SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-20943
INTELLIGROUP, INC.
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(Exact Name of Registrant as Specified In Its Charter)
New Jersey 11-2880025
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
499 Thornall Street, Edison, New Jersey 08837
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(Address of Principal Executive Offices) (Zip Code)
(732) 590-1600
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(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $54,920,024 at March 22, 1999 based on the last sales price
on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 22, 1999:
Class Number of Shares
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Common Stock, $.01 par value 15,558,751
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business.................................................... 4
2. Properties.................................................. 18
3. Legal Proceedings........................................... 18
4. Submission of Matters to a Vote of Security Holders......... 20
PART II 5. Market for the Company's Common Equity and Related
Shareholder Matters......................................... 21
6. Selected Financial Data..................................... 22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24
7A. Quantitative and Qualitative Disclosure About Market Risk... 34
8. Financial Statements........................................ 34
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 34
PART III 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of the
Exchange Act................................................ 35
11. Executive Compensation...................................... 35
12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 35
13. Certain Relationships and Related Transactions.............. 35
PART IV 14. Exhibits, List and Reports on Form 8-K...................... 36
SIGNATURES ............................................................ 37
EXHIBIT INDEX ............................................................ 39
FINANCIAL STATEMENTS........................................................ F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Overview
Intelligroup, Inc. ("Intelligroup" or the "Company") provides a wide range
of information technology services, including management consulting,
enterprise-wide business process solutions, Internet applications services,
applications outsourcing and maintenance, web site design and customization, IT
training solutions, systems integration and custom software development based on
leading technologies.
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 499 Thornall Street, Edison, New Jersey 08837
and its telephone number is (732) 590-1600.
The Company has grown rapidly since 1994 when it made a strategic decision
to diversify its customer base by expanding the scope of its integration and
development services and to utilize software developed by SAP AG, based in
Germany, and distributed through its other subsidiaries including SAP America,
Inc. (collectively "SAP") as a primary tool to implement enterprise-wide
business process solutions.
SAP's software is representative of a class of application products known
as Enterprise Resource Planning ("ERP") software. ERP products are pre-packaged
solutions for business areas, including financial information, manufacturing and
human resources. For prospective customers, ERP products are an alternative to
the custom design and development of their own applications. Although ERP
products are pre-packaged, there is a significant amount of technical work
involved in implementing them and tailoring their use for a particular
customer's needs. The Company recognized that this implementation and
customization services work represented a significant potential business
opportunity.
ERP vendors such as SAP, Oracle, PeopleSoft and Baan, have a vested
interest in encouraging third party service companies to provide implementation
and customization services to customers. These vendors have established formal
programs which are designed to recruit and authorize third party service
companies as service partners. Companies wishing to become authorized partners
must meet performance criteria established by the ERP vendor. They are then
allowed to use the vendor's partner designation and associated logo to promote
their own services. The ERP product vendors also promote these authorized
partners to customers and prospective customers of their ERP products. The
Company believes that such partner status with the ERP vendors has and will
continue to result in direct referrals and enhanced industry recognition.
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In 1995, the Company achieved the status of a SAP National Implementation
Partner. In the same year, the Company also began to utilize Oracle's ERP
application products to diversify its service offerings. In 1997, the Company
enhanced its partner status with SAP, by first achieving National Logo Partner
status and then AcceleratedSAP Partner Status. Also, in 1997, the Company
further diversified its ERP-based service offerings, by beginning to provide
PeopleSoft and Baan implementation services. In July 1997, the Company was
awarded PeopleSoft implementation partnership status. In September 1997, the
Company was awarded Baan international consulting partnership status. In June
1998, the Company also expanded its Oracle applications implementation services
practice and added upgrade services to meet market demand of mid-size to large
companies that are implementing or upgrading Oracle applications.
The Company's software implementation, custom development and maintenance
services are enhanced by round-the-clock access to qualified and experienced
programmers at its offices in the United States, United Kingdom, New Zealand and
at its Advanced Development Center ("ADC") located in India. The ADC is
connected by dedicated, high speed satellite links to certain customer sites, as
well as to the Company's operations centers in the United States, the United
Kingdom and New Zealand.
The Company believes that the ADC is one of the world's largest offshore
SAP development centers. In 1998, the ADC was awarded ISO 9001 certification for
offshore SAP development. ISO 9001 is an international certification for
organizations, which achieve and demonstrate required levels of quality in
software development processes. The Company believes that, at this time, no
other services company has achieved ISO 9001 certification for offshore SAP
development.
The ADC is operated by Intelligroup Asia Private Ltd. ("Intelligroup
Asia"). The Company owns 99.8% of the shares of Intelligroup Asia. The remaining
shares are expected to be transferred to the Company by the founders in 1999.
Upon consummation of such transfer, Intelligroup Asia will be a wholly owned
subsidiary of the Company.
The Company provides its services directly to end-user organizations, or as
a member of consulting teams assembled by other information technology
consulting firms. The number of customers billed by the Company has grown
substantially from three customers in 1993 to approximately 750 customers in
1998. The Company's customers are Fortune 1000 and other large and mid-sized
companies in the United States and abroad. They include Armstrong World
Industries, AT&T, Block Drug Company, Bristol-Myers Squibb, IMC Global and Simon
& Schuster. The Company has also participated in project teams lead by
information technology consulting firms such as Ernst & Young LLP, IBM Global
Services, KPMG LLP and PricewaterhouseCoopers LLP.
During 1998, the Company made the decision to expand the portfolio of
services offered to existing and potential ERP customers, as well as customers
wishing to implement Internet-based solutions. These service offerings include
management consulting, Internet solutions and ERP and Internet application
outsourcing. This decision was based on the Company's business assessment of
customer needs over the life cycle of their solution. This assessment showed
that:
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o many ERP and non-ERP customers need business and technology consulting
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assistance to prepare and optimize systems plans to support their
organization's business strategies;
o many ERP and non-ERP customers need assistance in designing, implementing
and managing Internet and advanced technology applications, in areas such
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as web commerce and procurement, customer relationship management and
supply chain management; and
o many customers who install ERP or related Internet solutions need
assistance to maintain, manage and operate those solutions and are open to
proposals to outsource those functions.
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By providing a set of services throughout a customers' solution life cycle
and adding Internet solutions services, the Company believes that it is
leveraging its strengths in the ERP market, and broadening and expanding the
potential sources of future business opportunity.
The Company's stated direction is to expand its service offerings through
an appropriate mix of internal growth and acquisitions. During 1998, the Company
expanded its service operations, both domestically and internationally, through
a number of acquisitions. In May 1998, the Company expanded its PeopleSoft
services business in Europe, by acquiring the outstanding capital stock of each
of CPI Consulting Limited and CPI Resources Limited (the "CPI Companies")
located in the United Kingdom. The CPI Companies provide consulting and
implementation services related to PeopleSoft applications. In November 1998,
the Company acquired the outstanding capital stock of each of Azimuth Consulting
Limited, Azimuth Holdings Limited, Braithwaite Richmond Limited and Azimuth
Corporation Limited (the "Azimuth Companies") located primarily in New Zealand.
The Azimuth Companies provide business and management consulting services in
Australia, New Zealand and Southeast Asia. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In December 1998, the Application Management Services practice was
reorganized as the worldwide Enterprise Sourcing Services ("ESS") practice. The
ESS practice will focus on selling, delivering and supporting outsourced ERP and
Internet implementation and maintenance services. The offshore ADC in Hyderabad,
India is part of the ESS practice. The ADC enables ESS to take on larger and
more complex implementation projects and outsourcing arrangements, while
maintaining our aggressive implementation schedules and cost-effective services.
In January 1999, in order to augment the Internet/Advanced Technology
practice, the Company acquired the outstanding capital stock of Network
Publishing, Inc. ("NPI") located in Provo, Utah. NPI provides web site design
and front-end application solutions services. In February 1999, by way of merger
transactions, the Company augmented the PeopleSoft practice in North America by
acquiring Empower Solutions, L.L.C. and its affiliate Empower, Inc. (the
"Empower Companies") located in Plymouth, Michigan.
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Trademarks and Service Marks
"Intelligroup," "4Sight," "4Sight Plus", and the Company's logo are service
marks and "OIM" are trademarks of the Company.
"Azimuth" is a trademark of Azimuth Consulting.
"Empower Solutions" is a trademark of Empower Solutions.
All other trade names, trademarks or service marks referenced herein are
the property of their respective owners and are not the property of the Company.
Safe Harbor Statements
This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's intention to shift to
higher margin turnkey management assignments and more complex projects and to
utilize its proprietary implementation methodology in an increasing number of
projects. In addition, statements regarding the Company's intent to expand its
service offerings through internal growth and acquisitions are also
forward-looking statements. Such forward-looking statements include risks and
uncertainties, including, but not limited to:
o the substantial variability of the Company's quarterly operating results
caused by a variety of factors, many of which are not within the Company's
control, including (a) patterns of software and hardware capital spending
by customers, (b) information technology outsourcing trends, (c) the
timing, size and stage of projects, (d) timing and impact of acquisitions,
(e) new service introductions by the Company or its competitors and the
timing of new product introductions by the Company's ERP partners, (f)
levels of market acceptance for the Company's services, (g) general
economic conditions, (h) the hiring of additional staff and (i) fixed price
contracts;
o changes in the Company's billing and employee utilization rates;
o the Company's ability to manage its growth effectively, which will require
the Company (a) to continue developing and improving its operational,
financial and other internal systems, as well as its business development
capabilities, (b) to attract, train, retain, motivate and manage its
employees, (c) to continue to maintain high rates of employee utilization
at profitable billing rates, (d) to successfully integrate the personnel
and businesses acquired by the Company, and (e) to maintain project
quality, particularly if the size and scope of the Company's projects
increase;
o the Company's ability to maintain an effective internal control structure;
o the Company's limited operating history within its current line of
business;
o the Company's reliance on a continued relationship with SAP America and the
Company's present status as a SAP National Logo Partner;
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o the Company's substantial reliance on key customers and large projects;
o the highly competitive nature of the markets for the Company's services;
o the Company's ability to successfully address the continuing changes in
information technology, evolving industry standards and changing customer
objectives and preferences;
o the Company's reliance on the continued services of its key executive
officers and leading technical personnel;
o the Company's ability to attract and retain a sufficient number of highly
skilled employees in the future;
o the Company's ability to continue to diversify its offerings, including
growth in its Oracle, Baan and PeopleSoft services;
o uncertainties resulting from pending litigation matters and from potential
administrative and regulatory immigration and tax law matters;
o the Company's ability to protect its intellectual property rights; and
o Year 2000 compliance of vendors' products and related issues, including
impact of the Year 2000 problem on customer buying patterns.
As a result of these factors and others, the Company's actual results may
differ materially from the results disclosed in such forward-looking statements.
INDUSTRY BACKGROUND
Many large and mid-sized businesses face a rapidly changing business
environment, including intense global competition, accelerating technological
change, and the need to embrace emerging web commerce and procurement
strategies. Such businesses continually seek to improve the quality of products
and services, lower costs, reduce cycle times, optimize their supply chain and
increase value to customers. Businesses are implementing and utilizing advanced
information and Internet technology solutions, that enable them to redesign
their business processes in such areas as product development, service delivery,
manufacturing, sales and human resources.
Many businesses have adopted information systems strategies using
client/server architectures based on personal computers, local area network/wide
area network ("LAN/WAN"), shared databases and packaged software applications.
Frequently these strategies are intended to replace legacy systems, which are
often mainframe-based, running proprietary software and applications. Such
client/server systems, when developed and implemented appropriately, enable the
creation and utilization of more functional, flexible and cost effective
applications, which are critical to the competitive needs of businesses.
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As part of their client/server strategies, organizations often acquire, or
consider acquisition of, packaged enterprise-wide business software
applications, including those offered by leading ERP vendors, such as SAP,
Oracle, PeopleSoft or Baan. These applications are then implemented or
customized to meet their particular business needs. Alternatively, the
organizations may develop, or commission development of, customized software
applications to meet their needs.
For many customers, the issue of Year 2000 compliance has driven their
decisions to migrate to new client/server-based ERP solutions. Others have
decided to retain their legacy mainframe applications and make them Year 2000
compliant, rather than replacing them. In both cases, these customers now have a
set of core operations applications which they use to support their central
business processes. These customers may now face competing internal demands
against their budgets and resources. The customers must balance demands from
their user departments for new, innovative business applications against the
absolute requirement to maintain, manage and optimize the core operations
applications. These competing demands reflect areas of potential business
opportunity for the Company in the areas of management consulting, Internet
solutions and the outsourcing of ERP applications maintenance.
Intense competitive and market pressures continue to force many
organizations to look for improvements in the quality, efficiency and
responsiveness of their end-to-end business models. This would normally require
an in-depth analysis of their business strategies, operational processes and
supporting delivery mechanisms, including information systems. Customers will
sometimes retain external business and management consulting organizations to
assist with this analysis and the preparation of relevant recommendations.
Two consistent conclusions result from customers' analyses. The first is
the importance of timely access to relevant information, tools and applications,
at reasonable cost, for customers, suppliers, business partners and employees.
The second conclusion is that, because of its low cost and universal
availability, the Internet and associated browser and web technology is becoming
the de-facto information access and delivery standard for many organizations
around the world. Together, these are leading to a new class of web site,
commonly called "enterprise information portals". These sites need to be
designed and implemented to provide access to all information, applications and
communications tools required for internal and external users to perform their
designated business functions.
The majority of customers who have implemented, or are implementing, ERP
solutions have been Fortune 2000 companies. The Company believes that
opportunities for new ERP implementations will continue to exist in this
segment, as these companies deploy ERP solutions to subsidiaries and operating
units. In addition, these customers are also faced with the need to manage and
maintain their ERP applications. The Company believes that there is significant
potential business opportunity for implementing ERP version-to-version upgrades
and also for application outsourcing.
Because of the ERP penetration of Fortune 2000 customers, the marketing
focus of the ERP vendors has turned toward mid-market clients. In addition, the
leading ERP vendors are also realigning their sales organizations along industry
segments (e.g. manufacturing, finance etc.). The mid-market segment presents the
most opportunity for new ERP product sales and
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implementations. Many of these companies are growing rapidly and are likely to
have the need for core financial and other operations systems that can be
addressed by ERP products. The Company believes that opportunity exists for ERP
implementation services to mid-market clients. This segment is very cost
conscious and will require a highly efficient services delivery model.
In both the Fortune 2000 and mid-market segments, the Company believes that
enterprise information portals will become a focus of many customers'
information systems plans. Enterprise information portals provide customized,
integrated access to information, tools and applications. Much of the demand for
new applications, to be accessed via the portals, will be driven by the
customers' need to compete on such fronts as web commerce, customer relationship
management, sales force automation and supply chain integration. A new wave of
product vendors has emerged, which address these new application requirements.
These include providers of packaged applications, as well as providers of
middleware frameworks designed to simplify the task of building or integrating
custom applications. Often, integration of these new applications with the
customers' core ERP or legacy-based business systems will be critical.
The task of developing and implementing enterprise-wide, mission-critical,
information solutions is complex. It presents significant challenges for most
customer organizations and can be a time consuming and costly undertaking, which
typically requires significant allocation of organizational resources.
Information technology managers must integrate and manage information systems
environments consisting of multiple computing platforms, operating systems,
databases and networking protocols, and as well as multiple packaged and custom
developed applications.
Companies must also continually keep pace with a broad and often confusing
array of new technological developments, which can render internal information
technology skills obsolete. Professionals with the requisite technology skills
often are in short supply and many organizations are reluctant to expand their
internal information systems department for particular projects. At the same
time, external economic factors encourage organizations to focus on their core
competencies and trim work forces in the information technology management area.
Accordingly, organizations often lack sufficient, and/or appropriate, technical
resources necessary to design, develop, implement and manage the information
technology solutions needed to support their business needs.
To support their information technology needs, many businesses increasingly
engage experienced outside specialists for assistance across the full life cycle
of their solutions. Because of the heightened business pressures they face,
these customers are demanding innovative solutions, in shorter timeframes, with
lower life cycle cost of ownership, at higher levels of quality and service, all
with lower risk to themselves and their businesses.
As a result of these industry dynamics, demand for information technology
services has grown significantly and changed. It has moved from an
implementation focus to one addressing an integrated view of corporate business
and information processes; it has also moved to a focus on value-based pricing
and cost of ownership over the total life cycle of the solution. These changes
favor services companies which can provide high quality, low cost life cycle
services, and which address high value solution areas for clients' businesses.
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THE INTELLIGROUP SOLUTION
Intelligroup improves its clients' business performance, through the
intelligent application of information technology. Intelligroup provides a
continuum of services throughout our clients' solution life cycle. These
services comprise management consulting, ERP solutions design and
implementation, Internet consulting and solution development and enterprise
outsourcing.
The Company delivers to our clients timely, cost-effective and innovative
ERP, Internet and maintenance solutions by combining our:
Proven Offshore Development and Maintenance Model: The Company has the
ability to develop, implement and maintain business solutions through its
offshore ADC, at high quality and low cost. The ADC, which the Company believes
is one of the world's largest SAP offshore development and maintenance centers,
is ISO 9001 certified for SAP offshore development. The center is process driven
and connected to the Company's operations centers in Asia/Pacific, the United
States and Europe via high-speed satellite links. The center operates on a 24x7,
round-the-clock basis, allowing next business day turn-around of work units to
clients. Combining the center's quality processes, skilled development team and
low cost of operation allows the Company to compete for implementation and
maintenance contracts on a fixed price/fixed time basis.
Expertise in a Wide Range of Technologies, Industries and Disciplines: The
Company's consultants have expertise with SAP, Oracle, PeopleSoft and Baan
products and with a wide variety of leading computing technologies, including
Internet, client/server architectures, object-oriented technologies, CASE,
distributed database management systems, mainframe connectivity, LAN/WAN and
telecommunications technologies. The Company believes that its personnel are
effective because of their technical excellence, their industry experience and
their strong grounding in the disciplines of project implementation and
management.
Customer-Driven Approach: The Company's project managers and consultants
maintain on-going communication and close interaction with customers to ensure
that they are involved in all facets of a project and that the solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide training to its customers during a project to achieve high
levels of self-sufficiency among its customers' end users and internal
information technology personnel. The Company believes that its ability to
deliver the requisite knowledge base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.
Accelerated Implementation Methodology and Toolset: The Company has
developed a proprietary implementation methodology, 4Sight, as well as a
software-based implementation toolset, 4Sight Plus, which are designed to
minimize the time required to develop and implement SAP, Oracle, PeopleSoft and
Baan solutions for its customers. 4Sight and 4Sight Plus are designed to be
technology independent and modular, and have also been extended to support the
Company's Internet solutions engagements.
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INTELLIGROUP SERVICES
Intelligroup provides a wide range of information technology services,
including (i) management consulting services; (ii) ERP solutions utilizing SAP,
as well as Oracle, PeopleSoft and Baan products, all of which are leading
software applications; (iii) internet solution services; and (iv) enterprise
sourcing services (outsourcing) for the maintenance, administration and
operations of customers' ERP and Internet solutions.
Historically, the Company's services have ranged from providing customers
with a single consultant to multi-personnel full-scale projects. The Company
provides these services to its customers primarily on a time and materials basis
and pursuant to agreements, which are terminable upon relatively short notice.
As the Company has re-oriented itself towards serving our clients' needs over
their solutions' entire life cycle, we are beginning to enter into outsourcing
agreements with customers. The contractual arrangements in these situations will
typically be fixed term, fixed price and multi-year, as is common in the
outsourcing market. The Company's focus on life cycle services is also intended
to encourage ongoing and recurring service relationships, rather than one-time
implementation engagements.
MANAGEMENT CONSULTING
During 1998, the Company's management consulting practice has focused on
two areas: (i) Business Consulting (covering Business Process Re-engineering,
Change Management, IT Strategy and Software selection); and (ii) Leasing & Asset
Management.
The Company believes that significant value is provided to customers, by
providing business consulting services. Such services also have the potential to
stimulate additional revenue opportunities for the Company, in the execution of
recommendations made to clients. The acquisition of Azimuth Consulting
significantly strengthens Intelligroup's management consulting capabilities.
Founded in 1984, Azimuth has built a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
other Southeast Asian countries. Azimuth operates as a wholly-owned subsidiary
of Intelligroup with headquarters in Wellington, New Zealand. The Company
intends to integrate its existing management consulting services groups in the
United States and Europe, under Azimuth worldwide. The Company is currently
re-evaluating its Leasing and Asset Management solution offerings.
ENTERPRISE RESOURCE PLANNING SOLUTIONS
The Company designs, develops, integrates and implements sophisticated
business process solutions based on SAP, Oracle, PeopleSoft and Baan products,
utilizing our best business practices, methodologies and toolsets. The Company
believes that its expertise in a wide variety of technologies, coupled with its
ability to provide comprehensive business process solutions and timely and
cost-effective implementation of new business systems, enables its customers to
achieve substantial improvements in efficiency and effectiveness in their
businesses and fosters long-term customer relationships.
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Accelerated Implementation Methodology and Toolset: As a result of our
experience in implementing ERP software, the Company has developed a proprietary
methodology (4Sight) and associated toolset (4Sight Plus) for implementing
enterprise business software applications. 4Sight Plus also contains a project
management and tracking tool, which the Company utilizes to monitor
implementation projects undertaken for clients. The Company believes that the
use of 4Sight and 4Sight Plus, throughout an implementation project, may enable
its customers to realize significant savings in time and resources. Furthermore,
the Company believes that use of 4Sight Plus also shortens the turn-around time
for program development, as it streamlines the information flow between the
Company's offices and customer sites.
4Sight and 4Sight Plus, initially used by the Company in projects
implementing SAP, were designed to be portable to other packaged software
applications and to be adaptable to the scope of a particular project. 4Sight
and 4Sight Plus have been adapted for Baan, Oracle and PeopleSoft
implementations.
INTERNET SOLUTIONS SERVICES
In 1998, the Company created a practice focusing on providing Internet
consulting and application development services, designed to help companies
develop innovative ways to reach their customers, suppliers and target markets
by leveraging the power of the Internet and corporate intranets. This practice
developed expertise in Internet technologies as well as the integration of those
technologies with ERP and legacy systems.
The Company's core expertise has been in the technical development and
integration of the solutions. However, a key element of the new breed of
Internet solution relates to the projection of the customers' offering to their
intended Internet audience. The Company, however, did not possess this required
expertise in brand marketing, graphic and multimedia design. With the
acquisition of NPI, the Company is now able to provide those services and
provide a complete Internet solution which combines NPI's web design capability
with Intelligroup's expertise in Internet application development and
integration with ERP systems.
NPI has built a strong track record in designing web-sites that enable
clients to achieve the desired sales and marketing impact. Its customers include
a number of Fortune 500 companies in such industries as automotive, technology
and entertainment. The Company intends to leverage its proven 4Sight
methodologies and offshore development model to pursue Internet business
opportunities. The Company believes that the existing set of ERP customers will
be a receptive audience for the Company's Internet solutions. These customers
represent a large and well-defined target, which can be reached by the Company's
direct sales and marketing activities.
A wide variety of Internet solutions may be offered to prospective clients,
including electronic commerce, customer interaction, sales force automation and
web training. The Company intends to promote the use of enterprise information
portals in marketing its Internet solutions services.
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ENTERPRISE SOURCING SERVICES
The ESS practice focuses on selling, delivering and supporting outsourced
ERP and Internet implementation and maintenance services. The offshore ADC in
Hyderabad, India is part of the ESS practice. ESS provides full life cycle
support of ERP and Internet applications through the following service
offerings:
o Offshore Support: These services are provided in conjunction with the
Company's ERP and Internet practices, allowing them to provide
clients with high quality, low cost and time-dependent project
implementation services.
o Outsourcing: The Company provides clients with application
management, support and maintenance services. These services may be
provided on-site, off-site through the Company's operations centers
and ADC, or a combination of both on-site and off-site. The Company's
low cost, high quality ADC delivery model allows the Company to
compete for long term fixed price/fixed time contracts.
The ESS practice teams with the Company's various ERP and Internet
practices on their implementation projects, and will take the lead role in
selling and delivering longer term outsourcing relationships.
Advanced Development Center: The ADC is an important component of the
Company's value proposition to customers. The Company utilizes the programmers
at the ADC, in conjunction with its consultants in the United States who are on
site at customer locations, to provide its customers with savings in development
and implementation costs and time to project completion. The center allows the
Company to provide cost-effective, timely and high quality software development,
maintenance and support services to customers throughout the world. We are able
to deliver high value services at attractive prices due to the following: (i)
the high level of expertise and experience of our ADC consultant programmers;
(ii) the rigorous application of the Company's proprietary 4Sight software
project methodologies, tools and project management disciplines; and (iii) the
cost structures associated with the ADC's offshore location in Hyderabad, India.
The ADC is connected by dedicated, high-speed satellite links, to certain
customer sites, as well as the Company's headquarters in the United States, its
European headquarters in the United Kingdom and its office in New Zealand. The
ADC is staffed by over 200 qualified and experienced programmers. The ADC has
performed work on projects with SAP, as well as with Baan and certain custom
Internet solutions. As the Company expands both its ERP and Internet businesses,
the ADC is being prepared to undertake projects in any of the four ERP practices
(SAP, Baan, Oracle and PeopleSoft), as well as certain Internet and other
advanced technologies.
SALES AND MARKETING
The Company historically has generated new sales leads from (i) referrals
from existing customers, (ii) introductions to potential customers by the
Company's alliance partners, which often need to recommend qualified systems
integrators to implement their software products, and (iii) internally generated
sales. In addition, the Company has been introduced to customers by
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<PAGE>
certain of its competitors, such as the "Big Five" accounting firms, which at
times require the Company's expertise and ability to deliver qualified personnel
for complex projects.
The Company has dedicated an increased level of resources to sales and
marketing efforts. The Company will continue to market to potential customers
with demonstrated needs for the Company's expertise in ERP and Internet
solutions. The Company intends to implement focused sales management programs,
to leverage its relationships with existing customers, as well as those with ERP
and other product vendors. In particular, the Company has reorganized its SAP
practice along industry lines and will endeavor to partner with SAP's industry
sales organization to seek and close business opportunities.
Among its sales and marketing efforts, the Company's has exhibited and
presented the Company's expertise at trade events associated with the primary
ERP offerings. These include events such as SAPPHIRE, the annual SAP conference
for SAP service providers and end-users, the Americas SAP User Group, the Oracle
Americas User Group, BaanWorld and the PeopleSoft Users Group. The Company
intends to continue participation in such industry-recognized programs and trade
shows.
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, 1998, the Company's sales and marketing group consisted
of 35 employees in the United States, 2 for Europe, and 9 for the Asia Pacific
region. The Company markets and delivers its services to customers on an
international basis through its network of offices. The Company's headquarters
in New Jersey and its branch offices in Phoenix, AZ; Foster City, CA;
Washington, DC; Miami, FL; Atlanta, GA; Chicago, IL; Detroit, MI; Dallas, TX and
Reston, VA serve the United States market. In addition, the Company, also
maintains offices in Europe (Denmark, the United Kingdom and Belgium); Asia
Pacific (Australia, India, Japan, New Zealand, Philippines and Singapore).
Azimuth Consulting will operate worldwide, as a wholly owned subsidiary of
Intelligroup with headquarters in Wellington, New Zealand. The Company's
existing management consulting services groups in the United States and Europe,
will be merged with Azimuth worldwide.
The Company's services require a substantial financial commitment by
customers and, therefore, typically involve a long sales cycle. Once a lead is
generated, the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the appropriate solution and
bid accordingly. The Company's project managers are involved throughout the
sales cycle to ensure mutual understanding of customer goals, including time to
completion, and technological requirements. Sales cycles for complex business
solutions projects typically range from one to six months from the time the
Company initially meets with a prospective customer until the customer decides
whether to authorize commencement of an engagement.
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<PAGE>
CUSTOMERS
The Company provides its services directly to Fortune 2000 and other large
and mid-sized companies, many of which have information-intensive, multinational
operations, or as a member of a consulting team assembled by other information
technology consultants, such as "Big Five" accounting firms. The number of
customers billed by the Company has grown substantially from three customers in
1993 to approximately 750 customers in the year ended December 31, 1998.
The Company's ten largest customers accounted for, in the aggregate,
approximately 50%, 46% and 34% of its revenue in 1996, 1997 and 1998,
respectively. During 1996 and 1997, PricewaterhouseCoopers LLP and Bristol-Myers
Squibb each accounted for more than 10% of revenue. During 1998, no single
customer accounted for more than 10% of revenue. In 1996, 1997 and 1998, 34%,
32% and 25% 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. Under the ESS practice, the
Company expects to compete for multi-year fixed term, fixed price contracts.
There can be no assurance that the Company's customers will continue to enter
into contracts with the Company or that existing contracts will not be
terminated.
Many of the Company's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a customer's
expectations in the performance of its services could result in a material
adverse change to the customer's operations giving rise to claims for damages
against the Company or causing damage to the Company's reputation, adversely
affecting its business, financial condition and results of operations. In
addition, certain of the Company's agreements with its customers require the
Company to indemnify the customer for damages arising from services provided to,
or on behalf of, such customer. Under certain of the Company's customer
contracts, the Company warrants that it will repair errors or defects in its
deliverables without additional charge to the customer. The Company has not
experienced, to date, any material claims against such warranties. The Company
has purchased and maintains errors and omissions insurance to insure the Company
for damages and expenses incurred in connection with alleged negligent acts,
errors or omissions.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that its principal competitors include the internal information systems
groups of its prospective customers, as well as the following classes of
companies (some of which are also customers of the Company):
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<PAGE>
o Consulting and software integration firms: including Andersen
Consulting, IBM Global Services, Cambridge Technology Partners, MCI
Systemhouse, Computer Sciences Corporation and others.
o "Big Five" accounting firms: Deloitte & Touche, Ernst & Young, KPMG,
PricewaterhouseCoopers.
o Software applications vendors: SAP, Oracle, Baan and PeopleSoft.
In addition, the Company competes with smaller companies such as Plaut,
Clarkson-Potomac, Whittman-Hart and Origin.
Many of the Company's competitors have longer operating histories, possess
greater industry and name recognition and have significantly greater financial,
technical and marketing resources than the Company. In addition, there are
relatively low barriers to entry into the Company's markets and the Company has
faced, and expects to continue to face, additional competition from new entrants
into its markets.
The Company believes that the principal competitive factors in its markets
include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of services that are competitive with
the Company's services and the extent of its competitors' responsiveness to
customer needs.
The Company believes that it competes based on its expertise across the
full life cycle of our clients' ERP and Internet solutions. This expertise
includes management consulting skills, plus design and implementation skills in
ERP products (primarily SAP, Oracle, PeopleSoft and Baan), Internet and
application integration and application outsourcing related to those solutions.
There can be no assurance that the Company will be able to continue to compete
successfully with existing and new competitors.
EMPLOYEES
As of December 31, 1998, the Company employed 1,260 full-time employees, of
whom 957 were engaged as consultants or as software developers, 46 were engaged
in sales and marketing, and 257 were engaged in sales and delivery management,
finance and administration. Of the total number of employees, 631 were based in
the United States, 522 were based in the Asia Pacific region and 107 were based
in Europe. In addition, the Company engaged 102 independent contractors to
perform information technology services.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements containing non-competition, non-disclosure and non-solicitation
clauses. In addition, the Company requires that all new employees execute such
agreements as a condition of employment by the Company. The Company believes
that it has been successful in attracting and retaining skilled and
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<PAGE>
experienced personnel. There is increasing competition for experienced sales and
marketing personnel and technical professionals. The Company's future success
will depend in part on its ability to continue to attract, retain, train and
motivate highly qualified personnel. The Company considers relations with its
employees to be good.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary
accelerated implementation methodology, development tools and other intellectual
property rights. The Company relies upon a combination of trade secret,
non-disclosure and other contractual arrangements, and copyright and trademark
laws, to protect its proprietary rights. The Company generally enters into
confidentiality agreements with its employees, consultants and customers, and
limits access to and distribution of its proprietary information. The Company
also requires that substantially all of its employees and consultants assign to
the Company their rights in intellectual property developed while employed or
engaged by the Company. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of its
proprietary information or that the Company will be able to detect unauthorized
use of and take appropriate steps to enforce its intellectual property rights.
ITEM 2. PROPERTIES.
As of December 31, 1998, the Company owns no real property and currently
leases or subleases all of its office space. The Company leases its headquarters
in Edison, New Jersey, totaling approximately 48,475 square feet. Such lease has
an initial term of ten (10) years, which commenced in September 1998. The
Company uses such facility for certain technical and support personnel, sales
and marketing, administrative, finance and management personnel. The Company
also leases or subleases offices for its sales and operations in Phoenix, AZ;
Foster City, CA; Washington, DC; Miami, FL; Atlanta, GA; Chicago, IL; Detroit,
MI; Dallas, TX; and Reston, VA; and operations in Hyderabad, India; Australia;
Denmark; Japan; New Zealand; Singapore and the United Kingdom. The Company is in
the process of opening a sales office in Brussels, Belgium. In October 1998, the
Company finalized an agreement to sublet the space used for its prior
headquarters for the remainder of the term of its sublease, which expires
November 15, 1999.
ITEM 3. LEGAL PROCEEDINGS.
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 Company, seven former employees of the Company and
Pegasus Systems, Inc. ("Pegasus"), a corporation which currently employs certain
of 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
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<PAGE>
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. 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. On October 13, 1998, the
parties negotiated a settlement to dispose of all claims asserted in this
lawsuit as well as those asserted in the claim against Sophien Bennaceur
(discussed below). The Company drafted and circulated a settlement agreement
which, if executed, would dispose of both lawsuits. On March 11, 1999, the
Company filed a Motion to Enforce the settlement agreement in light of Sophien
Bennaceur's failure to execute such settlement agreement. 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.
On February 13, 1998, Russell Schultz, a former employee of the Company,
filed a complaint in the Superior Court of New Jersey, Law Division, Monmouth
County, naming the Company as a defendant. The complaint, which seeks damages,
alleges, among other things, that the Company misrepresented plaintiff's job
description in order to induce plaintiff to leave his prior employer, failed to
provide stock options to the plaintiff and violated plaintiff's written
employment contract. The Company was served with the complaint on March 16,
1998. Subsequently, on July 10, 1998, upon the Company's Motion to Compel
Arbitration, the court dismissed the plaintiff's complaint without prejudice.
Subsequently, the plaintiff's motion to reconsider the dismissal was denied. The
plaintiff filed his demand for Arbitration with the American Arbitration
Association on February 17, 1999 and the Company filed its answer on February
26, 1999. It is too early in the dispute process to determine the impact, if
any, that such dispute will have upon the Company's business, financial
condition or results of operations.
On May 28, 1998, the Company and Rajkumar Koneru, as plaintiffs, filed a
complaint in the United States District Court for the District of New Jersey,
against Sophien Bennaceur, a former employee and officer of the Company. The
complaint, which seeks damages and injunctive relief against the defendant,
alleges among other things, misappropriation of proprietary information, breach
of employment agreement, breach of fiduciary duty and duty of loyalty, unfair
competition and tortious interference. The defendant was served with the
complaint and filed an answer on July 9, 1998. On October 13, 1998, the parties
negotiated a settlement to dispose of all claims asserted in this lawsuit as
well as those asserted in the Pegasus litigation (discussed above). The Company
drafted and circulated a settlement agreement which, if executed, would dispose
of both lawsuits. On March 11, 1999, the Company filed a Motion to Enforce the
settlement agreement in light of Sophien Bennaceur's failure to execute such
settlement agreement.
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<PAGE>
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.
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<PAGE>
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 consummated
its initial public offering. The following table sets forth, for each of the
periods indicated, the high and low sale prices per share of Common Stock as
quoted on the NNM. The prices shown represent quotations among securities
dealers, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
Quarter Ended High Low
---------------------------- ---------- ---------
March 31, 1997 $12 3/4 $9 7/8
June 30, 1997 $11 7/8 $8 1/4
September 30, 1997 $23 1/2 $9 1/2
December 31, 1997 $25 7/8 $13 3/4
March 31, 1998 $21 1/2 $14 1/2
June 30, 1998 $23 5/8 $15
September 30, 1998 $24 1/4 $16
December 31, 1998 $19 3/4 $10 5/8
As of March 22, 1999, the approximate number of holders of record of the
Common Stock was 47 and the approximate number of beneficial holders of the
Common Stock was 1,750.
The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
All information relating to the Common Stock of the Company in this Annual
Report on Form 10-K reflects a 81,351.1111-for-1 stock split of the Common Stock
effected July 12, 1996, prior to the Company's initial public offering of its
Common Stock in September 1996.
The following information relates to all securities of the Company sold by
the Company which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), at the time of grant, issuance and/or sale, and
have not previously been disclosed in a Quarterly Report on Form 10-Q:
On November 25, 1998, Intelligroup, Inc. (the "Company"),
consummated the acquisition (the "Acquisition") of all of the shares
of outstanding capital stock of each of Azimuth Consulting Limited,
Azimuth Holdings Limited, Braithwaite Richmond Limited and Azimuth
Corporation Limited, each a company formed pursuant to the laws of New
Zealand (the "Azimuth Companies"). As a result of the Acquisition,
each of the Azimuth Companies became a wholly-owned subsidiary of the
Company. The parties have accounted for such transaction as a pooling
of interests. The principal activity of each of the Azimuth Companies
is providing business and management consultancy services.
