UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33625
VIRTUSA CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3512883
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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2000 West Park Drive
Westborough, Massachusetts 01581
(508) 389-7300
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.01 par value per
share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No:
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No:
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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
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No:
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
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.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No:
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The aggregate market value of the registrants voting and
non-voting shares of common stock held by non-affiliates of the
registrant on September 30, 2007, based on $15.00 per
share, the last reported sale price on the NASDAQ Global Market
on that date, was $131,733,030.
Indicate the number of shares outstanding of each of the
issuers class of common stock, as of June 2, 2008:
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Class
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Number of Shares
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Common Stock, par value $0.01 per share
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23,058,539
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement for
its 2008 annual meeting of stockholders pursuant to
Regulation 14A within 120 days of the end of the
fiscal year ended March 31, 2008. Portions of the
registrants Proxy Statement are incorporated by reference
into Part III of this
Form 10-K.
With the exception of the portions of the Proxy Statement
expressly incorporated by reference, such document shall not be
deemed filed with this
Form 10-K.
VIRTUSA
CORPORATION
ANNUAL REPORT ON
FORM 10-K
Fiscal Year Ended March 31, 2008
TABLE OF CONTENTS
Part I
This Annual Report on
Form 10-K
(the Annual Report) contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to
the safe harbor created by those sections. These
statements relate to, among other things, our expectations
concerning our business strategy. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and may be
forward-looking. Some of the forward-looking statements can be
identified by the use of forward-looking terms such as
believes, expects, may,
will, should, seek,
intends, plans, estimates,
projects, anticipates, or other
comparable terms. These forward-looking statements involve risk
and uncertainties. We cannot guarantee future results, levels of
activity, performance or achievements, and you should not place
undue reliance on our forward-looking statements. Our actual
results may differ significantly from the results discussed in
the forward-looking statements. Our forward-looking statements
do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or strategic investments.
Factors that might cause such a difference include, but are not
limited to, those set forth in Item 1A. Risk
Factors and elsewhere in this Annual Report. Except as may
be required by law, we have no plans to update our
forward-looking statements to reflect events or circumstances
after the date of this report. We caution readers not to place
undue reliance upon any such forward-looking statements, which
speak only as of the date made. You are advised, however, to
consult any further disclosures we make on related subjects in
our
Form 10-Q
and
8-K
reports to the Securities and Exchange Commission (the
SEC).
Overview
Virtusa Corporation (the Company,
Virtusa, we, us or
our) is a global information technology services
company. We use an offshore delivery model to provide a broad
range of information technology (IT) services, including IT
consulting, technology implementation and application
outsourcing. Using our enhanced global delivery model,
innovative platforming approach and industry expertise, we
provide cost-effective services that enable our clients to use
IT to enhance business performance, accelerate time-to-market,
increase productivity and improve customer service.
Headquartered in Massachusetts, we have offices in the United
States and the United Kingdom and global delivery centers in
Hyderabad and Chennai, India and Colombo, Sri Lanka. We have
experienced compounded annual revenue growth of 46% over the
five-year period ended March 31, 2008.
Our enhanced global delivery model leverages a highly-efficient
onsite-to-offshore service delivery mix and proprietary tools
and processes to manage and accelerate delivery, foster
innovation and promote continual improvement. Our global service
delivery teams work seamlessly at our client locations and at
our global delivery centers in India and Sri Lanka to provide
value-added services rapidly and cost-effectively. They do this
by using our enhanced global delivery model, which we manage to
a 20/80, or better, onsite-to-offshore service delivery mix.
We apply our innovative platforming approach across all of our
services. We help our clients combine common business processes
and rules, technology frameworks and data into reusable
application platforms that can be leveraged across the
enterprise to build, enhance and maintain existing and future
applications. Our platforming approach enables our clients to
continually improve their software platforms and applications in
response to changing business needs and evolving technologies
while also realizing long-term and ongoing cost savings.
We enable our clients to use IT to accelerate time-to-market,
increase productivity and improve customer service. We are able
to reduce costs through our enhanced global delivery model. We
also reduce the effort and costs required to maintain and
develop IT applications by streamlining and consolidating our
clients applications on an ongoing basis. We believe that
our solution provides our clients with the consultative and
high-value services associated with large consulting and systems
integration firms, the cost-effectiveness associated with
offshore IT outsourcing firms and ongoing benefits of our
innovative platforming approach.
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We provide our IT services primarily to enterprises engaged in
the following industries: communications and technology;
banking, financial services and insurance (BFSI); and media and
information. Our current clients include leading global
enterprises such as Aetna Life Insurance Company, British
Telecommunications plc (BT), ING North America Insurance
Corporation, International Business Machines Corporation, Iron
Mountain Information Management, Inc., JPMorgan Chase Bank, N.A.
and Thomson Healthcare Inc., and leading enterprise software
developers such as Pegasystems Inc. and Vignette Corporation. We
have a high level of repeat business among our clients. For
instance, during the fiscal year ended March 31, 2008, 96%
of our revenue came from clients to whom we had been providing
services for at least one year. Our top ten clients accounted
for approximately 76%, 72% and 62% of our total revenue in the
fiscal years ended March 31, 2008, 2007 and 2006,
respectively. Our largest client, BT, accounted for 27% and 23%
of our total revenue in the fiscal years ended March 31,
2008 and 2007, respectively.
Our
solution
We deliver a broad range of IT services using an enhanced global
delivery model and an innovative platforming approach. We have
significant domain expertise in IT-intensive industries,
including communications and technology, BFSI and media and
information. We enable our clients to leverage IT to improve
business performance, use IT assets more effectively and reduce
IT costs.
Broad range of IT services.
We provide a broad
range of IT services, either individually or as part of an
end-to-end solution, from IT consulting and technology
implementation to application outsourcing. Our IT consulting
services include strategic activities such as defining
technology roadmaps, providing architecture services and
assessing application portfolios. Our technology implementation
services include application development, systems integration
and legacy system conversion and enablement. Our application
outsourcing services include application enhancement,
maintenance and infrastructure management.
Enhanced global delivery model.
We believe we
have an enhanced and integrated global delivery model. Our
enhanced global delivery model leverages a highly-efficient
onsite-to-offshore service delivery mix and proprietary tools
and processes to manage and accelerate delivery, foster
innovation and promote continual improvement. We manage to a
20/80, or better, onsite-to-offshore service delivery mix, which
allows us to provide value-added services rapidly and
cost-effectively. During the past three fiscal years, we
performed more than 80% of our total billable hours at our
offshore global delivery centers. Our onsite client service
teams comprise senior technical and industry experts, who work
on an integrated basis with our offshore teams in India and Sri
Lanka. We leverage our global delivery model across all of our
service offerings.
Platforming approach.
We apply an innovative
platforming approach across our IT consulting, technology
implementation and application outsourcing services to reduce
costs, increase productivity and improve the efficiency and
effectiveness of our clients IT application environments.
As part of our platforming approach, we assess our clients
application environments to identify common elements, such as
business processes and rules, technology frameworks and data. We
incorporate those common elements into one or more application
platforms that can be leveraged across the enterprise to build,
enhance and maintain existing and future applications. Our
platforming approach enables our clients to continually improve
their software platforms and applications in response to
changing business needs and evolving technologies while also
realizing long-term and ongoing cost savings.
Services
We provide a broad range of IT consulting, technology
implementation and application outsourcing services to our
clients, either individually or as part of an end-to-end
solution.
IT
consulting services
We provide IT consulting services to assist our clients with
their continually-changing IT environments. Our goal is to help
them to continually improve the effectiveness and efficiency of
their IT application environments by adopting and evolving
towards re-useable software platforms. We help clients analyze
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business
and/or
technology problems and identify and design platform-based
solutions. We also assist our clients in planning their IT
initiatives and transition plans.
Our IT consulting services include the following assessment and
planning, architecture and design and governance-related
services:
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Assessment
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and Planning Services
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Architecture and Design Services
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Governance-Related Services
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application inventory and portfolio
assessment
business/technology alignment
analysis
IT strategic planning
quality assurance process consulting
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enterprise architecture analysis
technology roadmaps
product evaluation and selection
business process analysis and design
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program governance and change
management
program management office planning
IT process/methodology consulting
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During our consulting engagements, we often leverage proprietary
frameworks and tools to differentiate our services and to
accelerate delivery. Examples of these frameworks and tools
include our Strategic Enterprise Information Roadmap framework
and our Business Process Visualization tools. We believe that
our consulting services are also differentiated in that we are
typically able to leverage our global delivery model for our
engagements. Our onsite teams work directly with our clients to
understand and analyze the current-state problems and to design
the conceptual solutions. Our offshore teams work seamlessly
with our onsite teams to design and expand the conceptual
solution, research alternatives, perform detailed analyses,
develop prototypes and proofs-of-concept and produce detailed
reports. We believe that this approach reduces cost, allows us
to explore more alternatives in the same amount of time and
improves the quality of our deliverables.
Technology
implementation services
Our technology implementation services involve building, testing
and deploying IT applications, and consolidating and
rationalizing our clients existing IT applications and IT
environments into platforms.
Our technology implementation services include the following
development, legacy asset management, data warehousing and
testing services:
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Legacy Asset
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Data
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Development Services
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Management Services
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Warehousing Services
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Testing Services
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application development
package implementation and
integration
software product engineering
Business Process Management
implementations
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systems consolidation and
rationalization
technology migration and porting
web-enablement of legacy applications
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data management and transformation
business intelligence, reporting and
decision support
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testing frameworks
automation of test data and cases
test cycle execution
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Our technology implementation services are typically
characterized by short delivery cycles, stringent service levels
and evolving requirements. We have incorporated rapid, iterative
development techniques into our approach, extensively employing
prototyping, solution demonstration labs and other collaboration
tools that enable us to work closely with our clients to
understand and adapt to their changing business needs. As a
result, we are able to develop and deploy applications quickly,
often within solution delivery cycles of less than three months.
We provide technology implementation services across Microsoft
and Java-based, client-server and mainframe technologies.
Application
outsourcing services
We provide a broad set of application outsourcing services that
enable us to provide comprehensive support for our clients
software applications and platforms. We endeavor to continually
improve the applications under our management and to evolve our
clients IT applications into leverageable platforms.
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Our application outsourcing services include the following
application and platform management, infrastructure management
and quality assurance management services:
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Application and Platform
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Infrastructure
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Quality Assurance
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Management Services
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Management Services
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Management Services
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production support
maintenance and enhancement of
custom-built and package-based applications
ongoing software engineering services
for software companies
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systems administration
database administration
monitoring
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outsourcing of quality assurance
planning
preparation of test cases, scripts and
data
execution of test cases, scripts and
data
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We believe that our application outsourcing services are
differentiated because they are based on the principle of
migrating installed applications to flexible platforms that can
sustain further growth and business change. We do this by:
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developing a roadmap for the evolution of applications into
platforms
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establishing an ongoing planning and governance process for
managing change
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analyzing applications for common patterns and service
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identifying application components that can be extended or
enhanced as core components
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integrating new functions, features and technologies into the
target architecture
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Platforming
approach
Our platforming approach is embodied in a set of proprietary
processes, tools and frameworks that addresses the fundamental
challenges confronting IT executives. These challenges include
the rising costs of technology ownership and the need to
accelerate time-to-market, improve service and enhance
productivity.
Our platforming approach draws from analogs in industries that
standardize on platforms composed of common components and
assemblies used across multiple product lines. Similarly, we
work with our clients to evolve their diverse software assets
into unified, rationalized software platforms. Our platforming
approach leads to simplified and standardized software
components and assemblies that work together harmoniously and
readily adapt to support new business applications. For example,
a software platform for trading, once developed within an
investment bank, can be the foundation for the banks
diverse trading applications in equities, bonds and currencies.
Our platforming approach stands in contrast to traditional
enterprise application development projects, where different
applications remain separate and isolated from each other,
replicating business logic, technology frameworks and enterprise
data.
At the center of our platforming approach is a five-level
maturity framework that allows us to adapt our service offerings
to meet our clients unique needs. Level 1 maturity in
our platforming approach represents traditional applications
where every line of code is embedded and unique to the
application and every application is monolithic. Level 2
applications are less monolithic and more flexible and
demonstrate characteristics such as configurability and
customizability. Level 3 are advanced applications where
the common code components and software assets are leveraged
across multiple application families and product lines.
Level 4 applications are framework-driven where the core
business logic is reused with appropriate custom logic built
around them. At the highest level of maturity are Level 5
applications, where platforms are greatly leveraged to simplify
and accelerate application development and maintenance.
At lower levels of maturity, few assets are created and reused.
Consequently, agility, total cost of ownership and ability to
quickly meet client needs are sub-optimal. As organizations
mature along this continuum, from Level 1 to Level 5,
substantial intellectual property is created and embodied in
software platforms that enable steady gains in agility, reduce
overall cost of ownership and accelerate time-to-market.
Our platforming approach improves software quality and IT
productivity. Software assets within platforms are reused across
applications, their robustness and quality improves with time
and our clients are able to develop software with fewer defects.
A library of ready-made building blocks significantly enhances
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productivity and reduces software development risks compared to
traditional methods. This establishes a cycle of continual
improvement: the more an enterprise embraces platform-based
solutions, the better the quality of its applications and the
less the effort required to build, enhance and maintain them.
Global
delivery model
We have developed an enhanced global delivery model that allows
us to provide innovative IT services to our clients in a
flexible, cost-effective and timely manner. Our model leverages
an efficient onsite-to-offshore service delivery mix and our
proprietary Global Innovation Process (GIP), to manage and
accelerate delivery, foster innovation and promote continual
improvement.
We manage to a highly-efficient 20/80, or better,
onsite-to-offshore service delivery mix, which allows us to
cost-effectively deliver value-added services and rapidly
respond to changes in resources and requirements. During the
past three fiscal years, we performed more than 80% of our total
annual billable hours at our offshore global delivery centers.
Using our global delivery model, we generally maintain onsite
teams at our clients locations and offshore teams at one
or more of our global delivery centers. Our onsite teams are
generally composed of program and project managers, industry
experts and senior business and technical consultants. Our
offshore teams are generally composed of project managers,
technical architects, business analysts and technical
consultants. These teams are typically linked together through
common processes and collaboration tools and a communications
infrastructure that features secure, redundant paths enabling
seamless global collaboration. Our global delivery model enables
us to provide around-the-clock, world-class execution
capabilities that span multiple time zones.
Our enhanced global delivery model is built around our
proprietary GIP, which is a software lifecycle methodology that
combines our decade-long experience building platform-based
solutions for global clients with leading industry standards
such as Rational Unified Process, eXtreme Programming,
Capability Maturity Model and Product Line Engineering. By
leveraging GIP templates, tools and artifacts across diverse
disciplines such as requirements management, architecture,
design, construction, testing, application outsourcing and
production support, each team member is able to take advantage
of tried and tested software engineering and platforming best
practices and extend these benefits to clients.
We have adapted and incorporated modern techniques designed to
accelerate the speed of development into GIP, including rapid
prototyping, agile development and eXtreme Programming. During
the initial process-tailoring phase of an engagement, we work
with the client to define the specific approach and tools that
will be used for the engagement. This process-tailoring takes
into consideration the clients business objectives,
technology environment and currently-established development
approach. We believe our innovative approach to adapting proven
techniques into a custom process has been an important
differentiator. For example, a large high-tech manufacturer
engaged us to use our process-tailoring approach to design a
common, standards-based development process for use by its own
product development teams.
The backbone of GIP is our global delivery operations
infrastructure. This infrastructure combines enabling tools and
specialized teams that assist our project teams with important
enabling services such as workforce planning, knowledge
management, integrated process and program management and
operational reporting and analysis.
Two important aspects of our global delivery model are
innovation and continual improvement. A dedicated process group
provides three important functions: they continually monitor,
test and incorporate new approaches, techniques, tools and
frameworks into GIP; they advise project teams, particularly
during the process-tailoring phase; and they monitor and audit
projects to ensure compliance. New and innovative ideas and
approaches are broadly shared throughout the organization,
selectively incorporated into GIP and deployed through training.
Clients also contribute to innovation and improvement as their
ideas and experiences are incorporated into our body of
knowledge. We also seek regular informal and formal client
feedback. Our global leadership and executive team regularly
interacts with client leadership and each client is typically
given a formal feedback survey on a quarterly basis. Client
feedback is qualitatively and quantitatively analyzed and forms
an important component of our teams performance
assessments and our continual improvement plans.
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Sales and
marketing
Our global sales, marketing and business development teams seek
to develop strong relationships with managers and executives at
prospective and existing clients to establish long-term business
relationships that continue to grow in size and strategic value.
As of March 31, 2008, we had 76 sales, marketing and
business development professionals, including sales managers,
sales representatives, account managers, telemarketers, sales
support personnel and marketing professionals.
The sales cycle for our services often includes initiating
contact with a prospective client, understanding the prospective
clients business challenges and opportunities, performing
discovery or assessment activities, submitting proposals,
providing client case studies and references and developing
proofs-of-concept or solution prototypes. We organize our sales
teams by business unit with professionals who have specialized
industry knowledge. This industry focus enables our sales teams
to better understand the prospective clients business and
technology needs and to offer appropriate industry-focused
solutions.
Sales and sales support.
Our sales and sales
support teams focus primarily on identifying, targeting and
building relationships with prospective clients. These teams are
supported in their efforts by industry specialists, technology
consultants and solution architects, who work together to design
client-specific solution proposals. Our sales and sales support
teams are based in offices throughout India, Sri Lanka, the
United Kingdom and the United States.
Account management.
We assign experienced
account managers who build and regularly update detailed account
development plans for each of our clients. These managers are
responsible for developing strong working relationships across
the client organization, working day-to-day with the client and
our service delivery teams to understand and address the
clients needs. Our account managers work closely with our
clients to develop a detailed understanding of their business
objectives and technology environments. We use this knowledge to
identify and target additional consulting engagements and other
outsourcing opportunities.
Marketing.
We maintain a marketing presence in
India, Sri Lanka, the United Kingdom and the United States.
Our marketing team seeks to build our brand awareness and
generate target lists and sales leads through industry events,
press releases, thought leadership publications, direct
marketing campaigns and referrals from clients, strategic
alliances and industry analysts. The marketing team maintains
frequent contact with industry analysts and experts to
understand market trends and dynamics.
Strategic alliances.
We have strategic
alliances with software companies, some of which are also our
clients, to provide services to their customers. We believe
these alliances differentiate us from our competition. Our
extensive engineering, quality assurance and technology
implementation and support services to software companies enable
us to compete more effectively for the technology implementation
and support services required by their customers. In addition,
our strategic alliances with software companies allow us to
share sales leads, develop joint account plans and engage in
joint marketing activities.
Clients
and industry expertise
We market and provide our services primarily to companies in
North America and Europe. For additional discussion regarding
geographic information, see note 16 to our consolidated
financial statements included elsewhere in this Annual Report. A
majority of our revenue for the fiscal year ended March 31,
2008 was generated from Forbes Global 2000 firms or their
subsidiaries. We believe that our regular, direct interaction
with senior executives at these clients, the breadth of our
client relationships and our reputation within these clients as
a thought leader differentiates us from our competitors. The
strength of our relationships has resulted in significant
recurring revenue from existing clients. In the fiscal year
ended March 31, 2008, 73% of our revenue came from clients
who spent more than $5.0 million with us and 86% came from
clients who spent more than $2.0 million with us. Our
largest client, BT, accounted for 27% and 23% of our total
revenue in the fiscal years ended March 31, 2008 and 2007,
respectively.
We focus primarily on three industries: communications and
technology, BFSI and media and information. We build expertise
in these industries through our customer experience and industry
alliances, by hiring
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industry specialists and by training our business analysts and
other team members in industry-specific topics. Drawing on this
expertise, we strive to develop industry-specific perspectives
and services.
Communications and technology.
For our
communications clients, we focus on customer service, sales and
billing functions and regulatory compliance and help them
improve service levels, shorten time-to-market and modernize
their IT environments. For our technology clients, which include
hardware manufacturers and software companies, we provide a wide
range of industry-specific service offerings, including product
management services; product architecture, engineering and
quality assurance services; and professional services to support
product implementation and integration. These clients often
employ cutting-edge technology and generally require strong
technical skills and a deep understanding of the software
product lifecycle.
Banking, financial services and insurance.
We
provide services to clients in the retail, wholesale and
investment banking areas; financial transaction processors; and
insurance companies encompassing life,
property-and-casualty
and health insurance. For our BFSI clients, we have developed
industry-specific services for each of these sectors, such as an
account opening framework for banks, compliance services for
financial institutions and customer self-service solutions for
insurance companies. The need to rationalize and consolidate
legacy applications is pervasive across these industries and we
have tailored our platforming approach to address these
challenges.
Media and information.
For our media and
information clients, we focus primarily on solutions involving
electronic publishing, online learning, content management,
information workflow and mobile content delivery as well as
personalization, search technology and digital rights
management. Many media and information providers are focused on
building common platforms that provide customized content from
multiple sources, customized and delivered to many consumers
using numerous delivery mechanisms. We believe our platforming
approach is ideally suited to these opportunities.
Competition
The IT services market in which we operate is highly
competitive, rapidly evolving and subject to shifting client
needs and expectations. This market includes a large number of
participants from a variety of market segments, including:
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offshore IT outsourcing firms, such as Cognizant Technology
Solutions Corporation, HCL Technologies Ltd., Infosys
Technologies Limited, Patni Computer Systems Limited, Satyam
Computer Services Limited, Tata Consultancy Services Limited,
Tech Mahindra Limited and Wipro Limited
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consulting and systems integration firms, such as Accenture
Ltd., BearingPoint, Inc., Cap Gemini S.A., Computer Sciences
Corporation, Deloitte Consulting LLP, Electronic Data Systems
Corporation, IBM Global Services Consulting and Sapient
Corporation
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We also occasionally compete with in-house IT departments,
smaller vertically-focused IT service providers and local IT
service providers based in the geographic areas where we
compete. We expect additional competition from offshore IT
outsourcing firms in emerging locations such as Eastern Europe,
Latin America and China, as well as offshore IT service
providers with facilities in less expensive geographies within
India.
We believe that the principal competitive factors in our
business include technical expertise and industry knowledge, a
breadth of service offerings to provide one-stop solutions to
clients, a well-developed recruiting, training and retention
model, responsiveness to clients business needs and
quality of services. We believe that we compete favorably with
respect to these factors. Many of our competitors, however, have
significantly greater financial, technical and marketing
resources and a greater number of IT professionals than we do.
We cannot assure you that we will continue to compete favorably
or that we will be successful in the face of increasing
competition.
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Human
resources
We seek to maintain a culture of innovation by aligning and
empowering our team members at all levels of our organization.
Our success depends upon our ability to attract, develop,
motivate and retain highly-skilled and multi-dimensional team
members. Our people management strategy is based on six key
components: recruiting, performance management, training and
development, employee engagement and communication, compensation
and retention. Although not currently a material component of
our people management strategy, we also retain subcontractors at
all of our locations on an as-needed basis for specific client
engagements.
Recruiting.
Our global recruiting and hiring
process addresses our need for a large number of highly-skilled,
talented team members. In all of our recruiting and hiring
efforts, we employ a rigorous and efficient interview process.
We also employ technical and psychometric tests for our IT
professional recruiting efforts in India and Sri Lanka. These
tests evaluate basic technical skills, problem-solving
capabilities, attitude, leadership potential, desired career
path and compatibility with our team-oriented,
thought-leadership culture.
We recruit from leading technical schools in India and Sri Lanka
through dedicated campus hiring programs. We maintain a visible
position in these schools through a variety of specialized
programs, including IT curriculum development, classroom
teaching and award sponsorships. We also recruit and hire
laterally from leading IT service and software product companies
and use employee referrals as a significant part of our
recruitment process.
Performance management.
We have a
sophisticated performance assessment process that evaluates team
members and enables us to tailor individual development
programs. Through this process, we assess performance levels,
along with each team members potential. We create and
manage development plans, adjust compensation and promote team
members based on these assessments.
Training and development.
We devote
significant resources to train and integrate all new hires into
our global team. We conduct a training program for all lateral
hires that teaches them our culture and value system. We provide
a comprehensive training program for our campus hires that
combines classroom training with on-the-job learning and
mentoring. We also engage a leading
e-learning
company to provide world-class leadership development to our
managers. We strive to continually measure and improve the
effectiveness of our training and development programs based on
team member feedback.
Employee engagement and communication.
We
believe open communication is essential to our team-oriented
culture. We maintain multiple communication forums, such as
regular company-wide updates from senior management,
complemented by team member sessions at the regional, local and
account levels, as well as regular town hall sessions to provide
team members a voice with management.
Compensation.
We consistently benchmark our
compensation and benefits with relevant market data and make
adjustments based on market trends and individual performance.
Our compensation philosophy rewards performance by linking both
variable compensation and salary increases to performance.
Retention.
To attract, retain and motivate our
team members, we seek to provide an environment that rewards
entrepreneurial initiative, thought leadership and performance.
During the twelve months ended March 31, 2008, we
experienced team member attrition at a rate of 21.3%, which
included involuntary attrition. We remain committed to improving
and sustaining our attrition levels in-line with our long-term
stated goals. We define attrition as the ratio of the number of
team members who have left us during a defined period to the
total number of team members that were on our payroll at the end
of the period. Our human resources team, working with our
business units, proactively manages team member attrition by
addressing many factors that improve retention, including:
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providing team members with opportunities to handle challenging
technical and organizational problems and learn our platforming
approach
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providing team members with clear career paths, rotation
opportunities across clients and domains and opportunities to
advance rapidly
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providing team members opportunities to interact with our
clients and help shape their IT strategy and solutioning
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creating a strong peer group work environment that pushes our
team members to succeed
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creating a climate where there is a free exchange of ideas
cutting across organizational hierarchy
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creating a family-oriented work environment that is fun and
engaging
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recognizing team performance through highly-visible team
recognition awards
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As of March 31, 2008, we had 4,265 team members worldwide.
We also retain outside contractors from time to time to
supplement our services on an as needed basis. None of our team
members are covered by a collective bargaining agreement or
represented by a labor union. We consider our relations with our
team members to be good.
Network
and infrastructure
Our global IT infrastructure is designed to provide
uninterrupted service to our clients. We use a secure,
high-performance communications network to enable our
clients systems to connect seamlessly to each of our
offshore global delivery centers. We provide flexibility for our
clients to operate their engagements from any of our offshore
global delivery centers by using mainstream network topologies,
including site-to-site Virtual Private Networks,
International Private Leased Circuits and MultiProtocol Label
Switching. We also provide videoconferencing, voice conferencing
and Voice over Internet Protocol capabilities to our global
delivery teams and clients to enable clear and uninterrupted
communication in our engagements, be it intra-company or with
our clients.
