or more judgments or orders for the payment of
money exceeding $100,000 in the aggregate are rendered against Borrower, and any
such judgment or order continues unsatisfied and not effectively and
continuously stayed within thirty (30) days of such judgment or order.
11.12 ERISA. With respect to any Plan, there occurs or exists any of
the events or conditions described in the following clauses (a) through (h) and
such event or condition, together with all like events or conditions, could in
the opinion of Lender subject Borrower to any tax, penalty or other liability
that might, singly or in the aggregate, have a Material Adverse Effect: (a) a
"reportable event" as defined in Section 4043 of ERISA, (b) a "prohibited
transaction" as defined in Section 406 of ERISA or Section 4975 of the Code, (c)
the termination of any Plan or filing of notice of intention to terminate, (d)
the institution by the PBGC of proceedings to terminate, or to appoint a trustee
to administer, any Plan, or circumstances that constitute grounds for any such
proceedings, (e) the complete or partial withdrawal from a multiemployer Plan,
or the reorganization, insolvency or termination of a multiemployer Plan, (f) an
accumulated funding deficiency within the meaning of ERISA, (g) violation of the
reporting, disclosure or fiduciary responsibility requirements of ERISA or the
Code, or (h) any act or condition which could result in direct, indirect or
contingent liability to any Plan or the PBGC.
11.13 CHANGE IN MANAGEMENT OR OWNERSHIP. (a) Mr. Ashok Pandey or
either of Mr. Rajkumar Koneru or Mr. Nagarjun Valluripalli shall cease to hold
the office with Borrower that he currently holds and shall cease to be directly
involved in the day-to-day operations and management of Borrower, or (b) at any
time Mr. Ashok Pandey, Mr. Rajkumar Koneru and Mr. Nagarjun Valluripalli cease
to collectively own less than thirty-eighty percent (38%) of each class of the
issued and outstanding voting stock of Borrower or any such person owns less
than ten percent (10%) of each class of the issued and outstanding voting stock
of Borrower.
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<PAGE> 35
12. REMEDIES
12.1 RIGHTS IN GENERAL. Automatically upon the occurrence of an Event
of Default described in Section 11.10 hereof, and at the option of Lender, upon
the occurrence of any other Event of Default, (a) the Revolving Line of Credit
and all provisions for the making of additional Revolving Loans under this
Agreement shall terminate, (b) the principal and interest of the Loans and all
other Obligations shall become and be immediately due and payable, without
presentment, demand, protest, or further notice of any kind, all of which are
hereby expressly waived by Borrower, and (c) Lender shall be entitled to
exercise forthwith (to the extent and in such order as Lender may elect, in its
sole and absolute discretion) any or all rights and remedies provided for in
this Agreement and any other Loan Document, all rights and remedies of a secured
party under the UCC, and all other rights and remedies that may otherwise be
available to Lender by agreement or at law or in equity. The phrase "upon
occurrence and during the continuance of any Event of Default" and similar
phrases shall not imply in any manner that Borrower have the right to cure any
Event of Default after Lender has declared an Event of Default.
12.2 SPECIFIC RIGHTS REGARDING COLLATERAL. In addition to the rights
as stated generally in Section 12.1 hereof (and without limitation thereof),
Borrower agrees that, upon the occurrence of an Event of Default, Lender shall
be entitled to the rights and remedies, and Borrower shall have the obligations,
set forth below:
(a) Lender may enter upon the premises where any of the
Collateral is located and take possession thereof and, at Lender's option,
remove or sell in place any or all thereof.
(b) Upon notice from Lender, Borrower shall promptly at
its expense assemble any or all of the Collateral and make it available at a
reasonably convenient place designated by Lender.
(c) Lender may, with or without judicial process, sell,
lease or otherwise dispose of any or all of the Collateral at public or private
sale or proceedings, by one or more contracts, in one or more parcels, at the
same or different times and places, with or without having the Collateral at the
place of sale or other disposition, to such Persons, for cash or credit or for
future delivery and upon such other terms, as Lender may in its discretion deem
best in each such matter. The purchaser of any of the Collateral at any such
sale shall hold the same free of any equity of redemption or other right or
claim of Borrower, all of which, together with all rights of stay, exemption or
appraisal under any statute or other law now or hereafter in effect, Borrower
hereby unconditionally waives to the fullest extent permitted by law. If any of
the Collateral is sold on credit or for future delivery, Lender shall not be
liable for the failure of the purchaser to pay for same and, in the event of
such failure, Lender may resell such Collateral if it retains the right to do
so.
(d) Borrower hereby further agrees that notice of the time
and place of any public sale, or of the time after which any private sale or
other intended disposition or action relating to any of the Collateral is to be
made or taken, shall be deemed commercially reasonable notice thereof, and shall
satisfy the requirements of any applicable statute or other law, if such notice
(i) is delivered not less than five (5) Banking Days prior to the date of the
sale, disposition or other action to which the notice relates, or (ii) is mailed
(by ordinary first class mail, postage prepaid) not less than five (5) Banking
Days prior thereto. Lender shall not be obligated to make any sale or other
disposition or take other action pursuant to such notice and may, without other
notice or publication, adjourn or postpone any public or private sale or other
disposition or action by announcement at the time and place previously fixed
34
<PAGE> 36
therefor, and such sale, disposition or action may be held or accomplished at
any times or places to which the same may be so adjourned or postponed.
(e) Lender may purchase any or all of the Collateral at
any public sale. Lender may purchase at private sale any of the Collateral that
is of a type customarily sold in a recognized market or the subject of widely
distributed price quotations or otherwise unless prohibited by law. Lender may
make payment of the purchase price for any Collateral by credit against the then
outstanding amount of the Obligations.
(f) Lender may at its discretion retain any or all of the
Collateral and apply the same in satisfaction of part or all of the Obligations.
(g) Any cash proceeds of sale, lease or other disposition
of Collateral shall be applied as follows:
First: To the expenses of collecting, enforcing,
safeguarding, holding and disposing of the Collateral, and to other
expenses of Lender in connection with the enforcement of this
Agreement and any other Loan Document (including, without limitation,
court costs and the fees and expenses of accountants, appraisers and
in-house and outside attorneys), together with interest at the
Default Rate from the respective dates such sums are expended;
Second: Any surplus then remaining to the payment of
interest and principal of the Loans and other sums payable as part of
the Obligations, in such order as Lender elects; and
Third: Any surplus then remaining to Borrower or whoever
may be lawfully entitled thereto.
12.3 SET-OFF. Borrower further agrees that:
(a) Upon the occurrence of an Event of Default, Lender is
hereby authorized at any time and from time to time, without notice to Borrower
(any such notice being expressly waived by Borrower), to set off and apply (or
cause any affiliate of Lender to set off and apply) any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by Lender or such affiliate to or for the
credit or the account of Borrower, against any or all of the Obligations now or
hereafter existing under this Agreement, any Note or otherwise, irrespective of
whether or not Lender shall have made any demand and although such Obligations
may be unmatured.
(b) If any other lender has participated or hereafter
participates with Lender with respect to any of the Obligations, Borrower hereby
authorizes such participating lender disclosed to them prior to set-off, upon
the occurrence of any Event of Default, immediately and without notice or other
action, at the request of Lender, to set off against any of Borrower's
Obligations to Lender any deposits held or money owed by such participating
lender in any capacity to Borrower, whether or not due, and to remit the money
set off to Lender.
(c) The rights stated in this Section 12.3 are in addition
to other rights and remedies (including, without limitation, other rights of
set-off or lien) that Lender or any participating lender may have.
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12.4 CUMULATIVE REMEDIES; NO WAIVER BY LENDER. No remedy referred to
in this Agreement is intended to be exclusive, but each shall be cumulative and
in addition to any other remedy referred to in this Agreement or otherwise
available to Lender by agreement or at law or in equity. No express or implied
waiver by Lender of any default or Event of Default shall in any way be, or be
construed to be, a waiver of any future or subsequent default or Event of
Default. The failure or delay of Lender in exercising any rights granted it
hereunder and/or under any other Loan Document upon any occurrence of any of the
contingencies set forth herein shall not constitute a waiver of any such right
upon the continuation or recurrence of any such contingency or similar
contingencies, and any single or partial exercise of any particular right by
Lender shall not exhaust the same or constitute a waiver of any other right.
12.5 WAIVERS AND CONSENTS RELATING TO REMEDIES. In connection with
any action or proceeding arising out of or relating in any way to this
Agreement, any other Loan Document, any of the Loans, any of the Collateral, or
any act or omission relating to any of the foregoing:
(a) BORROWER AND LENDER WAIVE THE RIGHT TO TRIAL BY JURY;
(b) Borrower and Lender consent to the non-exclusive
jurisdiction of any court of the State of New Jersey and of any federal court
located in New Jersey, and waive any right to object to such court as an
inconvenient forum;
(c) Borrower waives personal service of any summons,
complaint or other process in connection with any such action or proceeding and
agrees that service thereof may be made, as Lender may elect, by certified mail
directed to Borrower at the location provided for notices to Borrower under this
Agreement or, in the alternative, in any other form or manner permitted by law;
(d) Borrower agrees that all of the Collateral constitutes
equal security for all of the Obligations, and agrees that Lender shall be
entitled to sell, retain or otherwise deal with any or all of the Collateral, in
any order or simultaneously as Lender shall determine in its sole and absolute
discretion, free of any requirement for the marshalling of assets or other
restriction upon Lender in dealing with the Collateral; and
(e) Borrower agrees that Lender may at Lender's election
proceed directly against Borrower for collection of any or all of the
Obligations without first selling, retaining or otherwise dealing with any of
the Collateral.