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<PAGE>
The purchase price consisted of the issuance by the Company of an
aggregate of 902,928 restricted shares of its Common Stock, $0.01 par
value per share, to David Anthony Stott and Alexander Graham Wilson,
the sole shareholders of each of the Azimuth Companies. The Company
agreed to use its best efforts to file a registration statement
registering the shares of the Company's Common Stock issued to Messrs.
Stott and Wilson on Form S-3 no later than February 28, 1999 and use
its best efforts to have such registration become effective as soon as
practicable thereafter. The Company filed such Registration Statement
on February 26, 1999 and anticipates that the Form S-3 will be
declared effective by the Securities and Exchange Commission in the
near term after the filing of this Form 10-K.
No underwriter was employed by the Company in connection with the
issuance by the Company of the securities described above. The Company
claims that the issuance of all of the foregoing securities was exempt
from registration under Section 4(2) of the Securities Act as
transactions not involving any public offering. Appropriate legends
were affixed to the stock certificates issued in such transaction.
Both recipients had adequate access to information about the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the years ended December 31,
1996, 1997 and 1998 and the selected balance sheet data as of December 31, 1997
and 1998 are derived from and are qualified by reference to, and should be read
in conjunction with, the more detailed audited consolidated financial statements
and the related notes thereto included elsewhere herein. The selected statement
of operations data for the year ended December 31, 1994 and 1995 and the
selected balance sheet data as of December 31, 1994, 1995 and 1996 have been
derived from audited financial statements of the Company which are not included
elsewhere herein. Prior period financial information has been revised to reflect
the Company's acquisitions of CPI Resources and the Azimuth Companies during
1998, which were accounted for in accordance with the pooling of interests rules
under generally accepted accounting principles.
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<PAGE>
The following should be read in conjunction with the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- -------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $19,438 $39,283 $61,699 $94,326 $144,861
Cost of sales.............................. 13,528 29,263 43,142 65,535 94,203
------- ------- ------- ------- --------
Gross profit............................. 5,910 10,020 18,557 28,791 50,658
------- ------- ------- ------- --------
Selling, general and administrative
expenses................................. 4,670 8,401 14,544 22,060 36,570
Acquisition expenses....................... -- -- -- -- 2,118
------- ------- ------- ------- ---------
Total selling, general and administrative
expenses................................ 4,670 8,401 14,544 22,060 38,688
------- ------- ------- ------- --------
Operating income......................... 1,240 1,619 4,013 6,731 11,970
Factor charges/Interest expense (income),
net...................................... 463 1,327 1,335 (257) (120)
------- ------- ------- ------- --------
Income before provision for
income taxes and extraordinary
charge................................. 777 292 2,678 6,988 12,090
Provision for income taxes................. 409 587 748 2,327 4,416
------- ------- ------- ------- --------
Income (loss) before extraordinary charge.. 368 (295) 1,930 4,661 7,674
Extraordinary charge, net of income tax
benefit of $296.......................... -- -- 1,148 -- --
------- ------- ------- ------- --------
Net income (loss)........................ $ 368 $ (295) $ 782 $ 4,661 $ 7,674
======= ======= ======= ======= ========
Earnings (loss) per share(1):
Basic earnings per share:
Income (loss) before extraordinary charge $ 0.02 $ (0.02) $ 0.18 $ 0.37 $ 0.57
Extraordinary charge, net of income tax
benefit.............................. -- -- 0.11 -- --
------- ------- ------- ------- --------
Net income (loss)...................... $ 0.02 $ (0.02) $ 0.07 $ 0.37 $ 0.57
======= ======= ======= ======= ========
Weighted average number of common shares -
Basic...................................... 15,011 15,011 11,003 12,636 13,386
======= ======= ======= ======= ========
Diluted earnings per share:
Income (loss) before extraordinary charge.. $ 0.02 $ (0.02) $ 0.16 $ 0.36 $ 0.55
Extraordinary charge, net of income tax
benefit.................................. -- -- 0.10 -- --
------- ------- ------- ------- --------
Net income (loss)........ $ 0.02 $ (0.02) $ 0.06 $ 0.36 $ 0.55
======= ======= ======= ======= ========
Weighted average number of common shares -
Diluted.................................... 15,011 15,011 12,263 13,116 13,968
======= ======= ======= ======= ========
AS OF DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- -------- --------- ----------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents................. $ 1,399 $ 1,412 $ 8,301 $ 8,821 $ 4,245
Working capital surplus (deficit)......... (492) (991) 16,246 29,672 29,611
Total assets.............................. 7,599 12,571 24,945 42,006 65,728
Short-term debt, including subordinated
debentures.............................. 1,304 3,608 226 386 11
Long-term debt and obligations under
capital leases, less current portion... 141 206 108 355 59
Shareholders' equity...................... 557 128 18,280 33,208 44,920
- -----------------
(1)Basic and diluted earnings per share have replaced primary and
fully diluted earnings per share in accordance with SFAS No. 128.
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company provides a wide range of information technology services,
including management consulting, enterprise-wide business process solutions,
Internet applications services, applications outsourcing and maintenance, web
site design and customization, IT training 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 software developed by SAP as a primary tool to implement enterprise-wide
business process solutions. In 1995, the Company achieved the status of a SAP
National Implementation Partner. In the same year, the Company also began to
utilize Oracle's ERP application products to diversify its service offerings. In
1997, the Company enhanced its partner status with SAP, by first achieving
National Logo Partner status and then AcceleratedSAP Partner Status. Also, in
1997, the Company further diversified its ERP-based service offerings, by
beginning to provide PeopleSoft and Baan implementation services. In July 1997,
the Company was awarded PeopleSoft implementation partnership status. In
September 1997, the Company was awarded Baan international consulting
partnership status. In June 1998, the Company also expanded its Oracle
applications implementation services practice and added upgrade services to meet
market demand of mid-size to large companies that are implementing or upgrading
Oracle applications.
During 1998, the Company expanded its operations through acquisitions. On
May 7, 1998, the Company acquired thirty percent of the outstanding share
capital of CPI Consulting Limited. The acquisition of CPI Consulting Limited was
accounted for utilizing purchase accounting. The consideration paid by the
Company included the issuance of 165,696 shares of the Company's Common Stock
with a fair market value of $3.1 million, and a future liability to the sellers
predicated upon operating results for the balance of 1998. The value of the
liability has been determined as of December 31, 1998 to be $2.5 million, which
is payable by the issuance of an additional 155,208 shares of the Company's
Common Stock. Such shares were issued by the Company on March 22, 1999. The
excess of the purchase price over the fair value of the net assets acquired was
attributed to intangible assets, amounting in the aggregate to $5.8 million.
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior results for all periods have been restated
in accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited.
The CPI Companies provide consulting and implementation services related to
PeopleSoft applications.
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<PAGE>
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
The Azimuth Companies provide business and management consulting services.
Founded in 1984, Azimuth has built a strong IT management consulting
organization with operations in New Zealand, Australia, the Philippines and
Southeast Asian countries.
In January 1999, in order to augment the Internet/Advanced Technology
Practice, the Company acquired the outstanding capital stock of NPI located in
Provo, Utah. The purchase price included an initial cash payment in the
aggregate of $1,800,000 together with a cash payment of $200,000 to be held in
escrow. In addition, the purchase price included an earn-out payment of up to
$2,212,650 in restricted shares of the Company's Common Stock payable on or
before April 15, 2000 and a potential lump sum cash payment of $354,024 payable
no later than March 31, 2000. This acquisition has been accounted for in 1999
under the purchase method of accounting. NPI provides web site design and
front-end application solutions services. NPI has built a strong track record in
designing web-sites that enable clients to achieve the desired sales and
marketing impact.
In addition, by way of merger transactions, the Company augmented its
PeopleSoft practice in North America by acquiring the Empower Companies located
in Plymouth, Michigan on February 16, 1999. The purchase price consisted of the
issuance of an aggregate of 1,831,091 restricted shares of the Company's Common
Stock. The Company may be required to issue additional shares of its restricted
Common Stock which may be issued in connection with a net worth adjustment
determined as of the closing date. The amount of such adjustment is in the
process of being finalized by the parties. The acquisition has been accounted
for as pooling of interest and thus prior financial statements will be revised
to reflect the activities of such companies for all periods in accordance with
generally accepted accounting principles. The Empower Companies provide business
process reengineering, system design and development, project management and
training services.
The Company generates revenue from professional services rendered to
customers. Revenue is recognized as services are performed. The Company's
services range from providing customers with a single consultant to
multi-personnel full-scale projects. The Company provides these services to its
customers primarily on a time and materials basis and pursuant to written
contracts which can be terminated with limited advance notice, typically not
more than 30 days, and without significant penalty, generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized companies. The Company generally
bills its customers semi-monthly for the services provided by its consultants at
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<PAGE>
contracted rates. Where contractual provisions permit, customers also are billed
for reimbursement of expenses incurred by the Company on the customers' behalf.
The Company has provided services on certain projects in which it, at the
request of the clients, offered a fixed price for its services. For the year
ended December 31, 1998, revenues derived from projects under fixed price
contracts represented approximately 5% of the Company's total revenue. No single
fixed price project was material to the Company's business during 1998. However,
one fixed price project, which began late in 1998, is expected be material to
the Company during 1999. The Company believes that, as it pursues its strategy
of making turnkey project management a larger portion of its business, it will
continue to offer fixed price projects. The Company has had limited prior
experience in pricing and performing under fixed price arrangements and believes
that there are certain risks related thereto and thus prices such arrangements
to reflect the associated risk. There can be no assurance that the Company will
be able to complete such projects within the fixed price timeframes. The failure
to perform within such fixed price contracts, if entered into, could have a
material adverse effect on the Company's business.
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, 1996, 1997 and 1998, the Company's
ten largest customers accounted for in the aggregate, approximately 50%, 46% and
34% of its revenue, respectively. In 1996 and 1997, PricewaterhouseCoopers LLP
and Bristol-Myers Squibb each accounted for more than 10% of revenue. During
1998, no customer accounted for more than 10% of revenue. For the years ended
December 31, 1996, 1997 and 1998, 34%, 32% and 25%, 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, 1996, 1997 and 1998, 57%, 58% and 59%,
respectively, of the Company's total revenue was derived from projects in which
the Company implemented software developed by SAP. For each of the years ended
December 31, 1997 and 1998, approximately 12% of the Company's total revenue was
derived from projects in which the Company implemented software developed by
Oracle. For each of the years ended December 31, 1998, 1997 and 1996,
approximately 9%, 8% and 9%, respectively, of the Company's total revenue was
derived from projects in which the Company implemented software developed by
PeopleSoft. During the year ended December 31, 1998, approximately 53% of the
Company's revenue was derived from engagements at which the Company had project
management responsibilities, compared to 28% and 12% during the years ended
December 31, 1997 and 1996, respectively.
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 has been shifting to such higher-margin turnkey management
- 26 -
<PAGE>
assignments and more complex projects by leveraging its reputation, existing
capabilities, proprietary implementation methodology, development tools and
offshore development capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales opportunities with both
new and existing customers. The Company's inability to continue its shift to
higher-margin turnkey management assignments and more complex projects may
adversely impact the Company's future growth.
Since late 1994, the Company has made substantial investments in its
infrastructure in order to support its rapid growth. For example, in 1994, the
Company established and funded an operations facility in India, the Advance
Development Center (the "ADC"), and in 1995 established a sales office in
California. In addition, from 1994 to date, the Company has incurred expenses to
develop proprietary development tools and its proprietary accelerated
implementation methodology and toolset. Since 1995, the Company has also been
increasing its sales force and its marketing, finance, accounting and
administrative staff, in order to manage its growth. The Company currently
maintains its headquarters in Edison, New Jersey, and branch offices in Chicago,
Detroit, Foster City (California), Reston (Virginia), Edison (New Jersey),
Dallas, Atlanta, Phoenix and Washington, D.C. The Company also currently
maintains offices in Europe (the United Kingdom, Denmark, and Belgium), and Asia
Pacific (Australia, India, New Zealand, the Philippines, and Singapore). The
Company leases its headquarters in Edison, New Jersey, totaling approximately
48,475 square feet. Such lease has an initial term of ten (10) years, which
commenced in September 1998. In October 1998, the Company finalized an agreement
to sublet the space used for its prior headquarters for the remainder of the
term of its sublease, which expires November 15, 1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------------
YEAR ENDED
DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue.......................................... 100.0% 100.0% 100.0%
Cost of sales.................................... 65.0 69.5 69.9
-------- ------- -------
Gross profit................................... 35.0 30.5 30.1
Selling, general and administrative expenses..... 25.2 23.4 23.6
Acquisition expenses............................. 1.5 -- --
-------- ------- -------
Operating income............................... 8.3 7.1 6.5
Interest and other expense (income), net......... -- (0.3) 2.2
-------- ------- -------
Income before provision for income taxes and
extraordinary charge........................... 8.3 7.4 4.3
Provision for income taxes....................... 3.0 2.5 1.2
-------- ------- -------
Income before extraordinary charge............... 5.3 4.9 3.1
Extraordinary charge, net of income tax benefit.. -- -- 1.8
-------- ------- -------
Net income .................................... 5.3 4.9 1.3
======== ======= =======
</TABLE>
- 27 -
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased by 53.6% or $50.6 million, from $94.3 million in
1997 to $144.9 million in 1998. This increase was attributable primarily to
increased demand for the Company's ERP implementation consulting services and,
to a lesser extent, to increased demand for the Company's systems integration
and Internet 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 43.7%, or $28.7 million, from $65.5 million
in 1997 to $94.2 million in 1998. The increase was due to increased personnel
costs resulting from the hiring of additional consultants to support the
increase in demand for the Company's services. The Company's gross profit
increased by 76%, or $21.9 million, from $28.8 million in 1997 to $50.7 million
in 1998. Gross profit margin increased from 30.5% of revenue in 1997 to 35.0% of
revenue in 1998. The increase in such gross profit margin was primarily
attributable to both the expanded utilization of the Company's offshore
development facility in India, and the increase in implementation service
projects where the Company has project management responsibilities, which
typically carry higher gross margins, than those in which the Company provides
supplemental staffing for client managed projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of administrative salaries, and
related benefits costs, occupancy costs, sales person compensation, travel and
entertainment, costs associated with the ADC and related development costs and
professional fees. Selling, general and administrative expenses increased by
65.7%, or $14.5 million, from $22.1 million in 1997 to $36.6 million in 1998,
and increased as a percentage of revenue from 23.4% to 25.2%, respectively. The
increases in such expenses in absolute dollars and as a percentage of revenue
were due primarily to the increase in salaries and related benefits reflecting
headcount increases in the Company's sales force and its marketing, finance,
accounting and administrative staff, in order to manage its growth. The
Company's occupancy costs increased as a result of the relocation of our
corporate headquarters into approximately 48,000 square feet of office space,
from our former location which consisted of approximately 17,000 square feet. In
addition, the Company experienced increases in sales and management recruiting
costs, occupancy costs as additional offices were opened in the United States,
support services and the provision for doubtful accounts.
Acquisition expense. During the year ended 1998, the Company incurred costs
of $2,118,000 in connection with the acquisitions of the CPI Companies and the
Azimuth Companies, each of which were accounted for as pooling of interests.
These costs primarily consisted of professional fees associated with such
acquisitions.
Provision for income taxes. The Company's effective income tax rate was 37%
and 33% for the years ended December 31, 1998 and 1997. During 1997, the Company
reduced its valuation allowance by $207,000 as management determined that it was
more likely than not, that the applicable portion of the net deferred tax asset
would be or had been realized. The 1997 valuation allowance reduction favorably
impacted the effective income tax rate by 3%. In 1996,
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<PAGE>
the Company elected a five year tax holiday in India in accordance with a local
tax incentive program whereby no income tax will be due during such period. For
the year ended December 31, 1998 and 1997, the tax holiday favorably impacted
the effective tax rate by approximately 10% and 8%, respectively. Based on
current and anticipated profitability, management believes all net deferred tax
assets are more likely than not to be realized.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue increased by 52.9%, or $32.6 million, from $61.7 million
in 1996 to $94.3 million in 1997. This increase was attributable primarily to
increased demand for the Company's SAP related implementation 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 increased by 51.9%, or $22.4
million, from $43.1 million in 1996 to $65.5 million in 1997. The increase was
due to increased personnel costs resulting from the hiring of additional
consultants to support the increase in demand for the Company's services. The
Company's gross profit increased by 55.1%, or $10.2 million, from $18.6 million
in 1996 to $28.8 million in 1997. Gross profit margin increased from 30.1% of
revenue in 1996 to 30.5% of revenue in 1997. The increase in such gross profit
margin was attributable to the increase in implementation services projects and
a combination of improved billing margins, greater consultant utilization and
achieving certain customer performance incentives.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 51.7%, or $7.6 million, from $14.5 million
in 1996 to $22.1 million in 1997, and decreased slightly as a percentage of
revenue from 23.6% to 23.4%, 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 1997 and increased
travel and entertainment expenses due to the growth of the business and the
employee base. Such expenses were increased to support the continued revenue
growth of the Company in the United States and abroad. In addition, such
expenses increased due to increased sales and management recruiting costs,
support services, and an increase in the provision for doubtful accounts.
Factor fees/Interest (income) expense, net. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable. On
October 10, 1996, the Company repaid the factor with a portion of the proceeds
from the Company's initial public offering, approximately $4.4 million,
consisting of all amounts outstanding under the agreement with its factor and
terminated its factor agreement. Subsequent to the Company's initial public
offering, interest income has been earned on interest bearing cash accounts and
short term investments.
Provision for Income Taxes. The Company's effective income tax rate was 33%
and 28% for the years ended December 31, 1997 and 1996. During 1997 and 1996,
the Company reduced their valuation allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable portion of the net deferred tax asset would be or
- 29 -
<PAGE>
had been realized. The 1997 and 1996 valuation allowance reduction favorably
impacted the effective income tax rate by 3% and 14%, respectively. In 1996, the
Company elected a five year tax holiday in India in accordance with a local tax
incentive program whereby no income tax will be due during such period. For the
year ended December 31, 1997, the tax holiday favorably impacted the effective
tax rate by approximately 8%. There was no significant impact for 1996. Based on
current and anticipated profitability, management believes all net deferred tax
assets are more likely than not to be realized.
BACKLOG
The Company normally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog. In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant penalty, the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected future revenue. In the event that a customer
terminates a project, the customer remains obligated to pay the Company for
services performed by it through the date of termination.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated from
operations, and prior to 1998 from cash balances generated from the Company's
initial and follow-on public offerings consummated in October 1996 and July
1997, respectively.
The Company had cash and cash equivalents of $4.2 million at December 31,
1998 and $8.8 million at December 31, 1997. The Company had working capital of
$29.6 million at December 31, 1998 and $29.7 million at December 31, 1997.
Cash provided by operating activities was $2.6 million during the year
ended December 31, 1998, resulting primarily from net income of $7.7 million
during the year ended December 31, 1998, an increase of $7.6 million in accounts
payable, accrued payroll and accrued expenses, offset by an increase of $14.6
million in accounts receivable and unbilled services. Cash used in operating
activities for the years ended December 31, 1997 and 1996 was $7.5 million and
$4.6 million, respectively.
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 $7.1 million, $2.4 million and $1.0 million in
computer equipment and office furniture and fixtures in 1998, 1997 and 1996,
respectively. The increase reflects purchases of computer and telecommunications
equipment for consultants and administrative staff and office furniture and
fixtures related to the Company's new headquarters in Edison, New Jersey, and
other offices opened during 1998.
- 30 -
<PAGE>
During 1996 the Company's factoring agreement 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. For
a variety of reasons, 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 factoring 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 $200,000 at March 31, 1996 and $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 has
been 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 funds 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 a $750,000 credit facility and
to satisfy approximately $358,000 of cash overdrafts. Upon receipt of the net
proceeds from the Company's initial public offering in October 1996, the Company
prepaid approximately $6.3 million, representing all amounts outstanding under
such debentures, including interest.
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 for unpaid 1994
and 1995 federal income tax withholding, FICA and FUTA taxes in the aggregate
amount of approximately $800,000 which was paid in full 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 above 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 and lack of
financial expertise and oversight.
From January 1997 until January 1999, the Company had a credit facility
with a bank, which included a revolving line of credit and a component for
equipment term loans. As of
- 31 -
<PAGE>
December 31, 1998, there were no amounts outstanding under the revolving line of
credit and no equipment term loans outstanding.
On January 29, 1999, the Company entered into an unsecured three-year $30
million Revolving Credit Loan Agreement (the "Loan Agreement") with PNC Bank
(the "Bank"). Subject to certain post-closing conditions, the proceeds of the
credit facility may be used by the Company for financing acquisitions and
general corporate purposes. At the Company's option, for each loan, interest
shall be computed either at the Bank's prime rate per annum or the Adjusted Libo
Rate plus the Applicable Margin, as such terms are defined in the Loan
Agreement. The Company's obligations under the credit agreement are payable at
the expiration of such facility on January 29, 2002.
The Company believes that its available funds, together with current credit
arrangements and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned operations for at least the next 12
months.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This statement is effective for the Company's fiscal year ending December 31,
1998. This statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial statements and is not expected to have a material effect on the
Company's consolidated financial statements. The Company adopted the provisions
of SFAS No. 130 on January 1, 1998.
SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. The Company adopted the provisions in
1998.
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expenses as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
- 32 -
<PAGE>
YEAR 2000 COMPLIANCE
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. Based on its assessment, the Company does not believe that Year 2000
compliance will result in material investments by the Company, nor does the
Company anticipate that the Year 2000 Problem will have any adverse effects on
the business operations or financial performance of the Company. The Company
does not believe that it has any material exposure to the Year 2000 Problem with
respect to its own information systems. Based upon its assessment, the Company
has established no reserve nor instituted any contingency plans.
However, the purchasing patterns of customers and potential customers may
be affected by issues associated with the Year 2000 Problem. As companies expend
significant resources to correct their current data storage solutions, these
expenditures may result in reduced funds to purchase products or undertake
projects such as those offered by the Company. There can be no assurance that
the Year 2000 Problem, as it relates to customers, potential customers and other
third-parties, will not adversely affect the Company's business, operating
results and financial condition. Conversely, the Year 2000 Problem may cause
other companies to accelerate purchases, thereby causing an increase in
short-term demand and a consequent decrease in long-term demand for the
Company's products.
EUROPEAN MONETARY UNION (EMU)
The euro was introduced on January 1, 1999, at which time the eleven
participating EMU member countries established fixed conversion rates between
their existing currencies (legacy currencies) and the euro. The legacy
currencies will continue to be used as legal tender through January 1, 2002;
thereafter, the legacy currencies will be canceled and euro bills and coins will
be used for cash transactions in the participating countries. The Company's
European sales and operations offices affected by the euro conversion have
established plans to address the systems issues raised by the euro currency
conversion and are cognizant of the potential business implications of
converting to a common currency. The Company is unable to determine the ultimate
financial impact of the conversion on its operations, if any, given that the
impact will be dependent upon the competitive situations which exist in the
various regional markets in which the Company participates and the potential
actions which may or may not be taken by the Company's competitors and
suppliers.
- 33 -
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements required to be filed pursuant to this Item 7 are
included in this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 13. Exhibits, List, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 34 -
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1999 Annual Meeting of Shareholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 1999 Annual Meeting of Shareholders is incorporated herein by reference
to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Shareholders is incorporated herein by reference to such proxy
statement.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(a) (2) Financial Statement Schedules.
None.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 39.
(b) Reports on Form 8-K.
On November 9, 1998, the Company filed a report on Form 8-K to
disclose the adoption by the Company of a Shareholder Protection
Rights Plan.
On December 8, 1998, the Company filed a report on Form 8-K to
disclose the acquisitions of each of Azimuth Consulting Limited,
Azimuth Holdings Limited, Braithwaite Richmond Limited and Azimuth
Corporation Limited.
Subsequent to the year ended December 31, 1998, the Company filed, on
January 20, 1999, a report on Form 8-K relating to the Company's
acquisition of Network Publishing, Inc.
Subsequent to the year ended December 31, 1998, the Company filed, on
February 24, 1999, a report on Form 8-K relating to the Company's
acquisition of Empower Solutions, LLC and its affiliate Empower, Inc.
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<PAGE>
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 1st day of April,
1999.
INTELLIGROUP, INC.
By:/s/ Stephen A. Carns
---------------------------------
Stephen A. Carns, President and
Chief Executive Officer
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen A. Carns President and Chief Executive April 1, 1999
- --------------------------
Stephen A. Carns Officer (principal executive
officer)
/s/ Rajkumar Koneru Co-Chairman of the Board and April 1, 1999
- --------------------------
Rajkumar Koneru Director
/s/ Ashok Pandey Co-Chairman of the Board and April 1, 1999
- --------------------------
Ashok Pandey Director
/s/ Nagarjun Valluripalli Co-Chairman of the Board and April 1, 1999
- --------------------------
Nagarjun Valluripalli Director
/s/ Gerard E. Dorsey Senior Vice President-Finance April 1, 1999
- --------------------------
Gerard E. Dorsey and Chief Financial Officer
(principal financial and
accounting officer)
/s/ Klaus Besier Director April 1, 1999
- --------------------------
Klaus Besier
/s/ David Finley Director April 1, 1999
- --------------------------
David Finley
/s/ Kevin P. Mohan Director April 1, 1999
- --------------------------
Kevin P. Mohan
/s/ John E. Steuri Director April 1, 1999
- --------------------------
John E. Steuri
- 38 -
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
2 Agreement and Plan of Merger of the Company and its wholly
owned subsidiary Oxford Systems Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996).
3.1 Amended and Restated Certificate of Incorporation.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996).
3.2 Amended and Restated Bylaws. (Incorporated by reference to
the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996).
4.1 Shareholder Protection Rights Agreement dated as of November
6, 1998, between the Company and American Stock Transfer &
Trust Company which includes (i) the Form of Rights
Certificate and (ii) the Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of
Intelligroup, Inc. (Incorporated by reference to Exhibit No.
4.1 of the Company's Report on Form 8-K dated November 9,
1998, filed with the Securities and Exchange Commission on
November 9, 1998).
10.1* 1996 Stock Plan of the Company. (Incorporated by reference
to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-5981) declared effective on
September 26, 1996).
10.2* 1996 Non-Employee Director Stock Option Plan. (Incorporated
by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared
effective on September 26, 1996).
10.3 Form of Indemnification Agreement entered into by the
Company and each of its Directors and officers.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996).
10.4 Sublease Agreement between Micrognosis, Inc., as sublessor,
the Company, as sublessee, with master lease. (Incorporated
by reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-5981) declared
effective on September 26, 1996).
10.5 Employee's Invention Assignment and Confidentiality
Agreement. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
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<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
10.6 Services Provider Agreement by and between Oracle
Corporation and the Company dated July 26, 1994.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-5981)
declared effective on September 26, 1996). See Exhibit 10.9.
10.7 Amended and Restated Agreement by Messrs. Pandey, Koneru and
Valluripalli dated July 16, 1996 to indemnify the Company
for certain losses. (Incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-5981) declared effective on September 26,
1996).
10.8 Agreement by and between the Company and Intelligroup Asia
Private Limited ("Intelligroup Asia") relating to
operational control of Intelligroup Asia, with related
agreements. (Incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration Statement
No. 333-5981) declared effective on September 26, 1996).
10.9 Amendment No. 1 to Services Provider Agreement by and
between Oracle Corporation and the Company dated December
30, 1996. (Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996).
See Exhibit 10.6.
10.10 R/3 National Logo Partner Agreement by and between SAP
America, Inc. and the Company dated as of April 29, 1997.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration Statement No.
333-29119) declared effective on June 26, 1997). See
Exhibits 10.12 and 10.28.
10.11* Employment Agreement dated December 6, 1996 between the
Company and Anthony Knight, as amended on February 18, 1997
(Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended March 31, 1997).
10.12 ASAP Partner Addendum to R/3 National Logo Partner Agreement
between SAP America, Inc. and the Company effective July 1,
1997 (amends existing R/3 National Logo Partner Agreement).
(Incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1997).
See Exhibits 10.10 and 10.28.
10.13 Implementation Partner Agreement between PeopleSoft, Inc.
and the Company effective July 15, 1997. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997). See Exhibit
10.27.
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<PAGE>
Exhibit No. Description of Exhibit
----------- ----------------------
10.14 Consulting Alliance Agreement with Baan International B.V.
and the Company effective September 29, 1997. (Incorporated
by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997).
10.15 Lease Agreement between Alfieri-Parkway Associates, as
Landlord, and Intelligroup, Inc., as Tenant, dated March 17,
1998. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998).
10.16* Employment Agreement dated April 22, 1998 between the
Company and Gerard E. Dorsey. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.17* Employment Agreement dated April 27, 1998 between the
Company and Stephen A. Carns. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998).
10.18** Change in Control Severance Pay Agreement dated November 4,
1998 between the Company and Gerard Dorsey.
10.19** Change in Control Severance Pay Agreement dated November 4,
1998 between the Company and Alan Ziegler.
10.20** Revolving Credit Loan Agreement between PNC Bank, National
Association and the Company dated January 29, 1999.
10.21 Agreement of Purchase and Sale dated as of May 7, 1998 among
the Company, Intelligroup Europe Limited and the
Shareholders of CPI Consulting Limited. (Incorporated by
reference to the Company's Report on Form 8-K filed May 27,
1998).
10.22 Agreement of Purchase and Sale dated as of May 21, 1998
among the Company, Intelligroup Europe Limited and the
Shareholders of CPI Resources Limited. (Incorporated by
reference to the Company's Report on Form 8-K filed May 27,
1998).
10.23 Agreement of Purchase and Sale dated as of November 25, 1998
among the Company and the Shareholders of each of Azimuth
Consulting Limited, Azimuth Holdings Limited, Braithwaite
Richmond Limited and Azimuth Corporation Limited.
(Incorporated by reference to the Company's Report on Form
8-K filed December 8, 1998).
- 41 -
<PAGE>
10.24 Stock Purchase Agreement dated as of December 21, 1998 among
the Company and the Shareholders of Network Publishing, Inc.
(Incorporated by reference to the Company's Report on Form
8-K filed January 8, 1999).
10.25 Agreement and Plan of Merger dated as of February 16, 1999
by and among the Company, ES Merger Corp., Empower
Solutions, LLC and the members of Empower Solutions, LLC.
(Incorporated by reference to the Company's Report on Form
8-K filed February 24, 1999.)
10.26 Agreement and Plan of Merger dated as of February 16, 1999
by and among the Company, ES Merger Corp., Empower
Solutions, Inc. and the stockholders of Empower, Inc.
(Incorporated by reference to the Company's Report on Form
8-K filed February 24, 1999.)
10.27** Fifth Amendment to the Implementation Partner Agreement
dated July 15, 1998, between the Company and PeopleSoft,
Inc. See Exhibit 10.13.
10.28** Amendment to the National Implementation Partner Agreement
dated as of January 1, 1999, between SAP America and the
Company. See Exhibits 10.10 and 10.12.
21** Subsidiaries of the Registrant.
23** Consent of Arthur Andersen LLP.
27.1** Financial Data Schedule for the year ended December 31,
1998.
27.2** Financial Data Schedule for the year ended December 31,
1997.
27.3** Financial Data Schedule for the year ended December 31,
1996.
- ----------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed herewith. All other exhibits previously filed.
- 42 -
<PAGE>
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, 1998 and 1997............ F-3
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedules
Financial Statement Schedules required by the Securities and
Exchange Commission have been omitted as the required information
is included in the Notes to the Consolidated Financial Statements
or are not applicable.
F - 1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Intelligroup, Inc.:
We have audited the accompanying consolidated balance sheets of
Intelligroup, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 4, 1999 (except with respect to the
third paragraph of Note 11
as to which the date is
February 16, 1999)
F - 2
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 4,245,000 $ 8,821,000
Accounts receivable, less allowance for doubtful
accounts of $1,053,000 and $799,000 at
December 31, 1998 and 1997, respectively................ 30,419,000 20,052,000
Unbilled services......................................... 10,842,000 7,840,000
Deferred tax asset........................................ 808,000 404,000
Other current assets...................................... 3,563,000 749,000
------------- -------------
Total current assets.................................. 49,877,000 37,866,000
Property and equipment, net................................. 9,506,000 3,781,000
Other assets................................................ 6,345,000 359,000
------------- -------------
$ 65,728,000 $ 42,006,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 5,337,000 $ 1,960,000
Accrued payroll and related taxes......................... 5,602,000 3,387,000
Accrued expenses and other liabilities.................... 2,854,000 1,382,000
Accrued acquisition costs................................. 3,302,000 --
Income taxes payable...................................... 3,160,000 1,079,000
Current portion of long term debt and obligations under
capital leases............................................ 11,000 386,000
------------- -------------
Total current liabilities............................. 20,266,000 8,194,000
------------- -------------
Long term debt and obligations under capital leases, less
current portion........................................... 59,000 355,000
------------- -------------
Deferred income taxes....................................... 483,000 171,000
------------- -------------
Minority interest........................................... -- 78,000
------------- -------------
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding.................. -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,572,000 and 13,262,000 shares issued
and outstanding at December 31, 1998 and 1997,
respectively............................................ 136,000 133,000
Additional paid-in capital................................ 35,263,000 30,814,000
Retained earnings......................................... 10,066,000 2,360,000
Currency translation adjustments.......................... (545,000) (99,000)
------------- -------------
Total shareholders' equity ........................... 44,920,000 33,208,000
------------- -------------
$ 65,728,000 $ 42,006,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F - 3
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenue................................................. $ 144,861,000 $ 94,326,000 $ 61,699,000
Cost of sales........................................... 94,203,000 65,535,000 43,142,000
------------- ------------- -------------
Gross profit........................................ 50,658,000 28,791,000 18,557,000
------------- ------------- -------------
Selling, general and administrative expenses............ 36,570,000 22,060,000 14,544,000
Acquisition expenses.................................... 2,118,000 -- --
------------- ------------- -------------
Total selling, general and administrative expenses.. 38,688,000 22,060,000 14,544,000
------------- ------------- -------------
Operating income.................................... 11,970,000 6,731,000 4,013,000
------------- ------------- -------------
Other expenses:
Interest (income) expense, net........................ (120,000) (257,000) 336,000
Factor charges........................................ -- -- 999,000
------------- ------------- -------------
(120,000) (257,000) 1,335,000
-------------- -------------- -------------
Income before provision for income taxes and
extraordinary charge.................................. 12,090,000 6,988,000 2,678,000
Provision for income taxes.............................. 4,416,000 2,327,000 748,000
------------- ------------- -------------
Income before extraordinary charge...................... 7,674,000 4,661,000 1,930,000
Extraordinary charge-Loss on early extinguishment of
debt, net of income tax benefit of $296,000........... -- -- 1,148,000
------------- ------------- -------------
Net income.............................................. $ 7,674,000 $ 4,661,000 $ 782,000
============= ============= =============
Earnings per share:
Basic earnings per share:
Income before extraordinary charge................ $ 0.57 $ 0.37 $ 0.18
Extraordinary charge, net of income tax benefit... -- -- (0.11)
------------- ------------- -------------
Net income per share............................ $ 0.57 $ 0.37 $ 0.07
============= ============= =============
Weighted average number of common shares - Basic.. 13,386,000 12,636,000 11,003,000
============= ============= =============
Diluted earnings per share:
Income before extraordinary charge................ $ 0.55 $ 0.36 $ 0.16
Extraordinary charge, net of income tax benefit... -- -- (0.10)
------------- ------------- -------------
Net income per share............................ $ 0.55 $ 0.36 $ 0.06
============= ============= =============
Weighted average number of common shares -
Diluted......................................... 13,968,000 13,116,000 12,263,000
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 4
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Cumulative
Retained Foreign Comprehensive
Additional Earnings Currency Total Income
Common Stock Paid-in (Accumulated Translation Shareholders' for the
------------
Shares Amount Capital Deficit) Adjustments Equity Period
---------- -------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995. 13,477,000 $135,000 $ 639,000 $ (701,000) $ 17,000 $ 90,000 --
Repurchase and retirement
of common stock............. (4,881,000) (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 --
Currency transactions
adjustments.................. -- -- -- -- 68,000 68,000 68,000
Shareholder dividends........ -- -- -- (931,000) -- (931,000) --
Net income................... -- -- -- 782,000 -- 782,000 782,000
---------- -------- ----------- ---------- -------- ---------- ----------
Balance at December 31, 1996. 12,010,000 120,000 19,840,000 (2,301,000) 85,000 17,744,000 $ 850,000
==========
Issuance of common stock,
net of related costs......... 1,150,000 12,000 9,888,000 -- -- 9,900,000 --
Exercise of stock options.... 102,000 1,000 838,000 -- -- 839,000 --
Tax benefit from exercise
of stock options............. -- -- 248,000 -- -- 248,000 --
Currency translation
adjustments.................. -- -- -- -- (184,000) (184,000) (184,000)
Net income................... -- -- -- 4,661,000 -- 4,661,000 4,661,000
---------- -------- ----------- ----------- -------- ---------- ----------
Balance at December 31, 1997. 13,262,000 133,000 30,814,000 2,360,000 (99,000) 33,208,000 $4,477,000
==========
Issuance of common stock in
connection with acquisitions. 166,000 2,000 3,126,000 -- -- 3,128,000 --
Exercise of stock options.... 144,000 1,000 1,021,000 -- -- 1,022,000 --
Tax benefit from exercise
of stock options............. -- -- 302,000 -- -- 302,000 --
Adjustment for difference
in Azimuth fiscal periods.... -- -- -- 32,000 -- 32,000 --
Currency translation
adjustments.................. -- -- -- -- (446,000) (446,000) (446,000)
Net income................... -- -- -- 7,674,000 -- 7,674,000 7,674,000
---------- -------- ----------- ----------- --------- ----------- ----------
Balance at December 31, 1998. 13,572,000 $136,000 $35,263,000 $10,066,000 $(545,000) $44,920,000 $7,228,000
========== ======== =========== =========== ========= =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 5
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 7,674,000 $ 4,661,000 $ 782,000
Adjustments to reconcile net income to net cash
(provided by) used in operating activities:
Depreciation and amortization........................ 1,538,000 571,000 362,000
Provision for doubtful accounts...................... 1,268,000 765,000 590,000
Extraordinary charge................................. -- -- 1,148,000
Deferred income taxes................................ (92,000) 178,000 (411,000)
Tax benefit from exercise of stock options........... 302,000 248,000 --
Minority interest.................................... -- 78,000 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (11,635,000) (10,182,000) (3,691,000)
Unbilled services.................................... (3,002,000) (4,920,000) (1,208,000)
Other current assets................................. (2,814,000) (213,000) 52,000
Other assets......................................... (357,000) (134,000) (193,000)
Cash overdraft....................................... -- -- (83,000)
Accounts payable..................................... 3,377,000 1,086,000 (1,252,000)
Accrued payroll and related taxes.................... 2,215,000 561,000 (1,137,000)
Accrued expenses and other liabilities............... 2,033,000 (611,000) (313,000)
Income taxes payable................................. 2,081,000 441,000 141,000
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ 2,588,000 (7,471,000) (4,587,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment................................... (7,116,000) (2,436,000) (984,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance
costs.................................................. -- 9,900,000 17,835,000
Proceeds from exercise of stock options.................. 1,022,000 839,000 --
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)
Repayments to factors, net............................... -- -- (3,343,000)
Proceeds from shareholder loans.......................... -- 235,000 13,000
Repayments to shareholders............................... (618,000) (357,000) (434,000)
Repayments of lines of credit, net....................... -- -- (45,000)
Principal payments under capital leases.................. (6,000) (6,,000) (22,000)
----------- ----------- -----------
Net cash provided by financing activities......... 398,000 10,611,000 12,392,000
----------- ----------- -----------
Effect of foreign currency exchange rate changes on cash. (446,000) (184,000) 68,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (4,576,000) 520,000 6,889,000
Cash and cash equivalents at beginning of year............. 8,821,000 8,301,000 1,412,000
----------- ----------- -----------
Cash and cash equivalents at end of year................... $ 4,245,000 $ 8,821,000 $ 8,301,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest................................... $ 24,000 $ -- $ 1,264,000
=========== =========== ===========
Cash paid for income taxes............................... $ 2,428,000 $ 1,707,000 $ 1,109,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F - 6
<PAGE>
INTELLIGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Intelligroup, Inc., and its subsidiaries (the "Company") provide a wide
range of information technology services, including management consulting,
enterprise-wide business process solutions, Internet application services,
applications outsourcing and maintenance, systems integration and custom
software development based on leading technologies. The Company markets its
services to a wide variety of industries 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. Minority interests were not
significant at December 31, 1998 and 1997. All significant intercompany balances
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments in highly liquid
short-term instruments, with original maturities of three months or less from
the date of purchase.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets (five years). Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life (ten
years). Costs of maintenance and repairs are charged to expense as incurred.