We monitor our network performance on a 24x7 basis to ensure
high levels of network availability and periodically upgrade our
network to enhance and optimize network efficiency across all
operating locations. We use leased telecommunication lines to
provide redundant data and voice communication with our
clients facilities and among all of our facilities in
Asia, the United States and the United Kingdom. We also maintain
multiple sites across our global delivery centers in India and
Sri Lanka as
back-up
centers to provide for continuity of infrastructure and
resources in the case of natural disasters or other events that
may cause a business interruption.
We have also implemented numerous security measures in our
network to protect our and our clients data, including
multiple layers of anti-virus solutions, network intrusion
detection, host intrusions detection and information monitoring.
We are ISO 27001 certified and believe that we meet all of our
clients stringent security requirements for ongoing
business with them.
Intellectual
property
We believe that our continued success depends in part on the
skills of our team members, the ability of our team members to
continue to innovate and our intellectual property rights. We
rely on a combination of copyright, trademark and design laws,
trade secrets, confidentiality procedures and contractual
provisions to protect our intellectual property rights and
proprietary methodologies. It is our policy to enter into
confidentiality agreements with our team members and consultants
and we generally control access to and distribution of our
proprietary information. These agreements generally provide that
any confidential or proprietary information developed by us or
on our behalf be kept confidential. We pursue the registration
of certain of our trademarks and service marks in the United
States and other countries. We have registered the mark
Virtusa in the United States, the European Community
and India and have filed for registration of Virtusa
in Sri Lanka. We also have a registered service mark in the
United States, Productization, which we use to
describe our methodology and approach to delivery services. We
have no issued patents.
Our business also involves the development of IT applications
and other technology deliverables for our clients. Our clients
usually own the intellectual property in the software
applications we develop for them. We generally implement
safeguards designed to protect our clients intellectual
property in accordance with their needs and specifications. Our
means of protecting our and our clients proprietary
rights, however, may not be
11
adequate. Despite our efforts, we may be unable to prevent or
deter infringement or other unauthorized use of our and our
clients intellectual property. Legal protections afford
only limited protection for intellectual property rights and the
laws of India and Sri Lanka do not protect intellectual property
rights to the same extent as those in the United States and the
United Kingdom. Time-consuming and expensive litigation may be
necessary in the future to enforce these intellectual property
rights.
In addition, we cannot assure you that our intellectual property
or the intellectual property that we develop for our clients
does not infringe the intellectual property rights of others, or
will not in the future. If we become liable to third parties for
infringing upon their intellectual property rights, we could be
required to pay substantial damage awards and be forced to
develop non-infringing technology, obtain licenses or cease
delivery of the applications that contain the infringing
technology.
Business
Segments and Geographic Information
We view our operations and manage our business as one operating
segment. For information regarding net revenue by geographic
regions for each of the last three fiscal years, see
note 16 to our consolidated financial statements for the
fiscal year ended March 31, 2008 contained in this Annual
Report.
For information regarding risks and dependencies associated with
foreign operations, see our risk factors listed in
Item 1A. Risk Factors
contained in this
Annual Report.
Our
corporate and available information
We were originally incorporated in Massachusetts in November
1996 as Technology Providers, Inc. We reincorporated in Delaware
as eRunway, Inc. in May 2000 and subsequently changed our name
to Virtusa Corporation in April 2002. Our principal executive
offices are located at 2000 West Park Drive, Westborough,
Massachusetts 01581, and our telephone number at this location
is
(508) 389-7300.
Our website address is www.virtusa.com. We have included our
website address as an inactive textual reference only. The
information on, or that can be accessed through, our website is
not part of this Annual Report. Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through the investor relations
page of our internet website as soon as reasonably practicable
after we electronically file such material with, or furnish it
to, the Securities and Exchange Commission. In addition, we make
available our Code of Business Conduct and Ethics free of charge
through our website. We intend to disclose any amendments to, or
waivers from, our Code of Business Conduct and Ethics that are
required to be publicly disclosed pursuant to rules of the SEC
and the NASDAQ Stock Market by filing such amendment or waiver
with the SEC and posting it on our website.
No information on our Internet website is incorporated by
reference into this
Form 10-K
or any other public filing made by us with the SEC.
12
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. This
discussion highlights some of the risks which may affect future
operating results. These are the risks and uncertainties we
believe are most important for you to consider. Our operating
results and financial condition have varied in the past and may
vary significantly in the future depending on a number of
factors. We cannot be certain that we will successfully address
these risks. If we are unable to address these risks, our
business may not grow, our stock price may suffer
and/or
we
may be unable to stay in business. Additional risks and
uncertainties not presently known to us, which we currently deem
immaterial or which are similar to those faced by other
companies in our industry or business in general, may also
impair our business operations.
Except for the historical information in this Annual Report, the
matters contained in this report include forward-looking
statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements
made in this report and presented elsewhere by management from
time to time. Such factors, among others, may have a material
adverse effect upon our business, results of operations and
financial condition. You should consider carefully the following
risk factors, together with all of the other information
included in this Annual Report. Each of these risk factors could
adversely affect our business, operating results and financial
condition, as well as adversely affect the value of an
investment in our common stock.
Risks
relating to our business
Our
revenue is highly dependent on a small number of clients and the
loss of any one of our major clients could significantly harm
our results of operations and financial condition.
We have historically earned and believe that over the next few
years we will continue to earn, a significant portion of our
revenue from a limited number of clients. For instance, we
generated approximately 54%, 49% and 43% of our revenue in our
fiscal years ended March 31, 2008, 2007 and 2006,
respectively, from our top five clients during those periods.
For the fiscal year ended March 31, 2008, BT, our largest
client, accounted for 27% of our revenue; no other client
accounted for 10% of our revenue in that fiscal year. During the
fiscal years ended March 31, 2008 and 2007, 96% and 97% of
our revenue, respectively came from clients to whom we had been
providing services for at least one year. The loss of any one of
our major clients could reduce our revenue or delay our
recognition of revenue, harm our reputation in the industry
and/or
reduce our ability to accurately predict cash flow. The loss of
any one of our major clients could also adversely affect our
gross profit and utilization as we seek to redeploy resources
previously dedicated to that client. Further, the loss of any
one of our major clients has required, and could in the future
require, us to initiate involuntary attrition. This could have a
material adverse effect on our attrition rate and make it more
difficult for us to attract and retain IT professionals in the
future. We may not be able to maintain our client relationships
and our clients may not renew their agreements with us, in which
case, our business, financial condition and results of
operations would be adversely affected. For instance, in March
2007 we entered into a five-year IT services agreement with BT,
which has been amended from time to time to reflect agreed upon
changes to terms and conditions, including rates and other
commercial terms, that is premised upon minimum aggregate
expenditures by BT of approximately $200 million over the
term of the agreement. However, there can be no assurance that
we will realize the full amount of those expenditures or that
the agreement will not be terminated or further amended prior to
the end of its term.
In addition, this client concentration may subject us to
perceived or actual leverage that our clients may have, given
their relative size and importance to us. If our clients seek to
negotiate their agreements on terms less favorable to us and we
accept such unfavorable terms, such unfavorable terms may have a
material adverse effect on our business, financial condition and
results of operations. Accordingly, unless and until we
diversify and expand our client base, our future success will
significantly depend upon the timing and volume of business from
our largest clients and the financial and operational success of
these clients. If we were to lose one of our major clients or
have a major client cancel substantial projects or otherwise
significantly
13
reduce its volume of business with us, our revenue and
profitability would be materially reduced and our business would
be seriously harmed.
We
depend on clients primarily located in the United States and the
United Kingdom, as well as clients concentrated in specific
industries, such as BFSI, and are therefore subject to risks
relating to developments affecting these clients and industries
that may cause them to reduce or postpone their IT
spending.
For the fiscal year ended March 31, 2008, we derived
substantially all of our revenue from clients located in the
United States and the United Kingdom, as well as clients
concentrated in certain industries. During the fiscal year ended
March 31, 2008, we generated 69% of our revenue in the
United States and 31% of our revenue in the United Kingdom. For
the same fiscal year, we derived substantially all of our
revenue from three industries: BFSI, communications and
technology, and media and information. In particular, the BFSI
industries have recently experienced substantial losses relating
to market conditions and economic downturn which have also
resulted in the consolidation of several large companies in the
BFSI industries. During our fiscal year ended March 31,
2008, we earned approximately 38% of our revenue from BFSI
clients and our revenue from this industry vertical grew by
approximately 43% from the prior fiscal year. Any significant
decrease in the growth of the BFSI industries, significant
consolidation in these industries or decrease in growth or
consolidation in other industry verticals on which we focus,
could reduce the demand for our services and negatively affect
our revenue and profitability. If economic conditions weaken,
particularly in the United States, the United Kingdom or
any of these industries in which we focus, our clients may
significantly reduce or postpone their IT spending. Reductions
in IT budgets, increased consolidation or decreased competition
in these geographic locations or industries could result in an
erosion of our client base and a reduction in our target market.
Any reductions in the IT spending of companies in any one of
these industries may reduce the demand for our services and
negatively affect our revenue and profitability.
A
significant or prolonged economic downturn in the IT services
industry, or industries in which we focus, may result in our
clients reducing or postponing spending on the services we
offer.
Our revenue is dependent on entering into large contracts for
our services with a limited number of clients each year. As we
are not the exclusive IT service provider for our clients, the
volume of work that we perform for any specific client is likely
to vary from year to year. There are a number of factors, other
than our performance, that could affect the size, frequency and
renewal rates of our client contracts. For instance, if economic
conditions weaken in the IT services industry or in any industry
in which we focus, our clients may reduce or postpone their IT
spending significantly which may, in turn, lower the demand for
our services and negatively affect our revenue and
profitability. As a way of dealing with a challenging economic
environment, clients may change their outsourcing strategy by
performing more work in-house or replacing their existing
software with packaged software supported by the licensor. The
loss of, or any significant decline in business from, one or
more of our major clients likely would lead to a significant
decline in our revenue and operating margins, particularly if we
are unable to make corresponding reductions in our expenses in
the event of any such loss or decline. Moreover, a significant
change in the liquidity or financial position of any of these
clients could have a material adverse effect on the
collectability of our accounts receivable, liquidity and future
operating results.
The IT
services market is highly competitive and our competitors may
have advantages that may allow them to compete more effectively
than we do to secure client contracts and attract skilled IT
professionals.
The IT services market in which we operate includes a large
number of participants and is highly competitive. Our primary
competitors include:
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offshore IT outsourcing firms
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consulting and systems integration firms
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We also occasionally compete with in-house IT departments,
smaller vertically-focused IT service providers and local IT
service providers based in the geographic areas where we
compete. We expect
14
additional competition from offshore IT outsourcing firms in
emerging locations such as Eastern Europe, Latin America and
China, as well as offshore IT service providers with facilities
in less expensive geographies within India.
The IT services industry in which we compete is experiencing
rapid changes in its competitive landscape. Some of the large
consulting firms and offshore IT service providers with which we
compete have significant resources and financial capabilities
combined with a greater number of IT professionals. Many of our
competitors are significantly larger and some have gained access
to public and private capital or have merged or consolidated
with better capitalized partners, which events have created and
may in the future create, larger and better capitalized
competitors. These competitors may have superior abilities to
compete for market share and for our existing and prospective
clients. Our competitors may be better able to use significant
economic incentives, such as lower billing rates or non-billable
resources, to secure contracts with our existing and prospective
clients. These competitors may also be better able to compete
for and retain skilled professionals by offering them more
attractive compensation or other incentives. These factors may
allow these competitors to have advantages over us to meet
client demands in an engagement for large numbers and varied
types of resources with specific experience or skill-sets that
we may not have readily available in the short- or long-term. We
cannot assure you that we can maintain or enhance our
competitive position against current and future competitors. Our
failure to compete effectively could have a material adverse
effect on our business, financial condition or results of
operations.
If we
cannot attract and retain highly-skilled IT professionals, our
ability to obtain, manage and staff new projects and continue to
expand existing projects may result in loss of revenue and an
inability to expand our business.
Our ability to execute and expand existing projects and obtain
new clients depends largely on our ability to hire, train and
retain highly-skilled IT professionals, particularly project
managers, IT engineers and other senior technical personnel. If
we cannot hire and retain such additional qualified personnel,
our ability to obtain, manage and staff new projects and to
expand, manage and staff existing projects, may be impaired. We
may then lose revenue and our ability to expand our business may
be harmed. There is intense worldwide competition for IT
professionals with the skills necessary to perform the services
we offer. We and the industry in which we operate generally
experience high employee attrition. Given our recent significant
growth and strong demand for IT professionals from our
competitors, we cannot assure you that we will be able to hire
or retain the number of technical personnel necessary to satisfy
our current and future client needs. We also may not be able to
hire and retain enough skilled and experienced IT professionals
to replace those who leave. Additionally, if we have to replace
personnel who have left our company, we will incur increased
costs not only in hiring replacements but also in training such
replacements until they can become productive and billable to
our clients. In addition, we may not be able to redeploy and
retrain our IT professionals in anticipation of continuing
changes in technology, evolving standards and changing client
preferences. Our inability to attract and retain IT
professionals could have a material adverse effect on our
business, operating results and financial condition.
Our
quarterly financial position, revenue, operating results and
profitability are difficult to predict and may vary from quarter
to quarter, which could cause our share price to decline
significantly.
Our quarterly revenue, operating results and profitability have
varied in the past and are likely to vary significantly from
quarter to quarter in the future. The factors that are likely to
cause these variations include:
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the number, timing, scope and contractual terms of IT projects
in which we are engaged
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delays in project commencement or staffing delays due to
immigration issues or assignment of appropriately skilled or
experienced personnel
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unanticipated contract or project terminations
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the accuracy of estimates of resources, time and fees required
to complete fixed-price projects and costs incurred in the
performance of each project
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changes in pricing in response to client demand and competitive
pressures
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the mix of onsite and offshore staffing
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the mix of leadership and senior technical resources to junior
engineering resources staffed on each project
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unexpected changes in the utilization rate of our IT
professionals
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general economic conditions
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seasonal trends, primarily our hiring cycle and the budget and
work cycles of our clients
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the ratio of fixed-price contracts to
time-and-materials
contracts in process
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employee wage levels and increases in compensation costs,
including timing of promotions and annual pay increases,
particularly in India and Sri Lanka
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the timing of collection of accounts receivable
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the continuing financial stability of our clients
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our ability to have the client reimburse us for travel and
living expenses, especially the airfare and related expenses of
our Indian and Sri Lankan offshore personnel traveling and
working onsite in the United States or the United Kingdom
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one-time, non-recurring projects
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As a result, our revenue and our operating results for a
particular period are difficult to predict and may decline in
comparison to corresponding prior periods regardless of the
strength of our business. Our future revenue is also difficult
to predict because we derive a substantial portion of our
revenue from fees for services generated from short-term
contracts that may be terminated or delayed by our clients
without penalty. In addition, a high percentage of our operating
expenses, particularly related to personnel and facilities, are
relatively fixed in advance of any particular quarter and are
based, in part, on our expectations as to future revenue. If we
are unable to predict the timing or amounts of future revenue
accurately, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall and
fail to meet our forecasts. Unexpected revenue shortfalls may
also decrease our gross margins and could cause significant
changes in our operating results from quarter to quarter. As a
result, and in addition to the factors listed above, any of the
following factors could have a significant and adverse impact on
our operating results, could result in a shortfall of revenue
and could result in losses to us:
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a clients decision not to pursue a new project or proceed
to succeeding stages of a current project
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the completion during a quarter of several major client projects
could require us to pay underutilized team members in subsequent
periods
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adverse business decisions of our clients regarding the use of
our services
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our inability to transition team members quickly from completed
projects to new engagements
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our inability to manage costs, including personnel,
infrastructure, facility and support services costs
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exchange rate fluctuations
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Due to the foregoing factors, it is possible that in some future
periods our revenue and operating results may not meet the
expectations of securities analysts or investors. If this
occurs, the trading price of our common stock could fall
substantially either suddenly or over time and our business,
financial condition and results of operations would be adversely
affected.
16
We are
investing substantial cash in new facilities and our
profitability could be reduced if our business does not grow
proportionately.
We have spent $7.7 million to date and currently plan to
spend approximately $23 million over the next two fiscal
years in connection with the construction and build-out of a
facility on our planned campus in Hyderabad, India. We also
intend to make increased investments to expand our existing
global delivery centers or procure additional capacity and
facilities in Chennai, India and Colombo, Sri Lanka. We may face
cost overruns and project delays in connection with these
facilities or other facilities we may construct or seek to lease
in the future. Such delays may also cause us to incur additional
leasing costs to extend the terms of existing facility leases or
to enter into new short-term leases if we cannot move into the
new facilities in a timely manner. Such expansion may also
significantly increase our fixed costs, including an increase in
depreciation expense. If we are unable to expand our business
and revenue proportionately, our profitability will be reduced.
The
international nature of our business exposes us to several
risks, such as significant currency fluctuations and unexpected
changes in the regulatory requirements of multiple
jurisdictions.
We have operations in India, Sri Lanka and the United Kingdom
and we serve clients across Europe, North America and Asia. For
the fiscal years ended March 31, 2008 , 2007 and 2006,
revenue generated outside of the United States accounted for
31%, 26% and 14% of total revenue, respectively. Our corporate
structure also spans multiple jurisdictions, with our parent
company incorporated in Delaware and operating subsidiaries
organized in India, Sri Lanka and the United Kingdom. As a
result, our international revenue and operations are exposed to
risks typically associated with conducting business
internationally, many of which are beyond our control. These
risks include:
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significant currency fluctuations between the U.S. dollar
and the U.K. pound sterling (in which our revenue is principally
denominated) and the Indian and Sri Lankan rupees (in which a
significant portion of our costs are denominated)
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legal uncertainty owing to the overlap of different legal
regimes and problems in asserting contractual or other rights
across international borders, including compliance with local
laws of which we may be unaware
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potentially adverse tax consequences, such as scrutiny of
transfer pricing arrangements and tax holidays by authorities in
the countries in which we operate, potential tariffs and other
trade barriers
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difficulties in staffing, managing and supporting operations in
multiple countries
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potential fluctuations in foreign economies
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unexpected changes in regulatory requirements
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government currency control and restrictions on repatriation of
earnings
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the burden and expense of complying with the laws and
regulations of various jurisdictions
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domestic and international economic or political changes,
hostilities, terrorist attacks and other acts of violence or war
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earthquakes, tsunamis and other natural disasters in regions
where we currently operate or may operate in the future
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Negative developments in any of these areas in one or more
countries could result in a reduction in demand for our
services, the cancellation or delay of client contracts,
business interruption, threats to our intellectual property,
difficulty in collecting receivables and a higher cost of doing
business, any of which could negatively affect our business,
financial condition or results of operations.
17
Currency
exchange rate fluctuations may negatively affect our operating
results.
The exchange rates among the Indian and Sri Lankan rupees and
the U.S. dollar and the U.K. pound sterling have changed
substantially in recent years and may fluctuate substantially in
the future. We expect that a majority of our revenue will
continue to be generated in the U.S. dollar and U.K. pound
sterling for the foreseeable future and that a significant
portion of our expenses, including personnel costs, as well as
capital and operating expenditures, will continue to be
denominated in Indian and Sri Lankan rupees. Accordingly, any
material appreciation of the Indian rupee or the Sri Lankan
rupee against the U.S. dollar or U.K. pound sterling could
have a material adverse effect on our cost of services, gross
margin and net income, which may in turn have a negative impact
on our business, operating results and financial condition.
Although we have adopted an eight quarter hedging program to
minimize the effect of the Indian rupee movement on our
financial condition, the hedging program may be inadequate and
could cause the Company to forego benefits associated with any
significant depreciation of the Indian rupee which would
otherwise have had a beneficial impact on our earnings and
margins, and create a competitive disadvantage compared to
companies exposed to the Indian rupee but who do not hedge. The
appreciation of the Indian rupee against the U.S. dollar
and U.K. pound sterling since March 31, 2007 has had a
negative impact on our earnings and margins, and any continued
appreciation is likely to have a negative impact on future
earnings and margins.
The
loss of key members of our senior management team may prevent us
from executing our business strategy.
Our future success depends to a significant extent on the
continued service and performance of key members of our senior
management team. Our growth and success depends to a significant
extent on our ability to retain Kris Canekeratne, our chief
executive officer, who is a founder of our company and has led
the growth, operation, culture and strategic direction of our
business since its inception. The loss of his services or the
services of other key members of our senior management could
seriously harm our ability to execute our business strategy.
Although we have entered into agreements with our executive
officers providing for severance and change in control benefits
to them, our executive officers or other key employees could
terminate their employment with us at any time. We also may have
to incur significant costs in identifying, hiring, training and
retaining replacements for key employees. The loss of any member
of our senior management team might significantly delay or
prevent the achievement of our business or development
objectives and could materially harm our business. We do not
maintain key man life insurance on any of our team members other
than Kris Canekeratne.
We may
lose revenue if our clients terminate or delay their contracts
with us.
Our clients typically retain us on a non-exclusive,
engagement-by-engagement
basis, rather than under exclusive long-term contracts. Many of
our contracts for services have terms of less than
12 months and permit our clients to terminate our
engagement on prior written notice of 90 days or less for
convenience, and without termination-related penalties. Further,
many large client projects typically involve multiple
independently defined stages, and clients may choose not to
retain us for additional stages of a project or cancel or delay
their start dates. These terminations, cancellations or delays
could result from factors unrelated to our work product or the
progress of the project, including:
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client financial difficulties
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a change in a clients strategic priorities, resulting in a
reduced level of IT spending
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a clients demand for price reductions
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a change in a clients outsourcing strategy that shifts
work to in-house IT departments or to our competitors
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replacement by our client of existing software to packaged
software supported by licensors
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If our contracts were terminated early or materially delayed,
our business and operating results could be materially harmed
and the value of our common stock could be impaired. Unexpected
terminations,
18
cancellation or delays in our client engagements could also
result in increased operating expenses as we transition our team
members to other engagements.
We
invest in auction rate securities that are subject to market
risk and the recent problems in the financial markets could
adversely affect the value and liquidity of our
assets.
As of March 31, 2008, our long-term investments included
$8.0 million of auction rate securities. In addition, all
of our auction rate securities, including those subject to the
prior failures, are currently rated AAA or Aaa, the highest
rating available by a credit rating agency. A substantial
majority of the underlying assets of these auction rate
securities are student loans which are backed by the federal
government under the Federal Family Education Loan Program.
Prior to March 31, 2008, all auctions on our auction rate
securities had failed and the securities have become illiquid.
An auction failure means that the parties wishing to sell
securities could not carry out the transaction. There is no
assurance that these auctions on auction rate securities will
succeed in the future. As a result, our ability to liquidate our
investments in the near term may be limited, and our ability to
fully recover the carrying value of our investments may be
limited or non-existent. If losses become other than temporary
in the future, we will be required to record an impairment
charge in our consolidated statements of income. Any such loses
or impairment charge could have a material adverse affect on our
results of operations and financial condition.
We may
face damage to our professional reputation if our services do
not meet our clients expectations.
Many of our projects involve technology applications or systems
that are critical to the operations of our clients
businesses and handle very large volumes of transactions. If we
fail to perform our services correctly, we may be unable to
deliver applications or systems to our clients with the promised
functionality or within the promised time frame, or to satisfy
the required service levels for support and maintenance. If a
client is not satisfied with our services or products, including
those of subcontractors we employ, our business may suffer.
Moreover, if we fail to meet our contractual obligations, our
clients may terminate their contracts and we could face legal
liabilities and increased costs, including warranty claims
against us. Any failure in a clients project could result
in a claim for substantial damages, non-payment of outstanding
invoices, loss of future business with such client and increased
costs due to non-billable time of our resources dedicated to
address any performance or client satisfaction issues,
regardless of our responsibility for such failure.
We may
not be able to continue to maintain or increase our
profitability and our recent growth rates may not be indicative
of our future growth.
We have been consistently profitable only since the quarter
ended December 31, 2005. We may not succeed in maintaining
our profitability and could incur losses in future periods. If
we experience declines in demand or declines in pricing for our
services, or if wages in India or Sri Lanka increase at a faster
rate than in the United States and the United Kingdom, we will
be faced with continued growing costs for our IT professionals,
including wage increases. We also expect to continue to make
investments in infrastructure, facilities, sales and marketing
and other resources as we expand our operations, thus incurring
additional costs. If our revenue does not increase to offset
these increases in costs or operating expenses, our operating
results would be negatively affected. In fact, in future
quarters we may not have any revenue growth and our revenue and
net income could decline. You should not consider our historic
revenue and net income growth rates as indicative of future
growth rates. Accordingly, we cannot assure you that we will be
able to maintain or increase our profitability in the future.
Restrictions
on immigration may affect our ability to compete for and provide
services to clients in the United States or the United Kingdom,
which could result in lost revenue and delays in client
engagements and otherwise adversely affect our ability to meet
our growth and revenue projections.
The vast majority of our team members are Indian and Sri Lankan
nationals. The ability of our IT professionals to work in the
United States, the United Kingdom and other countries depends on
the ability to obtain the necessary visas and entry permits. In
recent years, the United States has increased the level of
scrutiny in granting H-1B, L-1 and ordinary business visas. In
response to terrorist attacks and global unrest,
19
U.S. and U.K. immigration authorities, as well as other
countries, have not only increased the level of scrutiny in
granting visas, but have also introduced new security
procedures, which include extensive background checks, personal
interviews and the use of biometrics, as conditions to granting
visas and work permits. A number of European countries are
considering changes in immigration policies as well. The
inability of key project personnel to obtain necessary visas or
work permits could delay or prevent our fulfillment of client
projects, which could hamper our growth and cause our revenue to
decline. These restrictions and additional procedures may delay,
or even prevent, the issuance of a visa or work permit to our IT
professionals and affect our ability to staff projects in a
timely manner. Any delays in staffing a project can result in
project postponement, delays or cancellation, which could result
in lost revenue and decreased profitability and have a material
adverse effect on our business, revenue, profitability and
utilization rates.
Immigration laws in countries in which we seek to obtain visas
or work permits may require us to meet certain other legal
requirements as conditions to obtaining or maintaining entry
visas. These immigration laws are subject to legislative change
and varying standards of application and enforcement due to
political forces, economic conditions or other events, including
terrorist attacks. We cannot predict the political or economic
events that could affect immigration laws, or any restrictive
impact those events could have on obtaining or monitoring entry
visas for our personnel. Our reliance on work visas and work
permits for a significant number of our IT professionals makes
us particularly vulnerable to such changes and variations,
particularly in the United States and the United Kingdom,
because these immigration and legislative changes affect our
ability to staff projects with IT professionals who are not
citizens of the country where the onsite work is to be
performed. We may not be able to obtain a sufficient number of
visas for our IT professionals or may encounter delays or
additional costs in obtaining or maintaining such visas. To the
extent we experience delays due to such immigration
restrictions, we may encounter client dissatisfaction, project
and staffing delays in new and existing engagements, project
cancellations, higher project costs and loss of revenue,
resulting in decreases in profits and a material adverse effect
on our business, results of operations, financial condition and
cash flows.