12.6 ADDITIONAL WAIVERS AND CONSENTS OF BORROWER To the fullest
extent permitted by law, Borrower (a) waives demand, presentment, notice of
dishonor or protest under any Document evidencing or otherwise relating to the
Collateral and/or under or in connection with this Agreement and/or any other
Loan Document; and (b) consents to any of the following by Lender: (i) any
extension, postponement of time of payment or other indulgence, (ii) any
substitution, exchange or release of Collateral, (iii) any addition to, or
release of, any Person primarily or secondarily liable for any of the
Obligations, and (iv) after the occurrence and during the continuance of an
Event of Default, any acceptance of partial payments on any Accounts or
Documents and the settlement, compromising or adjustment thereof.
36
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13. COSTS, EXPENSES AND TAXES
(a) Borrower agrees to pay to Lender, upon the closing of
this Agreement, and otherwise on demand, all costs and expenses incurred by
Lender in connection with (i) the preparation, negotiation and delivery of this
Agreement and the other Loan Documents, and any amendments or modifications
thereto, and (ii) collecting any Loan or instituting, maintaining, preserving,
enforcing and foreclosing the security interest in any of the Collateral,
whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions or proceedings arising out of or relating to this
Agreement or any other Loan Document, including reasonable fees and expenses of
counsel (which may include costs of in-house counsel), expenses for auditors,
appraisers and environmental consultants, lien searches, recording and filing
fees and taxes.
(b) Borrower agrees to pay any and all stamp, excise and
other taxes payable or determined to be payable in connection with the
execution, delivery or performance of this Agreement or any other Loan Document,
and to pay on demand all liabilities to which Lender may become subject as the
result of delay in paying or omission to pay such taxes.
14. INDEMNIFICATION BY BORROWER
Borrower agrees to indemnify each of Lender, its directors, officers
and employees and each legal entity, if any, who controls Lender (the
"Indemnified Parties") and to hold each Indemnified Party harmless from and
against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, all reasonable fees of counsel with whom any
Indemnified Party may consult and all expenses of litigation or preparation
therefor) which any Indemnified Party may incur or which may be asserted against
any Indemnified Party in connection with or arising out of the matters referred
to in this Agreement or any other Loan Document by any Person (including any
person or entity claiming derivatively on behalf of Borrower), whether (a)
arising from or incurred in connection with any breach of a representation,
warranty or covenant by Borrower, or (b) arising out of or resulting from any
suit, action, claim, proceeding or governmental investigation, pending or
threatened, whether based on statute, regulation or order, or tort, or contract
or otherwise, before any court or governmental authority, which arises out of or
relates to this Agreement, any other Loan Document, or the use of the proceeds
of any Loan; provided, however, that the foregoing indemnity agreement shall not
apply to the extent such claims, damages, losses, liabilities and expenses are
solely attributable to an Indemnified Party's gross negligence or willful
misconduct. Borrower's obligations under this Article 14 shall survive the
repayment of the Obligations and the termination of this Agreement and the other
Loan Documents.
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15. MISCELLANEOUS
15.1 ENTIRE AGREEMENT; AMENDMENTS; LENDER'S CONSENT. This Agreement
(including the Exhibits and Schedules hereto) and the other Loan Documents
supersede, with respect to their subject matter, all prior and contemporaneous
agreements, understandings, inducements or conditions among the respective
parties, whether express or implied, oral or written. No amendment or waiver of
any provision of this Agreement or any other Loan Document, nor consent to any
departure by Borrower therefrom, shall in any event be effective unless the same
shall be in writing and signed by Lender (and Borrower, in the case of
amendments), and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. To the extent
this Agreement and any other Loan Document are actually inconsistent, this
Agreement shall control.
15.2 NOTICES. All notices and other communications relating to this
Agreement or any other Loan Document (unless otherwise specified therein) to be
effective shall be in writing (including by telecopy), and shall be deemed to
have been duly given or made when delivered by hand, or five (5) days after
being deposited in the United States mail, postage prepaid certified mail,
return receipt requested, or one business day after delivery to a nationally
recognized overnight courier service (against a signed receipt) or, in the case
of telecopy notice, when sent and confirmed as received, addressed as follows:
If to Lender: PNC Bank, National Association
Two Tower Center Boulevard
East Brunswick, New Jersey 08816
Attention: Commercial Finance Department
Telecopy: (908) 220-4393
with a copy to: Sills Cummis Zuckerman Radin
Tischman Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102-5400
Attention: Frederic M. Tudor, Esq.
Telecopy: (201) 643-6500
If to Borrower: Intelligroup, Inc.
517 Route One South
Iselin, New Jersey 08830
Attention: Mr. Robert M. Olanoff, Chief
Financial Officer
Telecopy: (908) 634-2267
with a copy to: Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540
Attention: David Sorin, Esq.
Telecopy: (609) 520-0360
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or to such other address as the respective party or its successors or assigns
may subsequently designate by proper notice. Notwithstanding the foregoing,
notices and other communications to Lender pursuant to Subsections 2.3, 3.4 and
4.7 hereof shall not be effective until received.
15.3 BINDING EFFECT; GOVERNING LAW. This Agreement shall be binding
upon and inure to the benefit of Borrower and Lender and their respective
successors and assigns, except that Borrower shall not have the right to assign
its rights hereunder or any interest herein without the prior written consent of
Lender. Borrower consents to Lender's sale of participations, assignment,
transfer or other disposition, at any time or times, of this Agreement, any Note
or any other Loan Document or any portion hereof or thereof, or of any right,
obligation or other interest herein or therein. This Agreement and the other
Loan Documents shall be governed by, and construed in accordance with, the laws
of the State of New Jersey without giving effect to the principles of conflicts
of laws.
15.4 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement.
15.5 SEVERABILITY OF PROVISIONS. Any provision of this Agreement or
any other Loan Document that is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions of this
Agreement or such other Loan Document or affecting the validity or
enforceability of such provision in any other jurisdiction and each provision
which is not wholly enforceable shall be enforced to the maximum extent
permitted by law.
15.6 TABLE OF CONTENTS; HEADINGS; TERMINOLOGY. The table of contents
and headings preceding the text of this Agreement are inserted solely for
convenience of reference and shall not constitute a part of this Agreement nor
affect its meaning, construction or effect. Amendments of Documents shall
include extensions, renewals and consolidations thereof.
15.7 EXHIBITS AND SCHEDULES. All of the Exhibits and Schedules to
this Agreement are hereby incorporated by reference herein and made a part
hereof.
15.8 LIMITATION OF LIABILITY. No claim may be made by Borrower or any
other Person against Lender and/or any director, officer, employee, attorney, or
agent of Lender for any special, indirect or consequential damages in respect of
any claim for breach of contract arising out of or relating to the transactions
contemplated by this Agreement or any other Loan Document, or any act, omission
or event occurring in connection herewith or therewith; and Borrower hereby
waives, releases and agrees not to sue upon any claim for any such damages,
whether or not accrued and whether or not known or suspected to exist in its
favor.
15.9 FURTHER ACKNOWLEDGMENTS AND AGREEMENTS OF BORROWER AND LENDER.
Borrower and Lender acknowledge and agree that they (i) have independently
reviewed and approved each and every provision of this Agreement, including the
Exhibits attached hereto and any and all other documents and items as they or
their counsel have deemed appropriate, and (ii) have entered into this Agreement
and have executed the closing documents voluntarily, without duress or coercion,
and have done all of the above with the advice of their legal counsel,
including, without limitation with respect to the risks and benefits of the
waiver of the right to a jury trial and the other waivers of rights contained in
this Agreement.
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15.10 DISCLOSURE OF FINANCIAL INFORMATION. Lender and its affiliates
are hereby authorized to disclose any financial or other information about
Borrower to any regulatory body or agency having jurisdiction over Lender or any
such affiliate or to any present, future or prospective participant or successor
in interest in any loan or other financial accommodation made by Lender or any
such affiliate to Borrower or pursuant to legal process.
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed by their proper corporate officers and sealed with their seal the day
and year first above written.
ATTEST: INTELLIGROUP, INC.