Other Assets
Other assets at December 31, 1998 include goodwill and other intangibles
totaling $5,629,000, that were attributable to the acquisition of the minority
interest of CPI Consulting (See Note 9). These intangible assets are being
amortized over the estimated useful lives ranging from 6 to 15 years using the
straight-line method. Amortization expense was $147,000 in 1998.
F - 7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Revenue Recognition
The Company generates revenue from professional services rendered. Revenue
is recognized as services are performed with the corresponding cost of providing
those services reflected as cost of sales. Substantially all customers are
billed on 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, 1998 and 1997
represent services provided which are billed subsequent to year-end. All such
amounts are anticipated to be realized in the following year.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts arising from
services, which is based upon a review of outstanding receivables as well as
historical collection information. Credit is granted to substantially all
customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. The provision
for doubtful accounts totaled $1,268,000, $765,000 and $590,000 in 1998, 1997
and 1996, respectively. Accounts written off totaled $1,014,000, $512,000 and
$575,000 in 1998, 1997 and 1996, respectively.
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 carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis.
The Company does not believe that any such impairment existed at December 31,
1998.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
under APB No. 25. For disclosure purposes, pro forma net income and earnings per
share impacts are provided as if the fair market value method had been applied.
Currency Translation
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using exchange rates in effect at the balance sheet date; income
and expenses are translated into U.S. dollars using monthly average exchange
rates during the year. Translation adjustments associated with assets and
liabilities are excluded from income and credited or charged directly to
shareholders' equity.
Concentrations
For the years ended December 31, 1998, 1997 and 1996, approximately 59%,
58% and 57% of revenue, respectively, was derived from projects in which the
Company's personnel
F - 8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, 1999 and is automatically renewed for successive
one-year periods, unless terminated by either party. This Agreement contains no
minimum revenue requirements or cost sharing arrangements and does not provide
for commissions or royalties to either party. In February 1997, the Company
achieved a National Logo Partner relationship with SAP. Additionally, for each
of the years ended December 31, 1998 and 1997, approximately 12%, and less than
10% during 1996 of revenue was derived from projects in which the Company's
personnel implemented software developed by Oracle.
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, 1998, 1997 and 1996, 25%, 32% and 34%, 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 7%, 9% and 10% of revenue in 1998,
1997 and 1996, respectively. Accounts receivable due from this customer was
approximately $2,045,000, $1,628,000 and $2,268,000 as of December 31, 1998,
1997 and 1996, respectively. Another customer accounted for approximately 5%,
10% and 15% of revenue for 1998, 1997 and 1996, respectively. Accounts
receivable due from this customer was approximately $1,395,000, $2,049,000 and
$988,000 as of December 31, 1998, 1997 and 1996, respectively.
During 1998, the Company derived revenue totaling $1.7 million from
contracts with an entity whose chief executive officer is a director of the
Company.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109") 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 bases of assets and
liabilities, using enacted tax rates currently in effect. The Company does not
provide for additional U.S. income taxes on undistributed earnings considered to
be permanently invested in foreign subsidiaries.
F - 9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Earnings Per Share
Basic earnings per share is computed by dividing income attributable to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding,
adjusted for the incremental dilution of outstanding stock options. The
computation of basic earnings per share and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net Income $ 7,674,000 $ 4,661,000 $ 782,000
---------- ---------- ----------
Denominator:
Weighted average number of common
shares................................... 13,386,000 12,636,000 11,003,000
Basic earnings per share................. $ 0.57 $ 0.37 $ 0.07
========== ========== ==========
Denominator:
Weighted average number of common
shares................................... 13,386,000 12,636,000 11,003,000
Common share equivalents of
outstanding stock options................ 582,000 480,000 1,260,000
---------- ---------- ----------
Total shares................................ 13,968,000 13,116,000 12,263,000
---------- ---------- ----------
Diluted earnings per share.................. $ 0.55 $ 0.36 $ 0.06
========== ========== ==========
</TABLE>
Vested stock options which would be antidilutive have been excluded from
the calculations of diluted shares outstanding and diluted earnings per share.
Recently Issued Accounting Standards
In April, 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires all costs incurred as start-up costs or
organization costs be expenses as incurred. Adoption of the SOP is required for
fiscal years beginning after December 15, 1998. The Company does not believe
that the new standard will have a material impact on the Company's consolidated
financial statements.
In March, 1998, the Accounting Standards Executive Committee issued SOP
98-1. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP required that computer software costs that are incurred
in the preliminary project stage be expensed as incurred and that criteria be
met before capitalization of costs to develop or obtain internal use computer
software. Adoption of the SOP is required for fiscal years beginning after
December 15, 1998. The Company does not believe that the new standard will have
a material impact on the Company's consolidated financial statements.
F - 10
<PAGE>
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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31:
1998 1997
--------- ---------
Vehicles........................ $ 109,000 $ 26,000
Furniture....................... 2,459,000 785,000
Equipment....................... 8,438,000 4,337,000
Computer software............... 816,000 25,000
Leasehold improvements.......... 474,000 --
---------- ----------
12,296,000 5,173,000
Less-Accumulated depreciation... (2,790,000) (1,392,000)
----------- ----------
$9,506,000 $3,781,000
========== ==========
Included in the above is $102,000 of equipment held under capital leases at
December 31, 1998, 1997 and 1996. Depreciation expense was $1,391,000, $571,000
and $362,000 in 1998, 1997 and 1996, respectively.
NOTE 3 - LINES OF CREDIT AND SUBORDINATED DEBENTURES
In January 1997, and as later amended on August 18, 1997, the Company
entered into a two-year credit agreement with a bank (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 either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option),
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 1/4 of 1% per annum) to
purchase equipment. 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. At December 31, 1998 the Company
was in compliance with all covenants. The facility was due to expire in January
1999, but was extended until a new three-year credit agreement took effect on
January 29, 1999. (See Note 11).
F - 11
<PAGE>
NOTE 4 - INCOME TAXES
Income tax attributable to income from continuing operations consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $2,843,000 $1,384,000 $ 631,000
State................................... 783,000 389,000 200,000
Foreign................................. 882,000 456,000 248,000
---------- ---------- ----------
4,508,000 2,229,000 1,079,000
---------- ---------- ----------
Deferred:
Federal................................. (71,000) 76,000 (259,000)
State................................... (21,000) 22,000 (72,000)
---------- ---------- ----------
(92,000) 98,000 (331,000)
---------- ---------- ----------
Total..................................... $4,416,000 $2,327,000 $ 748,000
========== ========== ==========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34%, 35% and 35% in 1998, 1997 and 1996, respectively, to
income before income taxes. The principal reasons for this difference are:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal statutory rate............. 34% 34% 34%
Nondeductible expenses.................... 5 1 1
State income tax, net of federal benefit.. 4 4 (3)
Utilization of net operating loss
carryforwards........................... (1) -- (8)
Foreign losses for which no benefit is
available............................... 7 -- 16
Changes in valuation allowance............ -- (3) (14)
Foreign operations taxed at less than
U.S. statutory rate, primarily India.... (11) (7) (1)
Other..................................... (1) 4 3
----- ----- -----
Effective tax rate........................ 37% 33% 28%
===== ===== =====
</TABLE>
In 1996, the Company elected a five year tax holiday in India in accordance
with a local tax incentive program whereby no income taxes will be due for such
period.
F - 12
<PAGE>
NOTE 4 - INCOME TAXES - (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The significant components of the
Company's deferred tax assets and liabilities as of December 31, 1998 and 1997
are as follows:
1998 1997
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts............ $ 432,000 $ 327,000
Certain accrued liabilities................ 376,000 77,000
--------- ---------
Total deferred tax assets.................... 808,000 404,000
Deferred tax liability-accelerated
depreciation............................... (483,000) (171,000)
--------- ---------
Net deferred tax asset....................... $ 325,000 $ 233,000
========= =========
Realization of the net deferred tax assets is dependent on the timing of
the reversal of temporary differences. Although realization is not assured,
management believes it is more likely than not, that the 1998 net deferred tax
assets will be realized.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
As of December 31, 1998, the Company had employment agreements with certain
of its executives which provide for minimum payments in the event of termination
in other than for just cause. The aggregate amount of compensation commitment in
the event of termination under such agreements is approximately $682,000.
Leases
The Company leases office space and office equipment and vehicles under
capital and operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of December 31, 1998. Future minimum aggregate
annual lease payments are as follows:
FOR THE YEARS ENDING DECEMBER 31, CAPITAL OPERATING
-------------------------------------- ------------- ------------
1999..................................... $ 11,000 $ 3,113,000
2000..................................... 9,000 2,865,000
2001..................................... -- 2,175,000
2002..................................... -- 1,658,000
2003..................................... -- 1,346,000
--------- ---------
Subtotal 20,000 11,157,000
Thereafter............................... -- 5,702,000
Less-Interest............................ --
---------
20,000
Less-Current portion..................... (11,000)
---------
$ 9,000
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,153,000, $656,000 and $444,000, respectively.
F - 13
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Legal
The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
NOTE 6 - STOCK OPTION PLANS AND WARRANTS
The Company's stock option plans permit the granting of options to
employees, non-employee directors and consultants. The Option Committee of the
Board of Directors generally has the authority to select individuals who are to
receive options and to specify the terms and conditions of each option so
granted, including the number of shares covered by the option, the type of
option (incentive stock option or non-qualified stock option), the exercise
price, vesting provisions, and the overall option term. A total of 1,590,000
shares of Common Stock have been reserved for issuance under the plans.
Subsequent to December 31, 1998, the Company granted options to purchase an
aggregate of 388,100 shares of its Common Stock to certain employees. All of the
options issued pursuant to these plans expire ten years from the date of grant.
F - 14
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The fair value of option grants for disclosure purposes is estimated on the
date of grant using the Black-Scholes option-pricing model using the following
weighted-average assumptions: expected volatility of 78%, 62% and 41%, risk-free
interest rate of 5.4%, 7.0% and 5.6% and expected lives of 8.5, 4.5 and 3.1
years, in 1998, 1997 and 1996, respectively. The weighted average fair value of
options granted during 1998, 1997 and 1996 was $13.49, $6.96 and $2.93,
respectively.
Weighted
Number of Average
Shares Exercise Price
---------------------------------------------------------------------------
Options Outstanding,
December 31, 1995 -- $ --
Granted 580,000 $ 8.38
Canceled (8,200) $ 8.00
---------------------------------------------------------------------------
Options Outstanding,
December 31, 1996
(none exercisable) 571,800 $ 8.39
Granted 647,640 $11.52
Exercised (102,381) $ 8.20
Canceled (74,113) $ 9.78
---------------------------------------------------------------------------
Options Outstanding,
December 31, 1997
(93,674 exercisable) 1,042,946 $10.25
Granted 1,257,630 $16.81
Exercised (143,297) $ 9.32
Canceled (258,138) $ 4.91
---------------------------------------------------------------------------
Options Outstanding,
December 31, 1998
(262,156 exercisable) 1,899,141 $14.14
========= =====
F - 15
<PAGE>
NOTE 6 - STOCK OPTION PLANS AND WARRANTS - (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Exercise Price Number of Average Average Number of Average
Range shares Remaining Exercise shares Exercise
Life (in Price Price
years)
- ---------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C>
$8 to 10 282,706 6.0 $8.14 156,944 $8.10
$10 to 12 448,605 5.8 $10.82 70,282 $10.92
$12 to 15 142,000 9.5 $14.11 8,000 $12.13
$15 to 22 1,020,830 8.2 $17.21 26,930 $16.40
$22 to 24 5,000 9.6 $23.38 -- --
---------- --------
$8 to 24 1,899,141 7.4 $14.14 262,156 $9.83
</TABLE>
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value option
pricing method, the tax-effective impact would be as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
as reported $ 7,674,000 $ 4,661,000 $ 782,000
pro forma $ 2,759,000 $ 2,433,000 $ 423,000
- ---------------------------------------------------------------------------------------------
Basic Earnings per Share:
as reported $0.57 $0.37 $0.07
pro forma $0.21 $0.29 $0.04
- ---------------------------------------------------------------------------------------------
Diluted Earnings per Share:
as reported $0.55 $0.36 $0.06
pro forma $0.20 $0.28 $0.03
</TABLE>
F - 16
<PAGE>
NOTE 7 - STOCK RIGHTS
In October 1998 the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding share of
the Company's Common Stock. These Rights will expire in November 2008 and trade
with the Company's Common Stock. Such Rights are not presently exercisable and
have no voting power. In the event a person or affiliated group of persons,
acquires 20% or more, or makes a tender or exchange offer for 20% or more of the
Company's Common Stock, the Rights detach from the Common Stock and become
exercisable and entitle a holder to buy one one-hundredth (1/100) of a share of
Preferred Stock at $100.00.
If, after the Rights become exercisable, the Company is acquired or merged,
each Right will entitle its holder to purchase $200.00 market value of the
surviving company's stock for $100.00, based upon the current exercise price of
the Rights. The Company may redeem the Rights, at its option, at $.01 per Right
prior to a public announcement that any person has acquired beneficial ownership
of at least 20% of the Company's Common Stock. These Rights are designed
primarily to encourage anyone interested in acquiring the Company to negotiate
with the Board of Directors.
NOTE 8 - INITIAL PUBLIC OFFERING, STOCK SPLIT AND PREFERRED STOCK AUTHORIZATION
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.
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.
On July 2, 1997, the Company consummated a follow-on public offering (the
"Offering") of 1,000,000 shares of its Common Stock at a price to the public of
$9.50 per share. On July 15, 1997 and as part of the Offering, an additional
150,000 shares at $9.50 per share were issued and sold by the Company to cover
over-allotments. The net proceeds to the Company from the Offering, after
underwriting discounts and commissions and other expenses of the Offering, were
approximately $9,900,000.
NOTE 9 - ACQUISITIONS
On May 7, 1998, the Company acquired thirty percent of the outstanding
share capital of CPI Consulting Limited. This acquisition was accounted for
utilizing purchase accounting. The consideration paid by the Company included
the issuance of 165,696 shares of the Company's Common Stock with a fair market
value of $3.1 million, and a future liability to the sellers predicated upon
operating results for the balance of 1998. The value of the liability has been
determined as of December 31, 1998 to be $2.5 million, which is payable by
issuance of additional 155,208 shares of the Company's Common Stock. The excess
of purchase price over the fair value of the net assets acquired was attributed
to intangible assets, amounting in the aggregate to $5.8 million.
F - 17
<PAGE>
On May 21, 1998, the Company acquired all of the outstanding share capital
of CPI Resources Limited. The acquisition of CPI Resources Limited was accounted
for as a pooling of interests. Prior results for all periods have been restated
in accordance with pooling of interests accounting. As consideration for this
acquisition, the Company issued 371,000 shares of the Company's Common Stock. At
the time of the acquisition, CPI Resources Limited owned seventy percent of the
outstanding share capital of CPI Consulting Limited.
On November 25, 1998, the Company consummated the acquisition of all of the
outstanding capital stock of each of Azimuth Consulting Limited, Azimuth
Holdings Limited, Braithwaite Richmond Limited and Azimuth Corporation Limited
(collectively the "Azimuth Companies"). The acquisition of the Azimuth Companies
was accounted for as a pooling of interests. Prior results for all periods have
been restated in accordance with pooling of interests accounting. As
consideration for this acquisition, the Company issued 902,928 shares of the
Company's Common Stock.
The pre-merger results of CPI Resources Limited and the Azimuth Companies
were revenues of $14,137,000 and net income of $190,000 for 1997, and revenues
of $14,510,000 and a net loss after taxes of $11,000 for 1996. In connection
with these mergers, $2,118,000 of non-recurring acquisition related charges were
incurred and have been charged to expense during the year ended December 31,
1998. These costs primarily relate to professional fees incurred in connection
with the mergers.
NOTE 10 - SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry, IT Services. The Company's service
lines share similar customer bases. The Company's identifiable business segments
can be categorized into three groups:
o ERP Implementation Services ("ERP") is the largest business segment of
the Company's operations, and includes the implementation,
integration, and development of solutions for clients utilizing a
class of application products known as Enterprise Resource Planning
software. This class of products include software developed by such
companies as SAP, Oracle, PeopleSoft, and Baan.
o Management Consulting ("MC") includes business consulting services,
such as Business Process Re-engineering, Change Management, IT
Strategy, and Software Selection.
o Advanced Technology Practice ("ATP") includes Internet technology
solutions and custom application and enhancement development for
clients.
F - 18
<PAGE>
The following table presents financial information based upon the Company's
identifiable business segments for the year ended December 31, 1998. Information
on revenue, operating income and margins for these segments is not available for
the year ended December 31, 1997, and the Company determined that it would be
impractical to recreate such data. Substantially all of the Company's operations
for the year ended December 31, 1996 were in the ERP segment:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 ERP MC ATP
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $120,761,000 $8,873,000 $15,227,000
Operating Income $25,836,000 ($1,232,000) $2,304,000
Operating Margin 21.4% N/A 15.1%
</TABLE>
The Company also incurred corporate expenses for selling, general and
administrative activities of $12,820,000 and non-recurring acquisition related
charges of $2,118,000 during the year ended December 31, 1998, resulting in
total operating income of $11,970,000. Other 1998 information is as follows:
Income before taxes $12,090,000
Total assets $65,728,000
Capital expenditures $ 7,410,000
Depreciation and amortization $ 1,538,000
The following table presents financial information based upon the Company's
geographic segments for the years ended December 31, 1998 and 1997. For the year
ended December 31, 1996, substantially all of the Company's revenues, operating
income, and assets were located within the United States.
Net Operating Identifiable
1998 Revenues Income Assets
-------------------------------------------------
United States $101,563,000 $ 7,719,000 $48,983,000
Asia-Pacific 19,466,000 2,299,000 8,475,000
Europe 23,832,000 1,952,000 8,270,000
--------------------------------------------------
Total $144,861,000 $11,970,000 $65,728,000
==================================================
Net Operating Identifiable
1997 Revenues Income Assets
-------------------------------------------------
United States $ 69,278,000 $ 4,075,000 $34,045,000
Asia-Pacific 12,438,000 1,875,000 3,849,000
Europe 12,610,000 781,000 4,112,000
--------------------------------------------------
Total $ 94,326,000 $ 6,731,000 $42,006,000
==================================================
F - 19
<PAGE>
NOTE 11 - SUBSEQUENT EVENTS
On January 8, 1999, the Company acquired Network Publishing, Inc., based in
Provo, Utah, for a purchase price of approximately $4.5 million consisting of
cash and Intelligroup common stock. NetPub shareholders will receive a portion
of this consideration as an earnout, payable at a later date subject to
operating performance.
On January 29, 1999, the Company entered into a new three-year credit
agreement (the "Credit Agreement") with the PNC Bank N.A. (the "Bank"). The new
credit facility with the Bank is comprised of a revolving line of credit
pursuant to which the Company may borrow up to $30.0 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the Company's option).
The Credit Agreement contains covenants which require the Company to (i)
maintain a consolidated cash flow leverage ratio equal to or less than 2.5 to
1.0 for the period of four fiscal quarters preceding the date of determination
taken together as one accounting period, (ii) maintain a consolidated net worth
of not less than 90% of the consolidated net worth as of September 30, 1998 plus
50% of positive net income commencing October 1, 1998, and thereafter at the end
of each fiscal year, to be not less than consolidated net worth of the prior
fiscal year plus 50% of positive net income for such fiscal year, (iii) not
enter into any agreement to purchase and/or pay for, or become obligated to pay
for capital expenditures, long term leases, capital leases or sale lease-backs,
in an amount at any time outstanding aggregating in excess of $5,000,000 during
any fiscal year, provided, however, in a one year carry-forward basis, the
Company may incur capital expenditures not to exceed $8,000,000 during any
fiscal year, and (iv) shall not cause or permit the minimum fixed charge
coverage ratio, calculated on the basis of a rolling four quarters of (a)
consolidated EBITDA to (b) the sum of cash income tax expense plus interest
expense, plus scheduled principal payments under any indebtedness, plus
dividends or distributions paid or declared, to be less than 1.4 to 1.0 as at
the end of each fiscal quarter. The proceeds of the Credit Agreement may be used
by the Company for financing acquisitions and general corporate purposes. At the
Company's option, for each loan, interest shall be computed either at the Bank's
prime rate per annum or the Adjusted Libo Rate plus the Applicable Margin, as
such terms are defined in the Loan Agreement. The Company's obligations under
the credit facility are payable at the expiration of such facility on January
29, 2002.
On February 16, 1999, the Company completed the acquisition of Empower
Solutions, LLC, in a transaction expected to be accounted for as a pooling of
interests. Intelligroup issued approximately 1.8 million shares of its common
stock in exchange for 100% Empower's outstanding equity.
F - 20
INTELLIGROUP, INC.
------------------
CHANGE IN CONTROL SEVERANCE PAY AGREEMENT
-----------------------------------------
THIS CHANGE IN CONTROL SEVERANCE PAY AGREEMENT (the "Agreement") is made as
of the 4th day of November, 1998, by and between Intelligroup, Inc., a New
Jersey corporation (the "Company"), and Gerard Dorsey (a.k.a. Rod Dorsey), an
employee of the Company (the "Employee").
Recitals:
--------
1. The Company is a New Jersey corporation that provides a wide range of
information technology services, including enterprise-wide business
process solutions, internet applications services, systems integration and
custom software development based on leading technologies. The Employee is
currently employed by the Company as Senior Vice President and Chief
Financial Officer.
2. The Company and the Employee desire to provide for the payment, in certain
instances, of severance pay to the Employee in the event of the
termination of his or her employment following a change of control of the
Company, on the terms and conditions set forth in this Agreement:
Agreement:
---------
In consideration of the premises and the mutual covenants and conditions
set forth herein, the Company and the Employee agree as follows:
Section 1. Operation of Agreement. This Agreement shall be effective
------------------------------------
immediately upon its execution, but the provisions hereof shall not be operative
unless and until a "Change in Control" (as such term is defined in Section 2
hereof) has occurred. The provisions of this Agreement shall not be operative
and shall not apply to any termination of employment, for any reason, which
--- -----
occurs before the period beginning three months and one day prior to a Change in
Control or which occurs after the period beginning one year and one day after a
Change in Control.
Section 2. Change in Control. The term "Change in Control" as used in
------------------------------
this Agreement shall mean the first to occur of any of the following:
(a) The effective date or date of consummation of any transaction or series
of transactions (other than a transaction to which only the Company and one
or more of its subsidiaries are parties) pursuant to which the Company:
(i) becomes a subsidiary of another corporation; (ii) is merged or
consolidated with or into another corporation; (iii) engages in an
exchange of shares with another corporation; or (iv) transfers,
sells or otherwise disposes of all or substantially all of its
assets to a single purchaser (other than the Employee) or a group of
purchasers (none of whom is the Employee);
<PAGE>
provided, however, that this Subsection (a) shall not be applicable to a
-------- -------
transaction or series of transactions in which a majority of the capital
stock of the other corporation, following such transaction or series of
transactions, is owned or controlled by the holders of a majority of the
Company's outstanding capital stock immediately before such sale, transfer
or disposition; or
(b) The date upon which any person (other than the Employee), group of
associated persons acting in concert (none of whom is the Employee) or
corporation becomes a direct or indirect beneficial owner of shares of
stock of the Company representing an aggregate of more than fifty percent
(50%) of the votes then entitled to be cast at an election of directors of
the Company; provided, however, that this Subsection (b) shall not be
-------- -------
applicable to a transaction or series of transactions in which the entity
acquiring such ownership in excess of fifty percent (50%) is a person or
entity who is eligible, pursuant to Rule 13d-1(b) under the Securities
Exchange Act of 1934, as amended, to file a statement on Schedule 13G with
respect to its beneficial ownership of the Company's capital stock, whether
or not such person or entity shall have filed a Schedule 13G, unless such
person or entity shall have filed a Schedule 13D with respect to beneficial
ownership of fifteen (15%) or more of the Company's capital stock; and
provided, further, that the acquisition of shares in a bona fide public
-------- ------- ---- ----
offering or private placement of securities by an investor who is acquiring
such shares for passive investment purposes only shall not constitute a
"Change in Control;" or
(c) The date upon which the persons who were members of the Board of
Directors of the Company as of the date of execution of this Agreement (the
"Current Directors") cease to constitute a majority of the Board of
Directors; provided, however, that any new director whose nomination or
-------- -------
selection has been approved by the affirmative vote of at least seven of
the Current Directors then in office shall also be deemed a Current
Director.
Section 3. Severance Pay Upon Termination by Company Without Cause or By
---------------------------------------------------------------------------
Employee for Cause. If, during the three-month period immediately preceding a
- ------------------
Change in Control or during the one-year period immediately following a Change
in Control, the Employee's employment with the Company is terminated:
(a) By the Company for no reason or for any reason other than:
(i) death; (ii) disability (in the event that the Employee shall be
unable to perform his or her duties for a period of ninety (90)
consecutive calendar days by reason of disability as a result of
illness, accident or other physical or mental incapacity or
disability); or (iii) the dishonest or willful misconduct of the
Employee, including but not limited to: misappropriating any funds or
property of the Company; attempting to willfully obtain any personal
profit from any transaction in which the Employee has an interest
which is adverse to the interests of the Company; any act or omission
which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner; unreasonable neglect or refusal
to perform the duties assigned to the
2
<PAGE>
Employee; a material breach of any provision of the Employee's
employment agreement with the Company, if any; conviction of a felony;
or any other act or omission which subjects the Company or any of its
subsidiaries to substantial public disrespect, scandal or ridicule; or
(b) By the Employee as a result of, or within 30 days of, the following:
(i) a reduction in the Employee's rate of regular compensation from
the Company to an amount below the rate of the Employee's regular
compensation as in effect immediately prior to the Employee's
termination or immediately prior to the Change in Control, as
applicable; (ii) a requirement that the Employee relocate to a
location more than thirty-five (35) miles from the Employee's office
location with the Company immediately prior to the Employee's
termination or immediately prior to the Change in Control, as
applicable; or (iii) a change in duties or job responsibilities from
those in effect immediately prior to the Employee's termination or
immediately prior to the Change in Control, as applicable, which
change results in the diminution of the Employee's status, authority
and duties, except for such subordination in duties or job
responsibilities as may normally be required due to the Company's
change from an independent business entity to being a subsidiary or
division of another corporate entity;
then, in the event (A) such termination occurred during the three-month period
immediately preceding such Change in Control, the Company shall pay the Employee
the Severance Amount (hereinafter defined) within 30 days of the occurrence of
the Change in Control or (B) such termination occurred during the one-year
period following the occurrence of the Change in Control, the Company shall pay
the Employee the Severance Amount, within thirty (30) days after the effective
date of the Employee's termination. For purposes of this Agreement, Severance
Amount shall mean an amount equal to the sum of: (x) either (i) the rate of the
Employee's monthly regular compensation as in effect immediately prior to the
Employee's termination or immediately prior to the Change in Control, as
applicable, times twelve minus the number of months since the change of control
or else (ii) if the employee has been employed by the Company for less than six
months at the time of such termination, the rate of the Employee's monthly
regular compensation as in effect immediately prior to the Employee's
termination or immediately prior to the Change in Control, as applicable, times
a factor of six minus the number of months since the change of control, but
whether under the preceding clause (i) or (ii) in no event shall the factor
times the applicable monthly compensation rate be less than three; and (y) the
Company's cost of then available health insurance benefits, as are customarily
provided to employees of the Company, for a period of twenty-four (24) months.
In addition, upon such termination: (i) the next portion under the stock option
vesting schedule of any outstanding stock options granted to the Employee that
would not otherwise have been vested until some time after such termination
occurred shall thereupon vest immediately and be exercisable by the Employee and
(ii) fifty percent of the remainder of any other outstanding but unvested stock
options, shall thereupon vest immediately and be exercisable by the Employee.
The Company may withhold from any such severance compensation any federal,
state, city, county or other taxes.
3
<PAGE>
Section 4. No Severance Pay Upon Any Other Termination. Upon any
-------------------------------------------------------------
termination of the Employee's employment with the Company other than as set
forth in Section 3, the sole obligation hereunder of the Company shall be to pay
the Employee's regular compensation up to the effective date of termination. The
severance pay provisions hereunder do not, however, impact in any way the rights
of the Employee or the obligations of the Company under any employment agreement
or any other agreement for the payment of employment compensation between the
Employee and the Company, whether such agreement(s) are in existence now or come
into existence hereafter; except, however, (i) that if such employment agreement
provides for severance pay which would be applicable under circumstances that
would also obligate the Company to make similar payments under this Agreement,
---- ---------
then this Agreement shall not be deemed as additive but shall be construed so
---- ---------
that the obligations hereunder when applied in conjunction with the employment
---------
agreement, do not require the Company to make such payments in excess of the
amount or time set forth herein, and (ii) with regard to the acceleration of
options the employee may elect to substitute the acceleration provision of this
Agreement in place of any provision dealing specifically with acceleration in
the employment agreement. By way of illustration, if the severance pay
provisions of this Agreement were activated by a termination that also would be
deemed to activate a then-existing employment agreement with a termination
provision which provided for six months of severance at the same regular
compensation rate, then this Agreement would be construed to provide only an
additional six months severance pay (plus the cost of the health benefits in
this Agreement's Severance Amount) rather than twelve months, keeping the
monthly factor between the two agreements as twelve months, rather than eighteen
months for the calculation of the Employee's severance pay. If the basis of the
severance amount were calculated differently in the employment agreement, then
the Employee would receive the greater of the amount(s) due either under the
employment agreement or the Severance Amount under this Agreement. By way of
further illustration if the severance pay provisions relating to the
acceleration of the vesting of options specified that only a fraction would vest
that was less than half of those options granted, then the Employee could elect
to accept the 50% acceleration provision of this Agreement.
Section 5. Entire Obligation. Payment to the Employee pursuant to Sections
----------------------------
3 or 4 of this Agreement shall constitute the entire obligation of the Company
to the Employee and full settlement of any claim under law or equity that the
Employee might otherwise assert against the Company, or any of its employees,
officers or directors on account of the Employee's termination.
Section 6. No Obligation to Continue Employment. This Agreement does not
------------------------------------------------
create any obligation on the part of the Company to continue to employ the
Employee following a Change in Control or in the absence of a Change in Control.
Section 7. Term of Agreement. This Agreement shall terminate and no longer
----------------------------
be in effect on the earlier of: (i) the termination date of employment
agreement, if any; (ii) the date upon which the Employee ceases to be an
employee of the Company, unless a Change in Control occurs within three months
after such termination date; or (iii) if a Change in Control occurs while the
Employee is employed by the Company, until the date one year following the
Change in Control.
4
<PAGE>
Section 8. Severability. Should any clause, portion or section of this
-----------------------
Agreement be unenforceable or invalid for any reason, such unenforceability or
invalidity shall not affect the enforceability or validity of the remainder of
the Agreement.
Section 9. Assignment: Successors in Interest. This Agreement, being
-------------------------------------------------
personal to the Employee, may not be assigned by the Employee. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company, and the heirs, executors and personal
representatives of the Employee.
Section 10. Waiver. Failure to insist upon strict compliance with any of
------------------
the terms, covenants or conditions of this Agreement shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.
Section 11. Governing Law. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New Jersey applicable in
the case of agreements made and to be performed entirely within such State.
Section 12. Arbitration. Any controversy or claim arising out of or in
------------------------
connection with this Agreement shall be settled by arbitration in accordance
with the rules of the American Arbitration Association then in effect in the
State of New Jersey and judgment upon such award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. The arbitration shall be
held in the State of New Jersey. The arbitration award shall include attorneys'
fees and costs to the prevailing party.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of
the date first above written.
Intelligroup, Inc.
By: /s/ Stephen A. Carns
--------------------------------------
Stephen A. Carns
President and Chief Executive Officer
The Employee
/s/ Rod Dorsey
------------------------------------------
Rod Dorsey
5
INTELLIGROUP, INC.
------------------
CHANGE IN CONTROL SEVERANCE PAY AGREEMENT
-----------------------------------------
THIS CHANGE IN CONTROL SEVERANCE PAY AGREEMENT (the "Agreement") is made as
of the 4th day of November, 1998, by and between Intelligroup, Inc., a New
Jersey corporation (the "Company"), and Alan Ziegler, an employee of the Company
(the "Employee").
Recitals:
--------
1. The Company is a New Jersey corporation that provides a wide range of
information technology services, including enterprise-wide business process
solutions, internet applications services, systems integration and custom
software development based on leading technologies. The Employee is
currently employed by the Company as General Counsel and Secretary.
2. The Company and the Employee desire to provide for the payment, in certain
instances, of severance pay to the Employee in the event of the termination
of his or her employment following a change of control of the Company, on
the terms and conditions set forth in this Agreement:
Agreement:
---------
In consideration of the premises and the mutual covenants and conditions
set forth herein, the Company and the Employee agree as follows:
Section 1. Operation of Agreement. This Agreement shall be effective
------------------------------------
immediately upon its execution, but the provisions hereof shall not be operative
unless and until a "Change in Control" (as such term is defined in Section 2
hereof) has occurred. The provisions of this Agreement shall not be operative
and shall not apply to any termination of employment, for any reason, which
occurs before the period beginning three months and one day prior to a Change in
Control or which occurs after the period beginning one year and one day after a
Change in Control.