Our
management has limited experience managing a public company, and
regulatory compliance may divert its attention from the
day-to-day management of our business.
The individuals who constitute our management team have limited
experience managing a publicly traded company and limited
experience complying with the increasingly complex laws
pertaining to public companies. We have hired, and may need to
hire a number of, additional team members with public accounting
and disclosure experience in order to meet our ongoing
obligations as a public company. Our management team and other
personnel will need to devote a substantial amount of time to
these new compliance initiatives. In particular, these new
obligations will require substantial attention from our senior
management and divert its attention away from the day-to-day
management of our business, which could materially and adversely
affect our business operations.
The Sarbanes-Oxley Act of 2002 requires, among other things,
that we maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular,
we must perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses. To comply with Section 404, we will
incur substantial accounting expense and expend significant
management time. Compared to many newly-public companies, the
scale of our organization and our significant foreign operations
may make it more difficult to comply with Section 404 in a
timely manner. We may not be able to successfully complete the
procedures and certification and attestation requirements of
Section 404 by the time we will be required to do so. If we
are not able to comply with the requirements of Section 404
in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies in our internal
control over financial reporting that are deemed to be material
weaknesses, we could be subject to sanctions or investigations
by the NASDAQ Stock Market, the Securities and Exchange
Commission or other regulatory authorities, which would require
20
additional financial and management resources. In addition,
because effective internal controls are necessary for us to
produce reliable financial reports and prevent fraud, our
failure to satisfy the requirements of Section 404 could
harm investor confidence in the reliability of our financial
statements, which could harm our business and the trading price
of our common stock.
We may
be required to spend substantial time and expense before we can
recognize revenue, if any, from a client contract.
The period between our initial contact with a potential client
and the execution of a client contract for our services is
lengthy, and can extend over one or more fiscal quarters. To
sell our services successfully and obtain an executed client
contract, we generally have to educate our potential clients
about the use and benefits of our services, which can require
significant time, expense and capital without the ability to
realize revenue, if any. If our sales cycle unexpectedly
lengthens for one or more large projects, it would negatively
affect the timing of our revenue, and hinder our revenue growth.
Furthermore, a delay in our ability to obtain a signed agreement
or other persuasive evidence of an arrangement or to complete
certain contract requirements in a particular quarter, could
reduce our revenue in that quarter. These delays or failures can
cause our gross margin and profitability to fluctuate
significantly from quarter to quarter. Overall, any significant
failure to generate revenue or delays in recognizing revenue
after incurring costs related to our sales or services process
could have a material adverse effect on our business, financial
condition and results of operations.
We may
not be able to recognize revenue in the period in which our
services are performed, which may cause our margins to
fluctuate.
Our services are performed under both
time-and-material
and fixed-price arrangements. All revenue is recognized pursuant
to applicable accounting standards. These standards require us
to recognize revenue once evidence of an arrangement has been
obtained, services are delivered, fees are fixed or determinable
and collectability is reasonably assured. If we perform our
services prior to the time when we are able to recognize the
associated revenue, our margins may fluctuate significantly from
quarter to quarter.
Additionally, payment of our fees on fixed-price contracts are
based on our ability to provide deliverables on certain dates or
meet certain defined milestones. Our failure to produce the
deliverables or meet the project milestones in accordance with
agreed upon specifications or timelines, or otherwise meet a
clients expectations, may result in our having to record
the cost related to the performance of services in the period
that services were rendered, but delay the timing of revenue
recognition to a future period in which the milestone is met.
Our
inability to manage to a desired onsite-to-offshore service
delivery mix may negatively affect our gross margins and costs
and our ability to offer competitive pricing.
We may not succeed in maintaining or increasing our
profitability and could incur losses in future periods if we are
not able to manage to a desired onsite-to-offshore service
delivery mix. To the extent that our engagements involve an
increasing number of consulting, production support, software
package implementation or other services typically requiring a
higher percentage of onsite resources, we may not be able to
manage to our desired service delivery mix. Additionally, other
factors like client constraint or preferences or our inability
to manage engagements effectively with limited resources onsite
may result in a higher percentage of onsite resources than our
desired service delivery mix. Accordingly, we cannot assure you
that we will be able to manage to our desired onsite-to-offshore
service delivery mix. If we are unable to manage to our targeted
service delivery mix, our gross margins may decline and our
profitability may be reduced. Additionally, our costs will
increase and we may not be able to offer competitive pricing to
our clients.
21
Our
profitability is dependent on our billing and utilization rates,
which may be negatively affected by various
factors.
Our profit margin is largely a function of the rates we are able
to charge for our services and the utilization rate of our IT
professionals. The rates we are able to charge for our services
are affected by a number of factors, including:
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our clients perception of our ability to add value through
our services
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the introduction of new services or products by us or our
competitors
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the pricing policies of our competitors
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general economic conditions
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A number of factors affect our utilization rate, including:
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our ability to transition team members quickly from completed or
terminated projects to new engagements
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our ability to maintain continuity of existing resources on
existing projects
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our ability to obtain visas for offshore personnel to commence
projects at a client site for new or existing engagements
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the amount of time spent by our team members on non-billable
training activities
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our ability to maintain resources who are appropriately skilled
for specific projects
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our ability to forecast demand for our services and thereby
maintain an appropriate number of team members
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our ability to manage team member attrition
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seasonal trends, primarily our hiring cycle, holidays and
vacations
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the number of campus hires
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If we are not able to maintain the rates we charge for our
services or maintain an appropriate utilization rate for our IT
professionals, our revenue will decline, our costs will increase
and we will not be able to sustain our profit margin, any of
which will have a material adverse effect on our profitability.
If we
fail to manage our rapid growth effectively, we may not be able
to obtain, develop or implement new systems, infrastructure,
procedures and controls that are required to support our
operations, maintain cost controls, market our services and
manage our relationships with our clients.
We have experienced rapid growth in recent periods. From
March 31, 2005 to March 31, 2008, the number of our
team members increased from 2,251 to 4,265. We expect that we
will continue to grow and our anticipated growth could place a
significant strain on our ability to:
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recruit, hire, train, motivate and retain highly-skilled IT
services and management personnel
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adequately and timely staff personnel at client locations in the
United States and Europe due to increasing immigration and
related visa restrictions and intense competition to hire and
retain these skilled IT professionals
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adhere to our global delivery process and execution standards
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maintain and manage costs to correspond with timeliness of
revenue recognition
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develop and improve our internal administrative infrastructure,
including our financial, operational and communication systems,
processes and controls
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provide sufficient operational facilities and offshore global
delivery centers to accommodate and satisfy the capacity needs
of our growing workforce on reasonable commercial terms, or at
all, whether by leasing, buying or building suitable real estate
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preserve our corporate culture, values and entrepreneurial
environment
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maintain high levels of client satisfaction
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To manage this anticipated future growth effectively, we must
continue to maintain and may need to enhance, our IT
infrastructure, financial and accounting systems and controls
and manage expanded operations in several locations. We also
must attract, integrate, train and retain qualified personnel,
especially in the areas of accounting, internal audit and
financial disclosure. Further, we will need to manage our
relationships with various clients, vendors and other third
parties. We may not be able to develop and implement, on a
timely basis, if at all, the systems, infrastructure procedures
and controls required to support our operations. Additionally
some factors, like changes in immigration laws or visa
processing restrictions that limit our ability to engage
offshore resources at client locations in the United States or
the United Kingdom, are outside of our control. Our future
operating results will also depend on our ability to develop and
maintain a successful sales organization despite our rapid
growth. If we are unable to manage our growth, our operating
results could fluctuate from quarter to quarter and our
financial condition could be materially adversely affected.
Unexpected
costs or delays could make our contracts
unprofitable.
When making proposals for engagements, we estimate the costs and
timing for completion of the projects. These estimates reflect
our best judgment regarding the efficiencies of our
methodologies, staffing of resources, complexities of the
engagement and costs. The profitability of our engagements, and
in particular our fixed-price contracts, are adversely affected
by increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including
delays caused by factors outside our control, which could make
these contracts less profitable or unprofitable. The occurrence
of any of these costs or delays could result in an unprofitable
engagement or litigation.
We may
face liability if we inappropriately disclose confidential
client information.
In the course of providing services to our clients, we may have
access to confidential client information. We are bound by
certain agreements to use and disclose this information in a
manner consistent with the privacy standards under regulations
applicable to our clients. Although these privacy standards may
not apply directly to us, if any person, including a team member
of ours, misappropriates client confidential information, or if
client confidential information is inappropriately disclosed due
to a breach of our computer systems, system failures or
otherwise, we may have substantial liabilities to our clients or
our clients customers. In addition, in the event of any
breach or alleged breach of our confidentiality agreements with
our clients, these clients may terminate their engagements with
us or sue us for breach of contract, resulting in the associated
loss of revenue and increased costs. We may also be subject to
civil or criminal liability if we are deemed to have violated
applicable regulations. We cannot assure you that we will
adequately address the risks created by the regulations to which
we may be contractually obligated to abide.
Our
failure to anticipate rapid changes in technology may negatively
affect demand for our services in the marketplace.
Our success will depend, in part, on our ability to develop and
implement business and technology solutions that anticipate
rapid and continuing changes in technology, industry standards
and client preferences. We may not be successful in anticipating
or responding to these developments on a timely basis, which may
negatively affect demand for our solutions in the marketplace.
Also, if our competitors respond faster than we do to changes in
technology, industry standards and client preferences, we may
lose business and our services may become less competitive or
obsolete. Any one or a combination of these circumstances could
have a material adverse effect on our ability to obtain and
successfully complete client engagements.
23
Interruptions
or delays in service from our third-party providers could impair
our global delivery model, which could result in client
dissatisfaction and a reduction of our revenue.
We depend upon third parties to provide a high speed network of
active voice and data communications 24 hours per day and
various satellite and optical links between our global delivery
centers and our clients. Consequently, the occurrence of a
natural disaster or other unanticipated problems with the
equipment or at the facilities of these third-party providers
could result in unanticipated interruptions in the delivery of
our services. For example, we may not be able to maintain active
voice and data communications between our global delivery
centers and our clients sites at all times due to
disruptions in these networks, system failures or virus attacks.
Any significant loss in our ability to communicate or any
impediments to any IT professionals ability to provide
services to our clients could result in a disruption to our
business, which could hinder our performance or our ability to
complete client projects in a timely manner. This, in turn,
could lead to substantial liability to our clients, client
dissatisfaction, loss of revenue and a material adverse effect
on our business, our operating results and financial condition.
We cannot assure you that our business interruption insurance
will adequately compensate our clients or us for losses that may
occur. Even if covered by insurance, any failure or breach of
security of our systems could damage our reputation and cause us
to lose clients.
Our
ability to raise capital in the future may be limited and our
failure to raise capital when needed could prevent us from
growing.
We anticipate that our current cash and cash equivalents and
short-term investments, together with cash generated from
operations, will be sufficient to meet our current needs for
general corporate purposes for the foreseeable future. We may
also need additional financing to execute our current or future
business strategies, including to:
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add additional global delivery centers
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procure additional capacity and facilities
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hire additional personnel
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enhance our operating infrastructure
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acquire businesses or technologies
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otherwise respond to competitive pressures
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If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders could be significantly diluted and these newly
issued securities may have rights, preferences or privileges
senior to those of existing stockholders. If we incur additional
debt financing, a substantial portion of our operating cash flow
may be dedicated to the payment of principal and interest on
such indebtedness, thus limiting funds available for our
business activities. Any such debt financing could require us to
comply with restrictive financial and operating covenants, which
could have a material adverse impact on our business, results of
operations or financial condition. We cannot assure you that
additional financing will be available on terms favorable to us,
or at all. If adequate funds are not available or are not
available on acceptable terms, when we desire them, our ability
to fund our operations and growth, take advantage of
unanticipated opportunities or otherwise respond to competitive
pressures may be significantly limited.
Potential
future acquisitions, strategic investments, partnerships or
alliances could be difficult to identify and integrate, divert
the attention of key management personnel, disrupt our business,
dilute stockholder value and adversely affect our financial
results.
We may acquire or make strategic investments in complementary
businesses, technologies or services or enter into strategic
partnerships or alliances with third parties to enhance our
business. If we do identify
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suitable candidates, we may not be able to complete transactions
on terms commercially acceptable to us, if at all. These types
of transactions involve numerous risks, including:
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difficulties in integrating operations, technologies, accounting
and personnel
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difficulties in supporting and transitioning clients of our
acquired companies or strategic partners
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diversion of financial and management resources from existing
operations
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risks of entering new markets
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potential loss of key team members
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inability to generate sufficient revenue to offset transaction
costs
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We may finance future transactions through debt financing or the
issuance of our equity securities or a combination of the
foregoing. Acquisitions financed with the issuance of our equity
securities could be dilutive, which could affect the market
price of our stock. Acquisitions financed with debt could
require us to dedicate a substantial portion of our cash flow to
principal and interest payments and could subject us to
restrictive covenants. Acquisitions also frequently result in
the recording of goodwill and other intangible assets that are
subject to potential impairments in the future that could harm
our financial results. It is possible that we may not identify
suitable acquisition, strategic investment or partnership or
alliance candidates. Our inability to identify suitable
acquisition targets, strategic investments, partners or
alliances, or our inability to complete such transactions, may
negatively affect our competitiveness and growth prospects.
Moreover, if we fail to properly evaluate acquisitions,
alliances or investments, we may not achieve the anticipated
benefits of any such transaction and we may incur costs in
excess of what we anticipate.
Some
of our client contracts contain restrictions or penalty
provisions that, if triggered, could result in lower future
revenue and decrease our profitability.
We have entered in the past, and may in the future enter, into
contracts that contain restrictions or penalty provisions that,
if triggered, may adversely affect our operating results. For
instance, some of our client contracts provide that, during the
term of the contract and for a certain period thereafter ranging
from six to 12 months, we may not use the same personnel to
provide similar services to any of the clients
competitors. This restriction may hamper our ability to compete
for and provide services to clients in the same industry. In
addition, some contracts contain provisions that would require
us to pay penalties to our clients if we do not meet pre-agreed
service level requirements. If any of the foregoing were to
occur, our future revenue and profitability under these
contracts could be materially harmed.
Negative
public perception in the United States and the United Kingdom
regarding offshore IT service providers and proposed legislation
may adversely affect demand for our services.
We have based our growth strategy on certain assumptions
regarding our industry, services and future demand in the market
for such services. However, the trend to outsource IT services
may not continue and could reverse. Offshore outsourcing is a
politically sensitive topic in the United States and the
United Kingdom. For example, many organizations and public
figures in the United States and the United Kingdom have
publicly expressed concern about a perceived association between
offshore outsourcing providers and the loss of jobs in their
home countries. In addition, there has been recent publicity
about the negative experience of certain companies that use
offshore outsourcing, particularly in India. Current or
prospective clients may elect to perform such services
themselves or may be discouraged from transferring these
services from onshore to offshore providers to avoid negative
perceptions that may be associated with using an offshore
provider. Any slowdown or reversal of existing industry trends
towards offshore outsourcing would seriously harm our ability to
compete effectively with competitors that operate out of
facilities located in the United States or the
United Kingdom.
Legislation in the United States or the United Kingdom may be
enacted that is intended to discourage or restrict outsourcing.
In the United States, a variety of federal and state legislation
has been proposed that, if enacted, could restrict or discourage
U.S. companies from outsourcing their services to companies
outside the
25
United States. For example, legislation has been proposed that
would require offshore providers to identify where they are
located. In addition, it is possible that legislation could be
adopted that would restrict U.S. private sector companies
that have federal or state government contracts from outsourcing
their services to offshore service providers. We do not
currently have any contracts with U.S. federal or state
government entities. However, there can be no assurance that
these restrictions will not extend to or be adopted by private
companies, including our clients. Recent legislation introduced
in the United Kingdom would restrict or discourage companies
from outsourcing their services, including IT services. Any
changes to existing laws or the enactment of new legislation
restricting offshore outsourcing in the United States or the
United Kingdom may adversely affect our ability to do business
in the United States or in the United Kingdom, particularly if
these changes are widespread, and could have a material adverse
effect on our business, results of operations, financial
condition and cash flows.
Our
results of operations and business may be adversely affected by
an investigation currently being conducted by the Wage and Hour
Division of the U.S. Department of Labor.
There are strict labor regulations associated with the H-1B visa
classification. Larger employers of the
H-1B
visa
program are often subject to investigations by the Wage and Hour
Division of the U.S. Department of Labor. The Department of
Labor commenced an investigation to determine if we have
complied with the elements of the Labor Condition Application(s)
(ETA Form 9035) to hire certain H-1B non-immigrant
workers. We believe the Department of Labor is primarily focused
on whether our team members with H-1B renewals were paid at the
appropriate pay level. However, the investigation has recently
been commenced and is in its early stages. We do not currently
know when this investigation will be concluded. An adverse
finding by the U.S. Department of Labor may result in
back-pay liability, substantial fines,
and/or
a ban
on future use of the H-1B program and other immigration
benefits, which could materially harm our business and results
of operations.
Our
services may infringe on the intellectual property rights of
others, which may subject us to legal liability, harm our
reputation, prevent us from offering some services to our
clients or distract management.
We cannot be sure that our services or the deliverables that we
develop and create for our clients do not infringe the
intellectual property rights of third parties and infringement
claims may be asserted against us or our clients. These claims
may harm our reputation, distract management, cost us money and
prevent us from offering some services to our clients.
Historically, we have generally agreed to indemnify our clients
for all expenses and liabilities resulting from infringement of
intellectual property rights of third parties based on the
services and deliverables that we have performed and provided to
our clients. In some instances, the amount of these indemnities
may be greater than the revenue we receive from the client. In
addition, as a result of intellectual property litigation, we
may be required to stop selling, incorporating or using products
that use or incorporate the infringed intellectual property. We
may be required to obtain a license or pay a royalty to make,
sell or use the relevant technology from the owner of the
infringed intellectual property. Such licenses or royalties may
not be available on commercially reasonable terms, or at all. We
may also be required to redesign our services or change our
methodologies so as not to use the infringed intellectual
property, which may not be technically or commercially feasible
and may cause us to expend significant resources. Subject to
certain limitations, under our indemnification obligations to
our clients, we may also have to provide refunds to our clients
to the extent that we must require them to cease using an
infringing deliverable if we are unable to provide a work around
or acquire a license to permit use of the infringing deliverable
that we had provided to them as part of a service engagement. If
we are obligated to make any such refunds or dedicate time to
provide alternatives or acquire a license to the infringing
intellectual property, our business and financial condition
could be materially adversely affected.
26
Any
claims or litigation involving intellectual property, whether we
ultimately win or lose, could be extremely time-consuming,
costly and injure our reputation.
As the number of patents, copyrights and other intellectual
property rights in our industry increases, we believe that
companies in our industry will face more frequent infringement
claims. Defending against these claims, even if the claims have
no merit, may not be covered by or could exceed the protection
offered by our insurance and could divert managements
attention and resources from operating our company.
Risks
related to our Indian and Sri Lankan operations
Political
instability or changes in the government in India could result
in the change of several policies relating to foreign direct
investment and repatriation of capital and dividends. Further,
changes in the economic policies could adversely affect economic
conditions in India generally and our business in
particular.
We have three subsidiaries in India and a significant portion of
our business, fixed assets and human resources are located in
India. As a result, our business is affected by foreign exchange
rates and controls, interest rates, local regulations, changes
in government policy, taxation, social and civil unrest and
other political, economic or other developments in or affecting
India.
Since 1991, successive Indian governments have pursued policies
of economic liberalization, including significantly relaxing
restrictions on foreign direct investment into India with
repatriation benefits. Nevertheless, the roles of the Indian
central and state governments in the Indian economy as
producers, consumers and regulators have remained significant.
The rate of economic liberalization could change and specific
laws and policies affecting software companies, foreign
investment, currency exchange and other matters affecting
investment in our securities could change as well. A significant
change in Indias economic liberalization and deregulation
policies could adversely affect business and economic conditions
in India generally and our business in particular, if new
restrictions on the private sector are introduced or if existing
restrictions are increased.
Changes
in the policies of the government of Sri Lanka or political
instability could delay the further liberalization of the Sri
Lankan economy and adversely affect economic conditions in Sri
Lanka, which could adversely affect our business.
Our subsidiary in Sri Lanka has been approved as an export
computer software developer by the Board of Investment in Sri
Lanka, which is a statutory body organized to facilitate foreign
investment into Sri Lanka and grant concessions and benefits to
entities with which it has entered into agreements. Pursuant to
our agreement with the Board of Investment, our subsidiary is
entitled to exemptions from taxation on income for a period of
12 years expiring on March 31, 2019. Our subsidiary is
also exempt from exchange control regulations which will enable
our subsidiary to repatriate dividends abroad. Nevertheless,
government policies relating to taxation other than on income
would have an impact on the subsidiary, and the political,
economic or social factors in Sri Lanka may affect these
policies. Historically, past incumbent governments have followed
policies of economic liberalization. However, we cannot assure
you that the current government or future governments will
continue these liberal policies.
Regional
conflicts or terrorist attacks and other acts of violence or war
in India, Sri Lanka, the United States or other regions
could adversely affect financial markets, resulting in loss of
client confidence and our ability to serve our clients which, in
turn, could adversely affect our business, results of operations
and financial condition.
The Asian region has from time to time experienced instances of
civil unrest and hostilities among neighboring countries,
including between India and Pakistan. Since May 1999, military
confrontations between India and Pakistan have occurred in
Kashmir. Also, there have been military hostilities and civil
unrest in Iraq. Terrorist attacks, such as the ones that
occurred in New York and Washington, D.C., on
September 11, 2001, New Delhi on December 13, 2001,
Bali on October 12, 2002, civil or political unrest in Sri
Lanka and other acts of violence or war, including those
involving India, Sri Lanka, the United States, the United
Kingdom or
27
other countries, may adversely affect U.S., U.K. and worldwide
financial markets. Prospective clients may wish to visit several
of our facilities, including our global delivery centers in
India and Sri Lanka, prior to reaching a decision on vendor
selection. Terrorist threats, attacks and international
conflicts could make travel more difficult and cause potential
clients to delay, postpone or cancel decisions to use our
services. In addition, such attacks may have an adverse impact
on our ability to operate effectively and interrupt lines of
communication and restrict our offshore resources from traveling
onsite to client locations, effectively curtailing our ability
to deliver our services to our clients. These obstacles may
increase our expenses and negatively affect our operating
results. In addition, military activity, terrorist attacks,
political tensions between India and Pakistan and conflicts
within Sri Lanka could create a greater perception that the
acquisition of services from companies with significant Indian
or Sri Lankan operations involves a higher degree of risk that
could adversely affect client confidence in India or Sri Lanka
as a software development center, each of which would have a
material adverse effect on our business.
Our
net income may decrease if the governments of the United
Kingdom, the United States, India or Sri Lanka adjust the
amount of our taxable income by challenging our transfer pricing
policies.
Our subsidiaries conduct intercompany transactions among
themselves and with the U.S. parent company on an
arms-length basis in accordance with U.S. and local
country transfer pricing regulations. The jurisdictions in which
we pay income taxes could challenge our determination of
arms-length profit and issue tax assessments. Although the
United States has income tax treaties with all countries in
which we have operations, which mitigates the risk of double
taxation, the costs to appeal any such tax assessment and
potential interest and penalties could decrease our earnings and
cash flows.
The Indian taxing authorities issued an assessment order with
respect to their examination of the tax return for the fiscal
year ended March 31, 2004 of our Indian subsidiary, Virtusa
(India) Private Ltd., or Virtusa India. At issue were several
matters, the most significant of which was the re-determination
of the arms-length profit which should be recorded by
Virtusa India on the intercompany transactions with its
affiliates. We are contesting the assessment and have filed
appeals with both the appropriate Indian tax authorities and the
U.S. Competent Authority. As of March 31, 2008, we
recorded a $0.5 million reserve related to this matter.
Our
net income may decrease if the governments of India or Sri Lanka
reduce or withdraw tax benefits and other incentives provided to
us or levy new taxes.
Virtusa India is an export-oriented company under the Indian
Income Tax Act of 1961 and is entitled to claim tax exemption
for each Software Technology Park, or STP, which it operates.
Virtusa India currently operates two STPs, in Chennai and in
Hyderabad. Substantially all of the earnings of both STPs
qualify as tax-exempt export profits. These holidays will be
completely phased out by March 2010, and at that time any
profits would be fully taxable at the Indian statutory rate,
which is currently 34%. Although we believe we have complied
with and are eligible for the STP holiday, the government of
India may deem us ineligible for the STP holiday or make
adjustments to the profit level resulting in an overall increase
in our effective tax rate. In anticipation of the phase-out of
the STP holidays, we intend to locate at least a portion of our
Indian operations in areas designated as a Special Economic
Zone, or SEZ, under the SEZ Act of 2005. In particular, we are
building a campus on a 6.3 acre parcel of land in
Hyderabad, India that has been designated as a SEZ. In addition,
we have leased space and intend to operate on a SEZ designated
location in Chennai, India. Although our profits from the SEZ
operations would be eligible for certain income tax exemptions
for a period up to 15 years, there is no guarantee that we
will secure SEZ status for any other location in India.
Additionally, the government of India may deem us ineligible for
a SEZ holiday or make adjustments to the transfer pricing profit
levels resulting in an overall increase in our effective tax
rate.
In addition, our Sri Lankan subsidiary, Virtusa Private Ltd., or
Virtusa SL, was approved as an export computer software
developer by the Sri Lanka Board of Investment in 1998 and has
negotiated multiple extensions of the original holiday period in
exchange for further capital investments in Sri Lanka
facilities. The most recent
12-year
agreement, which is set to expire on March 31, 2019,
requires that we meet certain
28
new job creation and investment criteria. Any inability to meet
the agreed upon timetable for new job creation and investment
would jeopardize the new holiday arrangement.
Newly-enacted
legislation in India could harm our results of operations and
ability to attract, hire and retain qualified
personnel.