By: By:
------------------------------- --------------------------------
Robert M. Olanoff, Ashok Pandey, President and
Secretary Chief Executive Officer
PNC BANK, NATIONAL
ASSOCIATION
By:
--------------------------------
David Raphaels,
Vice President
40
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. DEFINITIONS....................................................................................................1
1.1 DEFINED TERMS......................................................................................1
1.2 OTHER DEFINITIONAL PROVISIONS......................................................................8
2. REVOLVING LOANS................................................................................................8
2.1 AMOUNT OF REVOLVING LOANS..........................................................................8
2.2 REVOLVING NOTE.....................................................................................8
2.3 PROCEDURE FOR REVOLVING LOAN BORROWINGS............................................................9
2.4 OVERDRAFTS.........................................................................................9
2.5 USE OF PROCEEDS....................................................................................9
3. EQUIPMENT LOANS................................................................................................9
3.1 AMOUNT ............................................................................................9
3.2 EQUIPMENT NOTES....................................................................................9
3.3 PRINCIPAL PAYMENTS.................................................................................9
3.4 PROCEDURE FOR EQUIPMENT LOAN BORROWINGS...........................................................10
3.5 CERTAIN CONDITIONS TO EQUIPMENT LOAN BORROWINGS...................................................10
3.6 SHIPPED EQUIPMENT.................................................................................10
3.7 NOT A FIXTURE.....................................................................................10
3.8 USE OF PROCEEDS...................................................................................11
4. INTEREST RATE PROVISIONS, FEES, PAYMENTS, MONTHLY
STATEMENTS............................................................................................11
4.1 INTEREST RATES AND PAYMENT DATES..................................................................11
4.2 PAYMENTS, CHARGES TO ACCOUNTS, AND COMPUTATIONS...................................................11
4.3 FACILITY FEE......................................................................................12
4.4 REIMBURSEMENT OF INCREASED COST TO LENDER.........................................................12
4.5 OPTIONAL PREPAYMENTS OF EQUIPMENT LOANS...........................................................13
4.6 MANDATORY PREPAYMENTS OF LOANS....................................................................13
4.7 TERMINATION OF REVOLVING LINE OF CREDIT...........................................................13
4.8 MONTHLY STATEMENTS................................................................................14
5. CONDITIONS PRECEDENT..........................................................................................14
5.1 CONDITIONS TO INITIAL LOANS.......................................................................14
5.2 CONDITIONS TO ALL LOANS...........................................................................14
6. SECURITY INTERESTS; CROSS COLLATERALIZATION AND CROSS
DEFAULT...............................................................................................15
6.1 GRANT OF SECURITY INTERESTS.......................................................................15
6.2 CROSS DEFAULT; CROSS COLLATERALIZATION............................................................15
6.3 FURTHER ASSURANCES................................................................................15
6.4 COLLECTION AND REMITTANCE.........................................................................15
7. REPRESENTATIONS AND WARRANTIES................................................................................16
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C> <C>
7.1 ORGANIZATION AND QUALIFICATION....................................................................16
7.2 DUE AUTHORIZATION; NO DEFAULT.....................................................................16
7.3 NO GOVERNMENTAL CONSENT NECESSARY.................................................................16
7.4 NO PROCEEDINGS....................................................................................17
7.5 FINANCIAL STATEMENTS..............................................................................17
7.6 NO CHANGE IN CONDITION; SOLVENCY..................................................................17
7.7 COMPLIANCE WITH LAWS..............................................................................18
7.8 NO OTHER VIOLATIONS...............................................................................18
7.9 TAXES AND ASSESSMENTS.............................................................................18
7.10 ACCOUNTS.........................................................................................18
7.11 BOOKS AND RECORDS................................................................................18
7.12 LOCATION OF COLLATERAL...........................................................................18
7.13 PLACES OF BUSINESS...............................................................................19
7.14 OTHER NAME OR ENTITIES...........................................................................19
7.15 TITLE AND LIENS..................................................................................19
7.16 PERFECTED FIRST PRIORITY LIENS...................................................................19
7.17 ERISA AND OSHA...................................................................................20
7.18 INSURANCE........................................................................................20
7.19 ENVIRONMENTAL MATTERS............................................................................20
7.20 FEDERAL REGULATIONS..............................................................................21
7.21 PROPRIETARY RIGHTS...............................................................................21
7.22 REPRESENTATIONS AND WARRANTIES TRUE, ACCURATE AND COMPLETE;
CONFIRMATION...............................................................................21
7.23 STOCK; SUBSIDIARIES..............................................................................21
7.24 CONSUMMATION OF MERGER...........................................................................22
7.25 SEC FILINGS......................................................................................22
8. AFFIRMATIVE COVENANTS.........................................................................................22
8.1 MAINTENANCE OF EXISTENCE AND QUALIFICATIONS.......................................................22
8.2 PAYMENT OF TAXES AND OTHER OBLIGATIONS............................................................22
8.3 MAINTENANCE OF PROPERTIES.........................................................................22
8.4 NOTICE OF ADVERSE EVENTS..........................................................................22
8.5 INFORMATION AND DOCUMENTS TO BE FURNISHED TO LENDER...............................................23
8.6 ACCESS TO RECORDS AND PROPERTY....................................................................25
8.7 INSURANCE AT BORROWER'S EXPENSE...................................................................25
8.8 PROCEEDS OF COLLATERAL............................................................................26
8.9 RECORDS...........................................................................................26
8.10 MAINTENANCE OF ACCOUNT AND BANKING RELATIONSHIPS.................................................26
8.11 DELIVERY OF DOCUMENTS............................................................................26
8.12 UNITED STATES CONTRACTS..........................................................................26
8.13 COMPLIANCE WITH LAWS.............................................................................26
8.14 FURTHER ASSURANCES...............................................................................26
8.15 PROJECTIONS......................................................................................26
9. NEGATIVE COVENANTS............................................................................................26
9.1 NO CONSOLIDATION, MERGER, ACQUISITION, LIQUIDATION................................................27
9.2 DISPOSITION OF ASSETS OR COLLATERAL...............................................................27
9.3 OTHER LIENS.......................................................................................27
9.4 OTHER LIABILITIES.................................................................................27
9.5 LOANS ...........................................................................................27
9.6 GUARANTIES; CONTINGENT LIABILITIES................................................................28
</TABLE>
ii
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C>
9.7 DIVIDENDS AND OTHER DISTRIBUTIONS.................................................................28
9.8 TRANSACTIONS WITH AFFILIATES......................................................................28
9.9 SALE OF INVENTORY.................................................................................28
9.10 REMOVAL OF COLLATERAL............................................................................28
9.11 RESTRICTIONS REGARDING NOTES AND ACCOUNTS........................................................28
9.12 SETTLEMENTS......................................................................................28
9.13 MODIFICATION OF ORGANIZATIONAL DOCUMENTS.........................................................29
9.14 CHANGE BUSINESS..................................................................................29
9.15 CHANGE OF LOCATION OR NAME.......................................................................29
9.16 CHANGE OF ACCOUNTING PRACTICES...................................................................29
9.17 INCONSISTENT AGREEMENT...........................................................................29
9.18 WORKING CAPITAL..................................................................................29
9.19 MINIMUM TANGIBLE NET WORTH.......................................................................29
9.20 CAPITAL EXPENDITURES.............................................................................29
9.21 HAZARDOUS SUBSTANCES.............................................................................29
10. ADDITIONAL POWERS OF LENDER..................................................................................30
10.1 POWERS OF ATTORNEY...............................................................................30
10.2 IRREVOCABILITY; LENDER'S DISCRETION..............................................................31
11. EVENTS OF DEFAULT............................................................................................31
11.1 FAILURE TO PAY...................................................................................31
11.2 FAILURE TO PERFORM OR OBSERVE COVENANTS..........................................................31
11.3 FALSE REPRESENTATION OR WARRANTY.................................................................31
11.4 SECURITY.........................................................................................32
11.5 LOAN DOCUMENTS...................................................................................32
11.6 CROSS DEFAULT; DEFAULT ON OTHER DEBT.............................................................32
11.7 CESSATION OF BUSINESS............................................................................32
11.8 CHANGE IN CONDITION..............................................................................32
11.9 LIQUIDATION OR DISSOLUTION.......................................................................32
11.10 INABILITY TO PAY DEBTS; BANKRUPTCY OR INSOLVENCY................................................33
11.11 JUDGMENTS.......................................................................................33
11.12 ERISA...........................................................................................33
11.13 CHANGE IN MANAGEMENT OR OWNERSHIP...............................................................33
12. REMEDIES.....................................................................................................34
12.1 RIGHTS IN GENERAL................................................................................34
12.2 SPECIFIC RIGHTS REGARDING COLLATERAL.............................................................34
12.3 SET-OFF..........................................................................................35
12.4 CUMULATIVE REMEDIES; NO WAIVER BY LENDER.........................................................36
12.5 WAIVERS AND CONSENTS RELATING TO REMEDIES........................................................36
12.6 ADDITIONAL WAIVERS AND CONSENTS OF BORROWER......................................................36
13. COSTS, EXPENSES AND TAXES....................................................................................37
14. INDEMNIFICATION BY BORROWER..................................................................................37
</TABLE>
iii
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C>
15. MISCELLANEOUS................................................................................................38
15.1 ENTIRE AGREEMENT; AMENDMENTS; LENDER'S CONSENT...................................................38
15.2 NOTICES..........................................................................................38
15.3 BINDING EFFECT; GOVERNING LAW....................................................................39
15.4 EXECUTION IN COUNTERPARTS........................................................................39
15.5 SEVERABILITY OF PROVISIONS.......................................................................39
15.6 TABLE OF CONTENTS; HEADINGS; TERMINOLOGY.........................................................39
15.7 EXHIBITS AND SCHEDULES...........................................................................39
15.8 LIMITATION OF LIABILITY..........................................................................39
15.9 FURTHER ACKNOWLEDGMENTS AND AGREEMENTS OF BORROWER AND LENDER....................................39
15.10 DISCLOSURE OF FINANCIAL INFORMATION.............................................................40
</TABLE>
EXHIBITS
Exhibit A - Revolving Note
Exhibit B - Form of Equipment Note
Exhibit C - Conditions Precedent
Exhibit D - Trademark Security Agreement
Exhibit E - Letter to Account Debtors
Exhibit F - Opinion of Borrower's Counsel
Exhibit G - Chief Financial Officer's Certificate
Exhibit H - Initial Borrowing Certificate
SCHEDULES
Schedule 1 - Locations of Books and Records and Collateral
Schedule 2 - Offices and Business Locations
Schedule 3 - Other Names and Subsidiaries
Schedule 4 - Permitted Liens
Schedule 5 - Filing Jurisdictions
Schedule 6 - Insurance
Schedule 7 - Environmental Matters
Schedule 8 - Patents
Schedule 9 - Trademarks
Schedule 10 - Existing Liabilities
Schedule 11 - Governmental Consents
Schedule 12 - Subsidiaries
Schedule 13 - Exceptions
iv
<PAGE> 46
REVOLVING NOTE
$7,500,000 January 22, 1997
Newark, New Jersey
FOR VALUE RECEIVED, the undersigned, INTELLIGROUP, INC., a New Jersey
corporation ("Borrower"), hereby absolutely and unconditionally promises to pay
to the order of PNC BANK, National Association ("Lender"), the principal amount
of the lesser of (a) SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000),
and (b) the aggregate unpaid principal amount of all Revolving Loans made by
Lender to Borrower pursuant to the Agreement referred to below, as hereinafter
provided, and to pay interest as hereinafter provided on the unpaid principal
balance of this Note from time to time, from the date each such Revolving Loan
is made until the principal thereof is paid in full. Both principal and interest
hereunder shall be payable in lawful money of the United States of America, and
in immediately available funds, at the office of Lender located at Two Tower
Center Boulevard, East Brunswick, New Jersey 08816, or at such other place as
Lender may from time to time designate in writing.