Section 2. Change in Control. The term "Change in Control" as used in this
----------------------------
Agreement shall mean the first to occur of any of the following:
(a) The effective date or date of consummation of any transaction or
series of transactions (other than a transaction to which only the Company
and one or more of its subsidiaries are parties) pursuant to which the
Company:
(i) becomes a subsidiary of another corporation; (ii) is merged or
consolidated with or into another corporation; (iii) engages in an
exchange of shares with another corporation; or (iv) transfers, sells
or otherwise disposes of all or substantially all of its assets to a
single purchaser (other than the Employee) or a group of purchasers
(none of whom is the Employee);
<PAGE>
provided, however, that this Subsection (a) shall not be applicable to a
-------- -------
transaction or series of transactions in which a majority of the capital
stock of the other corporation, following such transaction or series of
transactions, is owned or controlled by the holders of a majority of the
Company's outstanding capital stock immediately before such sale, transfer
or disposition; or
(b) The date upon which any person (other than the Employee), group of
associated persons acting in concert (none of whom is the Employee) or
corporation becomes a direct or indirect beneficial owner of shares of
stock of the Company representing an aggregate of more than fifty percent
(50%) of the votes then entitled to be cast at an election of directors of
the Company; provided, however, that this Subsection (b) shall not be
-------- -------
applicable to a transaction or series of transactions in which the entity
acquiring such ownership in excess of fifty percent (50%) is a person or
entity who is eligible, pursuant to Rule 13d-1(b) under the Securities
Exchange Act of 1934, as amended, to file a statement on Schedule 13G with
respect to its beneficial ownership of the Company's capital stock, whether
or not such person or entity shall have filed a Schedule 13G, unless such
person or entity shall have filed a Schedule 13D with respect to beneficial
ownership of fifteen (15%) or more of the Company's capital stock; and
provided, further, that the acquisition of shares in a bona fide public
-------- ------- ---- ----
offering or private placement of securities by an investor who is acquiring
such shares for passive investment purposes only shall not constitute a
"Change in Control;" or
(c) The date upon which the persons who were members of the Board of
Directors of the Company as of the date of execution of this Agreement (the
"Current Directors") cease to constitute a majority of the Board of
Directors; provided, however, that any new director whose nomination or
-------- -------
selection has been approved by the affirmative vote of at least seven of
the Current Directors then in office shall also be deemed a Current
Director.
Section 3. Severance Pay Upon Termination by Company Without Cause or By
---------------------------------------------------------------------------
Employee for Cause. If, during the three-month period immediately preceding a
- ------------------
Change in Control or during the one-year period immediately following a Change
in Control, the Employee's employment with the Company is terminated:
(a) By the Company for no reason or for any reason other than:
(i) death; (ii) disability (in the event that the Employee shall be
unable to perform his or her duties for a period of ninety (90)
consecutive calendar days by reason of disability as a result of
illness, accident or other physical or mental incapacity or
disability); or (iii) the dishonest or willful misconduct of the
Employee, including but not limited to: misappropriating any funds or
property of the Company; attempting to willfully obtain any personal
profit from any transaction in which the Employee has an interest
which is adverse to the interests of the Company; any act or omission
which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner; unreasonable neglect or refusal
to perform the duties assigned to the
<PAGE>
Employee; a material breach of any provision of the Employee's
employment agreement with the Company, if any; conviction of a felony;
or any other act or omission which subjects the Company or any of its
subsidiaries to substantial public disrespect, scandal or ridicule; or
(b) By the Employee as a result of, or within 30 days of, the following:
(i) a reduction in the Employee's rate of regular compensation from
the Company to an amount below the rate of the Employee's regular
compensation as in effect immediately prior to the Employee's
termination or immediately prior to the Change in Control, as
applicable; (ii) a requirement that the Employee relocate to a
location more than thirty-five (35) miles from the Employee's office
location with the Company immediately prior to the Employee's
termination or immediately prior to the Change in Control, as
applicable; or (iii) a change in duties or job responsibilities from
those in effect immediately prior to the Employee's termination or
immediately prior to the Change in Control, as applicable, which
change results in the diminution of the Employee's status, authority
and duties, except for such subordination in duties or job
responsibilities as may normally be required due to the Company's
change from an independent business entity to being a subsidiary or
division of another corporate entity;
then, in the event (A) such termination occurred during the three-month period
immediately preceding such Change in Control, the Company shall pay the Employee
the Severance Amount (hereinafter defined) within 30 days of the occurrence of
the Change in Control or (B) such termination occurred during the one-year
period following the occurrence of the Change in Control, the Company shall pay
the Employee the Severance Amount, within thirty (30) days after the effective
date of the Employee's termination. For purposes of this Agreement, Severance
Amount shall mean an amount equal to the sum of: (x) either (i) the rate of the
Employee's monthly regular compensation as in effect immediately prior to the
Employee's termination or immediately prior to the Change in Control, as
applicable, times twelve minus the number of months since the change of control
or else (ii) if the employee has been employed by the Company for less than six
months at the time of such termination, the rate of the Employee's monthly
regular compensation as in effect immediately prior to the Employee's
termination or immediately prior to the Change in Control, as applicable, times
a factor of six minus the number of months since the change of control, but
whether under the preceding clause (i) or (ii) in no event shall the factor
times the applicable monthly compensation rate be less than three; and (y) the
Company's cost of then available health insurance benefits, as are customarily
provided to employees of the Company, for a period of twenty-four (24) months.
In addition, upon such termination: (i) the next portion under the stock option
vesting schedule of any outstanding stock options granted to the Employee that
would not otherwise have been vested until some time after such termination
occurred shall thereupon vest immediately and be exercisable by the Employee and
(ii) fifty percent of the remainder of any other outstanding but unvested stock
options, shall thereupon vest immediately and be exercisable by the Employee.
The Company may withhold from any such severance compensation any federal,
state, city, county or other taxes.
<PAGE>
Section 4. No Severance Pay Upon Any Other Termination. Upon any
---------------------------------------------------------------
termination of the Employee's employment with the Company other than as set
forth in Section 3, the sole obligation hereunder of the Company shall be to pay
the Employee's regular compensation up to the effective date of termination. The
severance pay provisions hereunder do not, however, impact in any way the rights
of the Employee or the obligations of the Company under any employment agreement
or any other agreement for the payment of employment compensation between the
Employee and the Company, whether such agreement(s) are in existence now or come
into existence hereafter; except, however, (i) that if such employment agreement
provides for severance pay which would be applicable under circumstances that
would also obligate the Company to make similar payments under this Agreement,
---- ---------
then this Agreement shall not be deemed as additive but shall be construed so
---- ---------
that the obligations hereunder when applied in conjunction with the employment
---------
agreement, do not require the Company to make such payments in excess of the
amount or time set forth herein, and (ii) with regard to the acceleration of
options the employee may elect to substitute the acceleration provision of this
Agreement in place of any provision dealing specifically with acceleration in
the employment agreement. By way of illustration, if the severance pay
provisions of this Agreement were activated by a termination that also would be
deemed to activate a then-existing employment agreement with a termination
provision which provided for six months of severance at the same regular
compensation rate, then this Agreement would be construed to provide only an
additional six months severance pay (plus the cost of the health benefits in
this Agreement's Severance Amount) rather than twelve months, keeping the
monthly factor between the two agreements as twelve months, rather than eighteen
months for the calculation of the Employee's severance pay. If the basis of the
severance amount were calculated differently in the employment agreement, then
the Employee would receive the greater of the amount(s) due either under the
employment agreement or the Severance Amount under this Agreement. By way of
further illustration if the severance pay provisions relating to the
acceleration of the vesting of options specified that only a fraction would vest
that was less than half of those options granted, then the Employee could elect
to accept the 50% acceleration provision of this Agreement.
Section 5. Entire Obligation. Payment to the Employee pursuant to Sections
----------------------------
3 or 4 of this Agreement shall constitute the entire obligation of the Company
to the Employee and full settlement of any claim under law or equity that the
Employee might otherwise assert against the Company, or any of its employees,
officers or directors on account of the Employee's termination.
Section 6. No Obligation to Continue Employment. This Agreement does not
-----------------------------------------------
create any obligation on the part of the Company to continue to employ the
Employee following a Change in Control or in the absence of a Change in Control.
Section 7. Term of Agreement. This Agreement shall terminate and no longer
----------------------------
be in effect on the earlier of: (i) the termination date of employment
agreement, if any; (ii) the date upon which the Employee ceases to be an
employee of the Company, unless a Change in Control occurs within three months
after such termination date; or (iii) if a Change in Control occurs while the
Employee is employed by the Company, until the date one year following the
Change in Control.
<PAGE>
Section 8. Severability. Should any clause, portion or section of this
-------------------------
Agreement be unenforceable or invalid for any reason, such unenforceability or
invalidity shall not affect the enforceability or validity of the remainder of
the Agreement.
Section 9. Assignment: Successors in Interest. This Agreement, being
-------------------------------------------------
personal to the Employee, may not be assigned by the Employee. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company, and the heirs, executors and personal
representatives of the Employee.
Section 10. Waiver. Failure to insist upon strict compliance with any of
------------------
the terms, covenants or conditions of this Agreement shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.
Section 11. Governing Law. This Agreement shall be governed by and
----------------------------
construed in accordance with the laws of the State of New Jersey applicable in
the case of agreements made and to be performed entirely within such State.
Section 12. Arbitration. Any controversy or claim arising out of or in
------------------------
connection with this Agreement shall be settled by arbitration in accordance
with the rules of the American Arbitration Association then in effect in the
State of New Jersey and judgment upon such award rendered by the arbitrator may
be entered in any court having jurisdiction thereof. The arbitration shall be
held in the State of New Jersey. The arbitration award shall include attorneys'
fees and costs to the prevailing party.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as of
the date first above written.
Intelligroup, Inc.
By: /s/ Stephen A. Carns
--------------------------------------
Stephen A. Cams
President and Chief Executive Officer
The Employee
/s/ Alan Ziegler
------------------------------------------
Alan Ziegler
- --------------------------------------------------------------------------------
REVOLVING CREDIT LOAN AGREEMENT
executed by and between
INTELLIGROUP, INC.,
as the Borrower
and
PNC BANK, NATIONAL ASSOCIATION,
as the Lender
Dated: January 29, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
DEFINITIONS; RULES OF INTERPRETATION AND
CONSTRUCTION; AND ACCOUNTING
Section 1.01 Definitions................................................1
Section 1.02 Rules of Interpretation and Construction..................17
Section 1.03 Accounting Principles.....................................17
ARTICLE II
AMOUNT AND TERMS FOR THE REVOLVING CREDIT FACILITY
Section 2.01 Revolving Credit Facility.................................18
Section 2.02 Interest on the Revolving Credit Loans....................19
Section 2.03 Fees......................................................22
Section 2.04 Voluntary Prepayments.....................................23
Section 2.05 Payments..................................................23
Section 2.06 Special Provisions Governing Eurodollar Rate Loans........25
Section 2.07 Increased Capital.........................................28
Section 2.08. Authorized Officers of the Borrower.......................28
Section 2.09 Taxes.....................................................29
Section 2.10 Letter Of Credit..........................................30
Section 2.11 Lender Not Liable.........................................31
ARTICLE III
CONDITIONS TO THE REVOLVING CREDIT LOAN
Section 3.01 Conditions Precedent to the Effectiveness of this
Loan Agreement............................................33
Section 3.02. Conditions Precedent to All Revolving Credit Loans........34
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01 Representations and Warranties on the Closing Date........35
Section 4.02. Subsequent Funding Representations and Warranties.........41
Section 4.03. SEC Filings...............................................41
ARTICLE V
REPORTING COVENANTS
Section 5.01 Statement of Accounting...................................41
Section 5.02 Reporting and Information Requirements....................42
ARTICLE VI
AFFIRMATIVE COVENANTS
Section 6.01 Corporate Existence, etc..................................44
Section 6.02 Corporate Powers, etc.....................................44
Section 6.03 Compliance with Laws, etc.................................45
Section 6.04 Payment of Taxes and Claims...............................45
i
<PAGE>
Section 6.05 Maintenance of Properties; Insurance......................45
Section 6.06 Inspection of Property; Books and Records; Disclosure.....45
Section 6.07 Litigation, Claims, etc...................................46
Section 6.08 Maintenance of Licenses, Permits, etc.....................46
Section 6.09 Continuation of or Change in Business.....................46
Section 6.10 Additional Corporate Guarantors...........................46
Section 6.11 Year 2000.................................................46
Section 6.12 Further Acts..............................................47
ARTICLE VII
NEGATIVE COVENANTS
Section 7.01 Additional Liens..........................................47
Section 7.02 Mergers, Consolidations, Acquisitions and Sales of Assets.48
Section 7.03 Loans and Investments.....................................49
Section 7.04 Indebtedness..............................................49
Section 7.05 ERISA.....................................................50
Section 7.06 Amendment of Articles of Incorporation or By-Laws.........51
Section 7.07 Margin Regulations........................................51
Section 7.08 Cancellation of Debt; Prepayment..........................51
Section 7.09 Environmental Liabilities.................................51
Section 7.10 Fiscal Year...............................................52
Section 7.11 Guaranties................................................52
Section 7.12 Change in Business........................................52
Section 7.13 Other Negative Pledges....................................52
ARTICLE VIII
FINANCIAL COVENANTS
Section 8.01 Maximum Consolidated Cash Flow Leverage Ratio.............52
Section 8.02 Minimum Consolidated Net Worth............................53
Section 8.03 Capital Expenditures......................................53
Section 8.04 Minimum Fixed Charge Coverage Ratio.......................53
ARTICLE IX
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
Section 9.01 Events of Default.........................................53
Section 9.02 Rights and Remedies.......................................55
Section 9.03 Application of Proceeds...................................56
Section 9.04 No Notices................................................56
Section 9.05 Agreement to Pay Attorneys' Fees and Expenses.............56
Section 9.06 No Additional Waiver Implied by One Waiver................56
Section 9.07 Failure to Exercise Rights................................57
Section 9.08 WAIVER OF JURY TRIAL......................................57
Section 9.09 Remedies Cumulative.......................................57
ARTICLE X
MISCELLANEOUS
Section 10.01.Expenses..................................................58
Section 10.02.Indemnity.................................................58
Section 10.03.Amendments and Waivers....................................59
Section 10.04.Independence of Covenants.................................59
ii
<PAGE>
Section 10.05.Notices...................................................59
Section 10.06 Survival of Warranties and Agreements.....................59
Section 10.07 Marshaling; Recourse to Security; Payments Set Aside......60
Section 10.08 Severability..............................................60
Section 10.09 Governing Law.............................................60
Section 10.10 Successors and Assigns....................................60
Section 10.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS............60
Section 10.12 Counterparts; Effectiveness; Inconsistencies..............61
Section 10.13 Construction..............................................61
Section 10.14 Entire Agreement..........................................61
Section 10.15 Confidentiality...........................................61
iii
<PAGE>
EXHIBITS AND SCHEDULES
----------------------
Exhibits
--------
Exhibit "A" List of Eurodollar Affiliates
Exhibit "B" Form of Notice of Borrowing
Exhibit "C" Form of Notice of Conversion/Continuation
Exhibit "D" Form of Officer's Certificate
Exhibit "D1" Form of Compliance Certificate
Exhibit "E" Form of Revolving Credit Loan Note
Exhibit "F" Form of Opinion Letter of Borrower's Counsel
Schedules
---------
Schedule 4.01(v) Material Pending Actions, Suits, Proceedings,
Governmental Investigations or Arbitrations
Schedule 4.01(xii) Material Environmental Disclosure
Schedule 4.01(xiii) ERISA
Schedule 4.01(xxi) Labor Unions/Collective Bargaining Agreements
Schedule 4.01(xxiii) Material Contracts
Schedule 6.10 List of Corporate Guarantors
Schedule 7.01 Permitted Liens
Schedule 7.04 Existing Debt
Schedule 7.11 List of Contingent Obligations
iv
<PAGE>
REVOLVING CREDIT LOAN AGREEMENT
-------------------------------
THIS REVOLVING CREDIT LOAN AGREEMENT (hereinafter as it may be from time to
time amended, modified, extended, renewed, refinanced and/or supplemented shall
be referred to as this "Loan Agreement"), is made this 29th day of January,
1999, by and between
INTELLIGROUP, INC., a corporation duly organized, existing and in good
standing under the laws of the State of New Jersey, having its principal office
located at 499 Thornall Street, Edison, New Jersey 08837 (hereinafter referred
to as the "Borrower"),
AND
PNC BANK, NATIONAL ASSOCIATION, a national banking institution duly
organized and validly existing under the laws of the United States of America,
having an office located at Two Tower Center Boulevard, East Brunswick, New
Jersey 08816 (hereinafter referred to as the "Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower has requested that the Lender make available to the
Borrower a senior unsecured revolving credit loan in the aggregate principal
amount of up to Thirty Million ($30,000,000.00) Dollars for the general
corporate purposes of the Borrower and to finance acquisitions (hereinafter
referred to as the "Revolving Credit Facility"); and
WHEREAS, the Lender has agreed to make the Revolving Credit Facility
available to the Borrower, subject to the terms, conditions and provisions
hereinafter set forth; and
NOW, THEREFORE, in consideration of these premises and the mutual
representations, covenants and agreements of the Borrower and the Lender, each
party, binding itself and its successors and assigns, does hereby promise,
covenant and agree as follows:
ARTICLE I
DEFINITIONS; RULES OF INTERPRETATION AND
CONSTRUCTION; AND ACCOUNTING
----------------------------
SECTION 1.01 DEFINITIONS. The following terms, as used in this Loan
Agreement, shall have the following meanings, unless the context expressly
indicates and requires otherwise:
"Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Rate Loan
for any Eurodollar Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next highest 1/16 of 1%) equal to (i) the LIBO Rate for
such Eurodollar Interest Period multiplied by (ii) the Statutory Reserve Rate.
---------- --
"Affiliate" shall mean, with respect to a specified Person, another Person
that directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common
1
<PAGE>
control with the Person specified. For the purposes of the preceding sentence,
"controls" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise,
and in any case shall include direct or indirect ownership (beneficially or of
record) of, or direct or indirect power to vote, ten percent (10%) or more of
the outstanding shares of any class of capital stock of such Person (or in the
case of a Person that is not a corporation, ten percent (10%) or more of any
class of equity interest).
"Agreement of Guaranty" shall mean any Agreement of Guaranty, in form and
substance reasonably acceptable to the Lender and to the Corporate Guarantors,
dated the date of execution thereof, executed by the Corporate Guarantors in
favor of the Lender, pursuant to which the Corporate Guarantors have agreed to
unconditionally guaranty, on a joint and several basis, the full, prompt and
-- - ----- --- ------- -----
complete performance of all of the Borrower's duties, covenants and obligations
under this Loan Agreement, the Revolving Credit Loan Note and the other Loan
Documents. The term "Agreement of Guaranty" shall also be deemed to mean and
refer to all amendments, modifications, extensions, renewals, refinancings
and/or supplements to said agreement made and/or entered into subsequent to the
Closing Date, including, without limitation, all amendments which are
consummated for the purposes of adding any new and/or additional Persons as
Corporate Guarantors, all as provided for in Section 6.10 of this Loan
-------------
Agreement.
"Applicable Index" shall have the meaning set forth in Section 2.03(ii) of
----------------
this Loan Agreement.
"Applicable Margin" shall have the meaning set forth in Section 2.02(i)(b)
------------------
of this Loan Agreement.
"Authorized Officer" shall mean those officers of the Borrower, whose
signatures and incumbency shall have been certified to the Lender pursuant to an
Officer's Certificate delivered on the Closing Date or any other form of
resolution or certification delivered to and approved by the Lender after the
Closing Date.
"Bankruptcy Code" shall mean shall mean Title 11 of the United States
Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended from time to time,
-- ---
or any successor statute.
"Benefit Plan" shall mean a defined benefit plan as defined in Section 3
(35) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower
or an ERISA Affiliate is, or within the immediately preceding six (6) years was,
an "employer" as defined in Section 3(5) of ERISA.
"Borrower" shall have the meaning ascribed and assigned to such term as set
forth in the preamble of this Loan Agreement.
"Borrowing" shall mean a borrowing consisting of a Revolving Credit Loan or
Revolving Credit Loans made by the Lender to the Borrower on the same day.
2
<PAGE>
"Business Day" shall mean (i) for all purposes other than as covered by
clause (ii) below, any day excluding Saturday, Sunday and any day which is a
- -----------
legal holiday under the laws of the State of New Jersey, or is a day upon which
banking institutions located in New Jersey are required or authorized by law or
other Governmental Action to remain closed and (ii) with respect to all notices,
determinations, fundings and payments in connection with a Eurodollar Rate Loan,
any day which is a Business Day described in clause (i) above, and which is also
----------
a day for trading by and between banks in the London interbank market.
"Capital Expenditures" of any Person shall mean, for any period, all
expenditures (whether paid in cash or accrued as liabilities during such period)
of such Person during such period which would be classified as capital
expenditures in accordance with GAAP (including, without limitation,
expenditures for maintenance and repair which are capitalized, and Capitalized
Leases to the extent an asset is recorded in connection therewith in accordance
with GAAP), but excluding capital assets acquired as part of an acquisition.
"Capitalized Lease" and "Capitalized Leases" shall mean at any time any
lease which is, or is required under GAAP to be, capitalized on the balance
sheet of the lessee at such time.
"Capitalized Lease Obligations" of any Person, shall mean all obligations
of such Person to pay rent or other amounts under any lease (or similar
arrangement conveying the right to use) of real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as Capitalized Leases, in accordance with GAAP, and the amount of
such obligations shall be the capitalized amount thereof determined in
accordance with GAAP.
"Capital Stock" shall mean any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation)
and any and all warrants or options to purchase any of the foregoing.
"CERCLIS" shall mean the Comprehensive Environmental Response, Compensation
and Liability Information System List, as the same may be amended from time to
time.
"Change in Control" shall mean (a) the acquisition of ownership, directly
or indirectly, beneficially or of record, by any Person or group (within the
meaning of the Securities Exchange Act of 1934 and the rules of the Securities
and Exchange Commission thereunder as in effect on the date hereof), of shares
representing more than twenty-five (25%) percent of the aggregate ordinary
voting power represented by the issued and outstanding capital stock of the
Borrower; (b) occupation of a majority of the seats (other than vacant seats) on
the board of directors of the Borrower by Persons who were neither (i) nominated
by the board of directors of the Borrower, nor (ii) appointed by directors so
nominated; or (c) the acquisition of direct or indirect Control of the Borrower
by any Person or group. "Control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise.
"Claim" or "Claims" shall mean any claim or demand, by any Person, of
whatsoever
3
<PAGE>
kind or nature for any alleged Liabilities and Costs, whether based in contract,
tort, implied or express warranty, strict liability, criminal or civil statute,
permit, ordinance or regulation, common law or otherwise.
"Closing Date" shall mean the date upon which this Loan Agreement is
executed by the Lender and the Borrower, and the conditions set forth in Section
-------
3.01 of this Loan Agreement have been completed and fulfilled to the
- ----
satisfaction of the Lender.
"Code" means the Internal Revenue Code of 1986, as amended, any successor
statute of similar import, and regulations thereunder, in each case as in effect
from time to time. References to sections of the Code shall be construed also to
refer to any successor sections.
"Commitment" shall mean, at any particular time during the term of the
Revolving Credit Facility, the principal amount of the Revolving Credit Facility
which the Lender has committed to make available to the Borrower, as said
principal amount may be permanently reduced by the Borrower pursuant to Section
-------
2.01(v) of this Loan Agreement. As of the Closing Date, the initial amount
- -------
committed is $30,000,000.00.
"Consolidated Cash Flow Leverage Ratio" shall mean with respect to the
Borrower, the Corporate Guarantors and any Subsidiary, on a consolidated basis,
as of any date of determination thereof, the ratio of (i) Consolidated Debt, as
of such date of determination to (ii) Consolidated EBITDA for the period of four
(4) consecutive Fiscal Quarters immediately preceding said date of determination
taken together as one accounting period, calculated in accordance with GAAP.
"Consolidated Debt" shall mean, as of any date of determination, with
respect to the Borrower, any of the Corporate Guarantors and any Subsidiary, the
aggregate sum of the following items as such items appear on a consolidated
balance sheet of the Borrower, any of the Corporate Guarantors and any
Subsidiary in accordance with GAAP: (i) the unpaid principal balance of all
indebtedness or liability for money borrowed or owed by the Borrower, any of the
Corporate Guarantors and/or any Subsidiary from time to time (including any
renewals, extensions and refinancings thereof), whether or not the indebtedness
was heretofore or hereafter created, issued, incurred, assumed or guarantied;
(ii) the unpaid principal balance of all indebtedness or liability for the
deferred purchase price of property or services incurred (other than current
trade liabilities incurred in the ordinary course of business and payable in
accordance with customary practices); (iii) all obligations as lessee under
leases which have been or should be recorded as Capitalized Lease Obligations;
and (iv) all obligations, contingent or otherwise relative to the face amount of
all letters of credit issued for the Borrower, Corporate Guarantors or
Subsidiaries' account, whether or not drawn.
"Consolidated EBITDA" shall mean with respect to the Borrower, the
Corporate Guarantors and any Subsidiary, as of any date of determination
thereof, the amount equal to the sum of (i) Consolidated Net Income for such
test period, plus (ii) all gross interest expense on Consolidated Debt of the
----
Borrower, the Corporate Guarantors and any Subsidiary, for such test period,
plus (iii) all charges against income of the Borrower, the Corporate Guarantors
- ----
and any Subsidiary for foreign, federal, state and local taxes for such test
period, plus (iv) all depreciation
4
<PAGE>
expense for such test period, plus (v) all amortization expense for such test
----
period plus (vi) non-recurring investment banking, legal and accounting fees
----
incurred in connection with permitted acquisitions limited to the lesser of (A)
$1,000,000.00, and (B) fifteen (15%) percent of operating income for any four
quarter measurement period, provided such fees are reported to the Lender at the
time the financing statements are provided on a separate schedule with a
reconciliation to the applicable expense line items, plus (vii) all other net
----
non-cash charges for such test period, after eliminating therefrom any (a)
extraordinary items, (b) gains and losses from the sale of assets in connection
with any sale/leaseback transaction or arrangement and (c) results of
discontinued operations, all as determined in accordance with GAAP.
"Consolidated Net Income" shall mean with respect to the Borrower, the
Corporate Guarantors and any Subsidiary, as of any date of determination
thereof, all amounts which, in accordance with GAAP, would be included under net
income (after the payment of all federal and state income taxes) on a
consolidated income statement of the Borrower, the Corporate Guarantors and any
Subsidiary for such test period.
"Consolidated Net Worth" shall mean as of any date of determination
thereof, the total amount of the stockholder's equity of the Borrower, the
Corporate Guarantors and any Subsidiary which, in accordance with GAAP, would be
included as such on the consolidated balance sheet of the Borrower at such date.
"Contingent Obligation" shall mean as to any Person any guarantee of
payment or performance by such Person of any Debt or other obligation of any
other Person, or any agreement to provide financial assurance with respect to
the financial condition, or the payment of the obligations of, such other Person
(including, without limitation, purchase or repurchase agreements, reimbursement
agreements with respect to letters of credit or acceptances, indemnity
arrangements, grants of security interests to support the obligations of another
Person, keepwell agreement and take-or-pay or through-put arrangements) which
has the effect of assuring or holding harmless any third Person against loss
with respect to one or more obligations of such third Person, provided, however,
-------- --------
that the term Contingent Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation of any Person shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made, and (b) the
maximum amount for which such contingently liable Person may be liable pursuant
to the terms of the instrument embodying such Contingent Obligation, unless such
primary obligation and the maximum amount for which such contingently liable
Person may be liable are not stated or determinable, in which case the amount of
such Contingent Obligation shall be such contingently liable Person's maximum
reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
"Contractual Obligation" shall mean with respect to any Person, any
provision of any securities issued by said Person or of any indenture, mortgage,
deed of trust, contract, undertaking, document, instrument or other agreement or
instrument to which said Person is a party or by which it or any of its
properties is bound, or to which it or any of its properties is subject
(including, without limitation, any restrictive covenant affecting said Person
or any of its properties).
5
<PAGE>
"Corporate Guarantors" shall mean a collective reference to any majority
owned domestic and foreign operating subsidiary of the Borrower, whether
existing now or in the future, made a Corporate Guarantor pursuant to Section
-------
6.10 hereof. Each of the Corporate Guarantors may sometimes be hereinafter
- ----
referred to individually as a "Corporate Guarantor".
"Customary Permitted Liens" shall mean
(i) Liens (other than Environmental Liens and any Lien imposed
under ERISA) for taxes, assessments or charges of any Governmental Authority or
claims not yet due or which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP;
(ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen and other like Liens (other than any Lien
imposed under ERISA) imposed by Law, including, without limitation, Liens in
favor of any Governmental Authority securing progress payments made under
government contracts created in the ordinary course of business and for amounts
not yet due or which are being contested in good faith by appropriate
proceedings which are sufficient to prevent imminent foreclosure of such Liens,
are promptly instituted and diligently conducted and with respect to which
adequate reserves or other appropriate provision are being maintained in
accordance with GAAP;
(iii) Liens (other than any Lien imposed under ERISA) incurred or
deposits made in the ordinary course of business (including, without limitation,
surety bonds and appeal bonds) in connection with workers' compensation,
unemployment insurance and other types of social security benefits and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements or to secure the performance of tenders, bids, leases, contracts,
statutory obligations and other similar obligations or arising as a result of
progress payments or deposits under government contracts (including foreign
government contracts);
(iv) easements (including, without limitation, reciprocal easement
agreements and utility agreements), rights-of-way, covenants, consents,
reservations, encroachments, variations and other restrictions, charges or
encumbrances (whether or not recorded) affecting the use of real property or
impairing the use thereof which are imposed by law or arise in the ordinary
course of business that do not secure any monetary obligations and do not
materially detract from the value of the affected property or materially
interfere with the ordinary conduct of business of the Person owning such
property; and
(v) extensions, renewals or replacements of any Lien referred to
in paragraphs (i) through (iv) above, provided (a) that, in the case of
paragraphs (i) through (iii) above, the principal amount of the obligation
secured thereby is not increased and (b) that any such extension, renewal or
replacement is limited to the property originally encumbered thereby; provided,
--------
however, to the extent that the amount of obligations of the Borrower arising
- -------
from claims being contested in good faith secured by such Liens in paragraphs
(i) and (ii) above exceeds $25,000.00 in the aggregate, the Borrower shall have
set aside full cash reserves in the
6
<PAGE>
amount of such obligations.
"Debt" shall mean with respect to any Person the aggregate sum of the
following items as such items appear on a balance sheet of such Person in
accordance with GAAP: (i) the unpaid principal balance of all indebtedness or
liability for money borrowed or owed by such Person from time to time (including
any renewals, extensions and refinancings thereof), whether or not the
indebtedness was heretofore or hereafter created, issued, incurred, assumed or
guarantied; (ii) the unpaid principal balance of all indebtedness or liability
for the deferred purchase price of property or services incurred (other than
current trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices); (iii) all obligations as lessee
under leases which have been or should be recorded as Capitalized Lease
Obligations; and (iv) all obligations, contingent or otherwise relative to the
face amount of all letters of credit issued for such Person's account, whether
or not drawn.
"Default Rate" shall mean a rate of interest equal to two hundred basis
points (2.0%) above the Prime Rate then in effect with respect to any
outstanding Revolving Credit Loans.
"DOL" shall mean the United States Department of Labor and any successor
department or agency.
"Dollar", "Dollars" and the symbol "$" shall mean lawful money of the
United States of America.
"Dollar Equivalent" means, with respect to any amount in Dollars, such
amount.
"Environment" shall mean all air, surface water, water, vapor, groundwater,
drinking water supply or land, including land surface or subsurface, and
includes all fish, wildlife, biota and all other natural resources.
"Environmental Approval" and "Environmental Approvals" shall mean any
Governmental Action pursuant to or required under any Environmental Law.
"Environmental Concern Materials" shall mean (i) any flammable substance,
explosive, radioactive material, hazardous material, hazardous waste, toxic
substance, solid waste, pollution, contaminate or any related material, raw
material, substance, product or by-product of any substance specified in or
regulated or otherwise affected by any Environmental Law (including but not
limited to any "hazardous substance" as defined in any Environmental Law), (ii)
any toxic chemical or other substance from or related to industrial, commercial
or institutional activities, (iii) asbestos, gasoline, diesel fuel, motor oil,
waste and used oil, heating oil and other petroleum products or compounds,
polychlorinated biphenyls, radon gas and urea-formaldehyde and (iv) all other
substances or waste of any nature regulated pursuant to any Environmental Law.
"Environmental Law" and "Environmental Laws" shall mean any Law, whether
now existing or subsequently enacted or amended, relating to (i) pollution or
protection of the Environment, (ii) exposure of Persons, including but not
limited to employees, to Environmental
7
<PAGE>
Concern Materials, (iii) protection of the public health or welfare from the
effects of products, by-products, wastes, emissions, discharges or releases of
Environmental Concern Materials or (iv) regulation of the manufacture,
generation, use or introduction into commerce of Environmental Concern Materials
including their manufacture, formulation, packaging, labeling, distribution,
treatment, transportation, handling, storage or disposal. Without limitation,
"Environmental Law" shall include (a) any Environmental Approval and the terms
and conditions thereof, (b) the following statutes: the Clean Air Act (42 U.S.C.
7401 et seq.); the Comprehensive Environmental Response Compensation and
-- ---
Liability Act of 1980 (42 U.S.C. ss.9601 et seq.); the Federal Water Pollution
-- ---
Control Act (33 U.S.C. ss.1251 et seq.); the Hazardous Material Transportation
-- ---
Act (49 U.S.C. ss.1801 et seq.); the Federal Insecticide, Fungicide and
-- ---
Rodenticide Act (7 U.S.C. ss. 136 et seq.); the Resource Conservation and
-- ---
Recovery Act of 1976 (42 U.S.C. ss.6901 et seq.) (including the Hazardous and
-- ---
Solid Waste Amendments of 1984), the Toxic Substance Control Act (15 U.S.C. ss.
2601 et seq.); the Federal Occupational Safety & Health Act of 1970 (29 U.S.C.
-- ---
ss.651 et seq.) (including ss.3101 of the Omnibus Reconciliation Act of 1990),
-- ---
and the regulations promulgated thereunder and all as amended from time to time;
and (c) any common law doctrine (including, without limitation, injunctive
relief and tort, such as negligence, nuisance, trespass and strict liability)
that may impose obligations or liabilities for personal injury or property
damage due to, or threatened as a result of, the presence of or exposure to
Environmental Concern Materials.
"Environmental Lien" shall mean a Lien in favor of any Governmental
Authority for (i) any liability under any Environmental Laws or (ii) damages
arising from, or costs incurred by such Governmental Authority in response to, a
Release or threatened Release of any Environmental Concern Materials into the
Environment.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute of similar import, together
with the regulations promulgated thereunder by the United States Treasury
Department, the DOL and/or the PBGC.
"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with the Borrower and/or the Corporate Guarantors,
is treated as a "single employer" under Section 414(b) and (c) of the Code or,
solely for purposes of Section 302 of ERISA and Section 412 of the Code, is
treated as a "single employer" under Section 414 of the Code.
"Eurodollar Affiliate" shall mean with respect to the Lender, the Affiliate
of the Lender, if any, set forth on Exhibit "A" attached to this Loan Agreement.
-----------
"Eurodollar Interest Period" shall mean one or more periods of time during
which the Borrower may select, convert to or continue a Eurodollar Rate Loan,
such funding period with respect to the Revolving Credit Facility, to be either
a one, two, three or six month period(s), subject to availability, all as more
fully subject to the provisions of Section 2.06 of this Loan Agreement.
------------
"Eurodollar Interest Payment Date" shall mean, with respect to any
Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable
to such Loan; provided, however,
-------- -------
8
<PAGE>
if an Eurodollar Interest Period exceeds three months, then the Eurodollar
Interest Payment Date shall also mean the last day of every third month during
said Eurodollar Interest Period.
"Eurodollar Interest Rate Determination Date" shall mean the date on which
the Lender determines the Eurodollar Rate applicable to (i) a Borrowing or (ii)
the continuation or conversion of Eurodollar Rate Loans. The Eurodollar Interest
Rate Determination Date shall be the second Business Day prior to the first day
of the Eurodollar Interest Period applicable to such Borrowing, continuation or
conversion.
"Eurodollar Portion" of any Revolving Credit Loans shall mean at any time
the portion, including the whole, of such Revolving Credit Loans bearing
interest at any time under the Adjusted LIBO Rate.