In May 2007, the Parliament of India enacted the Finance Act,
2007, which, among other things, imposes a fringe benefit tax at
the applicable Indian tax rate (currently 34%) on certain stock
compensation and equity awards paid or issued to team members of
our Indian subsidiaries. Specifically, the fringe benefit tax,
which is payable upon the exercise of such equity awards, is
based on the difference between the exercise price of the equity
award and the fair market value of the equity award upon
vesting. Because our potential tax liability is dependent on the
fair market value of our common stock at the time of vesting of
such equity awards, which could span over the next several
years, and whether the equity awards are ultimately exercised,
it is difficult to accurately forecast and could represent a
significant liability and expense to us. We have decided to
reduce the impact of this tax obligation on us, such as passing
the cost of the fringe benefit tax on to our team members from
our Indian subsidiaries. However, such alternatives do not
eliminate the negative impact of the tax liability on our
statements of income and result in significant non-cash
compensation expense, which impacts our gross margin, operating
profit margin and net income and creates volatility in our
income from operations from period to period. This transfer of
cost could significantly decrease the desirability of these
equity awards to these team members, which could harm our
ability to attract, hire and retain qualified personnel.
Wage
pressures and increases in government mandated benefits in India
and Sri Lanka may reduce our profit margins.
Wage costs in India and Sri Lanka have historically been
significantly lower than wage costs in the United States and
Europe for comparably-skilled professionals. However, wages in
India and Sri Lanka are increasing, which will result in
increased costs for IT professionals, particularly project
managers and other mid-level professionals. We may need to
increase the levels of our team member compensation more rapidly
than in the past to remain competitive without the ability to
make corresponding increases to our billing rates. Compensation
increases may reduce our profit margins, make us less
competitive in pricing potential projects against those
companies with lower cost resources and otherwise harm our
business, operating results and financial condition.
In addition, we contribute to benefit funds covering our
employees in India and Sri Lanka as mandated by the Indian and
Sri Lankan governments. Benefits are based on the team member
years of service and compensation. If the governments of India
and/or
Sri
Lanka were to legislate increases to the benefits required under
these plans or mandate additional benefits, our profitability
and cash flows would be reduced.
Our
facilities are at risk of damage by earthquakes, tsunamis and
other natural disasters.
In December 2004, Sri Lanka and India were struck by multiple
tsunamis that devastated certain areas of both countries. Our
Indian and Sri Lankan facilities are located in regions that are
susceptible to tsunamis and other natural disasters, which may
increase the risk of disruption of information systems and
telephone service for sustained periods. Damage or destruction
that interrupts our ability to deliver our services could damage
our relationships with our clients and may cause us to incur
substantial additional expense to repair or replace damaged
equipment or facilities. Our insurance coverage may not be
sufficient to cover all such expenses. Furthermore, we may be
unable to secure such insurance coverage or to secure such
insurance coverage at premiums acceptable to us in the future.
Prolonged disruption of our services as a result of natural
disasters may cause our clients to terminate their contracts
with us and may result in project delays, project cancellations
and loss of substantial revenue to us. Prolonged disruptions may
also harm our team members or cause them to relocate, which
could have a material adverse effect on our business.
29
The
laws of India and Sri Lanka do not protect intellectual property
rights to the same extent as those of the United States and we
may be unsuccessful in protecting our intellectual property
rights. Unauthorized use of our intellectual property rights may
result in loss of clients and increased
competition.
Our success depends, in part, upon our ability to protect our
proprietary methodologies, trade secrets and other intellectual
property. We rely upon a combination of trade secrets,
confidentiality policies, non-disclosure agreements, other
contractual arrangements and copyright and trademark laws to
protect our intellectual property rights. However, existing laws
of India and Sri Lanka do not provide protection of intellectual
property rights to the same extent as provided in the United
States. The steps we take to protect our intellectual property
may not be adequate to prevent or deter infringement or other
unauthorized use of our intellectual property. Thus, we may not
be able to detect unauthorized use or take appropriate and
timely steps to enforce our intellectual property rights. Our
competitors may be able to imitate or duplicate our services or
methodologies. The unauthorized use or duplication of our
intellectual property could disrupt our ongoing business,
distract our management and team members, reduce our revenue and
increase our costs and expenses. We may need to litigate to
enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Any such
litigation could be extremely time-consuming and costly and
could materially adversely impact our business.
Risks
related to our common stock
Provisions
in our charter documents and under Delaware law may prevent or
delay a change of control of us and could also limit the market
price of our common stock.
Certain provisions of Delaware law and of our certificate of
incorporation and by-laws could have the effect of making it
more difficult for a third party to acquire, or of discouraging
a third party from attempting to acquire, control of us, even if
such a change in control would be beneficial to our stockholders
or result in a premium for your shares of our common stock.
These provisions may also prevent or frustrate attempts by our
stockholders to replace or remove our management. These
provisions include:
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a classified board of directors
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limitations on the removal of directors
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advance notice requirements for stockholder proposals and
nominations
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the inability of stockholders to act by written consent or to
call special meetings
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the ability of our board of directors to make, alter or repeal
our by-laws
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The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions that are contained in our
certificate of incorporation. In addition, our board of
directors has the ability to designate the terms of and issue
new series of preferred stock without stockholder approval.
Also, absent approval of our board of directors, our by-laws may
only be amended or repealed by the affirmative vote of the
holders of at least 75% of our shares of capital stock entitled
to vote.
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
limits business combination transactions with stockholders of
15% or more of our outstanding voting stock that our board of
directors has not approved. These provisions and other similar
provisions make it more difficult for stockholders or potential
acquirers to acquire us without negotiation. These provisions
may apply even if some stockholders may consider the transaction
beneficial to them.
These provisions could limit the price that investors are
willing to pay in the future for shares of our common stock.
These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or
tender offer is at a premium over the then current market price
for our common stock.
30
Because
our common stock price is likely to continue to be volatile, the
market price of our common stock could drop
unexpectedly.
Our stock price has been and may continue to be volatile, and
the market price of our common stock could drop unexpectedly.
Some of the factors that may cause the market price of our
common stock to fluctuate include:
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actual or anticipated variations in our quarterly operating
results or the quarterly financial results of companies
perceived to be similar to us
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announcements of technological innovations or new services by us
or our competitors
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changes in estimates of our financial results or recommendations
by market analysts
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announcements by us or our competitors of significant projects,
contracts, acquisitions, strategic alliances or joint ventures
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changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt
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regulatory developments in the United States, the United
Kingdom, Sri Lanka, India or other countries in which we operate
or have clients
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litigation involving our company, our general industry or both
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additions or departures of key team members
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investors general perception of us
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changes in general economic, industry and market conditions
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changes in the market valuations of other IT service providers
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Many of these factors are beyond our control. In addition, the
stock markets, especially the NASDAQ Global Market, have
experienced significant price and volume fluctuations that have
affected the market prices of equity securities of many
technology companies. These fluctuations have often been
unrelated or disproportionate to operating performance. If any
of the foregoing occurs, it could cause our stock price to fall
and may expose us to securities class action litigation. Any
securities class action litigation could result in substantial
costs and the diversion of managements attention and
resources.
Our
existing stockholders and management control a substantial
interest in us and thus may influence certain actions requiring
stockholder vote.
Our executive officers, directors and stockholders affiliated
with our directors will beneficially own, in the aggregate,
shares representing approximately 48% of our outstanding capital
stock. Although we are not aware of any voting arrangements that
are in place among these stockholders, if these stockholders
were to choose to act together, as a result of their stock
ownership, they would be able to control all matters submitted
to our stockholders for approval, including the election of
directors and approval of any merger, consolidation or sale of
all or substantially all of our assets. This concentration of
voting power could delay or prevent an acquisition of our
company on terms that other stockholders may desire.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our principal executive offices are located in Westborough,
Massachusetts, where we lease approximately 30,000 square
feet. We also have sales and business development offices
located in Reading and London in the United Kingdom.
31
We have global delivery centers located in Hyderabad and
Chennai, India and Colombo, Sri Lanka. We lease space at four
facilities in Hyderabad, India, totaling approximately
168,500 square feet, and at two facilities in Chennai,
India, totaling approximately 120,700 square feet. In
Colombo, Sri Lanka, we lease space at four facilities totaling
approximately 152,600 square feet. Our leases vary in
duration and term, have varying renewable terms and have
expiration dates extending from 2008 to 2012. In addition, in
March 2007, we entered into a
99-year
lease, as amended in August 2007, with an option for an
additional 99 years for approximately 6.3 acres of
land in Hyderabad, India, where we are presently building a
campus. We have begun construction of Phase I of the campus
which, when completed, will total approximately
340,000 square feet.
We believe that our existing and planned facilities are adequate
to support our existing operations and that, as needed, we will
be able to obtain suitable additional facilities on commercially
reasonable terms.
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Item 3.
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Legal
Proceedings
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We are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of our
management, the outcome of such claims and legal actions, if
decided adversely, is not currently expected to have a material
adverse effect on our operating results, cash flows or
consolidated financial position.
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Item 4.
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Submission
of Matter to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
for Our Common Equity, Related Stockholder Matters and Purchases
of Equity Securities.
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Our common stock commenced trading on the NASDAQ Global Market
on August 3, 2007 under the symbol VRTU. The
following table sets forth, for the periods indicated, the high
and low sale prices for our common stock for our fiscal year
ended March 31, 2008 since our initial public offering as
reported on the NASDAQ Global Market.
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High
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Low
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Fiscal 2008:
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Second quarter*
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$
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15.99
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$
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11.04
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Third quarter
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$
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19.97
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$
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12.57
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Fourth quarter
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$
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17.07
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$
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8.55
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*
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Our common stock began trading on August 3, 2007.
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As of June 2, 2008, there were approximately
23,058,539 shares of our common stock outstanding held by
approximately 62 stockholders of record and the last
reported sale price of our common stock on the NASDAQ Global
Market on June 2, 2008 was $10.15 per share.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock. We currently expect to retain future earnings, if any, to
finance the growth and development of our business and we do not
anticipate paying any cash dividends in the foreseeable future.
32
Equity
Compensation Plan Information
Equity
Compensation Plan Information
The following table provides information as of March 31,
2008 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans.
We have three equity compensation plans, each of which has been
approved by our stockholders: (1) Amended and Restated 2000
Stock Option Plan, which we refer to as the 2000 Plan;
(2) the 2005 Stock Appreciation Rights Plan, which we refer
to as the SAR Plan; and (3) the 2007 Stock Option and
Incentive Plan, which we refer to as the 2007 Plan. For
additional information on our equity compensation plans, please
see note 9 to the consolidated financial statements.
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Number of Securities
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to be Issued Upon
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Weighted Average
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Vesting
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Exercise Price of
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Number of Securities
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of Awards or
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Awards or
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Available for Future
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Exercise of
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Outstanding
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Issuance Under Equity
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Plan Category
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Outstanding Options
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Options
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Compensation Plans
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Equity compensation plans that have been approved by security
holders stock options(1)
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2,551,757
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(2)
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$
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5.64
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476,390
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(2)
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Equity compensation plans that have been approved by security
holders stock appreciation rights(3)
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151,274
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4.12
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(2)
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Equity compensation plans not approved by security holders(4)
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869,055
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2.74
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Total
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3,572,086
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476,390
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(1)
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Consists of the 2000 Plan and the 2007 Plan
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(2)
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In the event that any option under the 2000 Plan or any stock
appreciation right under the SAR Plan terminates without being
exercised, the number of shares underlying such option or stock
appreciation right becomes available for grant under the 2007
Plan. No further awards are authorized to be granted under the
2000 Plan or the SAR Plan.
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(3)
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Consists of the SAR Plan.
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(4)
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Consists of 869,055 shares issuable upon exercise of
options granted to Mr. Danford Smith, our President and
Chief Operating Officer, and Mr. Martin Trust, a board
member.
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Issuer
Purchases of Equity Securities
(a) On August 8, 2007, we completed our initial public
offering (the IPO) of 4,400,000 shares of
common stock at a public offering price of $14.00 per share
which we offered for sale pursuant to a registration statement
on
Form S-1
as amended (File
No. 333-141952).
Such registration statement was declared effective by the SEC on
August 2, 2007. The managing underwriters in the offering
were J.P. Morgan Securities Inc., Bear, Stearns & Co.
Inc., Cowen and Company, LLC and William Blair
& Company, LLC. Net proceeds of the IPO were
approximately $52.8 million, after deducting underwriting
discounts and commissions of approximately $4.3 million and
offering fees and expenses of approximately $4.5 million,
which includes legal, accounting and printing costs and various
other fees associated with registration and listing of our
common stock. We expect to use a portion of the net proceeds
from our IPO to fund the construction and build-out of a new
facility on our planned campus in Hyderabad, India, of which we
have spent approximately $7.2 million in our fiscal year
ended March 31, 2008 and plan to spend approximately
$23.3 million during our fiscal years ending 2009 and 2010.
The balance of the net proceeds will be used for working capital
and other general corporate purposes, including to finance the
expansion of our global delivery centers in Chennai, India and
Colombo, Sri Lanka, the hiring of additional personnel, sales
and marketing activities, capital expenditures, the costs of
operating as a public company and possible strategic alliances
or acquisitions.
33
(b) On April 9, 2008, we issued an aggregate of
6,285 shares of our common stock upon the exercise of a
warrant issued to Silicon Valley Bank on April 9, 2001,
giving effect to a net and automatic exercise provision in the
warrant. The 6,285 shares were issued based on the exercise
price of $5.48 per share (or an aggregate consideration of
$85,224) and a fair market value per share of $9.19 (or an
aggregate fair market value of $142,987), based on the closing
price of our common stock on the NASDAQ Global Market on
April 9, 2008. We issued the 6,285 shares of our
common stock under Section 4(2) of the Securities Act
(and/or Regulation D promulgated thereunder).
(c) During the fiscal quarter ended March 31, 2008,
there were no repurchases made by us or on our behalf, or by any
affiliated purchasers, of shares of our common stock.
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Item 6.
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Selected
Financial Data
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The selected historical financial data set forth below as of
March 31, 2008 and 2007 and for the fiscal years ended
March 31, 2008, 2007 and 2006 are derived from our
financial statements, which have been audited by KPMG LLP, our
independent registered public accounting firm, and which are
included elsewhere in this Annual Report on
Form 10-K.
The selected historical financial data as of March 31,
2006, 2005 and 2004 and for the fiscal years ended
March 31, 2005 and 2004 are derived from our financial
statements which are not included elsewhere in this Annual
Report.
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements,
the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on
Form 10-K.
The historical results are not necessarily indicative of the
results to be expected for any future period.
Consolidated
statement of operations data
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|
Fiscal Year Ended March 31,
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2008
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|
2007
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|
|
2006
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|
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2005
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|
|
2004
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(In thousands, except share and per share amounts)
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|
|
Revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
$
|
60,484
|
|
|
$
|
42,822
|
|
Costs of revenue
|
|
|
92,847
|
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
31,813
|
|
|
|
22,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,351
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|
|
|
56,629
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|
|
|
33,518
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|
|
|
28,671
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|
|
|
20,174
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|
Operating expenses
|
|
|
52,972
|
|
|
|
42,478
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|
|
|
32,925
|
|
|
|
27,838
|
|
|
|
20,309
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
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|
|
19,379
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|
|
|
14,151
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|
|
|
593
|
|
|
|
833
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|
|
|
(135
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)
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Other income
|
|
|
3,249
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|
|
|
1,209
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|
|
|
1,564
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|
|
|
376
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|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
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|
|
22,628
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|
|
|
15,360
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|
|
|
2,157
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|
|
|
1,209
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|
|
|
(62
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)
|
Income tax expense (benefit)
|
|
|
4,857
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|
|
|
(3,630
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)
|
|
|
176
|
|
|
|
99
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
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|
$
|
17,771
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|
|
$
|
18,990
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|
|
$
|
1,981
|
|
|
$
|
1,110
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|
|
$
|
(208
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss) per share of common stock
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Basic
|
|
$
|
0.83
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|
|
$
|
1.09
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|
|
$
|
0.12
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|
|
$
|
0.07
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|
|
$
|
(0.04
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)
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|
|
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|
|
|
|
|
|
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Diluted
|
|
$
|
0.76
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|
$
|
1.03
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|
|
$
|
0.11
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|
|
$
|
0.06
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|
|
$
|
(0.04
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Weighted average number of common shares outstanding
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|
|
|
|
|
|
|
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|
|
|
|
|
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Basic
|
|
|
21,368,470
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|
|
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6,005,619
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|
|
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5,613,623
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|
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5,448,048
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|
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5,561,278
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Diluted
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23,282,663
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18,351,161
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|
|
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17,361,219
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|
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17,116,473
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|
|
|
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Note:
The net income per share calculations
for the fiscal years ended March 31, 2007, 2006 and 2005
give effect to the automatic conversion of the redeemable
convertible preferred stock into 11,425,786 shares of
common stock upon the closing of the IPO on August 8, 2007.
The decrease in net income and earnings per
34
share in the fiscal year ended March 31, 2008 from the
fiscal year ended March 31, 2007 is due to our one-time
income tax benefit of $5.0 million in fiscal year 2007
caused by the release of our deferred tax asset valuation
allowance. Fiscal year 2004 did not give effect to the
conversion of the redeemable convertible preferred stock, which
would have been anti-dilutive.
Consolidated
balance sheet data
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As of March 31,
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2008
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2007
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2006
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2005
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2004
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(In thousands)
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Cash and cash equivalents
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$
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41,047
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$
|
45,079
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$
|
30,237
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$
|
28,406
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|
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$
|
30,361
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Working capital
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|
|
108,808
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|
|
|
65,765
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|
|
41,696
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|
|
|
35,436
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|
|
|
33,043
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Total assets
|
|
|
180,770
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|
|
|
99,319
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|
|
|
58,719
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|
|
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50,085
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|
|
|
47,141
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Redeemable convertible preferred stock
|
|
|
|
|
|
|
60,862
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|
|
|
60,814
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|
|
|
60,758
|
|
|
|
60,701
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|
Total stockholders equity (deficit)
|
|
|
155,834
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|
|
|
19,259
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|
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|
(13,610
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)
|
|
|
(17,899
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)
|
|
|
(20,992
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)
|
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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Business
overview
We are a global information technology services company. We use
an offshore delivery model to provide a broad range of IT
services, including IT consulting, technology implementation and
application outsourcing. Using our enhanced global delivery
model, innovative platforming approach and industry expertise,
we provide cost-effective services that enable our clients to
use IT to enhance business performance, accelerate
time-to-market,
increase productivity and improve customer service.
Headquartered in Massachusetts, we have offices in the United
States and the United Kingdom and global delivery centers in
Hyderabad and Chennai, India and Colombo, Sri Lanka. We have
experienced compounded annual revenue growth of 46% over the
five-year period ended March 31, 2008. At March 31,
2008, we had 4,265 employees, or team members, and for the
fiscal year ended March 31, 2008, we had revenue of
$165.2 million and income from operations of
$19.4 million.
In our fiscal year ended March 31, 2008, our revenue
increased 33% to $165.2 million compared to
$124.7 million in our fiscal year ended March 31,
2007. Net income decreased by $1.2 million to
$17.8 million in our fiscal year ended March 31, 2008,
as compared to $19.0 million in our fiscal year ended
March 31, 2007. The
year-over-year
decrease in net income of $1.2 million is primarily due to
a one-time income tax benefit of $5.0 million in the prior
year caused by the release of our deferred tax asset valuation
allowance.
The key drivers of our revenue growth in our fiscal year ended
March 31, 2008 were as follows:
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|
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greater penetration of the European market, where we experienced
revenue growth of 60% in our fiscal year ended March 31,
2008 as compared to our fiscal year ended March 31, 2007
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|
|
|
strong performance of our BFSI industry vertical, which had
fiscal year-over-year growth of 43%, our communication and
technology industry vertical which had fiscal year-over-year
revenue growth of approximately 34%, and our media and
information industry vertical which had fiscal year over year
growth of approximately 13%
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|
|
|
increased penetration at existing clients
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|
|
|
continued expansion of the market for global delivery of IT
services
|
High repeat business and client concentration is common in our
industry. During our fiscal year ended March 31, 2008, 96%
of our revenue was derived from clients who had been using our
services for more than one year. Accordingly, our global account
management and service delivery teams focus on expanding client
relationships and converting new engagements to long-term
relationships to generate repeat revenue and expand revenue
streams from existing clients. We also have a dedicated business
development team focused on generating engagements with new
clients to continue to expand our client base, and over time,
reduce client concentration.
35
Our European revenue increased to $51.1 million, or 31% of
total revenue, from $31.9 million, or 26% of total revenue
for the fiscal years ended March 31, 2008 and
March 31, 2007, respectively. Other revenue diversification
strategies include revenue by industry and revenue by service
offering. Our revenue from application outsourcing services has
represented a substantial majority of our total revenue.
However, IT consulting services and technology implementation
services have increased as a percentage of our total revenue in
recent years.
We perform our services under both
time-and-materials
and fixed-price contracts. Revenue from fixed-price contracts
was 21%, 14%, and 5% of total revenue for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively. The increased
revenue earned from fixed-price contracts reflects our
clients preferences.
As an IT services company, our revenue growth has been, and will
continue to be, highly dependent on our ability to attract,
develop, motivate and retain skilled IT professionals. We
closely monitor our overall attrition rates and patterns to
ensure our people management strategy aligns with our growth
objectives. For the last twelve months ended March 31,
2008, our attrition rate was 21.3%. We remain committed to
improving our attrition levels. There is intense competition for
IT professionals with the skills necessary to provide the type
of services we offer. If our attrition rate increases and is
sustained at higher levels, our growth may slow and our cost of
attracting and retaining IT professionals could increase.
In our fiscal year ended March 31, 2008, we experienced
pressure on our cost structure due to the appreciation of the
Indian rupee versus the U.S. dollar. This is in addition to
the continuing wage inflation, primarily in India and Sri Lanka,
that we have experienced over the last several years. In
response to these pressures, in our fiscal year ended
March 31, 2008, we initiated a hedging strategy using
forward contracts designed to hedge fluctuation in the Indian
rupee against the U.S. dollar and U.K. pound sterling.
There is no assurance that these hedging programs will be
effective.
We have been profitable for the past ten consecutive quarters.
We continually monitor and manage a number of operating metrics
to ensure quality and reduce volatility in our earnings,
including:
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|
|
|
|
Days sales outstanding, or DSO,
is a measure of the
number of days our accounts receivable are outstanding based
upon the last 90 days of revenue activity, which indicates
the timeliness of our cash collection from clients and our
overall credit terms to our clients. DSO was 78 days and
79 days for our fiscal years ended March 31, 2008 and
2007, respectively. Higher DSO reduces our cash balance because
the
revenue-to-cash
conversion process takes longer.
|
|
|
|
Realized billing rates
are the rates we charge our
clients for our services, which reflect the value our clients
place on our services, market competition and the geographic
location in which we perform our services. Our realized billing
rates have increased in our fiscal years ended March 31,
2007 and 2006, respectively, and have remained unchanged for our
fiscal year ended March 31, 2008. Any increase in realized
billing rates is a result of our ability to successfully
preserve or increase our billing rates with existing
and/or
new
clients.
|
|
|
|
Average cost per IT professional
is the sum of team
member salaries, including variable compensation, and fringe
benefits divided by the average number of IT professionals
during the period. We experienced increases in our average cost
per IT professional of 7.0% from our fiscal year ended
March 31, 2007 to our fiscal year ended March 31,
2008, primarily driven by the year-over-year appreciation of the
Indian rupee against the U.S. dollar, and of 1.9% from our
fiscal year ended March 31, 2006 to our fiscal year ended
March 31, 2007. These increases are primarily driven by
wage inflation and increased fringe benefit costs in India and
Sri Lanka, as well as increased foreign currency fluctuations
which we expect will continue to increase for the foreseeable
future.
|
|
|
|
Utilization rate
is the percentage of time billable IT
professionals are deployed on client engagements, which
indicates the efficiency of our billable IT resources. Our
utilization rate is defined as number of billable hours divided
by the total number of available hours of our IT professionals
in a given period of time, excluding trainees. We track our
utilization rates to measure revenue potential and gross profit
margins. Managements targeted range for utilization is
between 70% and 75%. Generally, gross margin moves directionally
with utilization rate. Utilization is affected by the rate of
quarterly sequential
|
36
|
|
|
|
|
revenue growth. In higher growth periods, utilization tends to
rise as more resources are deployed to meet rising demand. In
addition, the seasonal graduation patterns introduce a higher
number of graduates from universities who join us, which may
temporarily lower our utilization rate during the period as
these new graduates become deployable. When we anticipate
periods of high growth, we hire in advance of current demand,
which may temporarily lower our utilization rate. In order to
facilitate growth and maintain client satisfaction, we seek to
maintain a sustainable level of utilization.
|
|
|
|
|
|
Attrition rate
is the ratio of terminated team members
during the latest twelve months to the total number of team
members at the end of such period, which measures team member
turnover. Increased attrition rates result in increased hiring,
training and boarding costs and productivity losses, which may
affect our revenue, gross margin and operating profit margin.
Our attrition rate was 21.3% and 16.1% for our fiscal years
ended March 31, 2008 and 2007, respectively. The increase
in attrition from our fiscal year ended March 31, 2007 to
our fiscal year ended March 31, 2008 is primarily related
to the strong demand for IT professionals in India and Sri Lanka.
|
|
|
|
Operating expense efficiency
is a measure of operating
expenses as a percentage of revenue. If we continue to
successfully grow our revenue, we anticipate that operating
expenses will decrease as a percentage of revenue as such
expenses are absorbed across a larger revenue base. In the near
term, however, any operating expense efficiency that we realize
may be offset by higher costs of operating as a public company,
as well as the negative impact on our operating margins
resulting from the appreciation of the Indian rupee against the
U.S. dollar. We continually try to increase operating
efficiencies and to lower operating expenses as a percentage of
revenue.
|
|
|
|
Effective tax rate
is our worldwide tax expense as a
percentage of our consolidated net income before tax, which
measures the impact of income taxes worldwide on our operations
and net income. We monitor and assess our effective tax rate to
evaluate whether our tax structure is competitive as compared to
our industry. Our effective tax rate was 21.5% for the fiscal
year ended March 31, 2008 as compared to an income tax
(benefit) rate of (23.6%) for the fiscal year ended
March 31, 2007. The significant change in the rate for our
fiscal year ended March 31, 2008 was due to the recognition
of the one-time benefit related to the release of a
$5.0 million deferred tax asset valuation allowance in the
fiscal year ended March 31, 2007. We anticipate that our
effective tax rate will increase in our fiscal years ending
after March 31, 2010 as our India STPI tax holiday expires.
|
|
|
|
Onsite-to-offshore
mix
is the measurement of hours billed by resources located
offshore to hours billed onsite by our team members over a
defined period. We strive to manage both fixed-price contracts
and
time-and-materials
engagements to a highly-efficient 20/80, or better,
onsite-to-offshore
service delivery team mix.
|
Sources
of revenue
We generate revenue by providing IT services to our clients
located primarily in the United States and the United Kingdom.