Interest on the principal balance of each Revolving Loan shall be due
and payable monthly on the first (1st) Banking Day in each calendar month,
commencing on the first such date to occur after such Revolving Loan was made,
and on any Banking Day on which any prepayment is made or such Revolving Loan is
paid or payable in full, until the principal balance hereof has been paid in
full, at a fluctuating rate per annum equal to one-quarter of one percent (1/4
of 1%) per annum above the Prime Rate (as hereinafter defined) in effect from
time to time, each change in such fluctuating rate to take effect simultaneously
with the corresponding change in the Prime Rate, without notice to Borrower;
provided that if any amount of principal (or, to the extent permitted by law, of
interest) payable hereunder is not paid when due (whether at stated maturity, by
acceleration or otherwise and whether before or after judgment) or any other
Event of Default has occurred, the principal balance hereof shall bear interest,
payable on demand, from the day when said amount becomes due as aforesaid or
from the day when such other Event of Default occurs, as the case may be, at an
interest rate per annum equal at all times to two percent (2%) per annum above
the otherwise applicable rate in effect from time to time. The "Prime Rate"
applicable to this Note shall be the rate of interest announced from time to
time by Lender as its "prime rate" or "prime lending rate," which rate is
determined from time to time by Lender as a means of pricing some loans to its
customers and it is neither tied to any external rate of interest or index nor
necessarily reflects the lowest rate of interest actually charged by Lender to
any particular class or category of customers.
Borrower authorizes Lender, without demand, to charge and withdraw from
any checking, loan or other account that Borrower may then have with Lender or
with any affiliate of Lender, any amount that shall become due from Borrower to
Lender under this Note or any other Loan Document. Such authorization shall not
affect Borrower's obligation to pay when due all amounts payable hereunder
whether or not there are sufficient funds in any such
<PAGE> 47
accounts. The foregoing shall be in addition to, and not in limitation of, any
rights of set-off which Lender may have.
This Note (a) is the Revolving Note referred to in the Loan and
Security Agreement dated as of January 22, 1997 (as amended, supplemented or
otherwise modified from time to time, the "Agreement"), between Borrower and
Lender, (b) is entitled to the benefits thereof, (c) is secured as provided
therein and (d) is subject to optional and mandatory prepayment in whole or in
part as provided therein; provided, that any prepayment hereof shall be
accompanied by any amount due pursuant to Subsection 4.7(b) of the Agreement.
Capitalized terms used herein and not otherwise defined are used herein as
defined in the Agreement. All provisions of the Agreement are incorporated
herein by reference and, in the event of ambiguity or inconsistency between any
provisions of the Agreement and this Note, the provisions of the Agreement shall
prevail.
Borrower (and any endorser or guarantor of this Note by endorsing this
Note or executing a guaranty with respect to the obligations under this Note)
hereby to the fullest extent permitted by law (a) waives presentment for
payment, demand, notice of dishonor, protest, notice of protest and all other
demands and notices in connection with the delivery, performance and enforcement
of this Note, except as may be specifically otherwise provided in the Agreement,
and (b) consents that, without notice to or release of the liability of any such
party, the obligations of Borrower or any other Person may from time to time, in
whole or part, be renewed, extended, modified, accelerated, compromised, settled
or released by Lender.
Upon the occurrence and during the continuance of any one or more of
the Events of Default specified in the Agreement, all amounts then remaining
unpaid on this Note shall become, or may be declared to be, immediately due and
payable, all as provided therein.
This Note shall be governed by and construed in accordance with the
laws of the State of New Jersey without giving effect to principles of conflicts
of law. This Note may not be changed orally but only by an instrument in writing
signed by Borrower and Lender.
<PAGE> 48
IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower
has caused this Note to be duly executed and delivered as of the date first
above written.
ATTEST: INTELLIGROUP, INC.
By: By:
------------------------------- --------------------------------
Robert M. Olanoff, Secretary Ashok Pandey, President and
Chief Executive Officer
<PAGE> 49
STATE OF NEW JERSEY )
: ss.:
COUNTY OF ESSEX )
On the 22nd day of January, 1997, before me personally came Ashok
Pandey, to me known who, being by me duly sworn, did depose and say that he is
the President and Chief Executive Officer of INTELLIGROUP, INC., the corporation
described in and which executed the foregoing instrument; that he, in such
capacity, being authorized to do so, executed the foregoing instrument as such
entity's voluntary act and deed for the purposes therein contained by signing on
behalf of said corporation.
-----------------------------
Notary Public
My commission expires on
----------------------------.
<PAGE> 50
FORM OF EQUIPMENT NOTE
$__________ ____________, 19__
______, New Jersey
FOR VALUE RECEIVED, the undersigned, INTELLIGROUP, INC., a New Jersey
corporation ("Borrower"), hereby absolutely and unconditionally promises to pay
to the order of PNC BANK, NATIONAL ASSOCIATION ("Lender"), the principal amount
of DOLLARS ($___________) as hereinafter provided, and to pay interest as
hereinafter provided on the unpaid principal balance of this Note from time to
time, from the date hereof until the principal hereof is paid in full. Both
principal and interest hereunder shall be payable in lawful money of the United
States of America, and in immediately available funds, at the office of Lender
located at Two Tower Center Boulevard, East Brunswick, New Jersey 08816, or at
such other place as Lender may from time to time designate in writing.
The principal hereof shall be repaid in _______________ (___) consecutive
monthly installments of DOLLARS ($___________), and a final payment in the
_______________ (___) month of the entire unpaid principal balance hereof, all
payments to be made on the first (1st) Banking Day in each calendar month,
commencing on .
Interest on the principal balance hereof shall be due and payable monthly
on the first (1st) Banking Day in each calendar month, commencing on ,
and on any Banking Day on which any prepayment is made or the
Equipment Loan evidenced hereby is paid or payable in full, until the principal
balance hereof has been paid in full at a fluctuating rate per annum equal to
three-quarters of one percent (3/4 of 1%) per annum above the Prime Rate (as
hereinafter defined) in effect from time to time, each change in such
fluctuating rate to take effect simultaneously with the corresponding change in
the Prime Rate, without notice to Borrower; provided that if any amount of
principal (or, to the extent permitted by law, of interest) payable hereunder is
not paid when due (whether at stated maturity, by acceleration or otherwise and
whether before or after judgment) or any other Event of Default has occurred,
the principal balance hereof shall bear interest, payable on demand, from the
day when said amount becomes due as aforesaid or from the day when such other
Event of Default occurs, as the case may be, at an interest rate per annum equal
at all times to two percent (2%) per annum above the otherwise applicable rate
in effect from time to time. The "Prime Rate" applicable to this Note shall be
the rate of interest announced from time to time by Lender as its "prime rate"
or "prime lending rate," which rate is determined from time to time by Lender as
a means of pricing some loans to its customers and it is neither tied to any
external rate of interest or index nor necessarily reflects the lowest rate of
interest actually charged by Lender to any particular class or category of
customers.