"Eurodollar Rate Loan" or "Eurodollar Rate Loans" shall mean those
Revolving Credit Loans outstanding which bear interest at a rate determined by
reference to the Adjusted LIBO Rate, as provided for in Sections 2.02(i) and
-----------------
2.06 of this Loan Agreement.
- ----
"Eurodollar Rate Option" shall mean one of the interest rates available to
the Borrower as provided for and described in Section 2.02(i)(a) of this Loan
-------------------
Agreement.
"Eurodollar Rate Taxes" shall have the meaning ascribed to such term in
Section 2.06(vii)(a) of this Loan Agreement.
- --------------------
"Event of Default" or "Events of Default" shall mean any of the events of
default as defined and described in Section 9.01 of this Loan Agreement.
------------
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
successor thereto.
"Federal Funds Effective Rate" for any day shall mean the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%) announced by the
Federal Reserve Bank of New York, (or any successor) on such day as being the
weighted average of the rates on overnight federal funds transactions arranged
by Federal funds brokers on the previous trading day, as computed and announced
by such Federal Reserve Bank (or any successor) in substantially the same manner
as such Federal Reserve Bank computes and announces the weighted average it
refers to as the "Federal Funds Effective Rate" as of the date of this Loan
Agreement; provided, that if such Federal Reserve Bank (or its successor) does
--------
not announce such rate on any day, the "Federal Funds Effective Rate" for such
day shall be the Federal Funds Effective Rate for the last day on which such
rate was announced.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System or any governmental authority succeeding to its functions.
"Fiscal Quarter" shall mean the four (4) thirteen (13) week periods of each
Fiscal Year which with respect to the First Fiscal Quarter begins on January 1
of each Fiscal Year and with respect to the Fourth Fiscal Quarter ends on
December 31 of each Fiscal Year.
9
<PAGE>
"Fiscal Year" shall mean that period commencing on January 1 and ending on
December 31 of the next succeeding year or such other period as the Borrower
and/or the Corporate Guarantors may designate and the Lender may approve in
writing.
"Funding Date" shall mean, with respect to any Revolving Credit Loan, the
date of the funding of such Revolving Credit Loan by the Lender.
"Funding Segment" shall mean with respect to a Eurodollar Rate Loan, the
entire principal amount of such Eurodollar Portion to which at the time in
question there is applicable a particular Eurodollar Interest Period beginning
on a particular day and ending on a particular day and all Loans to which a
Prime Rate Option applies shall constitute one Funding Segment. (By definition,
each such Eurodollar Portion is at all times composed of an integral number of
discreteFunding Segments and the sum of the principal amounts of all Funding
Segments of any such Eurodollar Portion at any time equals the principal amount
of such Eurodollar Portion at such time.)
"GAAP" shall mean generally accepted accounting principles, consistently
applied, in the United States of America, as in effect from time to time, as
developed, modified and set forth in the opinions and pronouncements of the
Accounting Principles Board, the American Institute of Certified Public
Accountants and the Financial Accounting Standards Board, or in such other
statements by such other Person as may be in general use by significant segments
of the accounting profession, which are applicable to the circumstances as of
the date of determination, subject to the terms of Section 1.03 of this Loan
-------------
Agreement.
"Governmental Action" or "Governmental Approvals" shall mean any approval,
order, consent, authorization, certificate, license, permit or validation of, or
exemption or other action by, or filing, recording or registration with or
notice to, any Governmental Authority.
"Governmental Authority" shall mean the government of the United States of
America, any other nation or any political subdivision thereof, or any agency,
authority, bureau, central bank, commission, department or instrumentality of
either, or any court, tribunal, grand jury or arbitrator, in each case whether
foreign or domestic.
"Indemnified Party" and "Indemnified Parties" shall mean the Lender and the
directors, officers, trustees, employees, agents and controlling shareholders of
the Lender.
"Independent Certified Public Accountant" shall mean any independent
certified public accounting firm selected by the Borrower which accounting firm
is satisfactory to the Lender.
"IRS" shall mean the Internal Revenue Service and any Person succeeding to
the functions thereof.
"Law" shall mean any law (including common law), constitution, statute,
treaty, convention, regulation, rule, ordinance, code, order, injunction, writ,
decree or award of any Governmental Authority.
10
<PAGE>
"Lender" shall have the meaning ascribed and assigned to such term as set
forth in the preamble of this Loan Agreement.
"Letter of Credit" shall mean all letters of credit issued by Lender or any
affiliate of Lender at the request of and for the account of the Borrower.
"Letter of Credit Obligations" shall mean, at any time, the sum of (i)
Reimbursement Obligations at such time for the Letter of Credit plus (ii) the
----
dollar amount of the maximum amount then available for drawing under the Letter
of Credit.
"Liabilities and Costs" shall mean all liabilities, obligations,
responsibilities, losses, damages, punitive damages, consequential damages,
treble damages, costs and expenses (including, without limitation, attorneys',
experts' and consulting fees and costs of investigation and feasibility
studies), fines, penalties and monetary sanctions, interest, direct or indirect,
known or unknown, absolute or contingent, past, present or future.
"LIBO Rate" shall mean, with respect to any Eurodollar Rate Loan for any
Eurodollar Interest Period, the rate appearing on Page 3750 of the Telerate
Service (or on any successor or substitute page of such Service, or any
successor to or substitute for such Service, providing rate quotations
comparable to those currently provided on such page of such Service, as
determined by the Lender from time to time for purposes of providing quotations
of interest rates applicable to dollar deposits in the London interbank market)
at approximately 11:00 A.M., London time, two (2) Business Days prior to the
commencement of such Eurodollar Interest Period, as the rate for dollar deposits
with a maturity comparable to such Eurodollar Interest Period. In the event that
such rate is not available at such time for any reason, then the "LIBO Rate"
---------
with respect to such Eurodollar Rate Loan for such Eurodollar Interest Period
shall be the rate rounded upwards, if necessary, to the next highest 1/16 of 1%
at which dollar deposits of $5,000,000.00 and for a maturity comparable to such
Eurodollar Interest Period are offered by major banks in immediately available
funds in the London interbank market at approximately 11:00 A.M., London time,
two (2) Business Days prior to the commencement of such Eurodollar Interest
Period.
"Lien" and "Liens" shall mean with respect to any asset, any mortgage, deed
of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance,
lien (statutory or other) or preference, priority, security interest or other
security agreement of any kind or nature whatsoever (including any conditional
sale or other title retention agreement, any Capitalized Lease Obligation
involving substantially the same economic effect as any of the foregoing and the
filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction).
"Loan Account" shall have the meaning ascribed to such term in Section
-------
2.05(iv) hereof.
- --------
"Loan Agreement" shall have the meaning ascribed and assigned to such term
as set forth in the preamble of this Loan Agreement.
"Loan Documents" shall mean any and all agreements, documents, certificates
and
11
<PAGE>
instruments executed by the Borrower, any of the Corporate Guarantors and/or any
other Person and delivered by them to the Lender pursuant to and in connection
with the Revolving Credit Facility, including, without limitation, this Loan
Agreement, the Revolving Credit Loan Note, the Pledge Agreements and the
Agreement of Guaranty, in each case as amended, modified, extended, restated,
refinanced and/or supplemented from time to time in accordance with the
provisions hereof or thereof.
"Majority Owned Subsidiary" shall mean any Subsidiary of the Borrower or
any of the Corporate Guarantors in which more than fifty percent (50%) of the
voting capital stock of said Subsidiary is owned, legally or beneficially, by
the Borrower or any such Corporate Guarantors.
"Margin Stock" shall have the meaning ascribed and assigned to such term in
Regulation U.
"Material Adverse Effect" shall mean a material adverse effect upon (i) the
business, assets, financial condition, financial performance, prospects,
properties or operations of the Borrower, the Corporate Guarantors, any
Subsidiary and/or any Affiliate taken as a whole, (ii) the ability of the
Borrower and/or any of the Corporate Guarantors to perform their respective
obligations and duties under the Loan Documents or (iii) the rights of or
benefits available to the Lender under the Loan Documents.
"Multiemployer Plan" shall mean an employee benefit plan defined in Section
4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years
was, contributed to by the Borrower, the Corporate Guarantors or an ERISA
Affiliate.
"Notice of Borrowing" shall mean, with respect to a proposed Borrowing
pursuant to Section 2.01(ii) hereof, a notice substantially in the form of
-----------------
Exhibit "B" attached hereto and made a part thereof.
- -----------
"Notice of Conversion/Continuation" shall mean, with respect to a proposed
conversion or continuation of a Revolving Credit Loan pursuant to Section
-------
2.02(iii) hereof, a notice in the form of Exhibit "C" attached hereto and made a
- --------- -----------
part hereof.
"Obligations" shall mean all present and future Debt and other liabilities
of the Borrower and/or the Corporate Guarantors due and owing to the Lender, or
any Person entitled to indemnification pursuant to Section 10.02 hereof, or any
-------------
of their respective successors, transferees or assigns, of every type and
description, whether or not evidenced by any note, guaranty or other instrument,
arising under or in connection with this Loan Agreement or any other Loan
Document, whether or not for the payment of money, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising and however acquired. The term
includes, without limitation, all interest, charges, expenses, fees, attorneys'
fees and disbursements and any other sum chargeable to the Borrower and/or the
Corporate Guarantors under this Loan Agreement or any other Loan Document.
"Officer's Certificate" shall mean a certificate for the Borrower executed
by any of the
12
<PAGE>
Authorized Officers of the Borrower, including, without limitation, the
president, any vice-president or the chief financial officer, in the form of
Exhibit "D" attached hereto and made a part hereof.
- -----------
"Operating Lease" shall mean, as applied to any Person, any lease of any
property (whether real, personal or any combination thereof) by that Person as
lessee which is not a Capitalized Lease.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and
defined in ERISA and any Person succeeding to any or all of its functions and
duties under ERISA.
"Permits" shall mean any permit, approval, authorization, franchises,
license, variance, or permission required from a Governmental Authority under
any applicable Requirement of Law.
"Person" or "Persons" shall mean any natural person, employee, general or
limited partnership, corporation (including a business trust), joint stock
company, limited liability company, trust, unincorporated association, joint
venture, company, trust, bank or other organization, whether or not a legal
entity or any other non-governmental entity, or any Governmental Authority.
"Plan" shall mean any employee benefit plan within the meaning of Section
3(3) of ERISA (other than a Multiemployer Plan) of which the Borrower, the
Corporate Guarantors or any ERISA Affiliate are, or within the preceding five
years were, an "employer" as that term is defined in Section 3(5) of ERISA.
"Potential Event of Default" shall mean an event, condition or situation
which with the giving of any required notice and/or the passage of any required
grace or cure periods, or any combination of the foregoing, would constitute an
Event of Default.
"Prime Rate" or "Prime Lending Rate" shall mean for any day, a rate per
annum equal to the greater of (i) a fluctuating interest rate publicly announced
from time to time by the Lender as its prime rate in effect at its principal
office, which rate may not necessarily be the rate actually charged by the
Lender to its most creditworthy customers, and (ii) the Federal Funds Effective
Rate plus fifty basis points (.50%).
"Prime Rate Loan" or "Prime Rate Loans" shall mean all Revolving Credit
Loans outstanding which bear interest at a rate determined by reference to the
Prime Rate.
"Prime Rate Option" shall mean the interest rate available to the Borrower
as provided for and described in Section 2.02(i)(a) of this Loan Agreement.
------------------
"Property" shall mean any real or personal property, plant, building,
facility, structure, underground storage tank, equipment or unit, or other asset
owned, leased or operated by the Borrower, the Corporate Guarantors, any of
their Subsidiaries and/or Affiliates.
13
<PAGE>
"Rating Matrix" shall mean the following matrix upon which (i) interest
rates described in Section 2.02 hereof and (ii) certain fees described in
-------------
Section 2.03 hereof are determined on the basis of the Borrower's Consolidated
- ------------
Cash Flow Leverage Ratio:
(All Amounts Expressed in Basis Points)
Consolidated Cash Flow Applicable Applicable
Leverage Ratio Index Margin*
- ---------------------------------------------------------
I less than 1.00 to 1 25.0 50.0
II less than 1.50 to 1 but
greater than or equal
to 1.00 to 1 25.0 75.0
III less than 2.00 to 1 but
greater than or equal
to 1.50 to 1 25.0 100.00
IV less than or equal to
2.50 to 1 but greater
than 2.00 to 1 25.0 125.00
* Any adjustment to the Eurodollar Rate Option as a result of a change to the
Consolidated Cash Flow Leverage Ratio shall not take effect until the first day
of the subsequent Fiscal Quarter following the receipt of the calculation of the
Consolidated Cash Flow Leverage Ratio from the Borrower.
"RCRA" shall mean the Resource Conservation and Recovery Act, 42 U.S.C.
ss.6901 et seq. and any successor statute, and regulations promulgated
-- ---
thereunder.
"Regulation D" shall mean Regulation D of the Federal Reserve Board, or any
successor statute or regulation thereto, as in effect from time to time.
"Regulation T" shall mean Regulation T of the Federal Reserve Board, or any
successor statute or regulation thereto, as in effect from time to time.
"Regulation U" shall mean Regulation U of the Federal Reserve Board, or any
successor statute or regulation thereto, as in effect from time to time.
"Regulation X" shall mean Regulation X of the Federal Reserve Board, or any
successor statute or regulation thereto, as in effect from time to time.
"Reimbursement Obligations" shall mean the dollar amount of any and all
unpaid reimbursement or repayment obligations of the Borrower owed to the Lender
pursuant to this Loan Agreement for amounts drawn under the Letter of Credit.
14
<PAGE>
"Release" shall mean release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the indoor
or outdoor Environment or into or out of any Property, including the movement of
Environmental Concern Materials through or in the air, soil, surface water,
groundwater or Property.
"Remedial Action" shall mean actions required to (i) clean up, remove,
treat or in any other way address Environmental Concern Materials in the indoor
or outdoor environment; (ii) prevent the Release or threat of Release or
minimize the further Release of Environmental Concern Materials so they do not
migrate or endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment; or (iii) perform pre-remedial studies and
investigations and post-remedial monitoring and care.
"Reportable Event" shall have the meaning ascribed to, such term in Section
4043 of ERISA or regulations promulgated thereunder.
"Requirements of Law" shall mean, as to any Person, the charter and by-laws
or other organization or governing documents of such Person, and any law, rule
or regulation, Permit, or determination of an arbitrator or a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject, including, without limitation, the Securities Act, the Securities
Exchange Act, Regulations U and X, and any certificate of occupancy, zoning
ordinance, building, environmental or land use requirement or Permit or
occupational safety or health law, rule or regulation.
"Revolving Credit Facility" shall have the meaning ascribed and assigned to
such term as set forth in the first recital of this Loan Agreement.
"Revolving Credit Loan" and "Revolving Credit Loans" shall have the meaning
ascribed and assigned to such term in Section 2.01(i) of this Loan Agreement.
---------------
"Revolving Credit Loan Note" shall mean that certain Revolving Credit Loan
Note in substantially the form attached hereto as Exhibit "E" with blanks
------------
appropriately filled, such note payable to the order of the Lender in a face
amount equal to the Revolving Credit Facility.
"Revolving Credit Termination Date" shall mean the earlier of (i) January
29, 2002, (ii) the date of termination of the Revolving Credit Facility by the
Lender pursuant to Section 9.02 of this Loan Agreement or (iii) the date the
-------------
Revolving Credit Facility is fully repaid and terminated by the Borrower.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended to the
date hereof and from time to time hereafter, and any successor statute.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended to the date hereof from time to time hereafter, and any successor
statute.
15
<PAGE>
"Shareholder" shall mean any shareholder of the Borrower, the Corporate
Guarantors or any Subsidiary or Affiliate of the Borrower or the Corporate
Guarantors.
"Single Employer Plan" shall mean any Plan which is not a Multiemployer
Plan under Title IV of ERISA.
"Statutory Reserve Rate" shall mean a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
-----
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Federal Reserve Board to which the Lender is subject with
respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred
to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Rate Loans shall be deemed to constitute eurocurrency funding and to
be subject to such reserve requirements without benefit of or credit for
proration, exemptions or offsets that may be available from time to time to the
Lender under such Regulation D or any comparable regulation. The Statutory
Reserve Rate shall be adjusted automatically on and as of the effective date of
any change in any reserve percentage.
"Stock Pledge Agreement" shall mean the stock pledge agreements delivered
by Borrower to Lender contemporaneously herewith.
"Structuring Fee" shall mean that certain structuring fee in the amount of
$40,000.00 paid by the Borrower to the Lender as of the Closing Date ($15,000.00
of which was paid by the Borrower prior to the date hereof).
"Subsidiary" or "Subsidiaries" shall mean with respect to any Person at any
date of retention (i) a corporation a majority of whose capital stock with
voting power, under ordinary circumstances, to elect a majority of directors is
at the time, directly or indirectly, owned by said Person, (ii) any other Person
(other than a corporation) in which the said Person, directly or indirectly, at
the date of determination thereof has at least majority ownership interest
and/or (iii) any entity whose net earnings (losses) or portions thereof would be
properly included and consolidated with the net earnings of said Person;
provided, however, that the term Subsidiary shall not include any entity that is
- -------- -------
not reflected on the balance sheet of said Person due to inactivity and lack of
material assets and liabilities.
"Taxes" shall have the meaning ascribed and assigned to such term as set
forth in Section 2.09 of the Loan Agreement.
------------
"Termination Event" shall mean (i) any Reportable Event with respect to any
Benefit Plan described in Section 4043 of ERISA and the regulations issued
thereunder for which the notice requirements have not been waived by the PBGC,
(ii) the withdrawal of the Borrower, the Corporate Guarantors or an ERISA
Affiliate from a Benefit Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001 (a)(2) of ERISA, (iii) the occurrence of an
obligation arising under Section 4041 of ERISA of either the Borrower, the
Corporate
16
<PAGE>
Guarantors or an ERISA Affiliate to provide affected parties with a written
notice of an intent to terminate a Benefit Plan in a distress termination
described in Section 4041 (c) of ERISA, (iv) the institution by the PBGC of
proceedings to terminate any Benefit Plan, (v) any event or condition which
constitutes grounds under Section 4042 of ERISA for the appointment of a trustee
to administer a Benefit Plan, or (vi) the partial or complete withdrawal of the
Borrower, the Corporate Guarantors or any ERISA Affiliate from a Multiemployer
Plan.
"Uniform Customs" shall mean the Uniform Customs and Practice for
Documentary Credits (1993 Revisions), International Chamber of Commerce
Publication No. 500, as the same may be amended from time to time.
"Year 2000 Problem" shall mean the risk that computer applications used by
or for the benefit of the Borrower or any Subsidiary may be unable to recognize
or perform properly certain date sensitive functions involving certain dates
prior to and any date after December 31, 1999.
SECTION 1.02 RULES OF INTERPRETATION AND CONSTRUCTION. In this Loan
Agreement unless the context otherwise clearly requires:
(i) Words importing persons mean and include firms, associations,
partnerships (including limited partnerships), societies, trusts, corporations,
limited liability companies or other legal entities, including public or
governmental bodies, as well as natural persons; and
(ii) If any clause, provision or section of this Loan Agreement
shall bedetermined to be apparently contrary to or conflicting with any other
clause, provision or section of this Loan Agreement, then the clause, provision
or section containing the more specific provisions shall control and govern with
respect to such apparent conflict.
SECTION 1.03 ACCOUNTING PRINCIPLES.
(i) Except as otherwise provided in this Loan Agreement all
computations and determinations as to accounting or financial matters shall be
made, and all financial statements to be delivered pursuant to this Loan
Agreement shall be prepared, in accordance with GAAP (including principles of
consolidation where appropriate), and all accounting or financial terms shall
have the meanings ascribed to such term by GAAP, as established from time to
time.
(ii) Notwithstanding the provisions of Section 1.03(i) above, the
---------------
Borrower and the Lender hereby covenant and agree that for purposes of
calculating the financial covenants of the Borrower set forth in Article VIII of
------------
this Loan Agreement, the covenants shall be tested applying GAAP in effect from
time to time. The Borrower shall furnish the Lender with the necessary financial
information and calculations prepared by the Borrower required in order to
ascertain and determine compliance or non-compliance with the financial
covenants set forth in Article VIII of this Loan Agreement.
------------
(iii) All expenses of compliance with this Section 1.03 shall be paid
------------
for by the
17
<PAGE>
Borrower.
ARTICLE II
AMOUNT AND TERMS FOR THE REVOLVING CREDIT FACILITY
--------------------------------------------------
SECTION 2.01 REVOLVING CREDIT FACILITY.
(i) Availability. (a) Subject to the terms and conditions set forth
in this Loan Agreement and provided no Event of Default shall have occurred and
be continuing, the Lender hereby agrees to make available to the Borrower from
time to time during the period from the Closing Date to the Business Day next
preceding the Revolving Credit Termination Date, revolving credit loans
(hereinafter each individually referred to as a "Revolving Credit Loan" and
collectively referred to as the "Revolving Credit Loans") in amounts which shall
not exceed, in the aggregate for all Revolving Credit Loans at any time
outstanding, the Commitment. The Revolving Credit Loans shall be evidenced by
the Revolving Credit Loan Note. The Lender is hereby authorized to record the
date and amount of each Revolving Credit Loan made by the Lender and the date
and amount of each payment or prepayment of principal thereof made by the
Borrower on the schedule annexed to and constituting a part of the Revolving
Credit Loan Note, and any such recordation shall constitute prima facie evidence
of the accuracy of the information so recorded. If the outstanding amount of the
Revolving Credit Loans shall exceed the amount of the Revolving Credit Facility
at any time, such excess shall be immediately due and payable to the Lender.
(b) Revolving Credit Loans may be voluntarily prepaid pursuant
to Section 2.04 hereof and, subject to the provisions of this Loan Agreement,
------------
any amounts so prepaid may be reborrowed, up to the amount available under this
Section 2.01(i) at the time of such Borrowing, until the Business Day next
- ----------------
preceding the Revolving Credit Termination Date. The Lender's commitment to make
Revolving Credit Loans shall expire, and each Revolving Credit Loan then
outstanding shall be repaid in full by the Borrower, no later than the Revolving
Credit Termination Date.
(ii) Notice of Borrowing. Whenever the Borrower desires to borrow
under this Section 2.01, the Borrower shall deliver to the Lender a Notice of
-------------
Borrowing no later than 11:00 A.M. (New York, New York time) (a) at least three
(3) Business Days in advance of the proposed Funding Date in the case of a
Borrowing as a Eurodollar Rate Loan and (b) on the proposed Funding Date in the
case of a Borrowing as a Prime Rate Loan (provided such Notice of Borrowing is
received by the Lender before 10:00 A.M.). The Notice of Borrowing shall specify
(1) the Funding Date (which shall be a Business Day) in respect of the Revolving
Credit Loan, (2) the amount of the proposed Borrowing which shall not be less
than $500,000.00, (3) the intended use of the proceeds of such Borrowing, (4)
the applicable interest rate option as described in Section 2.02(i) of this Loan
---------------
Agreement and, if applicable, (5) the Eurodollar Interest Period. In lieu of
delivering the above-described Notice of Borrowing, the Borrower may give the
Lender telephonic notice of any proposed Borrowing by the time required under
this Section 2.01(ii); provided, however, that such notice shall be confirmed in
---------------- -------- -------
writing by delivery to the Lender promptly (but in no event later than the
Funding Date of the requested Revolving Credit
18
<PAGE>
Loan) of a Notice of Borrowing. Any Notice of Borrowing (or telephonic notice in
lieu thereof) pursuant to this Section 2.01(ii) shall be irrevocable.
------------------
(iii) Making of Revolving Credit Loans. The Lender shall make the
proceeds of such Revolving Credit Loan available to the Borrower in Edison, New
Jersey on such Funding Date by 12:00 NOON (New York, New York time) and shall
disburse such funds in Dollars and in immediately available funds to an account
of the Borrower maintained with the Lender and thereafter to any substitute
account, designated in writing by the Borrower in the Notice of Borrowing.
(iv) Use of Proceeds of Revolving Credit Loans. The proceeds of the
Revolving Credit Loans shall be used by the Borrower for financing acquisitions
and general corporate purposes. The proceeds of the Revolving Credit Loans shall
not be used for the issuance of any letters of credit or for the creation of any
bankers acceptances.
(v) Reduction of Revolving Credit Facility; Revolving Credit
Termination Date.
(a) The Borrower shall have the right, at any time and from
time to time, to terminate in whole or permanently reduce in part, the Revolving
Credit Facility in an amount up to the amount of the Commitment minus the
-----
aggregate principal amount of the Revolving Credit Loans then outstanding. Any
such prepayment may be made by the Borrower without premium or fee, except as
------
provided for in Section 2.04 of this Loan Agreement with respect to the
-------------
prepayment of a Eurodollar Rate Loan. The Borrower shall give not less than two
Business Days' prior express written notice to the Lender designating the date
(which shall be a Business Day) of such termination or reduction and the amount
of any partial reduction. Such termination or partial permanent reduction of the
Revolving Credit Facility shall be effective on the date specified in the
Borrower's notice. Any such partial permanent reduction of the Revolving Credit
Facility shall be in an aggregate minimum principal amount of $500,000.00 and
integral multiples of $500,000.00 in excess of that amount.
(b) The Revolving Credit Facility shall expire without further
action on the part of the Lender, and all then outstanding Revolving Credit
Loans shall be paid in full on the Revolving Credit Termination Date.
SECTION 2.02 INTEREST ON THE REVOLVING CREDIT LOANS.
(i) Rates of Interest. (a) All Revolving Credit Loans shall bear
interest computed daily on the outstanding principal balance thereof from the
Funding Date until repaid in full at one or more of the interest rate options
selected by the Borrower from between the two (2) interest rate options set
forth below. Subject to the provisions of this Loan Agreement, the Borrower may
select different options to apply simultaneously to different portions of the
Revolving Credit Loans and may select different Funding Segments to apply
simultaneously to different parts of the Eurodollar Rate Portion or Prime Rate
Portion of the Revolving Credit Loans. Each selection of a rate option shall
apply separately and without overlap to the Revolving Credit Loans as a class.
The aggregate number of Funding Segments applicable to the
19
<PAGE>
Eurodollar Rate Portion and Prime Rate Portion of the Revolving Credit Loans at
any time shall not exceed five (5).
Interest Rate Options for Revolving Credit Loans:
(1) Prime Rate Option: A fluctuating rate per annum for eac
day equal to the Prime Rate of the Lender, in effect from time to time; or
(2) Eurodollar Rate Option. A fixed rate per annum for each
day during a Eurodollar Interest Period equal to the Adjusted LIBO Rate
plus the Applicable Margin for such day. The Lender shall give prompt
----
notice to the Borrower of the Adjusted LIBO Rate determined or adjusted in
accordance with the provisions hereof, which determination or adjustment
shall be conclusive (absent manifest error) if made in good faith.
(b) The Applicable Margin for Eurodollar Rate Loans with
respect to the Revolving Credit Facility for any day shall be the applicable
amount (expressed in basis points) set forth in the Rating Matrix (hereinafter
referred to as the "Applicable Margin").
(c) Notwithstanding subsections (a) and (b) above, interest
in respect of any Revolving Credit Loan shall not exceed the maximum rate
permitted by applicable Law.
(ii) Interest Payments. Subject to Section 2.02(iv) hereof, interest
----------------
accrued on all Prime Rate Loans shall be payable by the Borrower in arrears (a)
on the last day of each quarter during the term of this Loan Agreement,
commencing on the last day of the first quarter next following the making of
each such Prime Rate Loan and (b) at maturity. Interest accrued on each
Eurodollar Rate Loan shall be payable by the Borrower in arrears (1) on each
Eurodollar Interest Payment Date applicable to that Loan, (2) upon prepayment
thereof in full or in part and (3) at maturity.
(iii) Conversion or Continuation. (a) Subject to the provisions of
Section 2.06 hereof, the Borrower shall have the option (1) to convert at any
- -------------
time all or any part of outstanding Revolving Credit Loans which comprise part
of the same Borrowing and which, in the aggregate, equal $500,000.00 or an
integral multiple of $500,000.00 in excess of that amount from Prime Rate Loans
to Eurodollar Rate Loans; (2) only in connection with the provisions of Section
-------------------------------------------------
2.06(v), to convert all or any part of outstanding Revolving Credit Loans from
- -------
Eurodollar Rate Loans to Prime Rate Loans or (3) upon the expiration of any
Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans,
to continue all or any portion of such Revolving Credit Loans equal to
$500,000.00 or an integral multiple of $500,000.00 in excess of that amount as
Eurodollar Rate Loans of the same type, and the succeeding Eurodollar Interest
Period of such continued Revolving Credit Loans shall commence on the expiration
date of the Eurodollar Interest Period applicable thereto; provided, however,
-------- -------
that no outstanding Revolving Credit Loan may be continued as, or be converted
into, a Eurodollar Rate Loan when any Event of Default or Potential Event of
Default has occurred and is continuing.
(b) In the event the Borrower shall elect to convert or
continue a
20
<PAGE>
Revolving Credit Loan under this Section 2.02 (iii), the Borrower shall deliver
------------------
a Notice of Conversion/Continuation to the Lender no later than 11:00 A.M. (New
York, New York time) at least three (3) Business Days in advance of the proposed
conversion/continuation date in the case of a conversion to or a continuation of
a Eurodollar Rate Loan. A Notice of Conversion/Continuation shall specify (1)
the proposed conversion/continuation date (which shall be a Business Day), (2)
the amount of the Revolving Credit Loan to be converted/continued, (3) the
nature of the proposed conversion/continuation, and (4) in the case of a
conversion to, or continuation of, a Eurodollar Rate Loan, the requested
Eurodollar Interest Period. In lieu of delivering the above-described Notice of
Conversion/Continuation, the Borrower may give the Lender telephonic notice of
any proposed conversion/continuation by the time required under this Section
-------
2.02(iii); provided, however, that such notice shall be confirmed in writing by
- --------- -------- -------
delivery to the Lender promptly (but in no event later than the proposed
conversion/continuation date) of a Notice of Conversion/Continuation.
(c) Any Notice of Conversion/Continuation for conversion to,
or continuation of, a Revolving Credit Loan (or telephonic notice in lieu
thereof) shall be irrevocable and the Borrower shall be bound to convert or
continue in accordance therewith.
(iv) Default Interest. Notwithstanding the rate of interest
specified in Section 2.02(i) hereof and the payment dates specified in Section
---------------- -------
2.02(ii) hereof, effective immediately upon the occurrence of any Event of
- --------
Default under Section 9.01 of this Loan Agreement and for as long thereafter as
------------
any such Event of Default shall be continuing, the principal balance of all
Revolving Credit Loans then outstanding and, to the extent permitted by
applicable Law, any interest payments on the Revolving Credit Loans not paid
when due, shall bear interest payable upon demand at the Default Rate.
(v) Computation of Interest. Interest on (i) Eurodollar Rate Loans
shall be computed on the basis of the actual number of days elapsed in the
period during which interest accrues and a year of 360 days, and (ii) Prime Rate
Loans shall be computed on the basis of the actual number of days elapsed in the
period during which interest accrues and a year of 365/366 days. In computing
interest on any Revolving Credit Loan, the date of the making of the Revolving
Credit Loan or the first day of a Eurodollar Interest Period, as the case may
be, shall be included and the date of payment or the expiration date of a
Eurodollar Interest Period, as the case may be, shall be excluded; provided,
--------
however, that if a Revolving Credit Loan is repaid on the same day on which it
- -------
is made, one day's interest shall be paid on that Revolving Credit Loan.
(vi) Changes; Legal Restrictions. Except as provided in Section
-------
2.06(iv) hereof with respect to certain determinations on Eurodollar Interest
- --------
Rate Determination Dates, in the event that after the date hereof (a) the
adoption of or any change in any law, treaty, rule, regulation, guideline or
determination of a court or Governmental Authority or any change in the
interpretation or application thereof by a court or Governmental Authority, or
(b) compliance by the Lender with any request or directive (whether or not
having the force of law and whether or not the failure to comply therewith would
be unlawful) from any central bank or other Governmental Authority or
quasi-governmental authority:
(1) does or may impose, modify, or hold applicable, in the
21
<PAGE>
determination of a Lender, any reserve, special deposit, compulsory loan, FDIC
insurance, capital allocation or similar requirement against assets held by, or
deposits or other liabilities in or for the account of, advances or loans by,
commitments made, or other credit extended by, or any other acquisition of funds
by, the Lender or any applicable lending office or Eurodollar Affiliate of the
Lender (except, with respect to a Eurodollar Rate Loan, to the extent that the
Statutory Reserve Rate requirements are reflected in the definition of "Adjusted
LIBO Rate"); or
(2) does or is reasonably likely to impose on the Lender any
other condition materially more burdensome in nature, extent or consequence than
those in existence as of the Closing Date;
and the result of any of the foregoing is to increase the cost to the Lender of
making, renewing or maintaining the Revolving Credit Loans, then, in any such
----
case, the Borrower shall promptly pay to the Lender, upon demand, such amount or
amounts (based upon an allocation thereof by the Lender to the financing
transactions contemplated by this Loan Agreement and effected by this Section
-------
2.02(vi)) as may be necessary to compensate the Lender for any such additional
- ---------
cost incurred or reduced amount received. The Lender shall deliver to the
Borrower a written statement of the costs or reductions claimed and the basis
therefore, and the allocation made by the Lender of such costs and reductions
shall be conclusive, absent manifest error, if made in good faith. If the Lender
subsequently recovers any amount previously paid by the Borrower pursuant to
this Section 2.02(vi), the Lender shall, within thirty (30) days after receipt
----------------
of such refund and to the extent permitted by applicable Law, pay to the
Borrower the amount of any such recovery.
SECTION 2.03 FEES.
(i) Structuring Fee. The Borrower shall have paid to the Lender
the Structuring Fee, in full, as of the Closing Date.
(ii) Facility Fee. The Borrower shall pay to the Lender a facility
fee from and after the Closing Date until the Obligations are paid in full and
the Revolving Credit Facility is terminated, equal to the Applicable Index
multiplied by the unused portion of the Commitment. The facility fee payable
- ---------- --
under this Section 2.03(ii) shall be calculated and payable quarterly in arrears
----------------
on the last Business Day in each Fiscal Quarter beginning after the Closing
Date. For the purposes of this Section 2.03(ii), the "Applicable Index" with
----------------
respect to the Revolving Credit Facility shall be the applicable amount
(expressed in basis points) set forth in the Rating Matrix (hereinafter referred
to as the "Applicable Index").
(iii) Late Charge Fee. In the event that any payment, including,
without limitation, interest or principal, required to be made by the Borrower
under the Revolving Credit Loan Note or under this Loan Agreement shall not be
received by the Lender within ten (10) days of when due, the Lender may charge,
and if so charged, the Borrower shall pay, to the extent permitted by law, a
late charge of ($0.05) for each dollar ($1.00) of each delinquent payment for
the purpose of defraying the expense incident to the handling of such delinquent
payment, which late charge shall not exceed $1,500.00 per occurrence.
22
<PAGE>
(iv) Letter of Credit Fee. The Borrower shall pay Lender the usual
and customary fees charged by Lender's International Department for letters of
credit.
(v) Payment of Fees. The fees described in this Section 2.03
-------------
represent compensation for services rendered and to be rendered separate and
apart from the lending of money or the provision of credit, and the obligation
of the Borrower to pay each fee described herein shall be in addition to, and
not in lieu of, the obligation of the Borrower to pay interest, other fees and
expenses otherwise described in this Loan Agreement. Fees shall be payable when
due at the office of the Lender in East Brunswick, New Jersey in immediately
available funds. All fees shall be non-refundable when paid. All fees and
expenses specified or referred to in this Loan Agreement due and owing to the
Lender, including, without limitation, those referred to in this Section 2.03
------------
and in Section 10.01 hereof, shall bear interest, if not paid when due, at the
-------------
Default Rate (but not to exceed the maximum rate permitted by applicable Law),
and shall constitute Obligations. All fees described in this Section 2.03 which
------------
are expressed as a per annum charge shall be calculated on the basis of the
actual number of days elapsed in a 360-day year.
SECTION 2.04 VOLUNTARY PREPAYMENTS.
(i) Eurodollar Rate Loans. The Borrower may, at any time and from
time to time, upon the giving of at least two (2) Business Days' prior express
written notice to the Lender, voluntarily prepay any Eurodollar Rate Loan in
whole or in part, in an aggregate minimum amount of $500,000.00 and in integral
multiples of $500,000.00, subject to the following: (a) any principal prepayment
of a Eurodollar Rate Loan shall be accompanied by the payment of all unpaid
accrued interest due and owing on said Eurodollar Rate Loan and (b) the Borrower
shall pay to the Lender all amounts described in Section 2.06(vi) of this Loan
-----------------
Agreement.
(ii) Prime Rate Loans. The Borrower may, at any time and from time
to time, upon the giving of at least one (1) Business Day's prior express
written notice to the Lender, voluntarily prepay any Prime Rate Loan in whole or
in part, without premium or fee; provided, however, any principal prepayment of
-------- -------
a Prime Rate Loan shall be accompanied by the payment of all unpaid accrued
interest due and owing on said Prime Rate Loan.