We have historically earned and believe that over the next few
years we will continue to earn, a significant portion of our
revenue from a limited number of clients. For the fiscal year
ended March 31, 2008, our five largest and ten largest
clients accounted for 54% and 76% of our revenue, respectively.
Our largest client, BT, accounted for 27% of our revenue for the
same period. Although no other client accounted for 10% or more
of our revenue during our fiscal year ended March 31, 2008,
the loss of any one of our major clients could reduce our
revenue or delay our recognition of revenue, harm our reputation
in the industry
and/or
reduce our ability to accurately predict cash flow. During the
fiscal year ended March 31, 2008, 69% of our revenue was
generated in the United States and 31% in the United Kingdom. We
provide IT services on either a
time-and-materials
or a fixed-price basis. For the fiscal year ended March 31,
2008, the percentage of revenue from
time-and-materials
and fixed-price contracts was 79% and 21%, respectively.
Revenue from services provided on a
time-and-materials
basis is derived from the number of billable hours in a period
multiplied by the rates at which we bill our clients. Revenue
from services provided on a fixed-price basis is recognized as
efforts are expended pursuant to the
percentage-of-completion
method.
37
Revenue also includes reimbursements of travel and
out-of-pocket
expenses with equivalent amounts of expense recorded in costs of
revenue.
Most of our client contracts, including those that are on a
fixed-price basis, can be terminated by our clients with or
without cause on 30 to 90 days prior written notice.
All fees for services provided by us through the date of
cancellation are generally due and payable under the contract
terms.
We have found there is a wide range in unit pricing from one
client to another and from one engagement to another, driven by
business need, delivery timeframes, complexity of the
engagement, operating differences (such as onsite/offshore
ratio), competitive environment and engagement size (or volume).
As a pricing strategy to encourage clients to increase the
volume of services that we provide to them, we may, on occasion,
offer volume discounts. We manage our business carefully to
protect our account margins and our overall profit margins. We
have not experienced significant pressure from clients to reduce
rates beyond what we consider to be our normal negotiation
process. We find that our clients generally purchase on the
basis of total value, rather than minimum cost, considering all
of the factors listed above.
While we are subject to the effects of overall market pricing
pressure, we believe that there is a fairly broad range of
pricing offered by different competitors for each service we
provide. We believe that no one competitor, or set of
competitors, sets pricing in our industry. As a result, we do
not see strong pricing pressure from competitors in our
industry. We find that our unit pricing, as a result of our
global delivery model, is generally competitive with other firms
who operate with a predominately offshore operating model.
The proportion of work performed at our offshore facilities and
at onsite client locations varies from
period-to-period.
Effort, in terms of the percentage of hours billed to clients by
onsite resources, was 17% of total hours billed in each of the
fiscal years ended March 31, 2008 and 2007, while the
revenue from onsite and offshore resources accounted for 46% and
54% and 47% and 53%, during the fiscal years ended
March 31, 2008 and 2007, respectively. We charge higher
rates and incur higher compensation and other expenses for work
performed at client locations in the United States and the
United Kingdom than for work performed at our global delivery
centers in India and Sri Lanka. Services performed at client
locations or at our offices in the United States or the United
Kingdom generate higher revenue per-capita at lower gross
margins than similar services performed at our global delivery
centers in India and Sri Lanka. We manage to a 20/80, or better,
onsite-to-offshore
service delivery mix and intend to manage to an efficient
onsite-to-offshore
service delivery ratio for the foreseeable future.
Costs of
revenue and gross profit
Costs of revenue consist principally of payroll and related
fringe benefits, reimbursable and non-reimbursable costs,
immigration-related expenses, fees for subcontractors working on
client engagements and share-based compensation expense for IT
professionals including account management personnel.
Wage costs in India and Sri Lanka have historically been
significantly lower than wage costs in the United States and
Europe for comparably-skilled IT professionals. However, wages
in India and Sri Lanka are increasing, which will result in
increased costs for IT professionals, particularly project
managers and other mid-level professionals. We may need to
increase the levels of our team member compensation more rapidly
than in the past to remain competitive without the ability to
make corresponding increases to our billing rates. Compensation
increases may reduce our profit margins, make us less
competitive in pricing potential projects against those
companies with lower cost resources and otherwise harm our
business, operating results and financial condition. We deploy a
campus hiring philosophy and encourage internal promotions to
minimize the effects of wage inflation pressure and recruiting
costs. Additionally, any material appreciation in the Indian or
Sri Lankan rupee against the U.S. dollar or U.K. pound
sterling could have a material adverse impact on our cost of
services. Although we have adopted an eight quarter hedging
program to minimize the effect of the Indian rupee movement on
our financial condition, the hedging program may be inadequate
and could cause the Company to forego benefits associated with
any significant depreciation of the Indian rupee which would
otherwise have had a beneficial impact on our earnings and
margins, and create a competitive disadvantage compared to
companies exposed to the Indian rupee but who do not hedge.
38
Our revenue and gross profit are also affected by our ability to
efficiently manage and utilize our IT professionals, as well as
fluctuations in foreign currency exchange rates. We define
utilization rate as the total number of days billed in a given
period divided by the total available days of our IT
professionals during that same period, excluding trainees. We
manage employee utilization by continually monitoring project
requirements and timetables to efficiently staff our projects
and meet our clients needs. The number of IT professionals
assigned to a project will vary according to the size,
complexity, duration and demands of the project. An
unanticipated termination of a significant project could cause
us to experience a higher than expected number of unassigned IT
professionals, thereby lowering our utilization rate, but such
hedging program may be ineffective.
Operating
expenses
Operating expenses consist primarily of payroll and related
fringe benefits, commissions, share-based compensation and
non-reimbursable costs, as well as promotion, communications,
management, finance, administrative, occupancy, marketing and
depreciation and amortization expenses. In the fiscal years
ended March 31, 2008, 2007 and 2006, we invested in all
aspects of our business, including sales, marketing, IT
infrastructure, human resources programs and financial
operations. Additionally, any material appreciation in the
Indian or Sri Lankan rupee against the U.S. dollar or U.K.
pound sterling could have a material adverse impact on our cost
of operating expenses. We have adopted an eight quarter hedging
program to mitigate the effect of the Indian rupee on our cost
of operating expenses.
Other
income (expense)
Other income (expense) includes interest income, interest
expense, investment gains and losses and foreign currency
transaction gains and losses. We generate interest income by
investing in money market instruments, short-term investments
and long-term investments. The functional currencies of our
subsidiaries are their local currencies. Foreign currency gains
and losses are generated primarily by fluctuations of the Indian
rupee, Sri Lankan rupee and U.K. pound sterling against the
U.S. dollar on intercompany transactions. We place our cash
in liquid investments at highly-rated financial institutions. We
believe that our credit policies reflect normal industry terms
and business risk.
Income
tax expense (benefit)
Our net income is subject to income tax in those countries in
which we perform services and have operations, including India,
Sri Lanka, the United Kingdom and the United States. In previous
years, we accumulated net operating loss carry-forwards which
were used to offset U.S. taxable income into fiscal 2008.
We have benefited from long-term income tax holiday arrangements
in both India and Sri Lanka that are offered to certain
export-oriented IT services firms. As a result of these net
operating losses and tax holiday arrangements, our worldwide
profit has been subject to a relatively low effective tax rate
as compared to the statutory rates in the countries in which we
operate. The effect of the income tax holidays increased our net
income in the fiscal years ended March 31, 2008 and 2007 by
$3.9 million and $2.4 million, respectively.
Our effective tax rates were 21.5% and (23.6%) for the fiscal
years ended March 31, 2008 and 2007, respectively. During
the fiscal year ended March 31, 2007, we determined that it
was more likely than not that our deferred tax assets would be
realized based upon our positive cumulative operating results
and our assessment of our expected future results. As a result,
we released our valuation allowance and recognized a discrete
income tax benefit of $5.0 million in our statement of
income for the fiscal year ended March 31, 2007. Our
effective tax rate in future periods will be affected by the
geographic distribution of our earnings, as well as the
availability of tax holidays in India and Sri Lanka.
Application
of critical accounting estimates and risks
Our consolidated financial statements have been prepared in
accordance with United States generally accepted accounting
principles, or GAAP. Preparation of these financial statements
requires us to make estimates and assumptions that affect the
reported amount of revenue and expenses, assets and liabilities
and
39
the disclosure of contingent assets and liabilities. We consider
an accounting estimate to be critical to the preparation of our
financial statements when both of the following are present:
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|
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the estimate is complex in nature or requires a high degree of
judgment; and
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the use of different estimates and assumptions could have a
material impact on the consolidated financial statements.
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We have discussed the development and selection of our critical
accounting estimates and related disclosures with the audit
committee of our board of directors. Those estimates critical to
the preparation of our consolidated financial statements are
listed below.
Revenue
recognition
Our revenue is derived from a variety of IT consulting,
technology implementation and application outsourcing services.
Our services are performed under both
time-and-material
and fixed-price arrangements. All revenue is recognized pursuant
to GAAP. Revenue is recognized as work is performed and amounts
are earned in accordance with the SEC Staff Accounting Bulletin,
or SAB, No. 101,
Revenue Recognition in Financial
Statements,
as amended by SAB No. 104,
Revenue
Recognition.
We consider amounts to be earned once evidence
of an arrangement has been obtained, services are delivered,
fees are fixed or determinable and collectability is reasonably
assured. For contracts with fees billed on a
time-and-materials
basis, we generally recognize revenue as the service is
performed.
Fixed-price engagements are accounted for under the
percentage-of-completion
method in accordance with the American Institute of Certified
Public Accountants Statement of Position, or SOP,
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
Under the
percentage-of-completion
method, we estimate the
percentage-of-completion
by comparing the actual number of work days performed to date to
the estimated total number of days required to complete each
engagement. The use of the
percentage-of-completion
method requires significant judgment relative to estimating
total contract revenue and costs to completion, including
assumptions and estimates relative to the length of time to
complete the project, the nature and complexity of the work to
be performed and anticipated changes in other engagement-related
costs. Estimates of total contract revenue and costs to
completion are continually monitored during the term of the
contract and are subject to revision as the contract progresses.
Unforeseen circumstances may arise during an engagement
requiring us to revise our original estimates and may cause the
estimated profitability to decrease. When revisions in estimated
contract revenue and efforts are determined, such adjustments
are recorded in the period in which they are first identified.
Income
taxes
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in
multiple jurisdictions. We record liabilities for estimated tax
obligations in the United States and other tax jurisdictions.
Determining the consolidated provision for income tax expense,
tax reserves, deferred tax assets and liabilities and related
valuation allowance, if any, involves judgment. We calculate and
provide for income taxes in each of the jurisdictions in which
we operate, including India, Sri Lanka, the United States and
the United Kingdom, and this can involve complex issues which
require an extended period of time to resolve. In the year of
any such resolution, additional adjustments may need to be
recorded that result in increases or decreases to income. Our
overall effective tax rate fluctuates due to a variety of
factors, including arms-length prices for our intercompany
transactions, changes in the geographic mix or estimated level
of annual pretax income, as well as newly enacted tax
legislation in each of the jurisdictions in which we operate.
Applicable transfer pricing regulations require that
transactions between and among our subsidiaries be conducted at
an arms-length price. On an ongoing basis we estimate
appropriate arms-length prices and use such estimates for
our intercompany transactions.
At each financial statement date we evaluate whether a valuation
allowance is needed to reduce our deferred tax assets to the
amount that is more likely than not to be realized. This
evaluation considers the
40
weight of all available evidence, including both future taxable
income and ongoing prudent and feasible tax planning strategies.
In the event that we determine that we will not be able to
realize a recognized deferred tax asset in the future, an
adjustment to the valuation allowance would be made resulting in
a decrease in income in the period such determination was made.
Likewise, should we determine that we will be able to realize
all or part of an unrecognized deferred tax asset in the future,
an adjustment to the valuation allowance would be made resulting
in an increase to income (or equity in the case of excess stock
option tax benefits).
We have benefited from long-term income tax holiday arrangements
in both India and Sri Lanka. Our Indian subsidiary is an
export-oriented company that is entitled to claim a tax
exemption for a period of ten years for each Software Technology
Park, or STP, it operates. All of our STP holidays will be
completely phased out by March 2010 and, at that time, any
profits could be fully taxable at the Indian statutory rate,
which is currently 34%. Although we believe we have complied
with, and are eligible for, the STP holidays, it is possible
that upon examination the government of India may deem us
ineligible for the STP holidays or make adjustments to the
profit level. In anticipation of the phase-out of the STP
holidays, we intend to locate at least a portion of our Indian
operations in areas designated as Special Economic Zones, or
SEZs, to secure additional tax exemptions for a period of ten
years, which could extend to 15 years if we meet certain
reinvestment requirements. Our Sri Lankan subsidiary has been
granted an income tax holiday by the Sri Lanka Board of
Investment which expires on March 31, 2019. The tax holiday
is contingent upon a certain level of job creation by us during
a given timetable. Any inability to meet the agreed upon level
or timetable for new job creation would jeopardize this holiday
arrangement. Primarily as a result of these tax holiday
arrangements, our worldwide profit has been subject to a
relatively low effective tax rate, and the loss of any of these
arrangements would increase our overall effective tax rate.
It is our intent to reinvest all accumulated earnings from India
and Sri Lanka back into their respective operations to fund
growth. As a component of this strategy, pursuant to Accounting
Principles Board Opinion No. 23,
Accounting for Income
Taxes-Special Areas,
we do not accrue incremental
U.S. taxes on Indian, Sri Lanka, or U.K. earnings as these
earnings are considered to be permanently or indefinitely
reinvested outside of the United States. If such earnings were
to be repatriated in the future or are no longer deemed to be
indefinitely reinvested, we will accrue the applicable amount of
taxes associated with such earnings, which would increase our
overall effective tax rate.
Share-based
compensation
Under the fair value recognition provisions of Statement of
Financial Accounting Standard (SFAS) No. 123R,
Share-Based Payment
, share-based compensation cost is
measured at the grant date based on the value of the award and
is recognized over the vesting period. Determining the fair
value of the share-based awards at the grant date requires
judgment, including estimating the expected term over which
stock options will be outstanding before they are exercised, the
expected volatility of our stock, the number of share-based
awards that are expected to be forfeited and due to a recent tax
law change in India, the expected exercise proceeds for
share-based awards subject to the Indian fringe benefit tax. If
actual results differ significantly from our estimates,
share-based compensation expense and our results of operations
could be materially impacted.
Effective April 1, 2007, a new fringe benefit tax was
introduced in India that obligates us to pay, upon the exercise
or distribution of shares under a stock-based compensation
award, a non-income related tax on the appreciation of the award
from date of grant to the date of total vesting. We intend to
collect the cash amount of the fringe benefit tax from our team
members. However under GAAP, the stock-based Indian fringe
benefit tax expense is required to be recorded as an operating
expense and the related cash recovery of such tax from our team
members is required to be recorded to stockholders equity
as proceeds from a stock-based compensation award. Our future
operating results may experience volatility as a result of the
timing of exercise or distribution of shares related to
stock-based compensation awards to our team members who worked
or are working in India. The amount of stock-based Indian fringe
benefit tax expense recorded during our fiscal year ended
March 31, 2008 was immaterial.
41
We established a stock appreciation rights plan, or SAR Plan,
during the fiscal year ended March 31, 2006. Prior to our
IPO in August 2007, under the terms of the SAR Plan, all stock
appreciation rights, or SARs, were settled in cash and the
compensation cost and future liability for these SARs were
determined using the fair value at the grant date and
remeasuring the fair value of the vested SARs at the close of
each reporting period. After our IPO, we are obligated under the
SAR Plan to settle all SARs in shares of our common stock.
Therefore, the SARs are now equity classified and are no longer
remeasured. The liability measured as of our IPO date was
$1.4 million and this amount has been reclassified as a
component of additional paid in capital subsequent to our IPO.
Results
of operations
Fiscal
year ended March 31, 2008 compared to fiscal year ended
March 31, 2007
The following table presents an overview of our results of
operations for the fiscal years ended March 31, 2008 and
2007:
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|
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|
|
|
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Fiscal Year Ended March 31,
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2008
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2007
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$ Change
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% Change
|
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(Dollars in thousands)
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|
Revenue
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|
$
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165,198
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|
$
|
124,660
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|
$
|
40,538
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|
32.5
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%
|
Costs of revenue
|
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|
92,847
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|
68,031
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|
24,816
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36.5
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|
|
|
|
|
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|
|
|
|
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|
Gross profit
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|
72,351
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|
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|
56,629
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|
15,722
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27.8
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|
Operating expenses
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52,972
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|
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|
42,478
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|
10,494
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|
24.7
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|
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|
Income from operations
|
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|
19,379
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|
|
|
14,151
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|
|
|
5,228
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|
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|
36.9
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|
Other income
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|
|
3,249
|
|
|
|
1,209
|
|
|
|
2,040
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|
|
|
168.7
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
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|
22,628
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|
|
|
15,360
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|
|
|
7,268
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|
|
|
47.3
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|
Income tax expense (benefit)
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|
|
4,857
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|
|
|
(3,630
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)
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|
8,487
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|
|
|
(233.8
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
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|
$
|
17,771
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|
|
$
|
18,990
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|
|
$
|
(1,219
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)
|
|
|
(6.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased by 32.5%, or $40.5 million, from
$124.7 million during the fiscal year ended March 31,
2007 to $165.2 million in the fiscal year ended
March 31, 2008. This increase is primarily attributed to
greater demand for our IT services delivered through our global
model. Revenue from clients existing as of March 31, 2007
increased in the fiscal year ended March 31, 2008 by
$34.3 million and revenue from new clients added since
March 31, 2007 was $6.2 million or 3.8% of total
revenue for the fiscal year ended March 31, 2008. In
addition, revenue from European clients in the fiscal year ended
March 31, 2008 increased by $19.2 million, or 60%, as
compared to the fiscal year ended March 31, 2007. Revenue
from North American clients increased by $21.1 million, or
23%, as compared to the fiscal year ended March 31, 2007.
We had 56 active clients as of March 31, 2008 as compared
to 41 active clients as of March 31, 2007. In addition, we
experienced strong demand across all of our industry verticals
for an increasingly broad range of services, with our BFSI and
communications and technology industry verticals experiencing
fiscal
year-over-year
revenue growth of 43% and 34%, respectively.
Costs
of revenue
Costs of revenue increased from $68.0 million in the fiscal
year ended March 31, 2007 to $92.8 million in the
fiscal year ended March 31, 2008, an increase of
$24.8 million, or 36.5%. A significant portion of the
increase was attributable to an increase in the number of our IT
professionals to support revenue growth, from 3,312 as of
March 31, 2007 to 4,036 as of March 31, 2008,
resulting in additional compensation and benefits costs of
$22.1 million. The net effects of a weaker U.S. dollar
against the Indian rupee during the fiscal year ended
March 31, 2008, as compared to the fiscal year ended
March 31, 2007, also increased our costs of revenue by
approximately $3.7 million which were partially offset by
$0.2 million gain recorded on foreign
42
currency forward contracts as part of our hedging program. These
increases were partially offset by a decrease in share-based
compensation expense of $0.6 million and a decrease in
subcontractors costs of $0.7 million in the fiscal year
ended March 31, 2008 as compared to the fiscal year ended
March 31, 2007.
Gross
profit
Our gross profit increased by $15.7 million or 27.8%, to
$72.4 million for the fiscal year ended March 31, 2008
as compared to $56.6 million in the fiscal year ended
March 31, 2007, primarily driven by higher utilization
rates. As a percentage of revenue, gross margin was 43.8% and
45.4% in the fiscal years ended March 31, 2008 and 2007,
respectively.
Operating
expenses
Operating expenses increased from $42.5 million in the
fiscal year ended March 31, 2007 to $53.0 million in
the fiscal year ended March 31, 2008, an increase of
$10.5 million, or 24.7%. The increase in our operating
expenses in absolute dollars is due to the increase of
$3.4 million in compensation and benefit costs and
$0.7 million in share-based compensation expense associated
with our non-IT professionals and an additional
$3.9 million in infrastructure expenses to accommodate the
increase in the number of IT professionals in Asia. In addition,
operating expenses during the fiscal year ended March 31,
2008 increased by $0.6 million from the fiscal year ended
March 31, 2007 with respect to the incremental non-payroll
costs associated with being a public company. The net effects of
a weaker U.S. dollar against the Indian rupee during the
fiscal year ended March 31, 2008, as compared to the fiscal
year ended March 31, 2007, also increased our operating
expenses by approximately $1.9 million. These increases
were partially offset by the $0.1 million gain recorded on
foreign currency forward contracts as part of our hedging
program. As a percentage of revenue, our operating expenses
decreased from 34.1% in the fiscal year ended March 31,
2007 to 32.1% in the fiscal year ended March 31, 2008.
Income
from operations
Income from operations increased from $14.2 million in the
fiscal year ended March 31, 2007 to $19.4 million in
the fiscal year ended March 31, 2008, an increase of
$5.2 million or 36.9%. This increase in income from
operations resulted from higher overall gross profit and lower
operating expenses as a percentage of revenue. As a percentage
of revenue, income from operations increased marginally from
11.4% in the fiscal year ended March 31, 2007 to 11.7% in
the fiscal year ended March 31, 2008, primarily due to our
lower operating expenses as a percentage of revenue, offset by a
lower gross margin.
Other
income
Other income increased from $1.2 million in the fiscal year
ended March 31, 2007 to $3.2 million in the fiscal
year ended March 31, 2008. The increase is primarily
attributed to an increase in interest income of
$2.7 million, from $1.2 million in the fiscal year
ended March 31, 2007 to $3.9 million in the fiscal
year ended March 31, 2008, partially offset by the increase
in foreign currency transaction losses of $0.8 million,
primarily due to the effects of a weaker U.S. dollar
against the Indian rupee and our hedging program. The increase
in interest income is due to an increase in average cash and
cash equivalents and our investment balances during the fiscal
year ended March 31, 2008 as a result of our IPO, when
compared to the fiscal year ended March 31, 2007.
Income
tax expense (benefit)
We had an income tax (benefit) of ($3.6) million in the
fiscal year ended March 31, 2007 compared to an income tax
expense of $4.9 million in the fiscal year ended
March 31, 2008. Our effective tax rate was an income tax
(benefit) rate of (23.6%) for the fiscal year ended
March 31, 2007, which is largely due to the recognition of
a discrete income tax benefit of approximately $5.0 million
due to the release of our deferred tax asset valuation allowance
in our statement of income during the fiscal year ended
March 31, 2007, as compared to an effective tax rate of
21.5% for the fiscal year ended March 31, 2008.
43
Net
income
Net income decreased from $19.0 million in the fiscal year
ended March 31, 2007 to $17.8 million in the fiscal
year ended March 31, 2008. This decrease was driven
primarily by the recognition of a discrete income tax benefit
due to the release of our deferred tax asset valuation allowance
during the fiscal year ended March 31, 2007, which offset
an increase in income from operations and other income during
the fiscal year ended March 31, 2008.
Fiscal
year ended March 31, 2007 compared to fiscal year ended
March 31, 2006
The following table presents an overview of our results of
operations for the fiscal years ended March 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
$
|
47,725
|
|
|
|
62.0
|
%
|
Costs of revenue
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
24,614
|
|
|
|
56.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
56,629
|
|
|
|
33,518
|
|
|
|
23,111
|
|
|
|
69.0
|
|
Operating expenses
|
|
|
42,478
|
|
|
|
32,925
|
|
|
|
9,553
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,151
|
|
|
|
593
|
|
|
|
13,558
|
|
|
|
2,286.3
|
|
Other income
|
|
|
1,209
|
|
|
|
1,564
|
|
|
|
(355
|
)
|
|
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
15,360
|
|
|
|
2,157
|
|
|
|
13,203
|
|
|
|
612.1
|
|
Income tax expense (benefit)
|
|
|
(3,630
|
)
|
|
|
176
|
|
|
|
(3,806
|
)
|
|
|
(2,162.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
|
$
|
17,009
|
|
|
|
858.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased by 62.0%, or $47.7 million, from
$76.9 million during the fiscal year ended
March 31, 2006 to $124.7 million in the fiscal
year ended March 31, 2007. This increase is primarily
attributed to greater demand for our IT services delivered
through our global model. Revenue from clients existing as of
March 31, 2006 increased in the fiscal year ended
March 31, 2007 by $43.9 million and revenue from new
clients added since March 31, 2006 was $3.8 million or
3.0% of total revenue for the fiscal year ended March 31,
2007. In addition, revenue from European clients for the fiscal
year ended March 31, 2007 increased by $21.3 million
as compared to the fiscal year ended March 31, 2006.
Revenue from North American clients for the fiscal year ended
March 31, 2007 increased by $26.3 million as
compared to the fiscal year ended March 31, 2006. We had
41 active clients as of March 31, 2007 as compared to
46 active clients as of March 31, 2006.
Costs
of revenue
Costs of revenue increased from $43.4 million in the fiscal
year ended March 31, 2006 to $68.0 million in the
fiscal year ended March 31, 2007, an increase of
$24.6 million, or 56.7%. A significant portion of the
increase was attributable to an increase in the number of IT
professionals to support revenue growth, from 2,113 as of
March 31, 2006 to 3,312 as of March 31, 2007,
resulting in additional compensation and benefits costs of
$21.5 million. We also experienced increases in
subcontractor costs working on client engagements of
$2.5 million and share-based compensation expense of
$0.7 million in the fiscal year ended March 31, 2007
as compared to the fiscal year ended March 31, 2006. The
net effects of a stronger U.S. dollar against the Indian
rupee during the fiscal year ended March 31, 2007 as
compared the fiscal year ended March 31, 2006, decreased
our costs of revenue by approximately $0.3 million,
partially offset by the impact of our hedged positions of
$0.2 million.
44
Gross
profit
Our gross profit increased from $33.5 million in the fiscal
year ended March 31, 2006 to $56.6 million in the
fiscal year ended March 31, 2007, an increase of
$23.1 million, or 69.0%. As a percentage of revenue, gross
margin was 45.4% and 43.6% in the fiscal years ended
March 31, 2007 and 2006, respectively.