Borrower authorizes Lender, without demand, to charge and withdraw from
any checking, loan or other account that Borrower may then have with Lender or
with any affiliate of Lender, any amount that shall become due from Borrower to
Lender under this Note or any other Loan Document. Such authorization shall not
affect Borrower's obligation to pay when due all amounts payable hereunder
whether or not there are sufficient funds in any such
<PAGE> 51
accounts. The foregoing shall be in addition to, and not in limitation of, any
rights of set-off which Lender may have.
This Note (a) is one of the Equipment Notes referred to in the Loan and
Security Agreement dated as of January 22, 1997 (as amended, supplemented or
otherwise modified from time to time, the "Agreement"), between Borrower and
Lender, (b) is entitled to the benefits thereof, (c) is secured as provided
therein and (d) is subject to optional and mandatory prepayment in whole or in
part as provided therein. Capitalized terms used herein and not otherwise
defined are used herein as defined in the Agreement. All provisions of the
Agreement are incorporated herein by reference and, in the event of ambiguity or
inconsistency between any provisions of the Agreement and this Note, the
provisions of the Agreement shall prevail.
Borrower (and any endorser or guarantor of this Note by endorsing this
Note or executing a guaranty with respect to the obligations under this Note)
hereby to the fullest extent permitted by law (a) waives presentment for
payment, demand, notice of dishonor, protest, notice of protest and all other
demands and notices in connection with the delivery, performance and enforcement
of this Note, except as may be specifically otherwise provided in the Agreement,
and (b) consents that, without notice to or release of the liability of any such
party, the obligations of Borrower or any other Person may from time to time, in
whole or part, be renewed, extended, modified, accelerated, compromised, settled
or released by Lender.
Upon the occurrence and during the continuance of any one or more of the
Events of Default specified in the Agreement, all amounts then remaining unpaid
on this Note shall become, or may be declared to be, immediately due and
payable, all as provided therein.
This Note shall be governed by and construed in accordance with the laws
of the State of New Jersey without giving effect to principles of conflicts of
law. This Note may not be changed orally but only by an instrument in writing
signed by Borrower and Lender.
<PAGE> 52
IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower has
caused this Note to be duly executed and delivered as of the date first above
written.
ATTEST: INTELLIGROUP, INC.
By: By:
------------------------------- ----------------------------
Robert M. Olanoff, Secretary Ashok Pandey, President and
Chief Executive Officer
<PAGE> 1
Exhibit 10.19
R/3 NATIONAL IMPLEMENTATION PARTNER AGREEMENT
SAP AMERICA, INC. -- INTELLIGROUP, INC.
This R/3 National Implementation Partner Agreement (the "Agreement"), made this
26th day of March, 1996, is by and between Intelligroup, Inc. ("IGI"), a New
Jersey corporation with offices at 5 Lincoln Highway, Suite 9, Edison, NJ
08820, and SAP America, Inc. ("SAP"), a Delaware corporation with its principal
place of business at 701 Lee Road, Suite 200, Wayne, Pennsylvania 19087.
RECITALS
A. WHEREAS IGI AND SAP, desiring to work together, in connection with the
SAP R/3 National Implementation Partner Program (as defined below), with the
goal of furthering the implementation of SAP's R/3 Software System;
B. WHEREAS SAP desires to enhance its capabilities to market and support
SAP Products through the use of IGI's services; and
C. WHEREAS IGI and SAP desire to formalize their relationship by entering
into this Agreement to undertake cooperative efforts for SAP R/3 Products within
the SAP IGI Program.
NOW, THEREFORE, in reliance upon the foregoing recitals, intending to be
legally bound, and for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, IGI and SAP agree as follows:
1. Definitions.
as used in this Agreement:
(a) the SAP-IGI R/3 National Implementation Partner Program (the
"R/3 NIP Program") means the business relationship set forth in this Agreement
and Appendix A to this Agreement.
(b) Software. Software shall mean all SAP R/3 software, in whole
or in part, licensed by SAP AG or SAP America, Inc. in any release, version or
correction level and including all improvements, modifications, and extensions
thereto, whether in human or machine readable form.
(c) Documentation. Documentation shall mean all human and machine
readable materials and copies of SAP manuals, program listings, flow charts,
logic diagrams, input and output forms, data models, specifications, and
instructions relating to the Software made available to IGI under this
Agreement, or, generally, to SAP end-user licensees.
(d) R/3 Products. R/3 Products shall mean the Software,
Documentation and related materials.
(e) "Proprietary Information" means: (i) with respect to SAP, the
Software and Documentation and any complete or partial copies thereof, the
Program Concepts, SAP licensors' Third-Party Database, any other third-party
software licensed with or as part of the Software, benchmark results, and any
other information identified or reasonably identifiable as confidential and
proprietary information of SAP, SAP, AG, or their licensors ("SAP Proprietary
Information"); and (ii) with respect to IGI, information identified or
reasonably
<PAGE> 2
identifiable as the confidential and proprietary information of IGI ("IGI
Proprietary Information"), provided that, any part of the SAP or IGI
Proprietary Information which: (a) is or becomes publicly available through no
act or failure of the other party; or (b) was or is rightfully acquired by the
other party from a source other than the disclosing party prior to receipt from
the disclosing party; or (c) becomes independently available to the other party
as a matter of right, shall be excluded.
(f) Territory. Territory shall mean the United States of America.
2. Authorization and Commitment of Resources.
(a) SAP hereby authorizes IGI to offer services as related to R/3
Products to potential users in the Territory under the terms of this Agreement
and any Appendices hereto. This authorization does not include maintenance of
the R/3 Products, physical installation of the R/3 Products, and training. This
authorization is non-exclusive and non-transferable.
(b) SAP in its sole discretion shall have the right to limit the
Territory, the R/3 Products, and the type of customers to be covered by this
Agreement, as SAP deems advisable in its sole discretion following reasonable
notice and consultation with IGI. SAP may authorize other parties to offer
services as related to the R/3 Products in the Territory as it deems advisable
in its sole discretion.
(c) Services to be provided by either party to its clients and
customers are to be contracted for separately by each party, independently of
each other, unless otherwise expressly agreed upon in writing between SAP and
IGI for that specific engagement. Each party shall be solely liable to its
customers and clients for its own services.
3. Services and Responsibilities of SAP
(a) SAP shall provide to IGI the Software under the terms of the
Appendix A. The Software shall only be used internally by IGI solely for (i)
training of IGI's personnel who are to work under this Agreement and (ii) for
demonstration of the Software to potential prospects upon the prior written
consent of SAP. The Software copy provided hereunder may not be used in the
operation of the business of IGI or of any other entity or person.
(b) Should IGI desire to license all or any part of the Software
for use in the operation of its own business, SAP will license it to IGI under
the terms of SAP's standard end-user license agreement and at SAP's standard
license fees then in effect.
(c) With regard to training for the Software, SAP shall:
(i) invite IGI, on a space available basis, at negotiated
rates, to SAP regularly scheduled alliance partner training. IGI shall be
responsible for all related travel and living expenses;
(ii) provide access, on a space available basis, to IGI for
its personnel participating in the R/3 NIP Program to customer training courses
generally offered by SAP, such training courses to be available at SAP's
current prices and terms;
(iii) provide marketing-oriented training courses to IGI on a
cost-sharing basis to be agreed upon between the parties; and
2
<PAGE> 3
(d) SAP shall otherwise inform and instruct IGI as to R/3 Products and
provide guidance, as SAP deems necessary in its sole judgment, for IGI to carry
out its responsibilities under this Agreement.
4. Services and Responsibilities of IGI.
IGI agrees that it shall:
(a) acquire as soon as possible and maintain a comprehensive and
fundamental knowledge of the R/3 Products and ensure that its employees are
technically qualified and sufficiently trained in SAP courses, including
ongoing training at SAP, and internally, to provide appropriate advice on the
use of the R/3 Products to clients and prospective users of the Software;
(b) use its best efforts to promote internally the R/3 Products and to
offer services as related to the R/3 Products throughout the Territory and
ensure that its employees who perform any services hereunder shall have the
proper skill, training and background to enable them to demonstrate the R/3
Products in a competent and professional manner, it being understood that IGI
will have no liability to SAP in the event that it fails to successfully
promote R/3 Products and related services except as committed to in this
Agreement;
(c) use its best efforts to meet the goals relative to the R/3 NIP
Program set out in IGI's annual business plan, which is attached hereto as
Appendix B, and to update such business plan quarterly;
(d) ensure that it has the necessary number of qualified personnel
available according to IGI's annual business plan attached as Appendix B;
(e) continually improve its training of all personnel as offered in
Section 3, who are or will be acting under this Agreement;
(f) use its best efforts to make the R/3 Products known to its
customers and potential customers; make every effort to see that the R/3
Products it suggests to each potential customer meet that entity's application
requirements; present the R/3 Products using only the product names given by
SAP; provide potential customers such marketing materials and nonconfidential
information necessary for evaluating the R/3 Products being considered (except
as limited by Section 10.(b) below); and, make no warranties, assurances or
statements concerning R/3 Product features that are misleading or materially
divergent from the descriptive literature supplies by SAP.