(iii) Prepayments in Full. Notwithstanding any provision of this
Section 2.04 to the contrary, in the event that any prepayments of any Revolving
- ------------
Credit Loans are made in connection with the termination of this Loan Agreement,
such prepayments shall be made only upon five (5) Business Days' prior express
written notice to the Lender.
SECTION 2.05 PAYMENTS.
(i) Manner and Time of Payment. All payments of principal, interest
and fees hereunder payable to the Lender, including, without limitation, all
payments in connection with Revolving Credit Loans, shall be made without
condition or reservation or right, in Dollars and in immediately available
funds, delivered to the Lender not later than 12:00 NOON (New York, New York
time) on the date due, to such account of the Lender in East Brunswick, New
Jersey, as the Lender may designate. Funds received by the Lender after that
time and date shall be
23
<PAGE>
deemed to have been paid on the next succeeding Business Day. The Lender shall
send a monthly and/or quarterly invoice, as applicable, to the Borrower
reflecting the accrued interest due and owing and all fees due and owing
hereunder. The Borrower hereby agrees that on the Business Day that any payment
of principal, interest and fees are due, the Lender shall automatically charge a
demand deposit account of the Borrower, which account shall be maintained with
the Lender at all times throughout the term of the Revolving Credit Facility.
The Borrower's authorization of the Lender to charge such account having
sufficient funds on deposit shall constitute payment of the amount so authorized
notwithstanding the Lender's failure to charge said account. Any failure or
delay by the Lender in submitting invoices for interest and fee payments shall
not discharge or relieve the Borrower of the obligation to make such payments
into the demand deposit account.
(ii) Apportionment of Payments. So long as there does not exist an
Event of Default, all payments of principal and interest in respect of
outstanding Revolving Credit Loans, all payments of the fees described herein
and all payments in respect of any other Obligation shall be allocated by the
Lender as it may be entitled thereto as provided herein. After the occurrence
and during the continuance of an Event of Default, the Lender shall, after
providing notice to the Borrower that payments and proceeds shall be so applied,
apply all payments remitted to the Lender and all amounts received by the
Lender, subject to the provisions of this Loan Agreement, (a) first, to pay
Obligations in respect of any fees, expense reimbursements or indemnities then
due and owing to the Lender from the Borrower; (b) second, to pay interest due
in respect of Revolving Credit Loans; (c) third, to pay or prepay principal of
Revolving Credit Loans and (d) fourth, to the ratable payment of all other
Obligations.
(iii) Payments on Non-Business Days. Whenever any payment to be made
by the Borrower hereunder shall be stated to be due on a day which is not a
Business Day, payments shall be made on the next succeeding Business Day and
such extension of time shall be included in the computation of the payment of
interest hereunder and of any of the fees specified in Section 2.03 hereof, as
------------
the case may be.
(iv) Lender's Accounting. The Lender shall maintain a loan account
(hereinafter referred to as the "Loan Account") on its books in which shall be
recorded (a) the principal amount of Revolving Credit Loans owing to the Lender
from time to time; (b) all other appropriate debits and credits as provided in
this Loan Agreement, including, without limitation, all interest, fees,
expenses, charges and other Obligations; and (c) all payments of Obligations
made by the Borrower or for the Borrower's account. All entries in the Loan
Account shall be made in accordance with the Lender's customary accounting
practices as in effect from time to time. The Lender will render a statement of
the Loan Account upon the request of the Borrower. Each and every such statement
shall be deemed final, binding and conclusive upon the Borrower in all respects
as to all matters reflected therein (absent manifest error), unless the
Borrower, within ten (10) days after the date such statement is rendered,
delivers to the Lender written notice of any objection which the Borrower may
have to any such statement. In that event, only those items expressly objected
to in such notice shall be deemed to be disputed by the Borrower.
Notwithstanding the foregoing, the Lender's entries in the Loan Account
evidencing Revolving Credit Loans and other financial accommodations made from
time to time shall be final, binding and conclusive upon the Borrower (absent
manifest error) as to the existence and amount of the
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Obligations recorded in the Loan Account. The Lender, in its discretion, may
charge any or all interest, fees and expenses incurred by the Borrower hereunder
to the Loan Account.
SECTION 2.06 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS.
Notwithstanding other provisions of this Loan Agreement to the contrary, if any,
the following provisions shall govern with respect to Eurodollar Rate Loans as
to the matters described below:
(i) Amount of Eurodollar Rate Loans. Each Eurodollar Rate Loan
shall be for a minimum amount of $500,000.00 and in integral multiples of
$500,000.00 in excess of that amount.
(ii) Determination of Eurodollar Interest Period. By giving notice
as set forth in Sections 2.01(ii) and 2.02(iii) hereof (with respect to a
----------------------------------
conversion into or a continuation of Eurodollar Rate Loans), the Borrower shall
have the option, subject to the other provision of this Section 2.06, to specify
------------
a Eurodollar Interest Period to apply to the Borrowing of Eurodollar Rate Loans
described in such notice, subject to availability. The determination of
Eurodollar Interest Periods shall be subject to the following provisions:
(a) In the case of immediately successive Eurodollar Interest
Periods applicable to a Borrowing of Eurodollar Rate Loans, each successive
Eurodollar Interest Period shall commence on the day on which the next preceding
Eurodollar Interest Period expires;
(b) If any Eurodollar Interest Period would otherwise expire
on a day which is not a Business Day, the Eurodollar Interest Period shall be
extended to expire on the next succeeding Business Day; provided, however, that
-------- -------
if any such Eurodollar Interest Period applicable to a Borrowing of Eurodollar
Rate Loans would otherwise expire on a day which is not a Business Day but is a
day of the month after which no further Business Day occurs in that month, then
that Eurodollar Interest Period shall expire on the immediately preceding
Business Day;
(c) The Borrower may not select a Eurodollar Interest Period
for any Revolving Credit Loan which terminates later than the Revolving Credit
Termination Date;
(d) The Borrower may not select a Eurodollar Interest Period
with respect to any portion of principal of a Eurodollar Rate Loan which extends
beyond a date on which the Borrower is required to make a scheduled payment of
any portion of principal, it being understood and agreed that any Eurodollar
Rate Loan whose Eurodollar Interest Period ends less than one month prior to
such required principal payment date shall be deemed converted to a Prime Rate
Loan as of the last day of such Eurodollar Interest Period for purposes of
determining whether any portion of principal of any Eurodollar Rate Loan is
required in order to make a mandatory payment of principal;
(e) There shall be no more than five (5) Eurodollar Interest
Periods under this Loan Agreement in effect at any one time under the Revolving
Credit Facility; and
(f) If any Eurodollar Interest Period commences on the last
Business
25
<PAGE>
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the last calendar month of such Eurodollar Interest Period)
then said Eurodollar Interest Period shall end on the last Business Day of the
last calendar month of such Eurodollar Interest Period.
(iii) Determination of Interest Rate. As soon as practicable after
12:00 NOON (New York, New York time) on any Eurodollar Interest Rate
Determination Date, the Lender shall determine (which determination shall,
absent manifest error, be presumptively correct) the interest rate which shall
apply to the Eurodollar Rate Loans for which an interest rate is then being
determined for the applicable Eurodollar Interest Period and shall promptly give
notice thereof (in writing or by telephone confirmed in writing) to the
Borrower.
(iv) Interest Rate Unascertainable, Inadequate or Unfair. If, with
respect to any Eurodollar Interest Period, the Lender determines that (a)
deposits in Dollars (in the applicable amounts) are not being offered in the
relevant market for such Eurodollar Interest Period, (b) adequate and reasonable
means do not exist for ascertaining the Adjusted LIBO Rate, (c) a contingency
has occurred which materially and adversely affects the London interbank
Eurodollar market or (d) the effective cost to the Lender of funding a proposed
Funding Segment of the Eurodollar Portion from a corresponding source of funds
shall exceed the Eurodollar Rate, applicable to such Funding Segment, the Lender
shall forthwith give notice thereof to the Borrower, whereupon until the Lender
notifies the Borrower that the circumstances giving rise to such suspension no
longer exist, (1) the right of the Borrower to elect to have Revolving Credit
Loans bear interest based upon the Adjusted LIBO Rate shall be suspended and (2)
each outstanding Eurodollar Rate Loan shall be converted into a Prime Rate Loan
on the last day of the then current Eurodollar Interest Period therefor,
notwithstanding any prior election by the Borrower to the contrary.
(v) Illegality. (a) In the event that on any date the Lender shall
have determined (which determination shall, absent manifest error, be final and
conclusive and binding upon all parties) that the making or continuation of any
Eurodollar Rate Loan has become unlawful by compliance by the Lender in good
faith with any Law, of any Governmental Authority (whether or not having the
force of Law and whether or not failure to comply therewith would be unlawful),
then, and in any such event, the Lender shall promptly give notice (by telephone
promptly confirmed in writing) to the Borrower.
(b) Upon the giving of the notice referred to in Section
-------
2.06(v)(a) hereof, (1) the Borrower's right to request of the Lender and the
- ----------
Lender's obligation to make Eurodollar Rate Loans shall be immediately
suspended, and the Lender shall make a Revolving Credit Loan, as part of any
requested Borrowing of Eurodollar Rate Loans, as a Prime Rate Loan, which Prime
Rate Loan shall, for all purposes, be considered a part of such Borrowing, and
(2) if the affected Eurodollar Rate Loan or Loans are then outstanding, the
Borrower shall immediately (or, if permitted by applicable Law, no later than
the date permitted thereby, upon at least one Business Day's written notice to
the Lender) convert each such Revolving Credit Loan into a Prime Rate Loan.
(c) In the event that the Lender determines at any time
following its giving of the notice referred to in Section 2.06 (iv) and Section
----------------- -------
2.06(v)(a) hereof that the Lender
- ----------
26
<PAGE>
may lawfully make Eurodollar Rate Loans of the type referred to in such notice,
the Lender shall promptly give notice (by telephone confirmed in writing) to the
Borrower of that determination, whereupon the Borrower's right to request of the
Lender, and the Lender's obligation to make, Eurodollar Rate Loans shall be
restored.
(vi) Compensation. In addition to such amounts as are required to be
paid by the Borrower pursuant to Sections 2.02(iv), 2.02(vi), 2.03(iii),
------------------------------------------
2.04(i), 2.06(vii), 2.07 and 2.09 hereof, the Borrower shall compensate the
- -----------------------------------
Lender, upon demand, for all losses, expenses and liabilities (including,
without limitation, any loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds required by the Lender to fund or
maintain the Lender's Eurodollar Rate Loans) which losses, expenses and
liabilities the Lender may sustain (a) if for any reason a Borrowing, conversion
or continuation of Eurodollar Rate Loans does not occur on a date specified
therefor in a Notice of Borrowing or a Notice of Conversion/Continuation or in a
telephonic request for borrowing or conversion/continuation or a successive
Eurodollar Interest Period does not commence after notice therefor is given
pursuant to Section 2.02(iii) hereof, (b) if any prepayment of an Eurodollar
------------------
Rate Loan (including, without limitation, any prepayment pursuant to Section
-------
2.04 hereof) occurs for any reason on a date which is not the last day of the
- ----
applicable Eurodollar Interest Period, (c) as a consequence of any required
conversion of a Eurodollar Rate Loan to a Prime Rate Loan as a result of any of
the events indicated in Section 2.06(v) on a day other than the last day of a
----------------
Eurodollar Interest Period, or (d) as a consequence of any other failure by the
Borrower to repay Eurodollar Rate Loans when required by the terms of this Loan
Agreement. The Lender shall deliver to the Borrower a written statement as to
such losses, expenses and liabilities which statement shall be conclusive as to
such amounts in the absence of manifest error.
(vii) Eurodollar Rate Tax. The Borrower agrees that:
(a) the Borrower will pay, prior to the date on which
penalties attach thereto, all present and future income, stamp and other taxes,
levies, or costs and charges whatsoever imposed, assessed, levied or collected
on or in respect of a Revolving Credit Loan solely as a result of the interest
rate being determined by reference to the Eurodollar Rate or the provisions of
this Loan Agreement relating to the Eurodollar Rate or the recording,
registration, notarization or other formalization of any thereof or any payments
of principal, interest or other amounts made on or in respect of a Revolving
Credit Loan made to the Borrower when the interest rate is determined by
reference to the Eurodollar Rate (all such taxes, levies, costs and charges
being hereinafter collectively called "Eurodollar Rate Taxes"); provided,
--------
however, that Eurodollar Rate Taxes shall not include net income or franchise
- -------
taxes imposed by any jurisdiction. Promptly after the date on which payment of
any such Eurodollar Rate Tax is due pursuant to applicable law, the Borrower
will, at the request of the Lender, furnish to the Lender evidence, in form and
substance satisfactory to the Lender, that the Borrower has met its obligation
under this Section 2.06(vii); and
------------------
(b) the Borrower will indemnify the Lender against, and
reimburse the Lender on demand for, any Eurodollar Rate Taxes paid by the Lender
in respect of a Revolving Credit Loan made to the Borrower, as determined by the
Lender in its sole discretion. The Lender shall provide the Borrower with (1)
appropriate receipts for any payments or
27
<PAGE>
reimbursements made by the Borrower pursuant to this clause (b) and (2) such
information as may reasonably be required to indicate the basis for such
Eurodollar Rate Taxes; provided, however, that if the Lender subsequently
recovers, or receives a net tax benefit with respect to, any amount of
Eurodollar Rate Taxes previously paid by the Borrower pursuant to this Section
-------
2.06(vii)(b), the Lender shall, within thirty (30) days after receipt of such
- ------------
refund, and to the extent permitted by applicable law, pay to the Borrower the
amount of any such recovery or permanent net tax benefit.
(viii) Booking of Eurodollar Rate Loans. The Lender may make, carry
or transfer Eurodollar Rate Loans at, to, or for the account of, any of its
branch offices, agencies or the office of an Affiliate of the Lender; provided,
--------
however, the Lender shall not be entitled to receive any greater amount under
- -------
Section 2.02(vi) or Section 2.06(vii) hereof as a result of the transfer of any
- ---------------- ------------------
such Revolving Credit Loan than the Lender would be entitled to immediately
prior thereto unless (a) such transfer occurred at a time when circumstances
giving rise to the claim for such greater amount did not exist and were not
reasonably foreseeable in the view of the Lender and (b) such claim would have
arisen even if such transfer had not occurred.
(ix) Affiliates Not Obligated. No Eurodollar Affiliate or other
Affiliate of the Lender shall be deemed a party to this Loan Agreement or shall
have any rights, liability or obligation under this Loan Agreement.
SECTION 2.07 INCREASED CAPITAL. If either (i) the introduction of or any
change in or in the interpretation of any Law or regulation or (ii) compliance
by the Lender with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law and whether or
not the failure to comply therewith would be unlawful) made subsequent to the
date hereof affects or would affect the amount of capital required or expected
to be maintained by the Lender or any corporation controlling the Lender and the
Lender determines that the amount of such capital is increased by or based upon
the existence of the Lender's commitment to make Revolving Credit Loans and
other commitments of this type, then, upon demand by the Lender, the Borrower
shall immediately pay to the Lender, from time to time as specified by the
Lender, additional amounts sufficient to compensate the Lender in the light of
such circumstances, to the extent that the Lender determines such increase in
capital to be allocable to the existence of the Lender's commitment to fund the
Revolving Credit Facility. A certificate as to such amounts submitted to the
Borrower by the Lender, shall, in the absence of manifest error, be conclusive
and binding for all purposes.
SECTION 2.08 AUTHORIZED OFFICERS OF THE BORROWER. The Borrower shall notify
the Lender in writing of the names of the officers and employees authorized to
request Revolving Credit Loans and shall provide the Lender with a specimen
signature of each such Authorized Officer. The Lender shall be entitled to rely
conclusively on such officer's or employee's authority to request such Revolving
Credit Loans until the Lender receives written notice to the contrary. The
Lender shall have no duty to verify the authenticity of the signature on any
written Notice of Borrowing or Notice of Conversion/Continuation and, with
respect to an oral request for such a Revolving Credit Loan, the Lender shall
have no duty to verify the identity of any Person representing himself as one of
the officers or employees authorized to make such request on behalf of the
Borrower. The Lender shall not incur any liability to the Borrower in acting
28
<PAGE>
upon any telephonic notice referred to above which the Lender believes in good
faith to have been given by a duly Authorized Officer or other Person authorized
to borrow on behalf of the Borrower or for otherwise acting in good faith under
this Section 2.08.
------------
SECTION 2.09 TAXES.
(i) Payments Net of Taxes, All payments made by the Borrower under
this Loan Agreement or any other Loan Document shall be made free and clear of,
and without reduction or withholding for or on account of, any present or future
income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions
or withholdings, now or hereafter imposed, levied, collected, withheld or
assessed by any Governmental Authority, and all liabilities with respect
thereto, excluding
(a) in the case of the Lender, income or franchise taxes
imposed on the Lender by the jurisdiction under the laws of which the Lender is
organized or any political subdivision or taxing authority thereof or therein or
as a result of a connection between the Lender and any jurisdiction and the
transactions contemplated hereby; and
(b) in the case of the Lender, income or franchise taxes
imposed by any jurisdiction in which the Lender's lending offices which make or
book Revolving Credit Loans, are located or any political subdivision or taxing
authority thereof or therein (all such non-excluded taxes, levies, imposts,
deductions, charges or withholdings being hereinafter called "Taxes"). If any
Taxes are required to be withheld or deducted from any amounts payable to the
Lender under this Loan Agreement or any other Loan Document, the Borrower shall
pay the relevant amount of such Taxes and the amounts so payable to the Lender
shall be increased to the extent necessary to yield to the Lender (after payment
of all Taxes) interest or any such other amounts payable hereunder at the rates
or in the amounts specified in this Loan Agreement and the other Loan Documents.
Any foreign lender (Any lender that is organized under the laws other than that
in which the Borrower is incorporated. For the purposes herein, the United
States of America, each State thereof and the District of Columbia shall be
deemed to constitute a single jurisdiction) that is entitled to an exemption
from or reduction of withholding tax under the law of the jurisdiction in which
the Borrower is located, or any treaty to which such jurisdiction is a party,
with respect to payments under this Agreement shall deliver to Borrower, at the
time or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably requested by the
Borrower as will permit such payments to be made without withholding or at a
reduced rate. Whenever any Taxes are paid by the Borrower with respect to
payments made in connection with this Loan Agreement or any other Loan Document,
as promptly as possible thereafter, the Borrower shall send to the Lender for
its own account a certified copy of an original official receipt received by the
Borrower showing payment thereof.
(ii) Indemnity. The Borrower hereby indemnifies the Lender for the
full amount of all Taxes attributable to payments by or on behalf of the
Borrower hereunder or under any of the other Loan Documents, any Taxes paid by
the Lender, any present or future claims, liabilities or losses with respect to
or resulting from any omission to pay or delay in paying any Taxes (including
any incremental Taxes, interest or penalties that may become payable by the
29
<PAGE>
Lender as a result of any failure to pay such Taxes), whether or not such Taxes
were correctly or legally asserted. Such indemnification shall be made within
thirty (30) days from the date the Lender makes written demand therefor.
SECTION 2.10 LETTER OF CREDIT (a) Subject to the terms and conditions set
forth in this Loan Agreement and provided no Event of Default has occurred or is
continuing, the Lender agrees to issue, for the account of the Borrower, the
Letter of Credit. Any and all Reimbursement Obligations in respect of the Letter
of Credit shall constitute financial accommodations under the Revolving Credit
Loan. The Letter of Credit shall be subject to the Uniform Customs and, to the
extent not inconsistent therewith, the Laws of the State of New Jersey.
(b) In addition to being subject to the satisfaction of the
conditions precedent contained in Article III hereof, the obligation of the
-----------
Lender to issue the Letter of Credit is subject to the satisfaction in full of
the following conditions:
(1) the Borrower shall have delivered to the Lender such
documents and materials as the Lender may reasonably require and the terms
of the Letter of Credit shall be reasonably satisfactory to the Lender;
and
(2) as of the date of issuance, no order, judgment or decree
of any court, arbitrator or Governmental Authority shall purport by its
terms to enjoin or restrain the Lender from issuing the Letter of Credit
and no Law applicable to the Lender and no request or directive (whether
or not having the force of Law and whether or not the failure to comply
therewith would be unlawful) from any Governmental Authority with
jurisdiction over the Lender shall prohibit or request that the Lender
refrain from the issuance of letters of credit generally or the issuance
of the Letter of Credit.
(c) In connection with the Letter of Credit:
(1) the Borrower shall unconditionally reimburse the Lender
for drawings under the Letter of Credit within thirty (30) days of the
date when a draw has been made under said Letter of Credit, irrespective
of any claim, set-off, defense or other right which the Borrower may have
at any time against the Lender, except with respect to the Lender's gross
negligence or willful misconduct; and
(2) to the extent any Reimbursement Obligation is not paid
when due, such Reimbursement Obligation shall be deemed to be a Revolving
Credit Loan in the amount of such Reimbursement Obligation; and
(3) any Reimbursement Obligation with respect to the Letter of
Credit shall bear interest from the date of the relevant drawing under the
Letter of Credit at the interest rate set forth herein, until paid in
full; and
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<PAGE>
(4) If the Letter of Credit has not been presented for honor
on or before the Revolving Credit Termination Date, notwithstanding the
occurrence of the Revolving Credit Termination Date and the satisfaction
of all other obligations under the Loan Documents, the Borrower's
obligations under the Loan Documents shall continue until all amounts paid
by the Lender under the Letter of Credit have been reimbursed (and all
other obligations under the Loan Documents have been satisfied) and the
liens granted under and pursuant to the Loan Documents shall continue to
secure such Letter of Credit Obligations; provided, however, that the
-------- -------
Lender may release the liens under the Loan Documents (but not the other
obligations thereunder) upon (i) the deposit by the Borrower in an
interest-bearing cash collateral account opened by the Lender of an amount
in cash or cash equivalents equal to the amount of the Letter of Credit
Obligations to collateralize the Reimbursement Obligations with respect to
the Letter of Credit or (ii) an indemnification agreement from a financial
institution or "back-up" letter of credit issued by a financial
institution all in form and substance reasonably satisfactory to the
Lender. Notwithstanding, the payment of all other obligations under the
Loan Documents, the Reimbursement Obligations associated with the Letter
of Credit shall accrue interest at the Prime Rate until such Reimbursement
Obligations have been satisfied in full.
(5) With respect to any Reimbursement Obligation, such
Reimbursement Obligation shall: (A) be payable by the Borrower upon
demand, (B) be deemed to be a Revolving Credit Loan as described in
Section 2.1 herein, and (C) bear interest from the date of payment by the
Lender at the Prime Rate set forth herein, until paid in full.
(d) No action taken or omitted to be taken by the Lender under or
in connection with the Letter of Credit (except in connection with the Lender's
gross negligence or willful misconduct) shall put the Lender under any resulting
liability to the Borrower or relieve the Borrower of its obligations hereunder
to reimburse the Lender for the Reimbursement Obligations. In determining
whether to pay under the Letter of Credit, the Lender shall have no obligation
to the Borrower other than to confirm that any documents required to be
delivered under the Letter of Credit appear to have been delivered and that they
appear on their face to comply with the requirements of the Letter of Credit.
(e) The Borrower unconditionally agrees to pay to the Lender the
amount of any and all Reimbursement Obligations, interest and other amounts
payable to the Lender under or in connection with the Letter of Credit upon
demand by the Lender, irrespective of any claim, set-off, defense or other right
which the Borrower may have at any time against the Lender or any other Person.
SECTION 2.11 LENDER NOT LIABLE. (a) In addition to amounts payable as
elsewhere provided in the Loan Documents, the Borrower hereby agrees to protect,
indemnify, pay and save the Lender harmless from and against any and all
liabilities and costs which the Lender may incur or be subject to as a
consequence, direct or indirect, of (1) the issuance of the Letter of
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Credit (other than as a result of the Lender's gross negligence or willful
misconduct, as determined by the final judgment of a court of competent
jurisdiction) or (2) the failure of the Lender to honor a drawing under the
Letter of Credit as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto Governmental Authority
(all such acts or omissions hereinafter referred to as the "Governmental Acts").
(b) As between the Borrower and the Lender, subject to the second
to the last sentence of this subparagraph (b), the Borrower assumes all risks of
----------------
the acts and omissions of, or misuse of such Letter of Credit by the beneficiary
of, such Letter of Credit. In furtherance and not in limitation of the
foregoing, the Lender shall not be responsible: (1) for the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document submitted by
the Borrower or the beneficiary in connection with the application for and
issuance of the Letter of Credit, even if it should in fact prove to be in any
or all respects invalid, insufficient, inaccurate, fraudulent or forged; (2) for
the validity or sufficiency of any instrument transferring or assigning, or
purporting to transfer or assign, the Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (3) for failure of the beneficiary of the
Letter of Credit to comply duly with conditions required in order to draw upon
the Letter of Credit; (4) for errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, cable, telegraph, telex, or
other similar form of teletransmission or otherwise, whether or not they be in
cipher; (5) for errors in interpretation of technical terms; (6) for any loss or
delay in the transmission or otherwise of any document required in order to make
a drawing under the Letter of Credit or of the proceeds thereof; (7) for the
misapplication by the beneficiary of the Letter of Credit of the proceeds of any
drawing under the Letter of Credit and (8) for any consequences arising from
causes beyond the control of the Lender including, without limitation, any
Governmental Acts. None of the above shall affect, impair or prevent the vesting
of any of the rights or powers of the Lender under this subparagraph (b);
provided, however, the Borrower may have a claim against the Lender to the
- -------- -------
extent of any direct, but not consequential, damages suffered by the Borrower
that were caused by the Lender's willful misconduct or gross negligence. In
furtherance and not in limitation of the foregoing, the Lender may accept
documents that appear on their face to be in order, without responsibility for
further investigation, regardless of any notice or information to the contrary.
(c) In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted by the
Lender under or in connection with the Letter of Credit in accordance with the
written directions of the Borrower, or any related certificates, if taken or
omitted in good faith, shall not, in the absence of an express violation of the
standards set forth in the Uniform Customs and subsequent revisions thereof, put
the Lender under any resulting liability to the Borrower or relieve the Borrower
of any of its obligations hereunder to any such Person.
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ARTICLE III
CONDITIONS TO THE REVOLVING CREDIT LOANS
----------------------------------------
SECTION 3.01 CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS LOAN
AGREEMENT. This Loan Agreement shall become effective on the Closing Date when
the following conditions precedent have been satisfied (unless waived by the
Lender or unless the deadline for delivery has been extended by the Lender):
(i) Certain Documents. The Lender shall have received on or before
the Closing Date all of the following, all of which, except as otherwise
specifically described below, shall be in form and substance satisfactory to the
Lender:
(a) this Loan Agreement together with all Exhibits and
Schedules attached hereto;
(b) a Notice of Borrowing pursuant to Section 2.01 hereof
-------------
dated the Closing Date executed by the Borrower;
(c) the Revolving Credit Loan Note;
(d) the Stock Pledge Agreement;
(e) the opinions of counsel to the Borrower substantially in
the form of Exhibit "F" attached hereto;
-----------
(f) a certificate of the Secretary or Assistant Secretary of
the Borrower dated the Closing Date certifying (1) the names and true signatures
of the incumbent officers of the Borrower authorized to sign this Loan Agreement
and all other Loan Documents executed by the Borrower in connection with the
Revolving Credit Facility, (2) the By-Laws of the Borrower as in effect on the
date of such certification and (3) the resolutions of the Borrower's Board of
Directors approving and authorizing the execution, delivery and performance of
this Loan Agreement and all other Loan Documents;
(g) the Certificate of Incorporation of the Borrower, as
amended, modified or supplemented to the Closing Date, shall be certified to be
true, correct and complete by the applicable Secretary of State as of a recent
date prior to the Closing Date;
(h) Good Standing Certificate for the Borrower certified by
the Secretary of State of the State of New Jersey;
(i) a certificate of the Chief Financial Officer of the
Borrower certifying that such financial information (including any annual or
quarterly financial statements of the Borrower) as the Lender may reasonably
request are true and accurate;
(j) evidence of payment in full of all existing Debt owed
by the Borrower to the Lender pursuant to that Loan and Security Agreement dated
January 22, 1997
33
<PAGE>
and termination of such credit facility; and
(k) such additional documentation as the Lender may
reasonably require.
(ii) Fees and Expenses Paid. The Borrower shall have paid to the
Lender, for its own account, all fees and expenses due and payable under this
Loan Agreement on the Closing Date.
(iii) Representations and Warranties. All of the representations and
warranties of the Borrower contained in subsections (i) through (xxii) of
Section 4.01 hereof and in any other Loan Document (other than for changes
- -------------
permitted or contemplated by this Loan Agreement) shall be true and correct in
all material respects on and as of the Closing Date as though made on and as of
that date (except any such representations and warranties stated to be given on
a specific date other than the Closing Date).
(iv) No Default. No Event of Default or Potential Event of Default
hereunder or under the other Loan Documents shall have occurred and be
continuing on the Closing Date.
(v) No Injunction. No Requirements of Law shall prohibit, and no
order, judgment or decree of any Governmental Authority shall and, except as set
forth on Schedule 4.01(v) hereto, no litigation shall be pending or threatened
-----------------
which in the judgment of the Lender would enjoin, prohibit, restrain, impose or
result in the imposition of any material adverse condition upon the consummation
of the transactions contemplated hereby.
(vi) Consents. The Borrower shall have received all consents and
authorizations required pursuant to any material Contractual Obligation with any
other Person and shall have obtained all consents and authorizations of, and
effected all notices to and filings with, any Governmental Authority, in each
case, as may be necessary to allow it lawfully to execute, deliver and perform,
in all material respects, its obligations under this Loan Agreement and the
other Loan Documents.
(vii) No Material Adverse Change. No adverse change deemed material
by the Lender, in its sole opinion, shall have occurred since the date of the
most recent annual audited financial report of the Borrower delivered to the
Lender through the Closing Date, as to the condition (financial or otherwise),
operations, performance or properties of the Borrower, individually or taken as
a whole.
SECTION 3.02 CONDITIONS PRECEDENT TO ALL REVOLVING CREDIT LOANS. The
obligation of the Lender to make any Revolving Credit Loan requested to be made
by it on any Funding Date is subject to the following conditions precedent as of
such date:
(i) Notice of Borrowing. With respect to a request for a Revolving
Credit Loan, the Lender shall have received in accordance with the provisions
of Section 2.01(ii) hereof, on or before any Funding Date, an original Notice of
----------------
Borrowing duly executed by an Authorized Officer of the Borrower.
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(ii) Additional Matters. As of the Funding Date for any Revolving
Credit Loan:
(a) Representations and Warranties. All of the representations
and warranties of the Borrower contained in subsections (i) through (xxii) of
Section 4.01 hereof and in any other Loan Document (other than representations
- ------------
and warranties which expressly speak only of a different date and other than for
changes permitted or contemplated by this Loan Agreement) shall be true and
correct in all material respects;
(b) No Default. No Event of Default or Potential Event of
Default shall have occurred and be continuing or would result from the making of
the requested Revolving Credit Loan;
(c) No Injunction. No Requirement of Law or regulations shall
prohibit, and no order, judgment or decree of any Governmental Authority shall,
and, except as set forth on Schedule 4.01(v) hereto, no litigation shall be
-----------------
pending or threatened which in the reasonable judgment of the Lender would
enjoin, prohibit, restrain, impose or result in the imposition of any material
adverse condition upon the Lender from making the Revolving Credit Loan
requested to be made on the Funding Date; and
(d) No Material Adverse Change. No adverse change deemed
material by the Lender, in its sole opinion, shall have occurred after the
Closing Date as to the condition (financial or otherwise), operations,
performance or properties of the Borrower, individually or taken as a whole.
Each submission by the Borrower to the Lender of a Notice of
Borrowing with respect to a Revolving Credit Loan and the acceptance by the
Borrower of the proceeds of each such Revolving Credit Loan made hereunder shall
constitute a representation and warranty by the Borrower as of the Funding Date
in respect of such Revolving Credit Loan that all the conditions contained in
this Section 3.02 have been satisfied.
------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 4.01 REPRESENTATIONS AND WARRANTIES ON THE CLOSING DATE. In order
to induce the Lender to enter into this Loan Agreement, the Borrower hereby
represents and warrants to the Lender that the following statements are true,
correct and complete on and as of the Closing Date:
(i) Organization; Corporate Powers. The Borrower (a) is a corporation
duly organized, validly existing and in good standing under the Laws of the
State of New Jersey, (b) is duly qualified to conduct business as a foreign
corporation and in good standing under the Laws of each jurisdiction in which it
owns or leases real property or in which the nature of its business requires it
to be so qualified where the failure to obtain such qualification is reasonably
likely to result in a Material Adverse Effect, and (c) has all requisite power
and authority to own, operate
35
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and encumber its property and assets and to conduct its business as presently
conducted and as proposed to be conducted in connection with and following the
consummation of the actions contemplated by the Loan Documents.
(ii) Authority. (a) The Borrower has the requisite corporate power
and authority (1) to execute, deliver and perform each of the Loan Documents
executed by it, or to be executed by it and (2) to file the Loan Documents filed
by it, or to be filed by it, with any appropriate Governmental Authority.
(b) The execution, delivery and performance (or filing, as the
case may be) of each of the Loan Documents to which the Borrower is a party and
the consummation of the transactions contemplated thereby, have been duly
authorized by the Board of Directors of the Borrower and no further corporate
proceedings on the part of the Borrower are necessary to consummate such
transactions.
(c) Each of the Loan Documents to which the Borrower is a
party has been duly executed and delivered (or filed, as the case may be) by the
Borrower and constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms.
(iii) No Conflict. The execution and delivery by the Borrower of
each Loan Document to which it is party and the performance of each of the
transactions contemplated thereby do not and will not (a) constitute a tortious
interference with any Contractual Obligation of the Borrower or (b) conflict
with or violate the Borrower's Certificate of Incorporation or By-Laws or (c)
conflict with, result in a breach of or constitute (with or without notice or
lapse of time or both) a default under any Requirement of Law or, subject to
clause (a) above, Contractual Obligation of the Borrower or require termination
of any Contractual Obligation, the consequences of which conflict or default or
termination would have or is reasonably likely to result in a Material Adverse
Effect or (d) result in or require the creation or imposition of any Lien
whatsoever upon any of the Properties or assets of the Borrower (other than
Liens permitted pursuant to Section 7.01(ii) hereof) or (e) require any approval
----------------
of stockholders.
(iv) Governmental Consents. The execution, delivery and performance
of each Loan Document (and the transactions contemplated thereby) do not and
will not require any registration with, consent or approval of, or notice to, or
other action to, with or by any Governmental Authority, except filings, consents
or notices which have been, or will in due course, be made, obtained or given.
(v) Litigation; Adverse Effects. (a) Except as set forth in
Schedule 4.01(v) attached hereto, there is no action, suit, proceeding,
- -----------------
governmental investigation or arbitration, at law or in equity, or before or by
any Governmental Authority, pending, or, to the knowledge of the Borrower,
threatened against the Borrower or any Property of the Borrower which is
reasonably likely to (1) result in any Material Adverse Effect, (2) materially
and adversely affect the ability of the Borrower to perform its obligations
under the Law, any Contractual Obligation and/or the Loan Documents or (3)
materially and adversely affect the ability of the Borrower to perform its
Obligations or the Lender's ability to enforce such Obligations.
36
<PAGE>
(b) The Borrower is not (1) in violation of any applicable Law
which violation has or is reasonably likely to have a Material Adverse Effect or
(2) subject to or in default with respect to any final judgment, writ,
injunction, decree, rule or regulation of any court or Governmental Authority
which has or is reasonably likely to have a Material Adverse Effect. There is no
action, suit, proceeding or investigation pending or, to the best knowledge of
the Borrower, threatened against or affecting the Borrower challenging the
validity or the enforceability of any of the Loan Documents.
(vi) No Material Adverse Change. Since September 30, 1998, no
material adverse change in, the condition (financial or otherwise), operations
or performance of the Borrower or the ability of the Borrower to perform its
Obligations under the Loan Documents and the transactions contemplated thereby
has occurred.
(vii) Payment of Taxes. All returns and reports of the Borrower
required to be filed, have been timely filed (or appropriate extensions of time
for the filing of same have been timely requested), and all taxes, assessments,
fees and other governmental charges thereupon and upon their Properties, assets,
income and franchises which are shown on such returns as being due and payable,
have been paid when due and payable (other than the amount or validity of which
are currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been set aside on the
books of the Borrower or its Subsidiaries, as the case may be). The Borrower has
no knowledge of any proposed tax assessment against the Borrower that is
reasonably likely to result in a Material Adverse Effect, which is not being
actively contested in good faith by the Borrower and which has not been
disclosed in writing to the Lender.
(viii) Performance. The Borrower is not in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any Contractual Obligation applicable to it, and no
condition exists which, with the giving of notice or the lapse of time or both,
would constitute a default under such Contractual Obligation in, each case,
except where the consequences, direct or indirect, of such default or defaults,
if any, would not have or are not reasonably likely to result in a Material
Adverse Effect.