Operating
expenses
Operating expenses increased from $32.9 million in the
fiscal year ended March 31, 2006 to $42.5 million in
the fiscal year ended March 31, 2007, an increase of
$9.6 million, or 29.0%. The increase in our operating
expenses in absolute dollars is due to the growth in our
headcount in non-IT professionals resulting in an increase of
$2.8 million in compensation and benefit costs,
$0.4 million in share-based compensation expense and an
additional $2.6 million in infrastructure expenses to
accommodate the increase in the number of IT professionals in
Asia. In addition, we incurred an additional $3.7 million
in professional services and travel expenses to establish a
financial shared-services center in India to provide back-office
transactional support to our Indian, U.K. and U.S. finance
organizations and to formalize our internal control framework in
anticipation of meeting the standards set forth by the
Sarbanes-Oxley Act of 2002 during the fiscal year ended
March 31, 2007 as compared to the fiscal year ended
March 31, 2006.
In the fiscal years ended March 31, 2007 and 2006, we
invested in sales, marketing, IT infrastructure, human resource
programs and financial operations. Our investments in our
infrastructure, principally in staff and systems, provided us
with higher economies of scale and supported our revenue growth.
As a result, our operating expenses, as a percentage of revenue,
decreased from 42.8% in the fiscal year ended March 31,
2006 to 34.1% in the fiscal year ended March 31, 2007.
Income
from operations
Income from operations increased from $0.6 million in the
fiscal year ended March 31, 2006 to $14.2 million in
the fiscal year ended March 31, 2007, an increase of
$13.6 million. This increase in income from operations
resulted from higher overall gross profit and lower operating
expenses as a percentage of revenue. As a percentage of revenue,
income from operations increased from 0.8% in the fiscal year
ended March 31, 2006 to 11.4% in the fiscal year ended
March 31, 2007.
Other
income
Other income decreased from $1.6 million in the fiscal year
ended March 31, 2006 to $1.2 million in the fiscal
year ended March 31, 2007. The decrease is attributed to
the absence of one-time investment gains of $0.9 million,
partially offset by an increase in interest income by
$0.4 million in the fiscal year ended March 31, 2007
as compared to the fiscal year ended March 31, 2006. The
increase in interest income is due to an increase in average
cash and equivalents during the fiscal year ended March 31,
2007 when compared to the fiscal year ended March 31, 2006.
Income
tax expense (benefit)
We had income tax expense of $0.2 million in the fiscal
year ended March 31, 2006 compared to an income tax
(benefit) of ($3.6) million in the fiscal year ended
March 31, 2007. This decrease in income tax expense is
largely related to the recognition of a discrete income tax
benefit of $5.0 million due to the release of our deferred
tax asset valuation allowance in our statement of income during
the fiscal year ended March 31, 2007. This was partially
offset by the provision of $1.4 million in income taxes in
the fiscal year ended March 31, 2007. Also reflected in the
provision are higher U.S. federal and state income taxes
due to higher U.S. profit levels. Our effective tax rate
was 8.1% for the fiscal year ended March 31, 2006 as
compared to an income tax (benefit) rate of (23.6%) for the
fiscal year ended March 31, 2007.
45
Net
income
Net income increased from $2.0 million in the fiscal year
ended March 31, 2006 to $19.0 million in the fiscal
year ended March 31, 2007. This increase was driven by the
increase in revenue, offset by comparatively smaller increases
in costs of revenue and operating expenses and the recognition
of a discrete income tax benefit of $5.0 million due to the
release of our deferred tax asset valuation allowance.
Liquidity
and capital resources
We completed an IPO of our common stock on August 8, 2007.
In connection with our IPO, we issued and sold
4,400,000 shares of common stock at a public offering price
of $14.00 per share. We received net proceeds of
$52.8 million after deducting underwriting discounts and
commissions of $4.3 million and offering costs of
$4.5 million.
We have financed our operations from sales of shares of equity
securities, including preferred and common stock and from cash
from operations. We have not borrowed against our existing or
preceding credit facilities.
As of March 31, 2008, we had cash and cash equivalents and
short-term investments of $81.9 million, of which
$6.7 million was held outside the United States. There were
foreign currency derivative contracts with a notional amount of
$73.1 million outstanding as at March 31, 2008. We
have a $3.0 million revolving line of credit with a bank.
This facility provides a $1.5 million sub-limit for letters
of credit. The revolving line of credit also includes a foreign
exchange line of credit requiring 15% of foreign exchange
contracts to be supported by our borrowing base. Advances under
our credit facility accrue interest at an annual rate equal to
the prime rate minus 0.25%. Our credit facility is secured by
certain U.S. assets in favor of the bank and contains
financial and reporting covenants and limitations. We are
currently in compliance with all covenants contained in our
credit facility and believe that our credit facility provides
sufficient flexibility so that we will remain in compliance with
its terms. As of March 31, 2008, we have no amounts
outstanding under this credit facility. Our credit facility
expires on September 30, 2008.
The funds held at locations outside of the United States are for
future operating expenses and expansion of our business, and we
have no intention of repatriating those funds. We are not,
however, restricted in repatriating those funds back to the
United States, if necessary. If we decide to remit funds from
India to the United States in the form of dividends, they would
be subject to Indian dividend distribution tax, which is
currently at a rate of approximately 17%, as well as
U.S. corporate income tax on the dividends.
On January 31, 2008, we purchased, from two banking
institutions, multiple foreign currency forward contracts
designed to hedge fluctuation in the Indian rupee against the
U.S. dollar and U.K. pound sterling. The contracts have an
aggregate notional amount of approximately 2.9 billion
Indian rupees (approximately $73.4 million) and will settle
on a monthly basis over a 21 month period ending
December 31, 2009. We have the obligation to settle these
contracts based upon the Reserve Bank of India published Indian
rupee exchange rates. The approximate weighted average Indian
rupee rate associated with these contracts is 39.56.
As of March 31, 2008, our long-term investments included
$8.0 million of auction-rate securities. All of these
auction rate securities are AAA or Aaa rated by one or more of
the major credit rating agencies. Furthermore, 85% of these
auction rate securities are issued by state agencies which issue
student loans, of which approximately 97% are guaranteed by the
U.S. government under the Federal Family Education Loan
Program (FFELP). The remaining 15% of these auction rate
securities consists of investments in municipal bonds and
preferred shares in a closed end mutual fund. As of
March 31, 2008, we experienced failed auctions with respect
to all of our auction rate securities, resulting in our
inability to sell these securities. However, this does not
represent a default by the issuer of the auction rate security.
Upon an auction failure, the interest rate does not reset at a
market rate but instead resets based on a formula contained in
the security, which is generally higher than the current market
rate. We have assessed each failed auction and believe that none
of the underlying issuers of auction rate securities are
presently at risk for default. At March 31, 2008, we
recorded, as a component of accumulated other comprehensive
income, a temporary impairment charge of $0.4 million, or
$0.3 million, net of tax, related to our auction rate
securities.
46
We believe we will be able to recover our investment in
auction-rate municipal debt securities due to: (i) the
strength of the underlying collateral, substantially backed by
FFELP, (ii) credit rating of the securities held by us and
(iii) recent news that certain municipal issuers of
auction-rate securities with failed auctions have announced
plans to call such securities. All of the auction-rate municipal
debt securities held by us are callable by the issuer at par
value. If future auctions continue to fail, we believe the
issuers of the auction-rate securities held by us will begin to
call these securities to avoid paying the higher penalty
interest rates associated with failed auctions. However, it
could take until the final maturity of the underlying security
(up to 37 years) to realize our investments recorded
value. Based on our expected operating cash flows, and our other
sources of cash, we do not anticipate the potential lack of
liquidity on these investments will affect our ability to
execute current and planned operations and needs for the
foreseeable future.
We believe that our available cash and cash equivalents,
short-term investments and cash flows expected to be generated
from operations will be adequate to satisfy our current and
planned operations for the foreseeable future. Our ability to
expand and grow our business in accordance with current plans
and to meet our long-term capital requirements will depend on
many factors, including the rate, if any, at which our cash flow
increases, our continued intent not to repatriate earnings from
India and Sri Lanka and the availability of public and private
debt and equity financing. To the extent we decide to pursue one
or more significant strategic acquisitions, we may incur debt or
sell additional equity to finance those acquisitions.
Anticipated
capital expenditures
We are constructing a facility as part of a planned campus on a
6.3 acre site in Hyderabad, India. We expect to construct
and build out this facility, which will be approximately
340,000 square feet, over the next two fiscal years at a
total estimated cost of $31.0 million, of which we
anticipate spending approximately $15.0 million during the
fiscal year ending March 31, 2009. Through March 31,
2008, we have spent $7.7 million toward the completion of
this facility with approximately $7.2 million spent during
the fiscal year ended March 31, 2008. Other capital
expenditures during the fiscal year ended March 31, 2008
were approximately $5.3 million. We expect other capital
expenditures in the normal course of business during the fiscal
year ended March 31, 2009 to be approximately
$6.0 million, primarily for leasehold improvements, capital
equipment and purchased software.
Cash
flows
The following table summarizes our cash flows for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
13,440
|
|
|
$
|
11,120
|
|
|
$
|
1,892
|
|
Net cash used for investing activities
|
|
|
(73,147
|
)
|
|
|
(6,364
|
)
|
|
|
(865
|
)
|
Net cash provided by financing activities
|
|
|
55,434
|
|
|
|
9,843
|
|
|
|
659
|
|
Effect of exchange rate on cash
|
|
|
241
|
|
|
|
243
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,032
|
)
|
|
|
14,842
|
|
|
|
1,831
|
|
Cash and cash equivalents, beginning of fiscal year
|
|
|
45,079
|
|
|
|
30,237
|
|
|
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of fiscal year
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
|
$
|
30,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
Net cash provided by operating activities was $13.4 million
during the fiscal year ended March 31, 2008 as compared to
$11.1 million during the fiscal year ended March 31,
2007. This increase was attributable to a decrease in our trade
accounts receivable by $6.1 million as a result of our
increased collection efforts, a decrease in deferred income
taxes of $5.4 million, an increase in accrued compensation
and benefits of $1.1 million and an increase in
depreciation and amortization of $0.7 million during the
fiscal year ended March 31, 2008 as compared to the fiscal
year ended March 31, 2007. These sources of cash were
partially offset by decreases in net income of
$1.2 million, an increase in prepaid and other current
assets of $3.3 million,
47
an increase in other long-term assets of $3.8 million and a
decrease in accounts payable of $2.8 million during the
fiscal year ended March 31, 2008 as compared to the fiscal
year ended March 31, 2007.
Net cash provided by operating activities was $11.1 million
during the fiscal year ended March 31, 2007 as compared to
$1.9 million during the fiscal year ended March 31,
2006. This increase was attributable to our increase in net
income of $17.0 million, an increase in accounts payable of
$2.0 million, an increase in share-based compensation
expense of $1.1 million and a $0.9 million reduction
on the one-time gain on the sale of an equity investment during
the fiscal year ended March 31, 2007 as compared to the
fiscal year ended March 31, 2006. These increases were
partially offset by an increase in trade receivables by
$6.1 million, an increase in deferred income taxes due to
the release of our valuation allowance of $5.0 million and
a decrease in deferred revenue by $0.7 million.
Net
cash used for investing activities
Net cash used for investing activities was $73.1 million
during the fiscal year ended March 31, 2008 as compared to
$6.4 million during the fiscal year ended March 31,
2007. The increase was due to investments of cash and IPO
proceeds into short-term investments of $79.8 million and
long-term investments of $23.9 million, partially offset by
proceeds from sale or maturity of short-term investments of
$40.9 million and long-term investments of
$4.7 million. Additionally, we invested $12.5 million
in facilities and equipment including $7.2 million on our
Hyderabad campus during the fiscal year ended March 31,
2008, as compared to total capital expenditures of
$6.0 million during the fiscal year ended March 31,
2007. There was also an increase in restricted cash of
$1.8 million in the fiscal year ended March 31, 2008
as compared to the fiscal year ended March 31, 2007.
Further, we received proceeds from the sale of equity
investments of $0.5 million in the fiscal year ended
March 31, 2007, with no such transaction in the fiscal year
ended March 31 2008.
Net cash used for investing activities was $6.4 million
during the fiscal year ended March 31, 2007 as compared to
$0.9 million during the fiscal year ended March 31,
2006. We invested $6.0 million on facilities and equipment
during the fiscal year ended March 31, 2007, as compared to
total capital expenditures of $1.4 million during the
fiscal year ended March 31, 2006. In our fiscal year ended
March 31. 2006, we contained our facilities and equipment
spending and made an effort to redeploy existing equipment due
to lower utilization at our global delivery centers in India and
Sri Lanka, particularly during the first half of the fiscal year
ended March 31, 2006. There was also an increase in
restricted cash of $0.9 million in the fiscal year ended
March 31, 2007 as compared to the fiscal year ended
March 31, 2006.
Net
cash provided by financing activities
Net cash provided by financing activities was $55.4 million
during the fiscal year ended March 31, 2008, as compared to
$9.8 million during the fiscal year ended March 31,
2007. The increase was due to the gross proceeds from our IPO of
$61.6 million during the fiscal year ended March 31,
2008 as compared to proceeds from the sale of common stock of
$11.0 million, net of expenses, during the fiscal year
ended March 31, 2007. In addition, we received proceeds of
$0.4 million from stock option exercises during the fiscal
year ended March 31, 2008 as compared to proceeds of
$0.5 million from other stock sales and stock option
exercises during the fiscal year ended March 31, 2007. We
also recognized tax benefits of $0.4 million on stock
option exercises during the fiscal year ended March 31,
2008. This increase was partially offset by the
$7.0 million of cash used to fund our IPO during the fiscal
year ended March 31, 2008 as compared to $1.8 million
during the fiscal year ended March 31, 2007.
Net cash provided by financing activities was $9.8 million
during the fiscal year ended March 31, 2007, as compared to
$0.7 million during the fiscal year ended March 31,
2006. The increase was due to the proceeds of
$11.0 million, net of expenses, on the sale of common stock
to a wholly-owned subsidiary of BT. In addition, we received
proceeds of $0.5 million from other stock sales and stock
option exercises during the fiscal year ended March 31,
2007 as compared to $0.9 million during the fiscal year
ended March 31, 2006. In the fiscal year ended
March 31, 2007, we incurred $1.8 million of costs to
fund our IPO.
48
Contractual
obligations
We have no long-term debt and have various contractual
obligations and commercial commitments. The following table sets
forth our future contractual obligations and commercial
commitments as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5+ Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations(1)
|
|
$
|
14,014
|
|
|
$
|
4,425
|
|
|
$
|
7,458
|
|
|
$
|
2,131
|
|
|
$
|
|
|
Defined benefit plan(2)
|
|
|
3,837
|
|
|
|
113
|
|
|
|
434
|
|
|
|
710
|
|
|
|
2,580
|
|
Capital Commitments(3)
|
|
|
11,022
|
|
|
|
11,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,873
|
|
|
$
|
15,560
|
|
|
$
|
7,892
|
|
|
$
|
2,841
|
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Our obligations under our operating leases consist of future
payments related to our real estate leases.
|
|
(2)
|
|
We accrue and contribute to benefit funds covering our employees
in India and Sri Lanka. The amounts in the table represent the
expected benefits to be paid out over the next ten years. We are
not able to quantify expected benefit payments beyond ten years
with any certainty.
|
|
(3)
|
|
Relates to construction of our campus in Hyderabad, India, net
of advances.
|
Off-balance
sheet arrangements
We do not have any investments in special purpose entities or
undisclosed borrowings or debt. We had cash-secured letters of
credit totaling approximately $0.6 million at
March 31, 2008.
We have entered into foreign currency derivative contracts with
the objective of limiting our exposure to changes in the Indian
rupee as described below in Qualitative and Quantitative
Disclosures about Market Risk.
During the quarter ended March 31, 2008, we adopted an
expanded foreign currency hedging program to further mitigate
the risks of volatility in the Indian rupee against the
U.S. dollar and U.K. pound sterling, although such hedging
program may not be effective. The expanded program contemplates
a partially hedged position for a rolling eight quarter period.
Other than these foreign currency derivative contracts, we have
not entered into off-balance sheet transactions, arrangements or
other relationships with unconsolidated entities or other
persons that are likely to affect liquidity or the availability
of or requirements for capital resources.
Recent
accounting pronouncements
In June 2006, the FASB issued Financial Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes-and
interpretation of SFAS No. 109
(FIN 48),
which clarifies the accounting for uncertainty in income taxes
by prescribing a minimum recognition threshold for a tax
position taken or expected to be taken in a tax return that is
required to be met before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. On April 1,
2007, we adopted FIN 48. The cumulative effect of adopting
FIN 48 of $0.1 million was recorded as a reduction of
beginning retained earnings.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, an amendment of FASB Statement No. 133.
(SFAS No. 161). SFAS No. 161 requires
enhanced disclosures about an entitys derivative
instruments and hedging activities with a view toward improving
the transparency of financial reporting, and is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. SFAS No. 161 encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. We are currently evaluating the impact of adopting
SFAS No. 161 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51
(SFAS No. 160).
SFAS No. 160
49
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for us beginning
April 1, 2009. We are currently evaluating the potential
impact that SFAS No. 160 will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115
(SFAS No. 159), which is effective
for our financial statements beginning April 1, 2008.
SFAS No. 159 permits entities to measure eligible
financial assets, financial liabilities and firm commitments at
fair value, on an
instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other GAAP. The fair value measurement election
is irrevocable and subsequent changes in fair value must be
recorded in earnings. We are currently evaluating the potential
impact that SFAS No. 159 will have on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007. However, on February 12, 2008, the FASB issued
FSP 157-2
(the FSP) which delays the effective date of
SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The FSP partially defers
the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of the FSP.
We are currently evaluating the potential impact that
SFAS No. 157 and the FSP will have on our consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and qualitative disclosures about market risk
|
Foreign
currency exchange rate risk
We are exposed to foreign currency exchange rate risk in the
ordinary course of business. We have historically entered into,
and in the future we may enter into, foreign currency derivative
contracts to minimize the impact of foreign currency
fluctuations on both foreign currency denominated assets and
forecasted expenses. The purpose of this foreign exchange policy
is to protect us from the risk that the recognition of and
eventual cash flows related to Indian rupee denominated expenses
might be affected by changes in exchange rates. Certain of these
contracts meet the criteria for hedge accounting as cash flow
hedges under SFAS 133
, Accounting for Derivative
Instruments and Hedging Activities
.
We evaluate our foreign exchange policy on an ongoing basis to
assess our ability to address foreign exchange exposures on our
balance sheet and operating cash flows from the U.K. pound
sterling, Indian rupee, and the Sri Lankan rupee.
During the fiscal year ended March 31, 2008, we adopted a
foreign currency hedging program to mitigate the risks of
volatility in the Indian rupee against the U.S. dollar and
U.K. pound sterling. The U.S. dollar equivalent market
value of the outstanding foreign currency derivative contracts
as of March 31, 2008 was $71.6 million. There were no
outstanding foreign currency derivative contracts as of
March 31, 2007.
Assuming the amount of expenditures by our Indian operations
were consistent with fiscal 2008 and the timing of the funding
of these operations were to remain consistent during our fiscal
year ending March 31, 2009, a constant increase or decrease
in the exchange rate between the Indian rupee and the
U.S. dollar during the fiscal 2009 of 10% would impact our
net income by $5.1 million excluding the effect of foreign
currency derivative contracts which would offset 85% of the
impact.
50
Interest
rate risk
We do not believe we are exposed to material direct risks
associated with changes in interest rates other than with our
cash and cash equivalents, short-term investments and long-term
investments. As of March 31, 2008, we had
$99.1 million in cash and cash equivalents, short-term
investments and long-term investments, the interest income from
which is affected by changes in short-term interest rates. Our
investment securities primarily consist of auction rate
securities, commercial paper and corporate debts. All of our
investments in debt securities are classified as
available-for-sale and are recorded at fair value.
Our available-for-sale investments are sensitive to
changes in interest rates. Interest rate changes would result in
a change in the net fair value of these financial instruments
due to the difference between the market interest rate and the
market interest rate at the date of purchase of the financial
instrument. A 10% decrease in market interest rates at
March 31, 2008 would impact the net fair value of such
interest-sensitive financial instruments by $0.3 million.
We had no debt outstanding as of March 31, 2008.
Concentration
of credit risk
Financial instruments which potentially expose us to
concentrations of credit risk primarily consist of cash and cash
equivalents, short-term investments and long-term investments,
accounts receivable and unbilled accounts receivable. We place
our temporary cash in liquid investments at highly-rated
financial institutions. We believe that our credit policies
reflect normal industry terms and business risk. We do not
anticipate non-performance by the counterparties and,
accordingly, do not require collateral. Credit losses and
write-offs of accounts receivable balances have historically not
been material to our financial statements and have not exceeded
our expectations.
As of March 31, 2008, our long-term investments included
$8.0 million of auction-rate securities. All of these
auction rate securities are AAA or Aaa rated by one or more of
the major credit rating agencies. Furthermore, 85% of these
auction rate securities are issued by state agencies which issue
student loans, of which approximately 97% are guaranteed by the
U.S. government under the FFELP. The remaining 15% of these
auction rate securities consists of investments in municipal
bonds and preferred shares in a closed end mutual fund. As of
March 31, 2008, we had experienced failed auctions with
respect to our auction rate securities, resulting our inability
to sell these securities. As a result, our ability to liquidate
and fully recover the carrying value of our investments in the
near term may be impacted. We believe that our available cash
and cash equivalents, short term investments and cash flows
expected to be generated from operations will be adequate to
satisfy our current and planned operations for the foreseeable
future.
51
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Virtusa
Corporation and Subsidiaries
Index to
Consolidated Financial Statements
52
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Shareholders
Virtusa Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Virtusa Corporation and Subsidiaries (the Company) as of
March 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders equity
(deficit) and cash flows for each of the years in the three-year
period ended March 31, 2008. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Virtusa Corporation and Subsidiaries as of
March 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended March 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in note 2 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payments effective April 1, 2005.