(g) not engage in any business activity, either directly or
indirectly, in any manner or capacity, in its own behalf or in behalf of any
other person, firm, corporation or organization, nor accept or continue any
obligations which may interfere with or impair its ability to perform any of
its duties or obligations under this Agreement;
(h) to the extent it conducts end-user training within its other
consultation activities, not offer or conduct end user training which competes
with official SAP courses offered by SAP or SAP AG or any other SAP-related
entity without prior written authorization from SAP;
(i) upon invitation by SAP to participate in SAP sponsored marketing
events by presenting speeches, providing information to potential prospects
(subject to Section 10.(b) below), and assisting, where requested, in the
organization and implementation of the events;
3
<PAGE> 4
(j) expressly inform its customers that modifications and extensions to
the Software may impair or terminate the maintenance or support services
provided by SAP and may nullify the warranty;
(k) undertake to provide customers with release and version management
and migration support as related to the Software throughout the period of
productive installation of the Software; and
(l) dedicate a coordinator with an adequate support structure to act as
the central focal point to coordinate activities with SAP and designate a
contact person within the support group to be available to SAP who is
authorized to act on behalf of IGI within the scope of this Agreement.
5. Services and Responsibilities of the Parties.
To the extent reasonable under the circumstances, the parties shall
undertake the following cooperative activities with respect to identifying and
bringing to each other opportunities to promote the R/3 Products:
(a) Regularly inform each other about general market developments and
factors relating to the R/3 Products in the marketplace and current projects
and customer implementations in which IGI is involved; this information shall
be designated and treated as Proprietary Information under Section 10. of this
Agreement;
(b) Furnish each other with appropriate information for support and
planning purposes; provided, however, that each party reserves the right, in
its sole discretion, to determine the content and availability of such
information;
(c) Inform appropriate personnel in their respective organizations of
the existence of this Agreement;
(d) Subject to confidentiality constraints, endeavor to keep each other
appraised about new products and services;
(e) Exchange such other information and conduct such other activities
as the parties agree will carry out the intent of this Agreement.
6. General Representations and Warranties.
Each party hereby represents and warrants to the other that:
(a) it has the right and power to enter into this Agreement;
(b) entering into this Agreement does not violate the terms and
conditions of any other agreement providing for cooperative marketing of
products of another entity, or any other legal obligations;
(c) the information which it may disclose to the other party, and the
process of disclosure and use of such information in accordance with the
provisions of this Agreement, will not violate any trade secret right,
trademark, issued United States patent, copyright or other proprietary right of
any third party;
(d) it holds good title or right, free and clear of all liens and
encumbrances, to the products and services which it is providing under this
Agreement;
(e) the products and services being provided under this Agreement do
not infringe any United States copyright, trademark, issued United States
patent, trade secret or other proprietary right of any third party; and
4
<PAGE> 5
(f) EXCEPT AS SPECIFICALLY SET FORTH HEREIN, NEITHER PARTY MAKES
ANY OTHER WARRANTY TO THE OTHER PARTY, EITHER EXPRESS, IMPLIED OR STATUTORY, OR
ARISING BY COURSE OF CONDUCT OR PERFORMANCE, CUSTOM OR USAGE IN THE TRADE,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
7. Term and Termination.
(a) This Agreement shall have an initial term expiring on December
31, 1996, with an automatic renewal for one (1) additional year unless, at
least six (6) weeks prior to the renewal date, either party gives written notice
of its intention not to renew this Agreement.
(b) At least four (4) months prior to any scheduled expiration
date, SAP will decide whether to continue or terminate the Agreement applying
the following criteria:
i. Customer satisfaction with the projects conducted by
IGI with special regard to the length and cost of the
project, the project objectives met by IGI, and the
achievements and professionalism of IGI employees;
ii. Number and scope of R/3 projects executed;
iii. Thoroughness of employee training;
iv. Accomplishment of goals set herein and in the annual
business plans; and
v. Level of effective communication with SAP.
The procedures for such audits and the weights to be assigned each
criterion will be provided in writing by SAP to IGI prior to the first such
audit.
On the basis of this evaluation and subsequent consultations with IGI,
IGI agrees that SAP, in its sole discretion, may choose to terminate this
Agreement six (6) weeks prior to the next scheduled expiration date.
(c) Notwithstanding the above, either party may terminate this
Agreement:
(i) In accordance with the provisions of Section 7.(a) and
(b) at the end of a term;
(ii) Upon a determination by SAP that IGI is offering
potential customers of R/3 Products other products that are in competition with
the R/3 Products; IGI expressly waives any claim to damages arising from
termination on this ground;
(iii) Upon thirty (30) days prior written notice in the event
of material breach of a material provision of this Agreement by the other
party, except that the party in breach shall have the right, during that 30-day
period, to cure the claimed breach or default; or
(iv) Immediately upon prior written notice if there is: (a)
a consolidation, merger or reorganization of the other party with or into
another corporation or entity; (b) creation of a new majority
5
<PAGE> 6
interest in, or change in majority ownership of, the other party; (c) a sale of
all or substantially all of the assets of the other party; or (d) a breach of
the confidentiality provisions as specified in Section 10 below.
(d) Upon any termination of this Agreement:
(i) each party shall, within ten (10) business days after
termination is effective, return to the other party or dispose of as mutually
agreed all advertising materials and other properties, including all
Proprietary Information, furnished to it by the other party pursuant to this
Agreement and so certify in writing;
(ii) within ten (10) business days after termination is
effective, IGI shall promptly return R/3 Products and related materials and all
copies thereof to SAP, or as the case may be, delete all R/3 Products and
Proprietary Information from IGI's hardware, including binary or other
resulting files (if any), and erase all R/3 Products and Proprietary
Information from any storage media before discarding such, and so certify in
writing;
(iii) IGI shall not hold itself out as a participant in the
R/3 NIP Program; and
(iv) both parties shall cease acting in a manner that would
suggest any continuing relationship between the parties regarding SAP's
Software, and shall cease all display and advertising contemplated under this
Agreement.
(e) Termination of this Agreement shall not impact upon any active
engagements in process prior to such termination.
(f) The following provisions of this Agreement shall in all events
survive its termination: Section 6. (General Representations and Warranties);
7. (Provisions Applicable to Termination); 8. (Relationship of Parties); 10.
(Confidentiality); and 11. (General Provisions).
(g) Termination of this Agreement shall result in termination of
Appendix A, R/3 Software Training and Demonstration License.
8. Relationship of Parties.
(a)IGI and SAP are independent contractors acting for their own account,
and neither party or its employees are authorized to make any representation
otherwise or any commitment on the other party's behalf unless previously
authorized by such party in writing. Neither party is responsible to any end
user for the quality of services or products provided by the other party. Each
party is solely responsible for establishing the prices for its own products.
(b) Neither party is a distributor or agent for the products or
services of the other. Each party's products and services shall be available to
a prospective client only through separate agreement between that party and the
client. Each party shall independently develop and price its respective
products and services offered between such party and a client.
(c) It is understood and agreed upon by the parties hereto, that
during the term of this Agreement, the use of the terms "joint venturer,"
"co-venturer," "partner," "marketing partner," "partnership" or similar terms
to be used to describe the relationship between the parties under this
Agreement refer to the spirit of cooperation between IGI and SAP, and do not
describe, or expressly or by implication create, a legal partnership or joint
venture, or any responsibility by one party for the actions of the other.
6
<PAGE> 7
9. Intellectual Property Rights.
(a) The name "R/3 NIP Program" shall be used by the parties only jointly
and pursuant to the terms of this Agreement; and upon any termination of this
Agreement, neither SAP nor IGI may use the name in conjunction with the
parties' respective corporate names; however, SAP shall have the right to use
the name with any other parties who choose to participate in the SAP R/3 NIP
Programs.
(b) Nothing in this Agreement grants to either party the right to use or
display any other names, trademarks, trade names, logos or service marks of the
other party, except to identify the products and associated services and
deliverables of the other party to the extent obligations are undertaken
pursuant to this Agreement. Except in the case of correspondence and proposals
issued in the ordinary course of business, each party agrees to submit to the
other party for written prepublication approval, any materials which may use or
display any name, trademark, trade name, logo or service mark of the other
party. Notwithstanding the foregoing, nothing contained in this Agreement shall
affect either party's rights and obligations to use any trademarks, service
marks or proprietary words or symbols of the other party to properly identify
the goods or services of such other party to the extent otherwise permitted by
applicable law or by written agreement between the parties.