(ix) Accurate and Complete Disclosure. The representations and
warranties of the Borrower or any other Person contained in the Loan Documents,
and all certificates and other documents delivered to the Lender, in connection
herewith and therewith, do not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
(x) Requirements of Law. The Borrower has no actual knowledge of
any non-compliance with respect to all Requirements of Law applicable to the
Borrower and its business which non-compliance could reasonably be expected to
result in a Material Adverse Effect.
(xi) Patents, Trademarks, Permits, Etc. The Borrower owns, is
licensed or otherwise has the lawful right to use, or has all permits and other
governmental approvals, patents, trademarks, trade names, copyrights,
technology, know-how and processes used in or
37
<PAGE>
necessary for the conduct of its business as currently conducted which are
material to its condition (financial or otherwise), operations and performance,
taken as a whole. The use of such permits and other governmental approvals,
patents, trademarks, trade names, copyrights, technology, know how and processes
by the Borrower does not infringe on the rights of any Person, subject to such
claims and infringements and does not, in the aggregate, give rise to any
liability on the part of the Borrower which has or is reasonably likely to
result in a Material Adverse Effect.
(xii) Environmental Matters. Except as disclosed in Schedule
--------
4.01(xii) attached hereto and only in all material respects and to the knowledge
- --------- --- ---- -- --- -------- --------
of the Borrower, (a) the operations of the Borrower comply with all applicable
environmental, health and safety Requirements of Law including, without
limitation, all Environmental Laws; (b) the Borrower's present and past
Properties and operations are not the subject of any order from or agreement
with any Governmental Authority or private party or any judicial or
administrative proceeding or investigations respecting any environmental, health
or safety Requirements of Law, and are not the subject of any Remedial Action or
other Liabilities and Costs arising from the Release or threatened Release of an
Environmental Concern Material into the Environment; (c) the Borrower has not
filed any notice under any Requirement of Law indicating past or present
treatment, storage or disposal of an Environmental Concern Material; (d) the
Borrower has not filed any notice under any applicable Requirement of Law
reporting a Release of an Environmental Concern Material into the Environment;
(e) there is not now, nor has there ever been, on or in the Property of the
Borrower any generation, treatment, recycling, storage or disposal of any
Environmental Concern Material; (f) the Borrower has not received any notice or
claim to the effect that it is or may be liable to any Person as a result of the
Release or threatened Release of an Environmental Concern Material into the
Environment, or as a result of exposure to asbestos or to cotton dust, which may
result in any liability; (g) no Environmental Lien has attached to any Property
of the Borrower; (h) the Borrower has not entered into any negotiations or
agreements with any Person (including, without limitation, the prior owner(s) of
any Property owned or leased by the Borrower) relating to any Remedial Action or
environmentally related Claim and (i) the Borrower has no material contingent
liabilities in connection with any Release or threatened Release of any
Environmental Concern Material into the Environment.
(xiii) ERISA. The Borrower and all ERISA Affiliates are in
compliance with ERISA and any and all regulations promulgated thereunder.
Neither the Borrower nor any ERISA Affiliate maintains or contributes to any
Plan other than a Plan listed on Schedule 4.01(xiii) attached hereto. Except as
-------------------
otherwise provided on Schedule 4.01(xiii), each Plan which is intended to be a
--------------------
qualified plan has been determined by the IRS to be qualified under Section
401(a), and each trust related to any such Plan has been so determined to be
exempt from federal income tax under Section 501(a) of the Code prior to its
amendment by the Tax Reform Act of 1986, and such Plan and trust are being
operated in all material respects in compliance with and will be timely amended
in accordance with the Tax Reform Act of 1986 and the Omnibus Budget
Reconciliation Act of 1987 as interpreted by the regulations promulgated
thereunder. Except as otherwise provided on Schedule 4.01(xiii) attached hereto,
-------------------
neither the Borrower nor any ERISA Affiliate maintains or contributes to any
employee welfare benefit plan within the meaning of Section 3(l) of ERISA which
provides lifetime benefits to retirees other than as may be required by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and
interpreted by
38
<PAGE>
regulations promulgated thereunder. No material accumulated funding deficiency
(as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code) exists
in respect to any Benefit Plan. The Borrower and any ERISA Affiliate and any
fiduciary of any Plan (a) have not engaged in a nonexempt "prohibited
transaction" described in Section 406 of ERISA or Section 4975 of the Code and
(b) have not taken any action which would constitute or result in a Termination
Event with respect to any Plan such that actions under (a) or (b) or both would
result in a material obligation to pay money. Neither the Borrower nor any ERISA
Affiliate have incurred any material liability to the PBGC which remains
outstanding. Schedule B to the most recent annual report filed with the IRS with
respect to each Benefit Plan and furnished to the Lender is complete and
accurate. Except as provided on Schedule 4.01(xiii) attached hereto, since the
-------------------
date of each such Schedule B, there has been no change in the funding status or
financial condition of the Benefit Plan relating to such Schedule B. Neither the
Borrower nor any ERISA Affiliate have failed to make a required installment
under subsection (m) of Section 412 of the Code or any other payment required
under Section 412 of the Code on or before the due date for such installment or
other payment. Neither the Borrower nor any ERISA Affiliate are required to
provide security to a Plan under Section 401(a)(29) of the Code due to a Plan
amendment that results in an increase in current liability for the plan year.
Neither the Borrower nor any ERISA Affiliate are now contributing or have ever
contributed to or been obligated to contribute to any Multiemployer Plan, and no
employees or former employees of the Borrower and or any ERISA Affiliate have
been covered by any Multiemployer Plan in respect of their employment by the
Borrower and or any ERISA Affiliate, and, accordingly, the representations and
warranties in this subsection (xiii) do not apply to Multiemployer Plans.
-----------------
(xiv) Assets and Properties. Substantially all of the assets and
properties owned by, leased to or used by the Borrower in its business (a) are
in good operating condition and repair (ordinary wear and tear excepted), (b)
are free and clear of any known defects (except such defects as do not
substantially interfere with the continued use thereof in the conduct of normal
operations) and (c) are able to serve the function for which they are currently
being used, in each case where the failure of such asset to meet such
requirements would not have or is not reasonably likely to result in a Material
Adverse Effect.
(xv) Insurance. The Borrower maintains with financially sound and
reputable insurers, not related to or affiliated with the Borrower, insurance
with respect to its Properties and business, insured against such liabilities,
casualties and contingencies and in such types and amounts as is customary in
the case of corporations engaged in the same or a similar business or having
similar properties similarly situated.
(xvi) Title to Property. The Borrower has good and marketable title
in fee simple to all Property owned or purported to be owned by it, including,
without limitation, all property reflected in the most recent audited balance
sheet referred to in Section 4.01(xvii) hereof or submitted pursuant to Article
------------------- -------
V (except as sold or otherwise disposed of in the ordinary course of business
- -
after the date of such balance sheet), in each case free and clear of all Liens,
other than Customary Permitted Liens.
(xvii) Audited Financial Statements. The Borrower has heretofore
furnished to the Lender a consolidated balance sheet of the Borrower and its
Subsidiaries dated as of
39
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December 31, 1997, and the related statements of income, cash flows and changes
in stockholders' equity for the Fiscal Year then ended, as examined and reported
on by its Independent Certified Public Accountant, who delivered an unqualified
opinion in respect thereof. Such financial statements (including the notes
thereto) present fairly the financial condition of the Borrower and its
Subsidiaries as of the end of such Fiscal Year and the results of its operations
and its cash flows for the Fiscal Year then ended, all in conformity with GAAP
(except as approved by such accountants and as disclosed therein) and complied
with as to form in all material respects with the applicable published rules and
regulations of the SEC.
(xviii) Interim Financial Statements. The Borrower has heretofore
furnished to the Lender interim consolidated balance sheets of the Borrower and
its Subsidiaries as of the end of its third Fiscal Quarter of the Fiscal Year
beginning September 30, 1998, together with the related statements of income and
cash flows for the applicable fiscal periods ending on each such date. Such
financial statements present fairly the financial condition of the Borrower and
its Subsidiaries as of the end of such Fiscal Quarters and the results of their
operations and their cash flows for the fiscal periods then ended, all in
conformity with GAAP (except to the extent set forth in the notes to said
financial statements), subject to normal and recurring year-end audit
adjustments and complied with as to form in all material respects with the
applicable published rules and regulations of the SEC.
(xix) Absence of Undisclosed Liabilities. The Borrower has no
liability or obligation of any nature whatever (whether absolute, accrued,
contingent or otherwise, whether or not due), unusual forward or long-term
commitments or unrealized or anticipated losses from unfavorable commitments,
except (a) as disclosed in the financial statements referred to in Sections 4.01
-------------
(xvii) and (xviii) hereof, (b) matters that, individually or in the aggregate
- ------ -------
could not result in a Material Adverse Effect and (c) Contractual Obligations
incurred in the ordinary course of the Borrower's business.
(xx) Margin Regulations. No part of the proceeds of the Revolving
Credit Facility will be used for the purpose of buying or carrying any Margin
Stock, or to extend credit to others for the purpose of buying or carrying any
Margin Stock. The Borrower is not engaged in the business of extending credit to
others for the purpose of buying or carrying Margin Stock. The making of any
Revolving Credit Loan and the use of proceeds of any such Revolving Credit Loan
will not violate or conflict with the provisions of Regulation T, U or X of the
Federal Reserve Board, as amended from time to time. The Borrower is not an
"investment company" registered or required to be registered under the
Investment Company Act of 1940, as amended, nor is the Borrower controlled by
such company.
(xxi) Labor Matters. Except as set forth on Schedule 4.01(xxi)
-------------------
attached hereto, the Borrower is not a party to any labor union or collective
bargaining agreements and is in material compliance with all applicable Laws
respecting employment and employment practices, including, without limitation,
laws, regulations, and judicial and administrative decisions relating to wages,
hours, conditions of work, collective bargaining, health and safety, payment of
social security, payroll, withholding and other taxes, worker's compensation,
insurance requirements, as well as requirements of ERISA and the Consolidated
Omnibus Budget Reconciliation Act.
40
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(xxii) Year 2000 Problem. Borrower reasonably anticipates that it
will, on a timely basis, successfully resolve the Year 2000 Problem for all
material computer applications used by it and, if unable to successfully resolve
all or part of the Year 2000 Problem, the Year 2000 Problem will not result in a
Material Adverse Effect.
(xxiii) Material Contracts. Schedule 4.01(xxiii) lists all material
contracts relating to the business operations of the Borrower and Corporate
Guarantors. All such material contracts are valid, binding and enforceable upon
the Borrower and/or Corporate Guarantors and each of the other parties thereto
in accordance with their respective terms, and there is no default thereunder,
to the Borrower's and/or Corporate Guarantors' knowledge.
SECTION 4.02 SUBSEQUENT FUNDING REPRESENTATIONS AND WARRANTIES. In order to
induce the Lender to enter into this Loan Agreement and to make Revolving Credit
Loans, the Borrower hereby represents and warrants to the Lender that the
statements set forth in sections (i) through (xxiii) of Section 4.01 hereof
-------------
(except to the extent that such statements (i) are made expressly only as of the
Closing Date or (ii) other than for changes permitted or contemplated by this
Loan Agreement), are true, correct and complete in all material respects after
the Closing Date on and as of the Funding Date in respect of each Borrowing.
SECTION 4.03 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 June 13, 1997, Amendment
No. 1 to Form SB-2, as filed with the SEC on June 17, 1997, a Prospectus dated
September 27, 1996, and a Prospectus dated June 26, 1997, all filed by the
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 and the Securities Exchange Act.
ARTICLE V
REPORTING COVENANTS
On and after the Closing Date and so long as the Borrower shall have any
Obligation hereunder, unless the Lender shall give its prior express written
consent to the effect otherwise, then:
SECTION 5.01 STATEMENT OF ACCOUNTING. The Borrower shall, and shall cause
each of its Subsidiaries and Affiliates, as applicable, (i) to make and to keep
books, records and accounts which, in reasonable detail, accurately and fairly
reflect their respective transactions and dispositions of their respective
assets and (ii) to maintain a system of internal accounting controls sufficient
to provide reasonable assurances that (a) transactions are executed in
accordance with management's general or specific authorization, (b) transactions
are recorded as necessary (1) to permit preparation of financial statements in
conformity with GAAP and any other accounting principles applicable thereto and
(2) to maintain accountability for assets and (c) the recorded accountability
for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
41
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SECTION 5.02 REPORTING AND INFORMATION REQUIREMENTS. The Borrower shall
deliver or cause to be delivered to the Lender the following financial
statements, data, reports and information, at the Borrower's own cost and
expense:
(i) Annual "Audited" Consolidated Financial Statements of the
Borrower, the Corporate Guarantors and any Subsidiary. As soon as available, but
in any event within ninety (90) days after the close of each Fiscal Year of the
Borrower, "audited" consolidated and consolidating statements of income and a
statement of cash flows and a consolidated statement of retained earnings for
the Borrower, the Corporate Guarantors and any Subsidiary for such Fiscal Year
and a consolidated and consolidating balance sheet of the Borrower, the
Corporate Guarantors and any Subsidiary as of the close of such Fiscal Year, and
notes to each, all in reasonable detail, setting forth in comparative form the
corresponding figures for the preceding Fiscal Year. Such financial statements
shall be accompanied by an opinion of the Independent Certified Public
Accountant, which opinion shall be signed by such Independent Certified Public
Accountant. The opinion of such accountants shall be free of exceptions or
qualifications not acceptable to the Lender, and in any event shall be free of
any exception or qualification which is of "going concern" or like nature or
which relates to a more limited scope of examination and shall be otherwise
acceptable to the Lender. In addition to the delivery of the annual "audited"
consolidated financial statements, the Borrower shall also deliver to the
Lender, at the same time, an "unaudited" management prepared consolidating
statement of income and retained earnings for the Borrower, the Corporate
Guarantors and any Subsidiary for such Fiscal Year and a consolidating balance
sheet for the Borrowers , the Corporate Guarantors and any Subsidiary as of the
close of such Fiscal Year, all prepared and certified to the Lender by the
Borrower's chief accounting officer in his capacity as an Authorized Officer.
(ii) Quarterly Management Prepared Consolidated Financial Statements
of the Borrower, the Corporate Guarantors and any Subsidiary. As soon as
available, but in any event within forty-five (45) days after the close of each
of the first three Fiscal Quarters of each Fiscal Year of the Borrower,
"unaudited" management prepared consolidated and consolidating statements of
income and a statement of cash flows and consolidated statements of retained
earnings and balance sheets for the Borrower, the Corporate Guarantors and any
Subsidiary for such Fiscal Quarter and for the period from the beginning of such
Fiscal Year to the end of such Fiscal Quarter, and an "unaudited" consolidated
and consolidating balance sheet of the Borrower, the Corporate Guarantors and
any Subsidiary as of the close of such Fiscal Quarter, all in reasonable detail
and with all notes and supporting schedules to the extent required to be
included in Borrower's 10-Q or 10-QSB, as applicable, setting forth in
comparative form the corresponding figures for the corresponding dates and
periods during the preceding Fiscal Year, and certified by the Chief Financial
Officer of the Borrower in his capacity as an Authorized Officer as presenting
fairly in all material respects, the financial position of the Borrower, the
Corporate Guarantors and any Subsidiary as of the end of such dates and fiscal
periods and the results of their operations and the changes in their financial
position and cash flows for such fiscal periods, in conformity with GAAP applied
in a manner consistent with that of the most recent audited financial statements
furnished to the Lender, subject to normal and recurring year-end audit
adjustments.
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(iii) Compliance Certificates. Together with each delivery of any
financial statement pursuant to this Section 5.02(i) and Section 5.02(ii) above,
------------------------------------
an Officer's Certificate of the Borrower substantially in the form of Exhibit
-------
"D" attached hereto, (a) stating that the officer signatory thereto in his
- ---
capacity as an Authorized Officer has reviewed the terms of this Loan Agreement
and the principal Loan Documents, and has made, or caused to be made under his
supervision, a review in reasonable detail of the transactions and condition of
the Borrower, taken as a whole, during the accounting period covered by such
financial statements, and that such review has not disclosed the existence
during or at the end of such accounting period, and that the signer does not
have knowledge of the existence as at the date of the Officer's Certificate, of
any condition or event which constitutes an Event of Default or Potential Event
of Default, or, if any such condition or event existed or exists, specifying the
nature and period of existence thereof and what action the Borrower has taken,
is taking and proposes to take with respect thereto and (b) demonstrating in
reasonable detail compliance, during and at the end of such accounting periods,
with the financial covenants contained in Article VIII of this Loan Agreement.
------------
(iv) Accountant's Certificate. Each set of financial statements
delivered pursuant to Section 5.02(i) hereof shall be accompanied by a
----------------
certificate or report dated the date of such financial statements by the
Independent Certified Public Accountant who certified such financial statements
stating in substance that they have reviewed this Loan Agreement and that in
making the examination necessary for their certification of such financial
statements they did not become aware of any Event of Default or Potential Event
of Default, or if they did become so aware, such certificate or report shall
state the nature and period of existence thereof. Such Accountant's Certificate
shall not be required in connection with the delivery of the Borrower's 10-Q and
such Accountant's Certificate shall be deemed to be acceptable to the Lender if
contained within the notes to such financial statements.
(v) Other Reports and Information. Promptly upon their becoming
available to the Borrower and in respect of those that are material, a copy of
--- -- ------- -- ----- ---- --- --------
(a) all reports, financial statements and other information distributed
generally by the Borrower to its stockholders, bondholders or the financial
community, (b) all accountants' management letters pertaining to, all other
reports submitted by accountants in connection with any audit of, and all other
material reports from outside accountants with respect to, the Borrower, and (c)
all reports submitted to Governmental Authorities and/or with respect to Plans
under ERISA, except as prepared in the normal course of the Borrower's business
and where no material adverse action with respect thereto would result.
(vi) Further Information. The Borrower shall promptly furnish to the
Lender any business, financial or other information concerning the Borrower, the
Corporate Guarantors, any Subsidiaries and/or any Affiliates which the Lender
may reasonably request from time to time in a form acceptable to the Lender.
(vii) Notice of Event of Default; Notice of Material Adverse Change.
Promptly upon becoming aware of any Event of Default, Potential Event of Default
or the commencement, existence or threat of any action, proceeding,
investigation or arbitration against or affecting the Borrower, the Corporate
Guarantors, any Subsidiaries and/or any Affiliates which, if adversely
43
<PAGE>
decided, would result in a Material Adverse Effect on the business, assets,
operations or financial condition of the Borrower, the Corporate Guarantors, any
Subsidiary and/or any Affiliate taken as a whole, or on the ability of the
Borrower and/or the Corporate Guarantors to perform their obligations under the
Loan Documents, the Borrower shall give the Lender written notice thereof,
together with a written statement of the President or Chief Financial Officer of
the Borrower in his capacity as an Authorized Officer setting forth the details
thereof and any action with respect thereto taken or contemplated to be taken by
the Borrower.
(viii) Notice of Pension-Related Events. The Borrower shall give the
Lender written notice within fifteen (15) days after the Borrower, any Corporate
Guarantors or an ERISA Affiliate knows, has reason to know or receives notice
concerning (a) the occurrence of any Termination Event; (b) the occurrence of a
non-exempt prohibited transaction (as defined in Section 406 of ERISA and
Section 4975 of the Code) or (c) any other ERISA-related event or action.
(ix) SEC Documents. As soon as available, true and complete copies
of any report or statement mailed by the Borrower to its stockholders generally
or filed by the Borrower with the SEC subsequent to the date hereof.
(x) Business Plans, Financial Projections. Within thirty (30) days
of the end of Borrower's Fiscal Year, Borrower shall submit to the Lender a
Board of Directors approved plan (including a projected balance sheet, income
statement and statement of cash flow) of the Borrower, which shall include the
Corporate Guarantors and Subsidiaries for the upcoming Fiscal Year in form and
substance as shall be reasonably satisfactory to Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
---------------------
The Borrower covenants and agrees that, on and after the Closing Date and
until payment in full of all of the Obligations, unless the Lender shall give
its prior express written consent to the effect otherwise, then:
SECTION 6.01 CORPORATE EXISTENCE, ETC. The Borrower shall, and shall cause
the Corporate Guarantors to, do or cause to be done all things necessary (i) to
maintain their respective status as a corporation duly organized, existing and
in good standing under the laws of their respective jurisdiction of
incorporation, and (ii) to preserve and to keep in full force and effect their
respective rights and franchises unless the failure to maintain such rights and
franchises would not result in a Material Adverse Effect. The Borrower shall
promptly provide the Lender with a complete up-to-date list of all Subsidiaries
and Affiliates of the Borrower and the Corporate Guarantors.
SECTION 6.02 CORPORATE POWERS, ETC. The Borrower shall, and shall cause the
Corporate Guarantors to, do or cause to be done all things necessary to qualify
and remain qualified to conduct business in each jurisdiction in which the
nature of their respective businesses or the ownership of their properties or
both requires them to be so qualified. The Borrower shall, and
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shall cause the Corporate Guarantors to, do or cause to be done all things
necessary to transact business in their own names and shall invoice all accounts
in their own name.
SECTION 6.03 COMPLIANCE WITH LAWS, ETC. The Borrower shall, and shall cause
the Corporate Guarantors (i) to comply with all Requirements of Law, and all
restrictive covenants affecting them or their businesses, properties, assets or
operations and (ii) to obtain as needed all Permits necessary for their
operations, and maintain such Permits in good standing, except to the extent
non-compliance with this Section 6.03 would not result in a Material Adverse
-------------
Effect.
SECTION 6.04 PAYMENT OF TAXES AND CLAIMS. The Borrower shall, and shall
cause the Corporate Guarantors to, pay or cause to be paid (i) all taxes,
assessments and other governmental charges imposed upon them or on any of their
respective properties or assets or in respect of any of their respective
franchises, business, income or property before any penalty or interest accrues
thereon and (ii) all Claims (including, without limitation, claims for labor,
services, materials and supplies), for sums material in the aggregate to the
Borrower and the Corporate Guarantors, which have become due and payable and
which by Law have or may become a Lien (other than a Customary Permitted Lien)
upon their Property, prior to time when any penalty or fine shall be incurred
with respect thereto; provided, however, that no such taxes, assessments and
governmental charges referred to in clause (i) above or Claims referred to in
----------
clause (ii) above need be paid if being contested in good faith by appropriate
- -----------
proceedings promptly instituted and diligently conducted and if adequate
reserves shall have been set aside therefor in accordance with GAAP.
SECTION 6.05 MAINTENANCE OF PROPERTIES; INSURANCE. The Borrower shall, and
shall cause the Corporate Guarantors to, maintain or cause to be maintained in
good repair, working order and condition, excepting ordinary wear and tear, all
of their respective Properties material to their operations and will make or
cause to be made all appropriate repairs, renewals and replacements thereof,
consistent with past practice. The Borrower shall, and shall cause the Corporate
Guarantors, to maintain or cause to be maintained with financially sound and
reputable insurers reasonably acceptable to the Lender, insurance policies and
programs currently in place and in full force and effect or substantially
similar programs or policies and amounts or other programs, policies and amounts
acceptable to the Lender. Not later than thirty (30) days later than the
renewal, replacement or material modification of any policy or program, the
Borrower shall deliver or cause to be delivered to the Lender a certificate of
insurance setting forth for each such policy or program: (i) the amount of such
policy, (ii) the risks insured against by such policy, (iii) the name of the
insurer and each insured party under such policy and (iv) the policy number of
such policy.
SECTION 6.06 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCLOSURE. Except
for information and records which the Borrower may not under applicable Law
disseminate or disclose to the Lender, the Borrower shall, and shall cause the
Corporate Guarantors, any Subsidiary and any Affiliate to, permit any authorized
representative(s) designated by the Lender to visit, to conduct a field audit or
to otherwise inspect any of the Borrower's Properties, including their financial
and accounting records, and to make copies and take extracts therefrom, and to
discuss the Borrower's, the Corporate Guarantors', any Subsidiaries' and any
Affiliate's affairs, finances and accounts with the Lender's officers,
employees, representatives or
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independent certified public accountants, upon reasonable notice and during
normal business hours. Each such visitation and inspection by or on behalf of
the Lender shall be at the Lender's own cost and expense, provided, however, if
an Event of Default has occurred or is continuing, the Lender may do any of the
foregoing at the Borrower's expense without notice and during normal business
hours.
SECTION 6.07 LITIGATION, CLAIMS, ETC., The Borrower shall provide the
Lender with (i) a litigation status report, in a form satisfactory to the
Lender, with respect to any new litigation (whether at law or in equity) which
is asserted against the Borrower, the Corporate Guarantors, any Subsidiary
and/or any Affiliate involving potential claims in excess of $1,000,000.00
promptly after the close of each Fiscal Quarter; (ii) notice of any suit at law
or in equity or claim brought or asserted against the Borrower, the Corporate
Guarantors, any Subsidiary and/or any Affiliate, promptly after learning thereof
with respect to any suit or claim involving money or property valued in excess
of $500,000.00 or any such suits or claims which in the aggregate involve money
----------------
or property valued in excess of $1,000,000.00; and (iii) prompt notice of any
investigation or proceeding before or by any Governmental Authority, the effect
of which is reasonably likely to result in a Material Adverse Effect.
SECTION 6.08 MAINTENANCE OF LICENSES, PERMITS, ETC., The Borrower shall,
and shall cause the Corporate Guarantors to, (i) maintain in full force and
effect all Permits or other rights necessary for the operation of their
businesses, except where the failure to obtain any of the foregoing would not
result in or is not reasonably likely to result in a Material Adverse Effect and
(ii) notify the Lender in writing, promptly after learning thereof, of the
suspension, cancellation, revocation or discontinuance of or of any pending or
threatened action or proceeding seeking to suspend, cancel, revoke or
discontinue any Permit where the result thereof could reasonably be expected to
result in a Material Adverse Effect.
SECTION 6.09 CONTINUATION OF OR CHANGE IN BUSINESS. Except as permitted
pursuant to Section 7.02, the Borrower shall, and shall cause the Corporate
-------------
Guarantors to continue to engage in their respective businesses substantially as
conducted and operated during the present and preceding Fiscal Year, and the
Borrower shall, and shall cause the Corporate Guarantors to not engage in any
other business.
SECTION 6.10 ADDITIONAL CORPORATE GUARANTORS. The Borrower shall cause each
domestic and foreign operating (i) Majority Owned Subsidiary or (ii) Affiliate
in which the Borrower is the owner (whether legal or beneficial and whether
direct or indirect) of at least fifty percent (50%) or more of the authorized,
issued and outstanding common stock of said Affiliate, or other form of
ownership interest in the event the Affiliate is not a corporation, which is
acquired or formed after the Closing Date, to enter into and execute the
Agreement of Guaranty, thereby becoming a Corporate Guarantor. Schedule 6.10
-------------
contains a current list of Corporate Guarantors as of the date hereof.
SECTION 6.11 YEAR 2000. The Borrower shall, and shall cause each Subsidiary
to, take all action necessary to assure that such Borrower's and each such
Subsidiary's computer-based systems are able to effectively process data
including dates prior to, on, and after January 1, 2000 such that there will be
no Material Adverse Effect. At the request of the Lender, the Borrower
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shall provide the Lender with assurance reasonably acceptable to the Lender of
the Borrower's or any Subsidiary's capabilities with respect to the Year 2000
Problem.
SECTION 6.12 FURTHER ACTS. Within forty-five (45) days of the date hereof,
the Borrower shall take, at its own expense, all actions necessary to deliver to
Lender, opinions of counsel and the Agreements of Guaranty of Intelligroup
Australia Pty Limited and Intelligroup Singapore Private Ltd., acceptable in
form and substance to Lender, with respect to the Agreements of Guaranty stating
that, among other things, the Agreements of Guaranty constitute the legal, valid
and binding obligations of each Corporate Guarantor, enforceable against such
party in accordance with its terms, the Corporate Guarantors have all requisite
corporate power and authority to perform their obligations under the Agreements
of Guaranty and neither the performance of the Corporate Guarantors' obligations
or consummation of the transaction under the Loan Documents resulted or will
result in a breach of any certificate of incorporation or by-laws or comparable
document or any rules, regulations or local law to which any Corporate Guarantor
is subject. Further, the Borrower shall take all actions necessary within the
above time, to deliver the original certificates of stock to be pledged to the
Lender in accordance with the Pledge Agreements executed contemporaneously
herewith along with all instruments and agreements to effect transfer thereof to
Lender. Failure of the Borrower to comply with the terms of this Section 6.12
may, at the Lender's sole discretion, result in an Event of Default hereunder
and the Lender may avail itself of such rights and remedies provided herein
ARTICLE VII
NEGATIVE COVENANTS
------------------
The Borrower covenants and agrees that, on and after the Closing Date and
until payment in full of all of the Obligations, unless the Lender shall give
its prior written consent to the effect otherwise, then:
SECTION 7.01 ADDITIONAL LIENS. The Borrower shall not, and shall not permit
any of the Corporate Guarantors to, directly or indirectly create, incur, assume
or permit to exist any Lien on or with respect to any of their respective
Properties except:
(i) Liens, if any, created under the Loan Documents;
(ii) Any interest or title of a lessor or secured by a
lessor's interest under any lease permitted by this Loan Agreement;
(iii) Liens existing on the date of this Loan Agreement as set
forth on Schedule 7.01 and Liens existing on the date of this Loan Agreement
securing the existing Debt (as set forth on Schedule 7.04) permitted to be
--------------
secured (but said Liens may not be renewed, extended or increased in principal
amount);
(iv) Customary Permitted Liens;
(v) Purchase money Liens securing Debt (including the
interest of a
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lease under a Capitalized Lease) permitted pursuant to Section 7.04(iv); and
---------------
(vi) Liens on the property or assets of a corporation which
becomes a Subsidiary after the date hereof securing Debt permitted by paragraph
7.04(vii), provided that (1) such Liens existed at the time such corporation
became a Subsidiary and were not created in anticipation of the acquisition, (2)
any such Lien does not by its terms cover any property or assets after the time
such corporation becomes a Subsidiary which were not covered immediately prior
thereto, and (3) any such Lien does not by its terms secure any Debt other than
Debt existing immediately prior to the time such corporation becomes a
Subsidiary.
SECTION 7.02 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES OF ASSETS.
(i) The Borrower (a) will not consolidate or merge with any Person
or acquire the stock or assets of any Person whether by merger, consolidation,
purchase of stock or otherwise, and (b) will not, and will not permit any of the
Corporate Guarantors to, sell, otherwise dispose of or lease all or any
substantial part (as defined in paragraph (ii) below) of the assets of the
Borrower and the Corporate Guarantors taken as a whole, provided, however, that
-------- -------
any Corporate Guarantor may sell, otherwise dispose of or lease its assets to
the Borrower or any other Corporate Guarantor; and provided, further, that the
Borrower may consolidate, merge or acquire (by way of acquisitions of stock or
other equity interests or transfer of property) any other entity or may sell,
otherwise dispose of or lease all or substantially all of such assets if (1)
either (A) in the case of a merger or consolidation, the Borrower shall be the
surviving or continuing corporation, or (B) the corporation formed by or
resulting from such merger or consolidation, if not the Borrower, or the
corporation to which such assets shall have been sold, otherwise disposed of or
leased, shall be a corporation organized under the laws of the United States,
any state of the United States or the District of Columbia and shall expressly
assume the obligations of the Borrower hereunder and such Persons are in
substantially the same business as the Borrower, and (2) at the time of such
consolidation, merger, acquisition or such sale, disposition or lease and before
or after giving effect thereto, on a pro forma basis, no Event of Default or
Potential Event of Default shall have occurred and be continuing.
(ii) As used in this Section 7.02, a sale, other disposition or
-------------
lease of assets shall be deemed to cover a "substantial part" of the assets of
the Borrower and the Corporate Guarantors only if, on a pro forma basis, the net
book value of such assets when added to the net book value of all other assets
sold, otherwise disposed of or leased by the Borrower and the Corporate
Guarantors during any Fiscal Year of such sale, other disposition or lease, on a
consolidated basis exceeds twenty-five (25%) percent of the consolidated assets.
-------
(iii) Not less than fifteen (15) days prior to the funding of each
such acquisition, the Borrower shall deliver to Lender a certificate from one of
the Authorized Officers certifying that after giving effect to such acquisition
and the incurrence of any indebtedness hereunder and permitted by Section 7.04
------------
in connection therewith, on a pro forma basis, as if the acquisition and such
incurrence of indebtedness had occurred on the first day of the twelve month
period ending on the last day of the Borrower's most recently completed Fiscal
Quarter, the Borrower would have been in compliance with all of the covenants
contained in this Agreement, including, without limitation, the financial
covenants set forth in Article 8.
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Such certificate shall include a spread sheet containing the calculations for
such financial covenants and a pro forma consolidated balance sheet and
statement of earnings and retained earnings after giving effect to such
acquisition along with all documentation evidencing the nature and type of
indebtedness in conjunction with such acquisition.
SECTION 7.03 LOANS AND INVESTMENTS. Borrower shall not, and shall not
permit any of the Corporate Guarantors at any time to purchase, acquire or own
any stock, bonds, notes or securities of, or any partnership interest (whether
general or limited) in, or any other interest in, or make any capital
contribution to, any other Person, or become a joint venture partner in any
joint venture (provided that Borrower may make joint venture investments not to
exceed an aggregate of $1,000,000.00 at any one time), or agree, become or
remain liable to do any of the foregoing, except for: (a) debt securities having
a maturity of not more than one year issued or guaranteed by the United States
government or by an agency or instrumentality thereof; (b) certificates of
deposit, bankers acceptances and time deposits, which in each case mature within
one year from the date of purchase thereof and which are issued by a lender
acceptable to Lender; (c) commercial paper maturing in two hundred-seventy (270)
days or less from the date of issuance which, at the time of acquisition by
Borrower either (i) is accorded the highest rating by Standard and Poor's Rating
Group or Moody's Investor's Service, Inc., or (ii) is issued by Lender, (d)
direct obligations of the United States of America or any agency or
instrumentality of the United States of America, the payment or guarantee of
which constitutes a full faith and credit obligation of the United States of
America, in each case maturing in 12 months or less from the date of
acquisition, provided that the amounts otherwise permitted under this section
shall not exceed $5,000,000.00 outstanding at any time and shall be approved by
a majority of the Board of Directors of the Borrower, (e) extensions of trade
credit to customers in the ordinary course of business, (f) loans to officers of
the Borrower in an aggregate principal amount outstanding at any time not to
exceed $250,000.00, (g) loans and advances to employees of the Borrower or its
Subsidiaries for travel, entertainment and relocation expenses in the ordinary
course of business in an aggregate amount for the Borrower and its Subsidiaries
not to exceed $250,000.00 at any one time outstanding, (h) Capital Stock of any
Subsidiary, (i) loans and advances by the Company to its wholly-owned
Subsidiaries, and (j) loans by the Borrower to its employees in connection with
management incentive plans in an aggregate amount not to exceed $250,000.00,
provided that the aggregate amount of such loans outstanding at any time may not
exceed $250,000.00.
SECTION 7.04 INDEBTEDNESS. The Borrower shall not, and shall not permit any
of its Subsidiaries to create, incur, assume or suffer to exist any Debt except:
(i) Debt under the Loan Documents;
(ii) Existing Debt as set forth on Schedule 7.04 (including any
--------------
extensions, renewals or modifications thereof provided there is no increase in
the amount thereof or other significant change in the terms thereof unless
otherwise specified on Schedule 7.04);
-------------
(iii) Debt which is subordinated to the Obligations on terms
approved by the Lender in writing;
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(iv) additional Debt secured by purchase money security interests
having an aggregate principal amount not to exceed $2,500,000.00 at any time;
(v) other Debt having an aggregate principal amount not to exceed
$3,000,000.00 at any time provided the Debt allowed in this Subsection (v) shall
not be on terms more favorable than the material terms set forth herein and the
Borrower shall have availability under the Revolving Credit Facility equal to at
all times, the amount of such outstanding Debt;
(vi) Debt consisting of unsecured overdraft facilities to foreign
Subsidiaries not to exceed $500,000.00 in the aggregate outstanding at any time;
and
(vii) Debt of a Person which becomes a Subsidiary after the date
hereof, provided that:
(1) such Debt existed at the time such Person became a
Subsidiary and was not created in anticipation of such acquisition;
(2) immediately after giving effect to the acquisition of such
Person by the Borrower or its Subsidiaries, no Potential Event of Default or
Event of Default shall occur and be continuing;
(3) the remaining amount of all such Debt does not exceed in
the aggregate (collectively for all such Persons which became a Subsidiary after
the date hereof) ten (10%) percent of the Consolidated Net Worth of the Borrower
and Subsidiaries;
(4) liens securing such Debt (if any) shall not extend to
cash, marketable securities, accounts receivable, inventory, work in process,
contracts receivable, patents, trademarks, notes receivable or any such assets
of such Person that would be properly categorized as current assets according to
GAAP;
(5) such Debt is not guaranteed by the Borrower or any
Subsidiaries;
(6) such Debt is not payable to selling shareholders or
Persons owned by or controlled by selling shareholders or other Persons unless
subordinated to Lender on terms approved by Lender in writing; and
(7) such Debt would not be subject to acceleration of maturity
or cause an Event of Default under existing loan documents as a result of such
acquisition by the Borrower.