Boston, Massachusetts
May 29, 2008
53
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
Short-term investments
|
|
|
40,816
|
|
|
|
|
|
Accounts receivable, net of allowance of $653 and $420 at
March 31, 2008 and 2007, respectively
|
|
|
34,716
|
|
|
|
28,588
|
|
Unbilled accounts receivable
|
|
|
4,233
|
|
|
|
2,422
|
|
Prepaid expenses
|
|
|
4,025
|
|
|
|
1,862
|
|
Deferred income taxes
|
|
|
901
|
|
|
|
3,094
|
|
Other current assets
|
|
|
6,349
|
|
|
|
3,681
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
132,087
|
|
|
|
84,726
|
|
Property and equipment, net
|
|
|
16,833
|
|
|
|
7,541
|
|
Long-term investments
|
|
|
17,091
|
|
|
|
41
|
|
Restricted cash
|
|
|
4,361
|
|
|
|
1,588
|
|
Deferred income taxes
|
|
|
4,429
|
|
|
|
1,946
|
|
Other long-term assets
|
|
|
5,969
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
180,770
|
|
|
$
|
99,319
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,726
|
|
|
$
|
4,414
|
|
Accrued employee compensation and benefits
|
|
|
10,424
|
|
|
|
6,999
|
|
Accrued expenses other
|
|
|
8,375
|
|
|
|
4,338
|
|
Deferred revenue
|
|
|
351
|
|
|
|
877
|
|
Income taxes payable
|
|
|
403
|
|
|
|
1,163
|
|
Accrued liabilities stock appreciation rights
|
|
|
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,279
|
|
|
|
18,961
|
|
Long-term liabilities
|
|
|
1,657
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,936
|
|
|
|
19,198
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, at accreted redemption
value:
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 4,043,582 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
13,500
|
|
Series B redeemable convertible preferred stock,
$0.01 par value. Authorized zero and 8,749,900 shares
at March 31, 2008 and 2007, respectively; issued and
outstanding zero and 8,647,043 shares at liquidation
preference at March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
15,132
|
|
Series C redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 12,807,624 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
12,230
|
|
Series D redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 7,458,494 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
|
|
|
|
60,862
|
|
|
|
|
|
|
|
|
|
|
Commitments and guarantees
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value; Authorized
5,000,000 and 29,016,038 shares at March 31, 2008 and
2007, respectively; issued zero shares at March 31, 2008
and 2007
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; Authorized 120,000,000 and
80,000,000 shares at March 31, 2008 and 2007,
respectively; issued 23,427,976 and 7,420,646 shares at
March 31, 2008 and 2007, respectively; outstanding
23,008,411 and 7,001,081 shares at March 31, 2008 and
2007, respectively
|
|
|
234
|
|
|
|
74
|
|
Treasury stock, 419,565 common shares, at cost
|
|
|
(442
|
)
|
|
|
(442
|
)
|
Additional paid-in capital
|
|
|
137,774
|
|
|
|
19,205
|
|
Accumulated earnings
|
|
|
18,428
|
|
|
|
752
|
|
Accumulated other comprehensive loss
|
|
|
(160
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
155,834
|
|
|
|
19,259
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders equity
|
|
$
|
180,770
|
|
|
$
|
99,319
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
54
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
Costs of revenue
|
|
|
92,847
|
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,351
|
|
|
|
56,629
|
|
|
|
33,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
52,972
|
|
|
|
42,478
|
|
|
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,379
|
|
|
|
14,151
|
|
|
|
593
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
3,917
|
|
|
|
1,246
|
|
|
|
800
|
|
Gain on sale of investments
|
|
|
|
|
|
|
|
|
|
|
927
|
|
Foreign currency transaction gains (losses)
|
|
|
(732
|
)
|
|
|
125
|
|
|
|
(193
|
)
|
Other, net
|
|
|
64
|
|
|
|
(162
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
3,249
|
|
|
|
1,209
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
22,628
|
|
|
|
15,360
|
|
|
|
2,157
|
|
Income tax expense (benefit)
|
|
|
4,857
|
|
|
|
(3,630
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.76
|
|
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
55
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
from
|
|
|
Accumulated
|
|
|
Other
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Employee
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stockholders
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at March 31, 2005
|
|
|
5,984,117
|
|
|
$
|
60
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
3,273
|
|
|
$
|
(71
|
)
|
|
$
|
(49
|
)
|
|
$
|
(20,219
|
)
|
|
$
|
(451
|
)
|
|
$
|
(17,899
|
)
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes receivable from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Accretion of preferred stock issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
266,030
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
80,917
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(96
|
)
|
|
|
(96
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,981
|
|
|
|
|
|
|
|
1,981
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
6,331,064
|
|
|
$
|
63
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
5,605
|
|
|
$
|
|
|
|
$
|
(51
|
)
|
|
$
|
(18,238
|
)
|
|
$
|
(547
|
)
|
|
$
|
(13,610
|
)
|
|
$
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes receivable from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Repayment of principal and accrued interest on notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
Accretion of preferred stock issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
1,006,669
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,420
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
82,913
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,962
|
|
|
|
|
|
Adjustment to initially apply SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
(136
|
)
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
353
|
|
|
|
353
|
|
Reclassification of warrants from equity to liabilities pursuant
to adoption of FSP
150-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
Reclassification of warrants from liabilities to equity pursuant
to warrant amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,990
|
|
|
|
|
|
|
|
18,990
|
|
|
|
18,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
7,420,646
|
|
|
$
|
74
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
19,205
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
752
|
|
|
$
|
(330
|
)
|
|
$
|
19,259
|
|
|
$
|
19,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
181,544
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
Reclass of SARs from liability to equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,811
|
)
|
|
|
|
|
Proceeds from initial public offering
|
|
|
4,400,000
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
61,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,600
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
11,425,786
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
60,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,862
|
|
|
|
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities,
net of taxes $107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
(196
|
)
|
Unrealized gain (loss) on effective cash flow hedges, net of
taxes $567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(931
|
)
|
|
|
(931
|
)
|
|
|
(931
|
)
|
Pension benefit adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
(167
|
)
|
|
|
(167
|
)
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
Tax benefit related to stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
1,464
|
|
|
|
1,464
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,771
|
|
|
|
|
|
|
|
17,771
|
|
|
|
17,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
23,427,976
|
|
|
$
|
234
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
137,774
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,428
|
|
|
$
|
(160
|
)
|
|
$
|
155,834
|
|
|
$
|
17,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
56
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,923
|
|
|
|
3,272
|
|
|
|
3,051
|
|
Share-based compensation expense
|
|
|
3,041
|
|
|
|
2,911
|
|
|
|
1,792
|
|
Gain on sale of equity investment
|
|
|
|
|
|
|
|
|
|
|
(927
|
)
|
Loss (gain) on disposal of property and equipment and investments
|
|
|
(144
|
)
|
|
|
7
|
|
|
|
245
|
|
Mark to market for liability classified warrants
|
|
|
|
|
|
|
148
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
402
|
|
|
|
(5,040
|
)
|
|
|
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(6,834
|
)
|
|
|
(12,887
|
)
|
|
|
(6,757
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,960
|
)
|
|
|
(1,625
|
)
|
|
|
(1,593
|
)
|
Other long-term assets
|
|
|
(3,875
|
)
|
|
|
(10
|
)
|
|
|
(297
|
)
|
Accounts payable
|
|
|
(1,011
|
)
|
|
|
1,836
|
|
|
|
(136
|
)
|
Accrued employee compensation and benefits
|
|
|
3,052
|
|
|
|
1,981
|
|
|
|
1,846
|
|
Accrued expenses other
|
|
|
2,032
|
|
|
|
941
|
|
|
|
1,560
|
|
Deferred revenue
|
|
|
(540
|
)
|
|
|
9
|
|
|
|
748
|
|
Income taxes payable
|
|
|
416
|
|
|
|
644
|
|
|
|
207
|
|
Excess tax benefits from stock option exercises
|
|
|
(437
|
)
|
|
|
(36
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
604
|
|
|
|
(21
|
)
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,440
|
|
|
|
11,120
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity investment
|
|
|
|
|
|
|
466
|
|
|
|
461
|
|
Proceeds from sale of property and equipment
|
|
|
172
|
|
|
|
35
|
|
|
|
103
|
|
Purchase of short-term investments
|
|
|
(79,773
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale or maturity of short-term investments
|
|
|
40,943
|
|
|
|
|
|
|
|
|
|
Purchase of long-term investments
|
|
|
(23,929
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale or maturity of long-term investments
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
(2,690
|
)
|
|
|
(872
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(12,526
|
)
|
|
|
(5,993
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(73,147
|
)
|
|
|
(6,364
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
442
|
|
|
|
129
|
|
|
|
109
|
|
Proceeds from sale of common stock
|
|
|
61,600
|
|
|
|
11,420
|
|
|
|
766
|
|
Principal payments on capital lease obligation
|
|
|
(7
|
)
|
|
|
(22
|
)
|
|
|
(216
|
)
|
Repayments of notes receivable
|
|
|
|
|
|
|
53
|
|
|
|
|
|
Deferred stock offering costs
|
|
|
(7,038
|
)
|
|
|
(1,773
|
)
|
|
|
|
|
Excess tax benefits from stock option exercises
|
|
|
437
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
55,434
|
|
|
|
9,843
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
241
|
|
|
|
243
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,032
|
)
|
|
|
14,842
|
|
|
|
1,831
|
|
Cash and cash equivalents, beginning of year
|
|
|
45,079
|
|
|
|
30,237
|
|
|
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
|
$
|
30,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3
|
|
|
$
|
13
|
|
|
$
|
28
|
|
Cash receipts from interest
|
|
$
|
3,275
|
|
|
$
|
1,233
|
|
|
$
|
807
|
|
Cash paid for income tax
|
|
$
|
4,219
|
|
|
$
|
722
|
|
|
$
|
65
|
|
See accompanying notes to consolidated financial statements
57
Virtusa
Corporation and Subsidiaries
(thousands,
except share and per share amounts)
|
|
(1)
|
Nature of
the Business
|
Virtusa Corporation (the Company or Virtusa) is a global
information technology services company. The Company uses an
offshore delivery model to provide a broad range of information
technology, or IT services, including IT consulting, technology
implementation and application outsourcing. Using its enhanced
global delivery model, innovative platforming approach and
industry expertise, the Company provides cost-effective services
that enable its clients to accelerate time to market, improve
service and enhance productivity. Headquartered in
Massachusetts, Virtusa has offices in the United States and the
United Kingdom, and global delivery centers in Hyderabad and
Chennai, India and Colombo, Sri Lanka.
The Company completed an initial public offering, or IPO, of its
common stock on August 8, 2007. In connection with the
Companys IPO, the Company issued and sold
4,400,000 shares of common stock at a public offering price
of $14.00 per share. The Company received net proceeds of
$52,789 after deducting underwriting discounts and commissions
of $4,312 and offering costs of $4,499. Upon the closing of the
IPO, all shares of redeemable convertible preferred stock
automatically converted into 11,425,786 shares of the
Companys common stock.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation
|
The consolidated financial statements reflect the accounts of
the Company and its subsidiaries, Virtusa (India) Private
Limited, organized and located in India, Virtusa (Private)
Limited, organized and located in Sri Lanka, Virtusa UK
Limited, organized and located in the United Kingdom, Virtusa
Securities Corporation, a Massachusetts securities corporation
located in the United States, Virtusa International, B.V.,
organized and located in the Netherlands, Virtusa Consulting
Services, Pvt. Ltd., organized and located in India, and Virtusa
Software Services, Pvt. Ltd., organized and located in India.
All intercompany transactions and balances have been eliminated
in consolidation.
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
including the recoverability of tangible assets, disclosure of
contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenue and
expenses during the reported period. Management reevaluates
these estimates on an ongoing basis. The most significant
estimates relate to the recognition of revenue and profits based
on the percentage of completion method of accounting for
fixed-price contracts, share-based compensation, income taxes
and related deferred tax assets and liabilities. Management
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances. The actual amounts may vary from the estimates
used in the preparation of the accompanying consolidated
financial statements.
|
|
(c)
|
Foreign
Currency Translation
|
The functional currencies of the Companys
non-U.S. subsidiaries
are the local currency. India, Sri Lanka and the United
Kingdoms operating and capital expenditures are
denominated in their local currency which is the currency most
compatible with their expected economic results. India and Sri
Lanka local expenditures form the underlying basis for
intercompany transactions which are subsequently conducted in
both U.S. dollars and U.K. pounds sterling. U.K. client
sales contracts are conducted in U.K. pounds sterling.
All transactions and account balances are denominated in the
local currency. The Company translates the value of these
non-U.S. subsidiaries local currency denominated
assets and liabilities into U.S. dollars at the
58
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
rates in effect at the balance sheet date. Resulting translation
adjustments are recorded in stockholders equity as a
component of accumulated other comprehensive income (loss). The
local currency denominated statement of income amounts are
translated into U.S. dollars using the average exchange
rates in effect during the period. Realized foreign currency
transaction gains and losses are included in the consolidated
statements of income. The Companys
non-U.S. subsidiaries
do not operate in highly inflationary countries.
|
|
(d)
|
Derivative
Instruments and Hedging Activities
|
The Company enters into forward foreign exchange contracts to
mitigate the risk of changes in foreign exchange rates on
intercompany transactions and forecasted transactions
denominated in foreign currencies. The Company designates
derivative contracts as cash flow hedges if it satisfies the
criteria for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
. Changes in fair values of derivatives designated
as cash flow hedges are deferred and recorded as a component of
accumulated other comprehensive income until the hedged
transactions occur and are then recognized in the consolidated
statements of income. Changes in fair value of derivatives not
designated as hedging instruments and the ineffective portion of
derivatives designated as cash flow hedges are recognized
immediately in the consolidated statements of income.
With respect to derivatives designated as hedges, the Company
formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objectives and
strategy for undertaking various hedge transactions. The Company
also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective
in offsetting changes in fair values or cash flows of the hedged
item. If the Company determines that a derivative or a portion
thereof is not highly effective as a hedge, or if a derivative
ceases to be a highly effective hedge, the Company will
prospectively discontinue hedge accounting with respect to that
derivative.
|
|
(e)
|
Cash
and Cash Equivalents and Restricted Cash
|
The Company considers all highly liquid investments with a
remaining maturity of three months or less from the date of
purchase to be cash equivalents. At March 31, 2008, cash
equivalents consisted of money market instruments,
U.S. Treasury bills and certificates of deposit.
The Company leases its Westborough, Massachusetts facility. The
lease is secured by a credit facility, which, in turn is secured
by a pledge of restricted cash. As of March 31, 2008 and
2007, cash of $490 was restricted in support of the Westborough,
Massachusetts lease. The Company also has restricted cash in
India totaling $1,242 and $935 at March 31, 2008 and 2007,
respectively, which includes restricted deposits with banks to
secure the import of computer and other equipment of $242 and
$72 at March 31, 2008 and 2007, respectively, deposits
under lien of $299 and $219 respectively, against bank
guarantees issued by a bank in favor of government agencies
associated with the construction of its facility in India, and
deposits under lien of $701 and $644 respectively against a bank
guarantee related to a transfer pricing tax appeal with the
government of India at March 31, 2008 and 2007. At
March 31, 2008 and 2007, the Company had restricted cash in
Sri Lanka of $129 and $163, respectively, for a bank guarantee
relating to refunds of value-added tax from the Sri Lankan
government. Additionally at March 31, 2008, the Company had
restricted cash related to its hedging program of $2,500.
|
|
(f)
|
Investment
Securities
|
The Company classifies all debt securities with readily
determinable market values as available for sale in
accordance with SFAS No. 115,
Accounting for
Certain Investments in Debt and Equity Securities.
These
securities are classified as short-term investments and
long-term investments on the consolidated balance sheet and are
carried at fair market value. Any unrealized gains and losses on
these securities are reported as other comprehensive income
(loss), net of tax, as a separate component of
stockholders equity unless the decline in
59
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
value is deemed to be other-than-temporary, in which case,
investments are written down to fair value and the loss is
charged to the consolidated statement of income. Short-term
investments are those with original maturities of more than
three months and less than one year at the date of purchase and
less than one year from the date of the balance sheet. Long-term
investments are those with maturities of more than one year from
the date of the balance sheet.
At March 31, 2008 and 2007, the Company held long-term
investments in equity instruments of companies, which the
Company accounts for under the cost method, as its ownership is
less than 20% and the Company does not have the ability to
exercise significant influence over the operations of these
companies. In prior years, because evidence indicated that it
would be highly unlikely that the Company would be able to sell
or otherwise recover the cost basis of certain investments, the
Company had reduced the carrying value of certain investments to
zero to reflect the value of the investments.
During the fiscal year ended March 31, 2006, the Company
recognized a gain of $696 from earn out payments on
the sale of an investment. The Company also recognized a gain of
$231 on the sale of a second investment during the fiscal year
ended March 31, 2006 which had a carrying value of zero.
|
|
(g)
|
Fair
Value of Financial Instruments
|
At March 31, 2008 and 2007, the carrying amounts of the
Companys financial instruments, which included cash and
cash equivalents, accounts receivable, unbilled accounts
receivable, restricted cash, accounts payable, accrued employee
compensation and benefits and other accrued expenses,
approximate their fair values due to their short-term nature.
Based on borrowing rates currently available to the Company for
leases with similar terms, the carrying value of capital lease
obligations approximated fair value at March 31, 2008 and
2007.
|
|
(h)
|
Concentration
of Credit Risk and Significant Customers
|
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily comprised of cash
and cash equivalents, investments, accounts receivable and
unbilled accounts receivable. The Company places its cash in
highly rated financial institutions. The Company adheres to a
formal investment policy with the primary objective of
preservation of principal, which contains credit rating minimums
and diversification requirements. Management believes its credit
policies reflect normal industry terms and business risk. The
Company does not anticipate non-performance by the
counterparties and, accordingly, does not require collateral.
At March 31, 2008 and 2007, one client accounted for 36%
and 28%, respectively, of gross accounts receivable. During the
fiscal years ended March 31, 2008 and 2007, one client
accounted for 27% and 23%, respectively, of the Companys
revenue.
|
|
(i)
|
Property
and Equipment
|
Property and equipment are recorded at cost and depreciated over
their estimated useful lives using the straight-line method.
Property and equipment held under capital leases, which involve
a transfer of ownership, are amortized over the estimated useful
life of the asset. Other property and equipment held under
capital leases and leasehold improvements are amortized over the
shorter of their lease term or the estimated useful life of the
related asset. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or
charged to income. Repair and maintenance costs are expensed as
incurred.
60
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The Companys long-lived assets include property and
equipment. The Company evaluates the recoverability of its
long-lived assets whenever events or changes in circumstances
indicate that the carrying amounts of the long-lived assets may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amounts of an asset
to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying value of the assets exceed the fair value of the
assets and the resulting losses are included in the statement of
income.
|
|
(k)
|
Internally-Developed
Software
|
Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
, requires certain research and
development costs associated with the application development
stage to be capitalized for internal use software. At
March 31, 2008 and 2007, capitalized software development
costs pursuant to
SOP 98-1
were approximately $825 and $870, respectively. These costs were
recorded in property and equipment. Capitalized internal use
software development costs are amortized over their estimated
useful life, generally three years, using the straight line
method, beginning with the date that an asset is ready for its
intended use. For the fiscal years ended March 31, 2008,
2007 and 2006, amortization of capitalized software development
costs amounted to approximately $326, $230 and $138,
respectively.
Income taxes are accounted for under the provisions of
SFAS No. 109,
Accounting for Income Taxes
,
using the asset and liability method whereby deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.
At December 31, 2006, the Company determined that it was
more likely than not that its deferred tax assets would be
realized based upon its positive cumulative operating results
and its assessment of its expected future results. As a result,
the Company released its valuation allowance and recognized a
discrete income tax benefit of $5,040 in its consolidated
statement of income for the fiscal year ended March 31,
2007. On an ongoing basis, the Company evaluates whether a
valuation allowance is needed to reduce its deferred tax assets
to the amount that is more likely than not to be realized based
on the weight of all the negative and positive evidence.
Effective April 1, 2007, the Company adopted Financial
Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes-an interpretation of SFAS No. 109
(FIN 48). In addition, the calculation of the
Companys tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in
multiple jurisdictions. The Company records liabilities for
estimated tax obligations in the United States and other tax
jurisdictions (see note 10).
The Company derives its revenue from a variety of IT consulting,
technology implementation and application outsourcing services.
Contracts for these services have different terms and conditions
based on the scope, deliverables, and complexity of the
engagement which require management to make judgments and
estimates in determining the overall cost to the customer. Fees
for these contracts may be in the form of
time-and-materials
or fixed price arrangements and volume discounts are recorded as
a reduction of revenue over the contractual period as services
are performed.
61
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Revenue on
time-and-material
contracts is recognized as the services are performed and
amounts are earned in accordance with the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 101,
Revenue Recognition in Financial
Statements
, as amended by SAB No. 104,
Revenue
Recognition.
The Company considers amounts to be earned once
evidence of an arrangement has been obtained, services are
delivered, fees are fixed or determinable, and collectibility is
reasonably assured. For contracts with fees based on
time-and-materials,
the Company recognizes revenue over the period of performance.
Revenue from fixed price contracts is accounted for under the
percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
Under the
percentage-of-completion method, management estimates the
percentage of completion based upon efforts incurred as a
percentage of the total estimated efforts for the specified
engagement. When total cost estimates exceed revenue, the
Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant
judgment relative to estimating total contract revenue and
efforts, including assumptions relative to the length of time to
complete the project, the nature and complexity of the work to
be performed, and anticipated changes in other
engagement-related costs. Estimates of total contract revenue
and efforts are continuously monitored during the term of the
contract and are subject to revision as the contract progresses.
When revisions in estimated contract revenue and efforts are
determined, such adjustments are recorded in the period in which
they are first identified.
Revenue includes reimbursements of travel and out-of-pocket
expenses with equivalent amounts of expense recorded in costs of
revenue of $4,303, $3,312 and $1,724 for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
|
|
(n)
|
Costs
of Revenue and Operating Expenses
|
Costs of revenue consist principally of salaries, employee
benefits and stock compensation expense, reimbursable and
non-reimbursable travel costs, subcontractor fees, and
immigration related expenses for IT professionals. Selling and
marketing expenses are charged to income as incurred. Selling
and marketing expenses are those expenses associated with
promoting and selling the Companys services and include
such items as sales and marketing personnel salaries, stock
compensation expense and related fringe benefits, commissions,
travel, and the cost of advertising and other promotional
activities. Advertising and promotional expenses incurred were
approximately $172, $207 and $455 for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
General and administrative expenses include other operating
items such as officers and administrative personnel
salaries, stock compensation expense and related fringe
benefits, legal and audit expenses, public company related
expenses, insurance, provision for doubtful accounts,
depreciation and operating lease expenses.
|
|
(o)
|
Share-Based
Compensation
|
Effective April 1, 2005, the Company adopted the provisions
of SFAS No. 123(R),
Share Based Payment
,
(SFAS 123R) using the modified prospective method.
Accordingly, the statements of income for the fiscal years ended
March 31, 2008, 2007 and 2006 include compensation costs
related to newly granted share-based awards calculated in
accordance with SFAS 123R, as well as for those issued in
prior years calculated in accordance with SFAS 123 that
vest after the adoption date. The compensation cost is
determined by estimating the fair value at the grant date of the
Companys common stock using the Black-Scholes option
pricing model, and expensing the total compensation cost on a
straight line basis (net of estimated forfeitures) over the
requisite employee service period. Due to the fringe benefit tax
in India, the Company estimated the fair value at grant date
using the lattice model for stock options granted to employees
based in India, during the fiscal year ended March 31,
2008. The total SFAS 123R compensation expense for the
fiscal years ended
62
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
March 31, 2008, 2007 and 2006 was $3,041, $2,911 and
$1,792, respectively, with $661, $1,216 and $537, respectively,
of this amount included in the costs of revenue, and $2,380,
$1,695 and $1,255, respectively, included in selling, general
and administrative expenses.
The fair value of each stock option is estimated on the date of
grant using the respective option pricing valuation model with
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Fair
|
|
|
|
|
|
|
|
|
|
Value Options Pricing
|
|
Year Ended March 31,
|
|
Model Assumptions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.02
|
%
|
|
|
4.63
|
%
|
|
|
4.24
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.44
|
|
Anticipated common stock volatility
|
|
|
43.8
|
%
|
|
|
50.06
|
%
|
|
|
60.10
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The risk-free interest rate assumptions are based on the
interpolation of various U.S. Treasury bill rates in effect
during the month in which stock option awards are granted. The
Companys volatility assumption is based on the historical
volatility rates of the common stock of its publicly held peers
over periods commensurate with the expected term of each grant.
The expected term of employee share-based awards represents the
weighted average period of time that awards are expected to
remain outstanding. The determination of the expected term of
share-based awards assumes that employees behavior is a
function of the awards vested, contractual lives, and the extent
to which the award is in the money. Accordingly, the Company has
elected to use the SAB No. 107
Share-Based
Payments
(as amended by
SAB 110) simplified method of determining
the expected term or life of its share-based awards. The SEC
permits the use of this method by newly-public companies that
have relatively little plan history or peer-company, industry,
or other empirical data available to determine the expected
period or term over which its awards will be held before
exercise.
As of March 31, 2008, there was $2,611 of total
unrecognized compensation cost related to nonvested stock
options granted under the Companys Amended and Restated
2000 Option Plan and the Companys 2007 Stock Option and
Incentive Plan (see note 9 for a more complete description
of these plans). That cost is expected to be recognized over a
remaining weighted average period of 2.38 years.
In addition to the stock options described above, the Company
established the 2005 Stock Appreciation Rights Plan, a stock
appreciation rights (SARs) compensation plan during the fiscal
year ended March 31, 2006 (see note 9 for a more
complete description of this plan). Prior to the Companys
IPO, SARs were required to be settled in cash under the terms of
the plan. Thus, the Company determined the compensation cost and
the future liability for these SARs by establishing the fair
value of the SARs at the date of grant and remeasuring the fair
value of the vested SARs at the close of each reporting period.
Subsequent to the Companys IPO, the Company is required,
under the terms of the plan to settle, and has settled, all
exercised SARs in shares of the Companys common stock.
Therefore, the SARs are now equity classified and are no longer
remeasured. The liability measured as of the IPO date was $1,382
and this amount has been reclassified as a component of
additional paid in capital during the fiscal year ended
March 31, 2008. During the fiscal years ended
March 31, 2008, 2007 and 2006, the Company recognized
compensation expense in the amount of $455, $984 and $206,
respectively, with $391, $883 and $185 of this amount included
in costs of revenue, and $64, $101 and $21 in selling, general
and administrative expenses.
|
|
(p)
|
Allowance
for Doubtful Accounts
|
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of clients to make
required payments. The allowance for doubtful accounts is
determined by
63
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
evaluating the relative credit worthiness of each client,
historical collections experience and other information,
including the aging of the receivables.
|
|
(q)
|
Unbilled
Accounts Receivable
|
Unbilled accounts receivable represent revenue on contracts to
be billed, in subsequent periods, as per the terms of the
related contracts.
|
|
(r)
|
Recent
Accounting Pronouncements
|
In June 2006, the FASB issued FIN 48 which clarifies the
accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or
expected to be taken in a tax return that is required to be met
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. On April 1, 2007, the
Company adopted FIN 48. The cumulative effect of adopting
FIN 48 of $95 was recorded as a reduction of beginning
retained earnings.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, an amendment of FASB Statement No. 133.
(SFAS No. 161). SFAS No. 161
requires enhanced disclosures about an entitys derivative
instruments and hedging activities with a view toward improving
the transparency of financial reporting, and is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. SFAS No. 161 encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the impact of
adopting SFAS No. 161 on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51
(SFAS No. 160).
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for the Company beginning April 1, 2009. The
Company is currently evaluating the potential impact that
SFAS No. 160 will have on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115
(SFAS No. 159), which is effective
for financial statements beginning April 1, 2008.
SFAS No. 159 permits entities to measure eligible
financial assets, financial liabilities and firm commitments at
fair value, on an
instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other generally accepted accounting principles.
The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings.
The Company is currently evaluating the potential impact that
SFAS No. 159 will have on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007. However, on February 12, 2008, the FASB issued FSP
SFAS No. 157-2
(the FSP) which delays the effective date of
SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The FSP partially
64
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
the FSP. The Company is currently evaluating the potential
impact that SFAS No. 157 and the FSP will have on its
consolidated financial statements.
Certain prior-year amounts have been reclassified to conform to
the fiscal year ended March 31, 2008 presentation.
Prior to the Companys IPO, the Company calculated net
income per share in accordance with SFAS No. 128,
Earnings per Share
(SFAS No. 128) and EITF
Issue
No. 03-6,
Participating Securities and the Two
Class Method under FASB Statement 128
(EITF
No. 03-6).
EITF
No. 03-6
clarifies the use of the two-class method for the
computation of earnings per share by companies with
participating securities or multiple classes of common stock.
The Companys series A, B, C and D redeemable
convertible preferred stock were participating securities due to
their participation rights related to cash dividends declared by
the Company. When determining basic earnings per share under
EITF
No. 03-6,
undistributed earnings for a period are allocated to a
participating security based on the contractual participation
rights of the security to share in those earnings as if all of
the earnings for the period had been distributed. Net losses are
not allocated to preferred stockholders.
Basic net income per share for the fiscal years ended
March 31, 2007 and 2006 has been calculated using the two
class method. Basic net income per share is computed by dividing
the net income available to common stockholders by the weighted
average common shares outstanding. The net income available to
common stockholders is calculated by deducting dividends
allocable to the Companys redeemable convertible preferred
stock from net income. There have been no dividends to common or
redeemable convertible preferred stock for any of the periods
presented. Diluted net income per share is computed giving
effect to all potentially dilutive common stock, including
options and all convertible securities to the extent they are
dilutive.
Subsequent to the IPO, for the fiscal year ended March 31,
2008, basic net income per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding for the period, and diluted earnings per share is
computed by including common stock equivalents outstanding for
the period in the denominator. Common stock equivalents include
shares issuable upon the exercise of outstanding stock options,
SARs and warrants, net of shares assumed to have been purchased
with the proceeds, using the
65
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
treasury stock method. The following table sets forth the
computation of basic and diluted net income per share for the
periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
Net income allocated to participating redeemable convertible
preferred stockholders
|
|
|
|
|
|
|
12,447
|
|
|
|
1,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
17,771
|
|
|
$
|
6,543
|
|
|
$
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
21,368,470
|
|
|
|
6,005,619
|
|
|
|
5,613,623
|
|
Dilutive effect of employee stock options and warrants
|
|
|
1,828,021
|
|
|
|
919,756
|
|
|
|
321,810
|
|
Dilutive effect of stock appreciation rights
|
|
|
86,172
|
|
|
|
|
|
|
|
|
|
Dilutive effect of redeemable convertible preferred shares
|
|
|
|
|
|
|
11,425,786
|
|
|
|
11,425,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares-Diluted
|
|
|
23,282,663
|
|
|
|
18,351,161
|
|
|
|
17,361,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-Diluted
|
|
$
|
0.76
|
|
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal years ended March 31, 2008, 2007, and
2006, options to purchase 257,386, 691,151 and
1,826,595 shares of common stock, respectively, were
excluded from the calculations of diluted earnings per share as
their effect would have been anti-dilutive.
|
|
(4)
|
Investment
Securities
|
At March 31, 2008, all of the Companys investment
securities were classified as available-for-sale and were
carried on its balance sheet at their fair market value. Fair
market value was determined based upon quoted market prices for
the applicable security.