(c) IGI herein acknowledges that title to all intellectual property
rights, including patent, copyright, trademark, and trade secret rights in R/3
Products, including any modifications, enhancements, versions, releases, or
correction levels thereto, program concepts including literal or nonliteral
structure, sequence and organization, training materials, literature, and other
SAP related materials shall remain exclusively with SAP AG, Walldorf, Germany,
or SAP as the case may be, and that by virtue of this Agreement, no such rights
have been transferred, licensed, granted, assigned or acquired by IGI from SAP
AG or SAP.
10. Confidentiality.
(a) Each party acknowledges that, during the term of this Agreement, it
will receive Proprietary Information from the other party. Neither party shall
disclose, provide or otherwise make available to any third party (including any
prospective client) any Proprietary Information of the other party and shall
utilize such Proprietary Information on an internal organization need-to-know
basis only to the extent necessary to effect the provisions and purposes of,
and as expressly contemplated under the terms of, this Agreement and for no
other purpose.
(b) Each party agrees that it will protect the Proprietary Information of
the other party through the exercise of no less protection and care than it
customarily uses in safeguarding its own confidential and proprietary
information which it desires to retain in confidence, but always at least a
reasonable degree of care. Disclosure of the other party's Proprietary
Information to employees shall only be made on a need-to-know basis. Further,
each party shall take reasonable steps to advise their employees of the
confidential nature of Proprietary Information, to ensure by agreement or
otherwise that such employees are prohibited from copying, revealing or using
such Proprietary Information except to the extent required to carry out the
parties' obligations under this Agreement, and to require that Proprietary
Information be kept in a secure location. Each party will promptly notify the
other if it believes that Proprietary Information has lost its status as such.
(c) The foregoing shall not prohibit or limit a party's use of
information, including but not limited to ideas, concepts, know how, techniques
and methodologies, which: (i) is or become publicly available through no act of
failure to act of the receiving party; (ii) rightfully obtained by the
receiving party without restriction; (iii) is released by the receiving party
in response to lawful legal process and with prior notice to the other party;
(iv) is rightfully already known to or is independently developed by the
receiving party prior to disclosure.
7
<PAGE> 8
(d) Notwithstanding the foregoing, each party hereto understands
that they may become familiar with each other's services and that IGI may
become familiar with SAP's R/3 Products, specifically its proprietary software.
Accordingly, IGI agrees, with respect to the R/3 Products (including all
program concepts therein) SAP's training materials, literature and other SAP
related materials, that as the case may be, IGI shall not copy, translate,
disassemble or decompile, nor create or attempt to create by reverse
engineering or otherwise the source code from the object code, or to use such
items to create derivative works, unless so authorized in advance, in writing,
by SAP. All updates, replacements, revisions, enhancements, additions, or
conversions to such SAP items specified above shall be subject to the provisions
as stated herein.
11. General Provisions.
(a) Non-solicitation. During the term of this Agreement and for
one (1) year after its termination, SAP and IGI agree that neither shall
directly or indirectly solicit for employment any staff of the other party who
have been directly and substantively involved in performance under this
Agreement.
(b) Non-exclusivity. Nothing in this Agreement shall limit or
restrict either party from entering into or continuing any agreement or other
arrangement with any other party, whether similar to this Agreement in nature
or scope. Moreover, each party shall remain free to provide products and
services to any client or prospective client so long as the terms of this
Agreement are not violated.
(c) Notices. All notices required to be given under this Agreement
shall be sent by certified mail to:
INTELLIGROUP, INC.
Attention: RAJ KONERU
5 LINCOLN HIGHWAY
EDISON, NJ 08820
and to
SAP America, Inc.
Attn: Contracts Department
701 Lee Road, Suite 200
Wayne, PA 19087
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without reference to its choice of law rules. To the extent that the parties
are permitted under this Agreement to seek judicial remedies, each party hereby
consents to the jurisdiction of the federal and state courts within the
Commonwealth of Pennsylvania to resolve any and all such matters.
(e) Merger. This Agreement and any Appendices hereto constitute
the entire agreement between the parties with respect to the matters set forth
herein. All prior agreements, oral or otherwise, between the parties and
relating to the subject matter contained herein, are hereby superseded,
provided, however, that in the event IGI executed an Alliance Agreement and
related License and Maintenance Agreement for SAP's R/2 Software Systems, such
agreement shall continue pursuant to its terms.
<PAGE> 9
(f) Amendments. This Agreement may not be modified except by a
writing signed by both parties.
(g) Severability. If any of the provisions of this Agreement are held
invalid, such provisions shall be deemed severed and the remaining provisions
shall remain in full force and effect.
(h) Non-assignment. This Agreement may not be assigned or
transferred, nor may rights or obligations be delegated, without the prior
written agreement of the parties; notwithstanding the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties of this
Agreement, as well as their respective permitted successors and assigns.
(i) Waiver. Failure of any party to enforce, in any one or more
instances, any of the terms or conditions of this Agreement shall not be
construed as a waiver of the future performance of any such terms or
conditions.
(j) Limitation of Liability.
(i) SAP AND ITS LICENSORS SHALL NOT BE LIABLE TO IGI OR THIRD
PARTIES FOR ANY LOSS OF BUSINESS, LOSS OF PROFITS, LOSS OF DATA OR COMPUTER
MALFUNCTION, OR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE
DAMAGES, EVEN IF SAP HAS BEEN APPRAISED OF THE POSSIBILITY THEREOF; OR
(ii) In no event shall the liability of SAP under this
Agreement, for any reason whatsoever, whether in contract, tort or statute
(including, without limitation, negligence) or otherwise, exceed $1,000,000.00
provided, however, that this limitation shall not apply to claims for personal
injury caused by SAP's gross negligence or willful misconduct.
(k) No Endorsement. Execution of this Agreement does not, and shall
not be construed to be, an endorsement by either party of the products or
services of the other party.
(l) Press Releases and Publicity. Any news release, public
announcement, advertisement, or publicity proposed to be released by either
party concerning the R/3 NIP Program or any matters arising under this
Agreement shall be subject to the approval of the designated representatives of
both parties.
(m) Dispute Resolution Procedures.
(i) Any dispute, disagreement, claim or controversy between
the parties arising under or relating to this Agreement or the parties'
performance thereunder (the "Disputed Matter") which cannot be resolved by
consultations between the senior executives of IGI and SAP shall be resolved by
binding arbitration, according to the then prevailing Commercial Arbitration
Rules of the American Arbitration Association, before a panel of three
arbitrators. Each party will select one arbitrator, and the third arbitrator
will be selected by the party-selected arbitrators. Any such arbitration shall
be held in the City of Philadelphia, Pennsylvania. The parties will share the
cost of the arbitration equally, subject to any final apportionment by the
arbitrators. The arbitrators will apply Pennsylvania law, without reference to
its choice of law rules, in resolving the Disputed Matter. The decision of the
arbitrators will be final and conclusive on the parties, and each party
consents that judgment upon an award rendered by the arbitrators may be entered
in any court of competent jurisdiction.
(ii) Neither party shall institute any action or proceeding against
the other in any court concerning any Disputed Matter that is or could be the
subject of a claim or proceeding under this Section; provided, however, that if
a party believes in good faith that a temporary or preliminary injunction is
necessary to
<PAGE> 10
preserve the status quo or otherwise to avoid irreparable harm to such party,
such as in the event of a breach of Section 9. or Section 10., such party shall
not be precluded by this Section from seeking such injunctive relief from a
court of competent jurisdiction.
(iii) Pending the resolution of a Disputed Matter, to the
extent feasible, both parties shall continue their performance under this
Agreement.
IN WITNESS WHEREOF and intending to be legally bound, the parties have
caused this Agreement to be signed by their authorized representative as of the
date shown above.
Intelligroup, Inc. SAP America, Inc.
(IGI) (SAP)
By: /s/ Raj Koneru By: /s/ A. Ott
----------------------------- ----------------------------
Printed Printed
Name: RAJ KONERU Name: A. OTT
--------------------------- ---------------------------
Title: Vice President Title: V.P.
------------------------- --------------------------
/s/ PA Leotta
10
<PAGE> 1
Exhibit 10.20
AMENDMENT NO. 1 TO
SERVICES PROVIDER AGREEMENT
AMENDMENT NO. 1 DATED AS OF DECEMBER 30, 1996, TO THE SERVICES
PROVIDER AGREEMENT dated as of July 24, 1994 by and between OXFORD SYSTEMS INC.,
a New Jersey corporation (the "Provider"), and Oracle Corporation ("Oracle") a
California corporation.