SECTION 7.05 ERISA. The Borrower shall not, and shall not permit any of
ERISA Affiliates to, do any of the following to the extent that such act or
failure to act would result in the aggregate, after taking into account any
other such acts or failures to act, in a obligation to pay a sum of money that
is material to the business of the Borrower and/or the Corporate Guarantors:
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(i) Engage, or permit an ERISA Affiliate to engage, in any
prohibited transaction described in Section 406 of ERISA or Section 4975 of the
Code for which a class exemption is not available or a private exemption has not
been obtained from the DOL;
(ii) Permit to exist any accumulated funding deficiency (as defined
in Section 302 of ERISA and Section 412 of the Code), whether or not waived;
(iii) Fail, or permit an ERISA Affiliate to fail, to pay timely
required contributions or annual installments due with respect to any waived
funding deficiency to any Plan;
(iv) Terminate, or permit an ERISA Affiliate to terminate, any
Benefit Plan which would result in any liability of the Borrower, the Corporate
Guarantors or an ERISA Affiliate under Title IV of ERISA; or
(v) Fail, or permit any ERISA Affiliate to fail, to pay any
required installment under section (m) of Section 412 of the Code or any other
payment required under Section 412 of the Code on or before the due date for
such installment or other payment.
SECTION 7.06 AMENDMENT OF ARTICLES OF INCORPORATION OR BY-LAWS. The
Borrower shall not, and shall not permit the Corporate Guarantors to, amend,
modify or supplement their respective articles of incorporation or By-Laws,
except upon at least ten (10) Business Days' prior express written notice to the
Lender.
SECTION 7.07 MARGIN REGULATIONS. The Borrower shall not permit any portion
of the proceeds of any Revolving Credit Loans extended to be used in any manner
which might cause the extension of credit or the application of such proceeds to
violate Regulation U or Regulation X or any other regulation of the Federal
Reserve Board or to violate the Securities Exchange Act or the Securities Act,
in each case as in effect on the date or dates of such Borrowing, such use of
proceeds, such creation or such issuance.
SECTION 7.08 CANCELLATION OF DEBT; PREPAYMENT. The Borrower shall not, and
shall not permit the Corporate Guarantors to, cancel any Claim or Debt, except
for adequate consideration and in the ordinary course of their respective
businesses, or to prepay any long-term Debt; provided, however, that the
-------- -------
foregoing shall not prohibit the prepayment of the Obligations.
SECTION 7.09 ENVIRONMENTAL LIABILITIES. The Borrower shall not, and shall
not permit the Corporate Guarantors to, become subject to any Liabilities and
Costs which the Lender deems has or is likely to have a Material Adverse Effect
arising out of or related to (i) the Release or threatened Release at any
location of any Environmental Concern Material into the Environment, or any
Remedial Action in response thereto, or (ii) any violation of any Environmental
Law, or any health or safety Requirement of Law; provided that this Section 7.09
-------- ---- ------------
shall not be violated so long as (a) the Borrower shall have notified the Lender
of the assertion of such liability or required expenditures promptly upon
receiving written notice of such assertion, (b) the Borrower shall have
continued to furnish the Lender with such information concerning such asserted
liability or required expenditure as the Lender shall have reasonably requested,
or
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as otherwise provided herein, (c) the Borrower shall be diligently pursuing
indemnification for such liability or required expenditures from any Person
which has an obligation to provide such indemnification, and (d) the Lender is
satisfied that the imposition of such liability during the pendency of the
Borrower's pursuit of indemnification will not materially impair the Borrower's
ability to perform its financial obligations under this Loan Agreement.
SECTION 7.10 FISCAL YEAR. The Borrower shall not, and shall not permit the
Corporate Guarantors to, change their respective Fiscal Year or permit their
respective Fiscal Year to end on a day other than December 31st.
SECTION 7.11 GUARANTIES. The Borrower shall not, and shall not permit the
Corporate Guarantors to assume, guaranty, endorse or otherwise be or become
directly or contingently responsible or liable, for any Contingent Obligation of
any Person, except for:
(i) Contingent Obligations existing on the Closing Date as described
on Schedule 7.11(i) attached hereto;
----------------
(ii) Contingent Obligations by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business; and
(iii) Contingent Obligations incurred in the ordinary course of
business after the date hereof in an aggregate amount not to exceed $750,000.00
at any time outstanding.
SECTION 7.12 CHANGE IN BUSINESS. The Borrower shall not, and shall not
permit the Corporate Guarantors to cause or permit a material change in the
nature or scope of their businesses as conducted on the Closing Date and
businesses directly related to such businesses and their primary source of
revenue shall be derived from information technology and management consulting,
software development and associated services and products.
SECTION 7.13 OTHER NEGATIVE PLEDGES. The Borrower shall not, and shall not
permit the Corporate Guarantors to incur, create or permit to exist any negative
pledge in any other agreement entered into between the Borrower or Corporate
Guarantor(s) with any other Person except where the Borrower or Corporate
Guarantor may enter into an agreement in connection with any Lien permitted by
this Agreement when such prohibition or limitation is by its terms effective
only against the assets subject to such Lien.
ARTICLE VIII
FINANCIAL COVENANTS
-------------------
The Borrower covenants and agrees that, on and after the Closing Date and
until payment in full of all the Obligations unless the Lender shall give its
prior written consent to the effect otherwise, then:
SECTION 8.01 MAXIMUM CONSOLIDATED CASH FLOW LEVERAGE RATIO. The Borrower
shall maintain a Consolidated Cash Flow Leverage Ratio equal to or less than
2.50 to 1.0 for the
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period of four (4) consecutive Fiscal Quarters immediately preceding said date
of determination taken together as one accounting period.
SECTION 8.02 MINIMUM CONSOLIDATED NET WORTH. The Borrower shall maintain a
Consolidated Net Worth as of not less than ninety (90%) percent of the
Consolidated Net Worth as of September 30, 1998, plus fifty (50%) percent of
----
positive net income commencing October 1, 1998 and thereafter at the end of each
Fiscal Year, to be not less than Consolidated Net Worth of the prior Fiscal Year
plus fifty (50%) percent of positive net income for such Fiscal Year.
SECTION 8.03 CAPITAL EXPENDITURES. The Borrower shall not enter into any
agreement to purchase and/or pay for, or become obligated to pay for capital
expenditures, long term leases, Capital Leases or sale lease-backs, in an amount
at any time outstanding aggregating in excess of $5,000,000.00 during any Fiscal
Year, provided however, on a one (1) year carry-forward basis, the Borrower may
incur Capital Expenditures not to exceed $8,000,000.00 during any Fiscal Year.
SECTION 8.04 MINIMUM FIXED CHARGE COVERAGE RATIO. The Borrower shall not
cause or permit the ratio, calculated on the basis of a rolling four quarters of
(a) Consolidated EBITDA to (b) the sum of cash income tax expense plus interest
----
expense (including, without limitation, the interest component of Capitalized
Lease Obligations), plus scheduled principal payments under any indebtedness
----
(including, without limitation, the principal component of Capitalized Lease
Obligations but excluding principal payments, if any, due under this Loan
Agreement), plus dividends or distributions paid or declared to be less than 1.4
----
to 1.0 as at the end of each Fiscal Quarter.
ARTICLE IX
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
--------------------------------------
SECTION 9.01 EVENTS OF DEFAULT. The occurrence of any of the following
events with the passing of any applicable notice and cure periods shall
constitute an "Event of Default" under this Loan Agreement (hereinafter referred
to as an "Event of Default"):
(i) any representation or warranty made by the Borrower or any of
the Corporate Guarantors or any other Person in any of the Loan Documents
furnished in connection with the Revolving Credit Facility, shall prove to have
been false, incorrect or misleading in any substantial and material respect on
the date as of which made;
(ii) the Borrower shall have failed to make any payment of any
installment of interest on the Revolving Credit Loan Note more than three (3)
days after its due date;
(iii) the Borrower shall have failed to make any payment of
principal on the Revolving Credit Loan Note on its due date;
(iv) the Borrower or any of the Corporate Guarantors shall have
failed to duly observe or perform any covenant, condition or agreement with
respect to the payment of moneys
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on their part which is to be observed or performed pursuant to the terms of the
Loan Documents, other than the payment of principal and interest which shall be
governed by (ii) and (iii) above, and such default shall have remained uncured
for a period of fifteen (15) days after written notice thereof to the Borrower
or such Corporate Guarantors by the Lender;
(v) the Borrower or any of the Corporate Guarantors shall have
failed to duly observe any of the financial covenants set forth in Article VIII
------------
hereof as of any date of determination;
(vi) the Borrower or any of the Corporate Guarantors shall have
failed to duly observe or perform any covenant, condition or agreement on the
part of the Borrower or such Corporate Guarantors to be observed or performed
pursuant to the terms of the Loan Documents other than the payment of moneys
which shall be governed by Section 9.01 (ii), (iii) and (iv) above, and such
-----------------------------------
default shall have remained uncured for a period of thirty (30) days after
written notice thereof to the Borrower or such Corporate Guarantors by the
Lender;
(vii) the Borrower or any of the Corporate Guarantors shall have
applied for or consented to the appointment of a custodian, receiver, or
liquidator of all or a substantial part of their respective assets; a custodian
shall have been appointed with or without consent of the Borrower and/or any of
the Corporate Guarantors; the Borrower and/or any of the Corporate Guarantors
shall generally not be paying their respective Debts as they become due; the
Borrower and/or any of the Corporate Guarantors shall have made a general
assignment for the benefit of their respective creditors; the Borrower and/or
any of the Corporate Guarantors shall have filed a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with their respective creditors, or shall have taken advantage of any insolvency
law, or shall have filed an answer admitting the material allegations of a
petition in bankruptcy, reorganization or insolvency proceeding; a petition in
bankruptcy shall have been filed against the Borrower and/or any of the
Corporate Guarantors and shall not have been dismissed for a period of sixty
(60) consecutive days, or an order for relief shall have been entered by the
appropriate bankruptcy court against the Borrower and/or any of the Corporate
Guarantors under the Bankruptcy Code; or an order, judgment or decree shall have
been entered without the application, approval or consent of the Borrower and/or
any of the Corporate Guarantors by any court of competent jurisdiction
appointing a receiver, trustee, custodian or liquidator of the Borrower and/or
any of the Corporate Guarantors of a substantial part of its assets and such
order, judgment or decree shall have continued unstayed and in effect for any
period of sixty (60) consecutive days;
(viii) writ of execution or attachment or any similar process shall
be issued or levied against all or any part of or interest in any of the
Properties of the Borrower and/or any of the Corporate Guarantors or any
judgment involving monetary damages shall be entered against the Borrower and/or
any of the Corporate Guarantors which shall become a lien on the Borrower's or
any of said Corporate Guarantor's Properties or any portion thereof or interest
therein and such execution, attachment or similar process is not released,
bonded, satisfied, vacated or stayed within thirty (30) days after its entry or
levy, and said writ of execution, attachment, levy or judgment shall involve
monetary damages aggregating more than $1,000,000.00;
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(ix) seizure or foreclosure of any of the Properties of the Borrower
and/or any of the Corporate Guarantors pursuant to process of law or by legal
self-help, involving monetary damages aggregating more than $1,000,000.00,
unless said seizure or foreclosure is stayed or bonded within thirty (30) days
after the occurrence of same;
(x) the voluntary permanent closing of business or ceasing of
operations of the Borrower and/or any of the Corporate Guarantors;
(xi) default by the Borrower and/or any of the Corporate Guarantors
in any of the terms or conditions of any agreement (excluding the Loan
Documents) covering the payment of borrowed money from the Lender and/or any
other creditor (which with respect to any other creditor shall be in an amount
involving not less than $1,000,000.00), which default has been declared by the
Lender or said other creditor, and said Debt with respect to any other creditor
shall have been accelerated;
(xii) the occurrence of a Reportable Event with respect to the
Borrower and/or any of the Corporate Guarantors; or
(xiii) a Change in Control shall occur.
SECTION 9.02 RIGHTS AND REMEDIES.
(i) Acceleration. Upon the occurrence and during the continuance of
any Event of Default described in the foregoing Section 9.01(vii) hereof, the
------------------
Revolving Credit Facility shall automatically and immediately terminate and the
unpaid principal amount of any and all accrued interest and fees due on the
Revolving Credit Loans outstanding shall automatically become immediately due
and payable, with all additional interest from time to time accrued thereon and
without presentment, demand, or protest or other requirements of any kind
(including, without limitation, valuation and appraisement, diligence,
presentment, notice of intent to demand or accelerate and of acceleration), all
of which are hereby expressly waived by the Borrower, and the obligation of the
Lender to make any Revolving Credit Loans hereunder shall thereupon terminate.
Upon the occurrence and during the continuance of any other Event of Default
described in Section 9.01 above, the Lender may by written notice to the
-------------
Borrower, (a) declare that the Revolving Credit Facility is terminated,
whereupon the obligation of the Lender to make any Revolving Credit Loans
hereunder shall immediately terminate, and/or (b) declare the unpaid principal
amount of and any and all accrued and unpaid interest on the Revolving Credit
Loans to be, and the same shall thereupon be, immediately due and payable with
all additional interest from time to time accrued thereon and without
presentment, demand, or protest or other requirements of any kind (including,
without limitation, valuation and appraisement, diligence, presentment, notice
of intent to demand or accelerate and of acceleration), all of which are hereby
expressly waived by the Borrower.
(ii) Rights Under Loan Documents. Upon the occurrence and during the
continuance of any Event of Default, the Lender may take any lawful action
against the Borrower and/or any of the Corporate Guarantors to collect the
payments then due and thereafter to become
55
<PAGE>
due under the Loan Documents, including, without limitation, the Agreement of
Guaranty.
(iii) Set-off. Upon the occurrence and during the continuance of any
Event of Default, without notice or other action (any such notice being
expressly waived by the Borrower) the Lender may set-off any money owed by the
Lender in any capacity to the Borrower or any Property of the Borrower in the
possession of the Lender against any of the monetary obligations of the Borrower
to the Lender under the Loan Documents, and the Lender shall be deemed to have
exercised such right of set-off and to have made a charge against any such money
or property immediately, even though the actual book entries may be made at some
time subsequent thereto.
SECTION 9.03 APPLICATION OF PROCEEDS.
(i) All payments and proceeds received under Section 9.02 of this
------------
Loan Agreement shall be applied in the following order of priority:
(a) First, to the payment of all reasonable fees, costs and
expenses (including reasonable attorney's fees and expenses) incurred by the
Lender and/or its agents or representatives in connection with the realization
of such payments or proceeds;
(b) Next, to the payment in full of all unpaid principal,
accrued interest and other sums, if any, due and owing under the Revolving
Credit Facility; and,
(c) Next, the balance, if any, of such payments, proceeds, or
amounts to the Borrower, or, if otherwise determined by a court of competent
jurisdiction, to whomever may be entitled thereto.
(ii) If the amount of the proceeds received in Section 9.03(i) above
---------------
shall be insufficient to satisfy in full the amounts referred to in clauses (a)
and (b) above, then the Borrower shall remain and be liable for any such
deficiency.
SECTION 9.04 NO NOTICES. In order to entitle the Lender to exercise any
remedy available to it under Section 9.02 of this Loan Agreement, it shall not
------------
be necessary for the Lender to give any notice, other than such notice as may be
required expressly in this Loan Agreement or by applicable law.
SECTION 9.05 AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. Upon the
occurrence and during the continuance of an Event of Default, as a result of
which the Lender shall require and employ attorneys or incur other expenses for
the collection of payments due or to become due or the enforcement or
performance or observance of any obligation or agreement on the part of the
Borrower contained herein, the Borrower shall, on demand, pay to the Lender, the
reasonable fees of such attorneys and such other expenses so incurred by them.
SECTION 9.06 NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any
agreement contained in this Loan Agreement should be breached by any party and
thereafter waived by the other parties, such waiver shall be limited to the
particular breach so waived and
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shall not be deemed to waive any other breach hereunder.
SECTION 9.07 FAILURE TO EXERCISE RIGHTS. Nothing herein contained shall
impose upon the Lender any obligation to enforce any terms, covenants or
conditions contained in this Loan Agreement and the other Loan Documents.
Failure of the Lender, in any one or more instances, to insist upon strict
performance by the Borrower of any terms, covenants or conditions of this Loan
Agreement and the other Loan Documents, shall not be considered or taken as a
waiver or relinquishment by the Lender of its right to insist upon and to
enforce in the future, by injunction or other appropriate legal or equitable
remedy, strict compliance by the Borrower with all the terms, covenants and
conditions of this Loan Agreement and the other Loan Documents. The consent of
the Lender to any act or omission by the Borrower shall not be construed to be a
consent to any other or subsequent act or omission or to waive the requirement
for the Lender's consent to be obtained in any future or other instance.
SECTION 9.08 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY WAIVE
ANY AND ALL RIGHTS THAT THEY MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE
UNITED STATES OF AMERICA OR ANY STATE, TO A TRIAL BY JURY OF ANY AND ALL ISSUES
ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN THE
BORROWER, THE LENDER OR THEIR SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY
CONNECTED WITH THIS LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS. IT IS INTENDED
THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR
COUNTERCLAIMS IN ANY ACTION OR PROCEEDING. THE BORROWER AND THE LENDER RECOGNIZE
THAT ANY DISPUTE ARISING IN CONNECTION WITH THE REVOLVING CREDIT FACILITY IS
LIKELY TO BE COMPLEX AND CONSEQUENTLY THEY WISH TO STREAMLINE AND MINIMIZE THE
COST OF THE DISPUTE RESOLUTION PROCESS BY AGREEING TO WAIVE THEIR RIGHTS TO A
JURY TRIAL.
SECTION 9.09 REMEDIES CUMULATIVE. No remedy herein conferred upon or
reserved to the Lender is intended to be exclusive of any other remedy or
remedies; but each and every such remedy shall be cumulative, and shall be in
addition to every other remedy given hereunder, or now or hereafter existing at
law or in equity or by statute. No express or implied waiver by the Lender of
any Event of Default hereunder shall in any way be, or construed to be, a waiver
of any future or subsequent Event of Default. No delay or omission to exercise
any right or power accruing upon any Event of Default continuing as aforesaid,
shall impair any such right or power or shall be construed to be a waiver of any
such Event of Default, or acquiescence therein; and every such right and power
may be exercised from time to time and as often as may be deemed expedient.
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ARTICLE X
MISCELLANEOUS
-------------
SECTION 10.01 EXPENSES.
(i) Generally. The Borrower covenants and agrees upon demand to pay,
or reimburse the Lender for, all the Lender's reasonable external legal costs
and expenses (but not internal legal costs and expenses) and all internal and
external audit, appraisal, valuation and investigation expenses and for all
other reasonable out-of-pocket costs and expenses of every type and nature
(including, without limitation, the reasonable fees, expenses and disbursements
of Reed Smith Shaw & McClay LLP and any other external attorneys retained by the
Lender, auditors, accountants, appraisers, insurance and environmental advisers,
and other consultants) incurred by the Lender in connection with (a) the
administration of this Loan Agreement, the other Loan Documents and the
Revolving Credit Facility including consultation with attorneys in connection
therewith and in connection with the amendment, waiver or consents required or
requested hereunder and (b) the protection, collection or enforcement of any of
the Obligations. For the purposes of this Section, the legal fees of counsel to
the Lender for the preparation and negotiation of the Loan Documents shall not
exceed $30,000.00 plus reasonable costs.
(ii) After Default. The Borrower further covenants and agrees to
pay, or reimburse the Lender for all reasonable out-of-pocket costs and
expenses, including, without limitation, reasonable external attorneys' fees and
disbursements, and costs of settlement incurred by the Lender after the
occurrence and during the continuance of an Event of Default (a) in enforcing
any Obligation or exercising or enforcing any other right or remedy available by
reason of such Event of Default, (b) in connection with any refinancing or
restructuring of the credit arrangements provided under this Loan Agreement in
the nature of a "work-out" or in any insolvency or bankruptcy proceeding, (c) in
commencing, defending or intervening in any litigation or in filing a petition,
complaint, answer, motion or other pleadings in any legal proceeding relating to
the Borrower and/or any of the Corporate Guarantors and related to or arising
out of the transactions contemplated thereby or by any of the Loan Documents or
(d) in taking any other action in or with respect to any suit or proceeding
(whether in bankruptcy or otherwise).
SECTION 10.02 INDEMNITY. The Borrower further covenants and agrees to
defend, protect, indemnify, and hold harmless the Indemnified Parties from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel for the Indemnified Parties in connection with any
investigative, administrative or judicial proceeding, whether or not the
Indemnified Parties shall be designated a party thereto), imposed on, incurred
by, or asserted against the Indemnified Parties (whether direct, indirect or
consequential and whether based on any Federal or state Laws or other statutory
regulations, including, without limitation, securities and commercial laws and
regulations, under common law or at equity, or on contract or otherwise,
including any liability and costs under Federal, state or local environmental,
health or safety laws, regulations, or common law principles, arising from or in
connection with the past, present or future environmental condition of the
Property or the Release or threatened Release of any
58
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Environmental Concern Material into the Environment from the Property) in any
manner relating to or arising out of this Loan Agreement or the other Loan
Documents, or any act, event or transaction related or attendant thereto, the
making of and participation in the Revolving Credit Facility and the management
of such Revolving Credit Loans or the use or intended use of the proceeds of the
Revolving Credit Facility hereunder (collectively, the "Indemnified Matters");
provided, however, that the Borrower shall not have any obligation to an
- -------- -------
Indemnified Party hereunder with respect to (a) matters for which such
Indemnified Party has been compensated pursuant to or for which an exemption is
provided in Section 2.06 and Section 2.07 hereof or any other provision of this
------------ ------------
Loan Agreement and (b) Indemnified Matters caused by or resulting from the
willful misconduct or gross negligence of that Indemnified Party, as determined
by a court of competent jurisdiction. To the extent that the undertaking to
indemnify, pay and hold harmless set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy, the Borrower
shall contribute the maximum portion which it is permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnified Parties.
SECTION 10.03 AMENDMENTS AND WAIVERS. No amendment or modification of any
provision of this Loan Agreement shall be effective without the written
agreement of the Lender and the Borrower, and no termination or waiver of any
provision of this Loan Agreement, or consent to any departure by the Borrower
therefrom, shall in any event be effective without the written concurrence of
the Lender, which the Lender shall have the right to grant or withhold at its
sole discretion.
SECTION 10.04 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of an Event of Default or Potential Event of Default if
such action is taken or condition exists.
SECTION 10.05 NOTICES. Unless otherwise specifically provided therein, any
notice or other communication herein required or permitted to be given shall be
in writing and may be personally served, or sent by confirmed telecopy
transmission, nationally recognized overnight courier service or United States
mail and shall be deemed to have been given when delivered in person or by said
courier service, or upon receipt of a confirmed telecopy transmission during
normal business hours or four (4) Business Days after deposit in the United
States mail (registered or certified, with postage prepaid and properly
addressed). Notices to the Lender pursuant to Article II hereof shall not be
----------
effective until received by the Lender. For the purposes hereof, the addresses
of the parties hereto (until notice of a change thereof is delivered as provided
in this Section 10.05) shall be as set forth below each party's name on the
---------------
signature pages hereof, or, as to each party, at such other address as may be
designated by such party in a written notice to the other party. A failure to
send the requisite copies does not invalidate an otherwise properly sent notice
to the Borrower and/or the Lender.
SECTION 10.06 SURVIVAL OF WARRANTIES AND AGREEMENTS. All agreements,
representations and warranties made herein shall survive the execution and
delivery of this Loan Agreement and the other Loan Documents.
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SECTION 10.07 MARSHALING; RECOURSE TO SECURITY; PAYMENTS SET ASIDE. The
Lender shall not be under any obligation to marshal any assets in favor of the
Borrower, any of the Corporate Guarantors or any other Person or against or in
payment of any or all of the Obligations. To the extent that the Borrower and/or
any of the Corporate Guarantors make a payment or payments to the Lender, or the
Lender enforces its rights and remedies under the Loan Documents or exercises
its right of set-off, and such payment or payments or the proceeds of such
enforcement or set-off or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, state
or federal law, common law or equitable cause, then to the extent of such
recovery, the obligation or part thereof originally intended to be satisfied,
and all Liens, right and remedies therefor (to the extent permissible and
practicable under the law and the circumstances), shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or set-off had not occurred.
SECTION 10.08 SEVERABILITY. In case any provision in or obligation under
this Loan Agreement or the other Loan Documents shall be held to be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations under the Loan
Agreement or the other Loan Documents shall not in any way be affected or
impaired thereby. The invalidating, illegality or unenforceability of a
particular provision in a particular jurisdiction shall not render such
provision invalid, illegal or unenforceable in any other jurisdiction.
SECTION 10.09 GOVERNING LAW. This Loan Agreement shall be governed by, and
shall be construed and enforced in accordance with, the laws of the State of New
Jersey.
SECTION 10.10 SUCCESSORS AND ASSIGNS. This Loan Agreement and the other
Loan Documents shall be binding upon the parties hereto and their respective
successors and assigns. The Borrower's Obligations hereunder may not be assigned
to any Person without the prior express written consent of the Lender. The
Lender may assign, transfer, sell, participate or convey all or any part of the
Revolving Credit Facility to any Person without the consent of the Borrower,
provided such assignment, transfer, sale, participation or conveyance shall be
in minimum amounts of $5,000,000.00. The Lender agrees to promptly notify the
Borrower in writing of any sale or participation by the Lender of all or any
part of the Revolving Credit Facility.
SECTION 10.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL
PROCEEDINGS BROUGHT AGAINST THE BORROWER WITH RESPECT TO THIS LOAN AGREEMENT AND
THE REVOLVING CREDIT LOAN NOTE MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF NEW JERSEY, AND BY EXECUTION AND DELIVERY
OF THIS LOAN AGREEMENT, THE BORROWER ACCEPTS, FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS LOAN
60
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AGREEMENT AND THE REVOLVING CREDIT LOAN NOTE FROM WHICH NO APPEAL HAS BEEN TAKEN
OR IS AVAILABLE. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS
NOTICE ADDRESS SPECIFIED ON THE SIGNATURE PAGES HEREOF, SUCH SERVICE TO BECOME
EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ANY OBJECTION (INCLUDING WITHOUT LIMITATION, ANY OBJECTION OF
THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH
RESPECT TO THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY JURISDICTION
SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY LENDER TO BRING
PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
SECTION 10.12 COUNTERPARTS; EFFECTIVENESS; INCONSISTENCIES. This Loan
Agreement and any amendments, waivers, consents, or supplements may be executed
in counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. This Loan Agreement and each of the other Loan Documents shall
be construed to the extent reasonable to be consistent one with the other, but
to the extent that the terms and conditions of this Loan Agreement are actually
inconsistent with the terms and conditions of any other Loan Documents, this
Loan Agreement shall govern.
SECTION 10.13 CONSTRUCTION. The parties acknowledge that each party and its
counsel have reviewed and revised this Loan Agreement and that the normal rule
of construction to the effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of this Loan
Agreement or any amendments or exhibits hereto.
SECTION 10.14 ENTIRE AGREEMENT. This Loan Agreement, taken together with
all of the other Loan Documents and all certificates and other documents
delivered by the Borrower or any other Person to the Lender, embody the entire
agreement and supersede all prior agreements, written and oral, relating to the
subject matter hereof.
SECTION 10.15 CONFIDENTIALITY. All information furnished to the Lender
under this Agreement shall be received and maintained by the Lender in strict
confidence and in accordance with applicable Law, and the Lender shall not
disseminate said information to any Person, except where required by and in
accordance with applicable Law or where contemplated by the Loan Documents. The
Lender agrees that it shall not take any action or omit to take any action which
would cause or result in the violation of Law (including without limitation, any
export control law) by the Borrower.
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IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be executed and delivered by their proper and duly authorized corporate officers
as appropriate, and the Borrower has caused its corporate seal to be hereunto
affixed and attested pursuant to the resolution of its Board of Directors, all
on the day and year first hereinabove written.
ATTEST: INTELLIGROUP, INC., as Borrower
By: /s/John F. Cinque By: /s/Ashok Pandey
---------------------------------- ------------------------------------
Ashok Pandey, Co-Chairman
NOTICE ADDRESS:
---------------
[SEAL] Intelligroup, Inc.
499 Thornall Street
Edison, New Jersey 08837
Attn: Rod Dorsey
Facsimile No.: (732) 362-2100
WITH A COPY TO:
---------------
Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540
Attn: David J. Sorin, Esq.
Facsimile No. (609) 520-0360
PNC BANK, NATIONAL ASSOCIATION,
as Lender
By: /s/ Edward D. Harrington
------------------------------------
Edward D. Harrington, Vice President
NOTICE ADDRESS:
---------------
PNC Bank, National Association
Two Tower Center Boulevard
East Brunswick, New Jersey 08837
Attn: Edward D. Harrington,
Vice President
Facsimile No.: (732) 220-3629
WITH A COPY TO:
---------------
Reed Smith Shaw & McClay LLP
136 Main Street, Suite 250
Princeton Forrestal Village
Princeton, New Jersey 08540
Attn: James A. Dempsey, Esq.
Facsimile No.: (609) 951-0824
Fifth Amendment to the
Implementation Partner Agreement
between
Intelligroup, Inc. and PeopleSoft, Inc.
THIS Fifth Amendment to the Implementation Partner Agreement ("Amendment") is
made and entered into on 15 July, 1998 ("Amendment Effective Date") by and
between PeopleSoft, Inc. ("PeopleSoft") and Intelligroup, Inc. ("Licensee").
The parties hereby agree that the Implementation Partner Agreement between the
parties, dated July 15, 1997 ("Agreement") is amended to provide as follows:
1. Definitions. Unless otherwise defined herein, capitalized terms used in
this shall have the same meaning as those used in the Agreement.
2. Term. The term of the Agreement is hereby extended for one year and will
expire on 15 July, 1999, subject to the original terms of the Agreement.
3. Membership Fees. The Annual Alliance Program Membership/Partner Fee
for the extended term is $20,000.
4. Conflict. In the event of any conflicts or inconsistencies between the
provisions of this Amendment and the Agreement and/or any amendments/addenda
thereto, the provisions of this Amendment shall prevail. The remainder of the
Agreement shall remain in full force and effect, unamended.
ACCEPTED BY: ACCEPTED BY:
INTELLIGROUP, INC. PEOPLESOFT, INC.
/s/ Samar Mismra /s/ Jeff McClure
- ------------------------------------ ----------------------------------
Authorized Signature Authorized Signature
Samar Mismra, Associate Partner Jeff McClure, Dir. Service Alliances
- ------------------------------------ ----------------------------------
Printed Name and Title Printed Name and Title
Amendment
effective January 1, 1999
to
National Implementation Partner Agreement
("Agreement")
between
SAP America, Inc. ("SAP")
and
Intelligroup, Inc. ("Partner")
effective April 29, 1997
As of the issuance date of January 1, 1999, this Amendment modifies the above
referenced Agreement between the parties. In each instance in which the
provisions of this Amendment contradict or are inconsistent with the provisions
of the Agreement, the provisions of this Amendment shall prevail and govern and
the contradicted or inconsistent provisions shall be deemed amended accordingly.
SAP and Partner agree that the Agreement effective April 29, 1997 is modified as
follows:
1. Delete section 7 (a) in its entirety, and insert in lieu thereof.
"(a) This Agreement shall have a term expiring on December 31, 1999, with
automatic renewals for one (1) year periods unless, at least six (6) weeks
prior to a scheduled renewal date, either party gives written notice of its
intentions not to renew this Agreement."
EXCEPT AS HEREIN PROVIDED, NONE OF THE PROVISIONS OF THE AGREEMENT SHALL BE
AFFECTED BY THIS AMENDMENT.
ACCEPTED BY: ACCEPTED BY:
SAP America, Inc.
SAP Intelligroup, Inc.
BY: /s/ Brad C. Brubaker BY: /s/ Robin Kearon
----------------------------------- -----------------------------------
NAME: Brad C. Brubaker NAME: Robin Kearon
-------------------------------- --------------------------------
TITLE: Vice President TITLE: Vice President, SAP Practice
-------------------------------- --------------------------------
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.
CPI Resources, a corporation formed pursuant to the laws of the United
Kingdom and a wholly-owned subsidiary of Intelligroup Europe Limited.
CPI Consulting Limited, a corporation formed pursuant to the laws of
the United Kingdom and 70% owned by CPI Resources and 30% owned by
Intelligroup Europe Limited.
Intelligroup Singapore Private Ltd., a corporation formed pursuant to the
laws of Singapore and 50% owned by each of Intelligroup, Inc., and Rajkumar
Koneru, Chief Executive Officer, President of U.S. Operations and Director of
Intelligroup, Inc.
Intelligroup Nordic A/S, a corporation formed pursuant to the laws of
Denmark and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Australia Pty Limited, a corporation formed pursuant to the
laws of Australia and a wholly-owned subsidiary of Intelligroup, Inc.
Intelligroup Asia Private, Ltd., a corporation formed pursuant to the laws
of India, and 99.8% owned and wholly-controlled subsidiary of Intelligroup, Inc.
Azimuth Consulting Limited, a corporation formed pursuant to the laws of
New Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
Azimuth Consulting Philippines, Inc., a corporation formed pursuant to
the laws of the Philippines and a wholly-owned subsidiary of Azimuth
Consulting Limited.
Azimuth Holdings Limited, a corporation formed pursuant to the laws of New
Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
Azimuth Holdings Pty Limited, a corporation formed pursuant to the
laws of Australia and a wholly-owned subsidiary of Azimuth Holdings
Limited.
Azimuth Consulting Australia Pty Limited, a corporation formed
pursuant to the laws of Australia and a wholly-owned subsidiary of
Azimuth Holdings Limited.
<PAGE>
Braithwaite Richmond Limited, a corporation formed pursuant to the laws of
New Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
Azimuth Corporation Limited, a corporation formed pursuant to the laws
of New Zealand and a wholly-owned subsidiary of Intelligroup, Inc.
New Zealand Public Information Management Limited, a corporation
formed pursuant to the laws of New Zealand and a wholly-owned
subsidiary of Azimuth Corporation Limited.
Network Publishing, Inc., a Utah corporation and a wholly-owned subsidiary
of Intelligroup, Inc.
Empower, Inc., a Michigan corporation and a wholly-owned subsidiary of
Intelligroup, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Intelligroup, Inc.:
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 333-31809, 333-56143,
333-67583 and 333-73051.
ARTHUR ANDERSEN LLP
Princeton, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1998 AND FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1998 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,245
<SECURITIES> 0
<RECEIVABLES> 42,314
<ALLOWANCES> (1,053)
<INVENTORY> 0
<CURRENT-ASSETS> 49,877
<PP&E> 12,296
<DEPRECIATION> (2,790)
<TOTAL-ASSETS> 65,728
<CURRENT-LIABILITIES> 20,266
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 44,784
<TOTAL-LIABILITY-AND-EQUITY> 65,728
<SALES> 144,861
<TOTAL-REVENUES> 144,861
<CGS> 94,203
<TOTAL-COSTS> 94,203
<OTHER-EXPENSES> 38,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> 12,090
<INCOME-TAX> 4,416
<INCOME-CONTINUING> 7,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,674
<EPS-PRIMARY> .57 <F1>
<EPS-DILUTED> .55 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1997 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,821
<SECURITIES> 0
<RECEIVABLES> 28,691
<ALLOWANCES> 799
<INVENTORY> 0
<CURRENT-ASSETS> 37,866
<PP&E> 5,173
<DEPRECIATION> (1,392)
<TOTAL-ASSETS> 42,006
<CURRENT-LIABILITIES> 8,194
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 33,075
<TOTAL-LIABILITY-AND-EQUITY> 42,006
<SALES> 94,326
<TOTAL-REVENUES> 94,326
<CGS> 65,535
<TOTAL-COSTS> 65,535
<OTHER-EXPENSES> 22,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 6,988
<INCOME-TAX> 2,327
<INCOME-CONTINUING> 4,661
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,661
<EPS-PRIMARY> .37 <F1>
<EPS-DILUTED> .36 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1996 WHICH ARE INCLUDED IN THE REGISTRANT'S FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001016439
<NAME> Intelligroup, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 61,699
<TOTAL-REVENUES> 61,699
<CGS> 43,142
<TOTAL-COSTS> 43,142
<OTHER-EXPENSES> 14,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (336)
<INCOME-PRETAX> 2,678
<INCOME-TAX> 748
<INCOME-CONTINUING> 1,930
<DISCONTINUED> 0
<EXTRAORDINARY> 1,148
<CHANGES> 0
<NET-INCOME> 782
<EPS-PRIMARY> .07 <F1>
<EPS-DILUTED> .06 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".
<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>
</TABLE>