W I T N E S S E T H:
WHEREAS, Intelligroup, Inc. ("Intelligroup") is a corporation
organized and existing under and by virtue of the laws of the State of New
Jersey and was incorporated therein on October 15, 1987; and
WHEREAS, Intelligroup owns 100% of the issued and outstanding shares
of capital stock of the Provider; and
WHEREAS, the Board of Directors of Intelligroup, acting pursuant to
Section 14A:10-5.1, of the New Jersey Business Corporation Act have executed and
filed with the Secretary of State of the State of New Jersey the documents
necessary to effect a statutory subsidiary-parent merger so that the Provider
shall be merged into Intelligroup, effective December 31, 1996; and
WHEREAS, the parties to the Services Provider Agreement desire to
supplement and amend the Services Provider Agreement dated as of July 24, 1994
(the "Agreement") by and between the Provider and Oracle in order to modify
certain existing rights and obligations of the parties pursuant to the Agreement
and for related purposes;
NOW, THEREFORE, in consideration of the mutual promises herein made
and the mutual benefits to be derived herefrom, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. Assignment.
The Assignment provision, as set forth in Section X of the Agreement, is
hereby amended to provide that the Agreement is binding upon, inures to the
benefit of and is enforceable by the heirs, personal representatives, successors
and assigns of the parties.
2. Ratification.
Except to the extent expressly amended hereby or inconsistent with the
provisions hereof, the provisions of the Agreement are hereby ratified and
confirmed and shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1
to the Services Provider Agreement on this 30 day of December, 1996.
INTELLIGROUP, INC.
By:/s/ Ashok Pandey
----------------------------------------
Ashok Pandey
President and Chief Executive Officer
OXFORD SYSTEMS INC.
By:/s/ Ashok Pandey
----------------------------------------
Ashok Pandey
President and Chief Executive Officer
ORACLE CORPORATION
By:/s/ J. William Marshall
----------------------------------------
Name: Bill Marshall
Title: Director
2
<PAGE> 1
Exhibit 10.21
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Amendment") made
effective as of the 18th day of February, 1997 (the "Effective Date") by and
between Intelligroup, Inc., a New Jersey corporation, with its principal place
of business at 517 Route One South, Iselin, New Jersey 08830 (the "Company"),
and Paul Coombs (the "Employee").
WITNESSETH:
WHEREAS, the Company and the Employee are parties to that certain
Employment Agreement dated as of June 1, 1996 (the "Employment Agreement"); and
WHEREAS, the Company and the Employee desire to amend the Employment
Agreement to reflect the mutually agreed upon revised terms of employment of the
Employee in accordance with the provisions of this Amendment; and
WHEREAS, in consideration for the revisions to the Employment Agreement
as set forth herein, the Company has, in addition to changing Employee's title
and electing Employee an executive officer of the Company, granted Employee
options to purchase 396,000 shares of Common Stock as consideration for such
revisions; and
WHEREAS, the Employee desires and is willing to accept continued
employment with the Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions. Capitalized terms used herein, but not otherwise
defined, shall have the meanings ascribed to them in the Employment Agreement.
<PAGE> 2
2. Amendments.
(a) All references to the title of "Director BSD Division"
shall hereinafter be deleted and there shall be substituted in lieu thereof the
title "Vice President - Business Solutions."
(b) Paragraph 1 of the Employment Agreement is amended by
deleting such paragraph in its entirety and substituting in lieu thereof, the
following:
"1. The Company hereby agrees to employ the Employee and the
Employee hereby agrees to serve the Company pursuant to the terms and conditions
of this Agreement as Vice President - Business Solutions of the Company, or in a
position at least commensurate therewith in all material respects, commencing on
the Effective Date; provided, however, that, also commencing on the Effective
Date, the Employee shall be employed by the Company as an employee at will, and
may be terminated at any time, with or without cause."
(c) Paragraph 5 of the Employment Agreement is amended by
deleting such paragraph in its entirety.
(d) Paragraph 6 of the Employment Agreement is amended by
deleting such paragraph in its entirety.
(e) Paragraph 7 of the Employment Agreement is amended by
deleting the words "In the event of expiration or early" and substituting in
lieu thereof "Upon".
(f) Paragraph 7(a)(4) of the Employment Agreement is amended
by deleting such paragraph in its entirety.
-2-
<PAGE> 3
3. Release by the Employee. The Employee hereby acknowledges that, on
February 18, 1997, the Board of Directors of the Company elected the
Employee to the executive office of Vice President - Business Solutions and that
such position was, and is, at least commensurate with the office of Director BSD
Division. In connection therewith, and except for the obligations expressly
arising hereunder, the Employee hereby fully, irrevocably and unconditionally
releases and discharges the Company, its agents, officers, employees,
shareholders, directors, successors and assigns from any and all manner of
claims, complaints, demands, causes of action, obligations, liabilities, costs,
expenses (including attorneys' fees and costs) and damages, of every kind,
either at law or in equity, arising from his employment with the Company prior
to the Effective Date.
4. Covenants Not to Sue. The Employee represents and warrants that he
has not filed, nor has he assigned to any third person, any complaints, charges
or claims for relief against the Company with any local, state or federal court
or administrative agency. The Employee further agrees and covenants not to sue
or to bring, or assign to any third person, any claims or charges against the
Company or its agents, officers, employees, shareholders, directors, successors
and assigns with respect to any matter arising before the date hereof or covered
by the release set forth in Section 3, and not to assert against the Company in
any suit, action, litigation or proceeding any matter arising before the date
hereof or covered by the release set forth in Section 3.
5. Reference to and Effect on the Agreement.
(a) On and after the Effective Date, each reference to "this
Agreement", "hereunder", "hereof", "herein", or words of like import shall mean
and be a reference to the Employment Agreement as amended hereby. No reference
to this Amendment need be made in any instrument or document at any time
referring to the Employment Agreement, a reference to
-3-
<PAGE> 4
the Employment Agreement in any of such instrument or document to be deemed to
be a reference to the Employment Agreement as amended hereby.
(b) Except as expressly amended by this Amendment, the
Employment Agreement shall remain in full force and effect.
6. Granting of Stock Options. In consideration for the revisions to the
Employment Agreement as set forth herein, the Company has issued options to
purchase 396,000 shares of the Company's Common Stock pursuant to the terms of
that certain Stock Option Agreement between the Company and the Employee with a
grant date of January 16, 1997.
7. Governing Law. This Amendment shall be governed by and its
provisions construed and enforced with the internal laws of New Jersey without
reference to its principles regarding conflicts of laws.
8. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single instrument.
** ** ** **
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed and attested by its duly authorized officers, and the Employee has set
his hand, all as of the day and year first above written.
ATTEST: INTELLIGROUP, INC.,
By:/s/ Ashok Pandey
- --------------------------- ---------------------------------
Ashok Pandey
President and Chief Executive Officer
WITNESS: EMPLOYEE
/s/ Paul Coombs
- --------------------------- ---------------------------------
Paul Coombs
Address: 30 Martin Lane
Cherry Hills Village
Colorado 80110
-5-
<PAGE> 1
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net income (loss) ............................. $ 793,000 $ (1,059,000)
============ ============
Weighted average shares outstanding ........... 9,729,000 12,203,000
Incremental shares considered outstanding(1) .. 1,260,000 1,534,000
------------ ------------
Shares used in per share calculation .......... 10,989,000 13,737,000
============ ============
Net income (loss) per share ................... $ 0.07 $ (0.08)
============ ============
</TABLE>
(1) Pursuant to the requirements of the Securities and Exchange Commission,
stock options and warrants issued by the Company during the twelve months
immediately preceding its initial public offering have been included in
computing net income (loss) per share as if they were outstanding for all
periods using the treasury stock method.
<PAGE> 1
Exhibit 21
SUBSIDIARIES:
Intelligroup New Zealand Limited, a corporation formed pursuant to the
laws of New Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Europe Limited, a corporation formed pursuant to the laws
of the United Kingdom and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Singapore Private Ltd., a corporation formed pursuant to
the laws of Singapore and 50% owned by each of Intelligroup, Inc., and Rajkumar
Koneru, an Executive Vice President and Director of Intelligroup, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1996 EXTRACTED FROM THE ISSUER'S ANNUAL REPORT ON FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0001016439
<NAME> INTELLIGROUP, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,479,000
<SECURITIES> 0
<RECEIVABLES> 8,538,000
<ALLOWANCES> 546,000
<INVENTORY> 0
<CURRENT-ASSETS> 19,756,000
<PP&E> 1,281,000
<DEPRECIATION> 243,000
<TOTAL-ASSETS> 21,262,000
<CURRENT-LIABILITIES> 4,043,000
<BONDS> 0
0
0
<COMMON> 107,000
<OTHER-SE> 17,055,000
<TOTAL-LIABILITY-AND-EQUITY> 2,262,000
<SALES> 47,189,000
<TOTAL-REVENUES> 47,189,000
<CGS> 33,605,000
<TOTAL-COSTS> 33,605,000
<OTHER-EXPENSES> 9,908,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,235,000
<INCOME-PRETAX> 2,441,000
<INCOME-TAX> 500,000
<INCOME-CONTINUING> 1,941,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,148,000
<CHANGES> 0
<NET-INCOME> 793,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