The following is a summary of investment securities as of
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
14,969
|
|
|
$
|
1
|
|
|
$
|
(14
|
)
|
|
$
|
14,956
|
|
Corporate bonds
|
|
|
16,621
|
|
|
|
88
|
|
|
|
(41
|
)
|
|
|
16,668
|
|
Auction Rate Securities
|
|
|
8,350
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
7,965
|
|
Treasury Coupons
|
|
|
8,579
|
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
8,583
|
|
Medium and Short-term notes
|
|
|
4,885
|
|
|
|
11
|
|
|
|
(9
|
)
|
|
|
4,887
|
|
Euro dollar bonds
|
|
|
2,806
|
|
|
|
32
|
|
|
|
|
|
|
|
2,838
|
|
Municipal bonds
|
|
|
1,200
|
|
|
|
8
|
|
|
|
|
|
|
|
1,208
|
|
Certificates of deposit
|
|
|
800
|
|
|
|
2
|
|
|
|
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,210
|
|
|
$
|
154
|
|
|
$
|
(457
|
)
|
|
$
|
57,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
At March 31, 2007, the Company had investments in Sri Lanka
treasury notes and bills of $41 which were carried at cost and
were redeemed during the Companys fiscal year ended
March 31, 2008.
The Company evaluates investments with unrealized losses to
determine if the losses are other than temporary. The Company
has determined that the gross unrealized losses at
March 31, 2008 are temporary. In making this determination,
the Company considered the financial condition and near-term
prospects of the issuers, the magnitude of the losses compared
to the investments cost, the length of time the investments have
been in an unrealized loss position and the Companys
ability to hold the investments to maturity.
The following table shows the gross unrealized losses and fair
value of the Companys investment securities with
unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position as of March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
7,929
|
|
|
$
|
(14
|
)
|
Corporate bonds
|
|
|
4,910
|
|
|
|
(41
|
)
|
Auction Rate Securities
|
|
|
7,965
|
|
|
|
(385
|
)
|
Treasury Coupons
|
|
|
5,070
|
|
|
|
(8
|
)
|
Medium and Short-term notes
|
|
|
1,967
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,841
|
|
|
$
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities by contractual maturity were as
follows:
|
|
|
|
|
|
|
March 31, 2008
|
|
|
Due in one year or less
|
|
$
|
40,816
|
|
Due after 1 year through 5 years
|
|
|
9,126
|
|
Due after 5 years
|
|
|
7,965
|
|
|
|
|
|
|
Total
|
|
$
|
57,907
|
|
|
|
|
|
|
The Companys investments in auction rate securities
generally have contractual maturities in excess of one year;
however, they are structured to provide liquidity to the Company
every ninety days or less when interest rates are reset through
a Dutch auction process. As of March 31, 2008,
the Company held $7,965 of auction rate securities whose
underlying assets are generally student loans which are
substantially backed by the Federal government. During the
period February 6, 2008 to March 31, 2008 auctions
failed for all of the auction rate securities held by the
Company at March 31, 2008, at which time, the Company
reclassified these auction rate securities from short-term
investments to long-term investments. There has not been a
deterioration of the underlying credit quality of the auction
rate securities, and the Company has the intent and ability to
hold the securities until there is a recovery in the market
value, if necessary. As of March 31, 2008, the Company
recorded as a component of other comprehensive income (loss) an
unrealized loss of $385, or $250 net of tax, related to its
auction rate securities.
During the year ended March 31, 2008, the Company recorded
net gains on investments of $64 on sales of marketable
securities.
67
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(5)
|
Property
and Equipment
|
Property and equipment and their estimated useful lives in years
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful Life
|
|
March 31,
|
|
|
|
(Years)
|
|
2008
|
|
|
2007
|
|
|
Computer equipment
|
|
3
|
|
$
|
17,043
|
|
|
$
|
14,664
|
|
Furniture and fixtures
|
|
7
|
|
|
1,768
|
|
|
|
2,005
|
|
Vehicles
|
|
4
|
|
|
229
|
|
|
|
299
|
|
Software
|
|
3
|
|
|
3,689
|
|
|
|
2,835
|
|
Leasehold improvements
|
|
Lesser of
Estimated
Useful Life or
Lease Term
|
|
|
3,476
|
|
|
|
2,220
|
|
Capital
work-in-progress
|
|
|
|
|
9,559
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,764
|
|
|
|
23,062
|
|
Less Accumulated depreciation and amortization
|
|
|
|
|
18,931
|
|
|
|
15,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,833
|
|
|
$
|
7,541
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the fiscal years ended
March 31, 2008, 2007 and 2006 was $3,923, $3,272 and
$3,051, respectively. Capital
work-in-progress
represents advances paid towards the acquisition of property and
equipment and the cost of property and equipment not put to use
before the balance sheet date.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued taxes
|
|
$
|
2,564
|
|
|
$
|
1,841
|
|
Accrued professional fees
|
|
|
1,317
|
|
|
|
1,043
|
|
Derivative instruments-current
|
|
|
1,530
|
|
|
|
|
|
Accrued miscellaneous
|
|
|
2,964
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,375
|
|
|
$
|
4,338
|
|
|
|
|
|
|
|
|
|
|
The Company has a $3,000 revolving line of credit with a bank
with a $1,500 sub-limit for letters of credit as of
March 31, 2008. The revolving line of credit also includes
a foreign exchange line of credit requiring 15% of foreign
exchange contracts to be supported by the Companys
borrowing base. Advances under this credit facility accrue
interest at an annual rate equal to the prime rate minus 0.25%.
The credit facility is secured by the grant of a security
interest in all of the Companys U.S. assets in favor
of the bank and contains financial and reporting covenants and
limitations. The Company is currently in compliance with all
covenants contained in its credit facility and believes that the
credit facility provides sufficient flexibility so that it will
remain in compliance with its terms. The credit facility expires
on September 30, 2008. The Company had no amounts
outstanding under this credit facility as of March 31, 2008.
68
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(8)
|
Redeemable
Convertible Preferred Stock, Preferred Stock, and Common
Stock
|
The Company completed an IPO of its common stock on
August 8, 2007. In connection with its IPO, the Company
issued and sold 4,400,000 shares of common stock at a
public offering price of $14.00 per share. Upon the closing of
the Companys IPO, the Companys series A, B, C,
and D redeemable convertible preferred stock automatically
converted into common stock.
The Companys redeemable convertible preferred stock
consisted of the following as of March 31, 2008 and 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Total
|
|
|
Balance at March 31, 2007
|
|
$
|
13,500
|
|
|
$
|
15,132
|
|
|
$
|
12,230
|
|
|
$
|
20,000
|
|
|
$
|
60,862
|
|
Conversion to Common Stock at IPO
|
|
|
(13,500
|
)
|
|
|
(15,132
|
)
|
|
|
(12,230
|
)
|
|
|
(20,000
|
)
|
|
|
(60,862
|
)
|
Balance at March 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
In addition, the Company in its certificate of incorporation has
authorized and reserved a total of 120,000,000 shares of
$0.01 par value, common stock and 5,000,000 shares of
$0.01 par value, undesignated preferred stock. None of the
undesignated shares of preferred stock have been issued as of
March 31, 2008.
Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive dividends whenever
funds are legally available and when declared by the board of
directors, subject to the prior rights of holders of all classes
of stock outstanding.
On March 29, 2007, the Company issued and sold
918,807 shares of common stock at $12.27 per share for
gross proceeds of approximately $11,273 to a wholly-owned
subsidiary of British Telecommunications plc (BT), one of the
Companys clients. The per share price was equal to the
estimated fair value of the common stock at the date of sale as
determined by the Companys board of directors. The sale
represented 4.99% of the Companys then outstanding common
stock at the date of the sale.
In August 2006, the Company issued and sold 87,866 shares
of its common stock to a newly-appointed member of the board of
directors at $4.19 per share.
Each of the per-share prices listed above was equal to the
estimated fair value of the common stock at the date of sale as
determined by the Companys board of directors.
|
|
(9)
|
Stock
Options and Appreciation Rights
|
The Companys Amended and Restated 2000 Stock Option Plan
(the 2000 Plan), was adopted in the fiscal year ended
March 31, 2001 under which shares were reserved for
issuance to the Companys employees, directors, and
consultants. The 2000 Plan was amended over the years to reduce
the number of shares reserved for issuance to a total of
3,281,149 as of March 31, 2008. Options granted under the
2000 Plan may be incentive stock options, nonqualified stock
options or restricted stock. Incentive stock options may only be
granted to employees. Options granted have a term of ten years
and generally vest over four years. The Company settles employee
stock option exercises with newly issued shares. The
compensation committee of the board of directors determines the
term of awards on an individual case basis. The exercise price
of incentive stock options shall be no less than 100% of the
fair market value per share of the Companys common stock
on the grant date. If an individual owns stock representing more
than 10% of the outstanding shares, the price of each share
shall be at least 110% of fair market value.
In July 2005, the Company adopted the Virtusa Corporation 2005
Stock Appreciation Rights Plan (the SAR Plan). Under the SAR
Plan, the Company may grant up to 479,233 SARs to employees and
consultants of Virtusa and its foreign subsidiaries, and settled
the SARs in cash or common stock, as set forth in the SAR Plan.
In connection with the adoption of the SAR Plan, the Company
reduced the number of shares reserved for issuance under the
2000 Plan by 479,233 to 3,281,149, canceled options previously
granted under the 2000
69
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Plan to certain
non-U.S. employees,
and issued SARs in replacement of the cancelled options that had
the identical exercise price, exercise period after termination
and vesting period as the canceled options. Prior to the
Companys IPO, the SARs could only be settled in cash.
After the Companys IPO, the cash settlement feature of the
SARs ceased and exercises may only be settled in shares of the
Companys common stock.
The Companys board of directors and its stockholders
approved the Companys 2007 Stock Option and Incentive Plan
(the 2007 Plan), in May 2007. The 2007 Plan permits the Company
to make grants of incentive stock options, non-qualified stock
options, SARs, deferred stock awards, restricted stock awards,
unrestricted stock awards, and dividend equivalent rights. The
Company reserved 830,670 shares of its common stock for the
issuance of awards under the 2007 Plan. The 2007 Plan provides
that the number of shares reserved and available for issuance
under the plan will be automatically increased each
April 1, beginning in 2008, by 2.9% of the outstanding
number of shares of common stock on the immediately preceding
March 31 or such lower number of shares of common stock as
determined by the board of directors. This number is subject to
adjustment in the event of a stock split, stock dividend or
other change in the Companys capitalization. Generally,
shares that are forfeited or canceled from awards under the 2007
Plan also will be available for future awards. In addition,
available shares under the 2000 Plan and the SAR Plan, including
as a result of the forfeiture, expiration, cancellation,
termination or net issuances of awards, are automatically made
available for issuance under the 2007 Plan. In May 2007, the
Companys board of directors determined that no further
grants would be made under the 2000 Plan or the SAR Plan.
The following table summarizes stock option activity under the
2000 Plan and the 2007 Plan for the fiscal years ended
March 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Options to Purchase
|
|
|
Weighted Average
|
|
|
|
Common Shares
|
|
|
Exercise Price
|
|
|
Outstanding at March 31, 2005
|
|
|
2,138,862
|
|
|
$
|
3.49
|
|
Granted
|
|
|
440,217
|
|
|
|
2.84
|
|
Exercised
|
|
|
(80,908
|
)
|
|
|
1.34
|
|
Canceled and replaced with SARs
|
|
|
(207,460
|
)
|
|
|
4.00
|
|
Forfeited
|
|
|
(340,696
|
)
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
1,950,015
|
|
|
|
3.29
|
|
Granted
|
|
|
610,032
|
|
|
|
5.46
|
|
Exercised
|
|
|
(82,899
|
)
|
|
|
1.55
|
|
Forfeited
|
|
|
(134,746
|
)
|
|
|
5.05
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
2,342,402
|
|
|
|
3.82
|
|
Granted
|
|
|
464,524
|
|
|
|
13.88
|
|
Exercised
|
|
|
(166,979
|
)
|
|
|
2.86
|
|
Forfeited
|
|
|
(88,190
|
)
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
2,551,757
|
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes options exercisable and available
for future grant under the 2000 Plan and 2007 Plan at
March 31, 2008:
|
|
|
|
|
|
|
March 31,
|
|
|
2008
|
|
Options exercisable
|
|
|
1,458,250
|
|
Options available for future grant
|
|
|
476,390
|
|
70
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic value and weighted average remaining
contractual life of stock options outstanding at March 31,
2008 was approximately $12,423 and 6.70 years,
respectively. The aggregate intrinsic value, weighted average
remaining contractual life and weighted average exercise price
of stock options exercisable at March 31, 2008 were $9,335,
5.52 years and $3.40, respectively. The aggregate intrinsic
value of options vested and expected to vest during the fiscal
year ended March 31, 2008 was $11,195. The aggregate
intrinsic value of options exercised during the fiscal years
ended March 31, 2008, 2007 and 2006 was $1,536, $381 and
$56, respectively. The weighted average fair value of options
granted during the fiscal year ended March 31, 2008, 2007
and 2006 was $13.88, $2.99 and $1.72, respectively. During the
fiscal year ended March 31, 2008, the Company realized $437
of income tax benefit from the exercise of stock options.
The tables below summarize information about the SAR Plan
activity for the fiscal years ended March 31, 2008, 2007
and 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
SAR Plan Activity
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
Outstanding at March 31, 2005
|
|
|
|
|
|
$
|
|
|
SARs issued in replacement of canceled options
|
|
|
207,453
|
|
|
|
4.01
|
|
Granted
|
|
|
11,677
|
|
|
|
2.72
|
|
Exercised
|
|
|
(3,463
|
)
|
|
|
1.57
|
|
Forfeited or expired
|
|
|
(31,797
|
)
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
183,870
|
|
|
|
3.85
|
|
Granted
|
|
|
51,360
|
|
|
|
4.73
|
|
Exercised
|
|
|
(5,223
|
)
|
|
|
2.13
|
|
Forfeited or expired
|
|
|
(33,766
|
)
|
|
|
4.48
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
196,241
|
|
|
|
4.04
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,466
|
)
|
|
|
2.68
|
|
Forfeited or expired
|
|
|
(22,501
|
)
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
151,274
|
|
|
|
4.12
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable and available for future grant at
March 31, 2008:
|
|
|
|
|
|
|
March 31, 2008
|
|
SARs exercisable
|
|
|
86,836
|
|
SARs available for future grant
|
|
|
|
|
The aggregate intrinsic value and weighted average remaining
contractual life of outstanding SARs were approximately $854 and
6.09 years at March 31, 2008. The aggregate intrinsic
value and weighted average remaining contractual life of the
exercisable SARs at March 31, 2008 were approximately $551
and 4.98 years, respectively. The aggregate intrinsic value
of SARs exercised during the fiscal years ended March 31,
2008 and 2007 was $293 and $28, respectively.
The weighted average fair value of SARs granted during the
fiscal years ended March 31, 2007 was $2.72. There were no
SARs granted during the fiscal year ended March 31, 2008.
During the fiscal years ended March 31, 2007 and 2006, the
Company granted nonqualified options of 6,388 shares and
6,389 shares, respectively, of common stock to a
non-employee at exercise prices of $7.39
71
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
and $2.88 per share, respectively, with immediate vesting and a
two-year vesting period, respectively. The value of all of the
options was determined using the Black-Scholes model with the
following assumptions: no dividend yield, 50% to 80% volatility,
risk-free interest rates of 4.16% to 4.86%, and expected terms
of five to 10 years. During the fiscal years ended
March 31, 2008, 2007 and 2006, compensation expense related
to
non-employee
options was not material.
During the fiscal year ended March 31, 2005, the Company
granted options to purchase an aggregate of 869,055 of common
stock outside of the 2000 Plan at an exercise price of $6.89 per
share. Of the total grants, an option to purchase
798,722 shares was issued to an executive officer and an
option to purchase 70,333 shares was issued to a director of the
Company. On the first anniversary of the employment date of the
executive officer, the executive officers option vests as
to 25% of the shares, and the remainder vests in equal quarterly
installments over the following three years. The directors
option vests in equal quarterly installments over three years.
During the fiscal year ended March 31, 2006, the executive
officers option agreement was amended to reduce the
exercise price from $6.89 to $2.38. The compensation related to
these options, including the effect of the modification, is
included in the accounting associated with the adoption of
SFAS 123R (see note 2(o)).
The income (loss) before income tax expense (benefit) shown
below is based on the geographic location to which such income
is attributed for each of the fiscal years ended March 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
7,878
|
|
|
$
|
6,811
|
|
|
$
|
(1,744
|
)
|
Foreign
|
|
|
14,750
|
|
|
|
8,549
|
|
|
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,628
|
|
|
$
|
15,360
|
|
|
$
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes for each of the fiscal
years ended March 31, 2008, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,538
|
|
|
$
|
262
|
|
|
$
|
97
|
|
State
|
|
|
863
|
|
|
|
430
|
|
|
|
24
|
|
Foreign
|
|
|
2,065
|
|
|
|
717
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
$
|
4,466
|
|
|
$
|
1,409
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,587
|
|
|
$
|
3,195
|
|
|
$
|
(74
|
)
|
State
|
|
|
(81
|
)
|
|
|
540
|
|
|
|
|
|
Foreign
|
|
|
(1,115
|
)
|
|
|
5
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
$
|
391
|
|
|
$
|
3,740
|
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
(8,779
|
)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
4,857
|
|
|
$
|
(3,630
|
)
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The items which gave rise to differences between the income
taxes in the statements of income and the income taxes computed
at the U.S. statutory rate are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
U.S. state and local taxes, net of U.S federal income tax effects
|
|
|
2.1
|
|
|
|
3.1
|
|
|
|
(0.9
|
)
|
Benefit from foreign subsidiaries tax holidays
|
|
|
(17.7
|
)
|
|
|
(13.8
|
)
|
|
|
(54.4
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
(56.8
|
)
|
|
|
4.5
|
|
Permanent items
|
|
|
3.6
|
|
|
|
4.3
|
|
|
|
26.5
|
|
Other adjustments
|
|
|
(0.5
|
)
|
|
|
5.6
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
21.5
|
%
|
|
|
(23.6
|
)%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Sri Lanka subsidiary has entered into an
agreement with the Sri Lanka Board of Investment whereby export
business income of the subsidiary is exempt from Sri Lanka
income tax through March 31, 2019. Additionally, the
Companys India subsidiary operates two Software Technology
Parks (STPs) which qualify as Export Oriented Units and are
exempt from India tax on business income through March 31,
2010. The effect of the income tax holidays was to increase both
net income and diluted net income per share in the fiscal years
ended March 31, 2008, 2007 and 2006 by $3,949, $2,443 and
$1,173, respectively, and by $0.17, $0.13 and $0.07,
respectively.
Deferred tax assets (liabilities) as of March 31, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
2,360
|
|
Deferred revenue
|
|
|
133
|
|
|
|
|
|
Bad debt reserve
|
|
|
232
|
|
|
|
118
|
|
Depreciation
|
|
|
181
|
|
|
|
179
|
|
Tax credit carryforwards
|
|
|
1,035
|
|
|
|
254
|
|
Accrued expenses and reserves
|
|
|
1,033
|
|
|
|
1,004
|
|
Compensation expense
|
|
|
2,043
|
|
|
|
1,099
|
|
Other
|
|
|
673
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
5,330
|
|
|
$
|
5,040
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company determined that it was
more likely than not that all of its deferred tax assets would
be realized based upon its positive cumulative operating results
and its assessment of its expected future results. As a result,
the Company released the deferred tax asset valuation allowance
and recognized a discrete income tax benefit of $5,040 in the
consolidated statement of income for the fiscal year ended
March 31, 2007. At March 31, 2008, the Company has an
Indian tax credit carryforward of $1,035, which is available to
reduce future Indian income tax liabilities, and which expires
in 2015.
The Company intends to reinvest certain of its foreign earnings
indefinitely. Accordingly, no U.S. income taxes have been
provided for approximately $32,529 of unremitted earnings of
international subsidiaries as of March 31, 2008. The amount
of taxes attributable to the permanently reinvested
undistributed earnings is not practically determinable.
The Indian taxing authorities issued an assessment order with
respect to their examination of the tax return for the fiscal
year ended March 31, 2004 of the Companys Indian
subsidiary, Virtusa (India) Private Ltd., or Virtusa India.
At issue were several matters, the most significant of which was
the
73
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
redetermination of the arms-length profit which should be
recorded by Virtusa India on the intercompany transactions with
its affiliates. The Company is contesting the assessment and has
filed appeals with both the appropriate Indian tax authorities
and the U.S. Competent Authority. As of March 31,
2008, the Company accrued $487 related to this matter. The
Indian taxing authorities have also indicated their intent to
issue a similar assessment for the fiscal year ended
March 31, 2005.
The Company adopted the provisions of FIN 48, on
April 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing a minimum recognition
threshold for a tax position taken or expected to be take in a
tax return that is required to be met before being recognized in
the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The cumulative effect of adopting FIN 48 of $95
was recorded as a reduction to opening retained earnings and an
increase to long-term liabilities. The total amount of
unrecognized tax benefits of $756 and $1,260 as of March 31,
2008 and April 1, 2007, respectively, would reduce income
tax expense and the effective income tax rate, if recognized.
The following summarizes the activity related to the gross
unrecognized tax benefits from April 1, 2007 through
March 31, 2008:
|
|
|
|
|
Balance as of April 1, 2007
|
|
$
|
1,260
|
|
Foreign currency translation related to prior year tax positions
|
|
|
43
|
|
Increases related to prior year tax positions
|
|
|
51
|
|
Decreases related to prior year tax positions
|
|
|
(598
|
)
|
|
|
|
|
|
Balance as of March 31, 2008
|
|
$
|
756
|
|
|
|
|
|
|
The Company continues to classify accrued interest and penalties
related to unrecognized tax benefits in income tax expense. The
total accrued for interest and penalties relating to certain tax
matters in India at March 31, 2008 and April 1, 2007
was $214 and $152, respectively. The total accrued interest and
penalties relating to certain tax matters in the United States
at March 31, 2008 and April 1, 2007 was $60 and $49,
respectively. At March 31, 2008, the Company had $7 accrued
for interest and penalties relating to certain tax matters in
the United Kingdom.
There has been a $598 decrease in unrecognized tax benefits
related to prior year U.S. tax positions. During the fiscal
year ended March 31, 2008, the Company reduced its
liability for unrecognized tax benefits by $598 upon a change in
estimate relating to certain unused net operating loss
carryforwards in the United States. No significant changes in
the unrecognized tax benefit balance are expected in the next
twelve months.
Currently, the Company is under income tax examination in India.
The Company does not believe that the outcome of any examination
will have a material effect on its consolidated financial
statements. The Companys major taxing jurisdictions
include the United States, United Kingdom, India, and Sri Lanka.
With few exceptions, the Company remains subject to examination
for all fiscal years ended after March 31, 2001.
The Companys Indian subsidiary, Virtusa (India) Private
Limited, is an export-oriented company under the Indian Income
Tax Act of 1961 and is entitled to claim tax exemption for each
Software Technology Park, or STP, which Virtusa India operates.
Virtusa India currently operates two STPs, in Chennai and in
Hyderabad. Substantially all of the earnings of both STPs
qualify as tax-exempt export profits. These holidays will be
completely phased out by March 2010, and at that time any
profits would be fully taxable at the Indian statutory rate,
which is currently 34.0%. In anticipation of the phase-out of
the STP holidays, the Company intends to locate at least a
portion of its Indian operations in areas designated as a
Special Economic Zone, or SEZ, under the SEZ Act of 2005. In
particular, the Company is building a campus on a 6.3 acre
parcel of land in Hyderabad, India that has been designated as
an SEZ. In addition, the Company has leased space and intends to
operate on an SEZ designated location in Chennai, India. The
Companys profits from the SEZ operations would be eligible
for certain income tax exemptions for a period of up to
15 years.
74
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In addition, the Companys Sri Lankan subsidiary, Virtusa
Private Ltd., or Virtusa SL, was approved as an export computer
software developer by the Sri Lanka Board of Investment in 1998
and has negotiated multiple extensions of the original holiday
period in exchange for further capital investments in Sri Lanka
facilities. The most recent
12-year
agreement, which is set to expire on March 31, 2019,
requires that the Company meet certain new job creation and
investment criteria.
|
|
(11)
|
Post-retirement
Benefits
|
The Company has noncontributory defined benefit plans (the
Benefit Plans) covering its employees in India and Sri Lanka as
mandated by the Indian and Sri Lankan governments. Benefits are
based on the employees years of service and compensation.
The Company uses March 31 as a measurement date for its plans.
Cost
of pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic pension expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
$
|
(36
|
)
|
|
$
|
|
|
|
$
|
|
|
Service costs for benefits earned
|
|
|
232
|
|
|
|
125
|
|
|
|
107
|
|
Interest cost on projected benefit obligation
|
|
|
61
|
|
|
|
30
|
|
|
|
21
|
|
Amortization of the unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Recognized net actuarial loss
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
269
|
|
|
$
|
155
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
assumptions
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
8.0%-15.0%
|
|
9.0%
|
|
9.0%
|
Compensation increases (annual)
|
|
6.5%-12.0%
|
|
6.5%-8.0%
|
|
5.0%-8.0%
|
Expected return on assets
|
|
8.0%-8.5%
|
|
|
|
|
Discount rate is based upon high quality fixed income
investments in India and Sri Lanka. The discount rates at
March 31, 2008 were used to measure the year-end benefit
obligations and the earnings effects for the subsequent year.
To determine the expected long-term rate of return on pension
plan assets, the Company considers the current and expected
asset allocations, as well as historical and expected returns on
various categories of plan assets. The Company amortizes
unrecognized actuarial gains or losses over a period no longer
than the average future service of employees.
The Companys benefit obligations are described in the
following tables. Accumulated and projected benefit obligations
(ABO and PBO, respectively) represent the obligations of a
pension plan for past service as
75
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
of the measurement date. ABO is the present value of benefits
earned to date with benefits computed based on current
compensation levels. PBO is ABO increased to reflect expected
future compensation.
Accumulated
benefit obligation and projected benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated benefit obligation
|
|
$
|
628
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at April 1,
|
|
$
|
575
|
|
|
$
|
370
|
|
Service cost
|
|
|
232
|
|
|
|
125
|
|
Interest cost
|
|
|
61
|
|
|
|
30
|
|
Actuarial loss
|
|
|
167
|
|
|
|
109
|
|
Benefits paid
|
|
|
(95
|
)
|
|
|
(57
|
)
|
Exchange rate adjustments
|
|
|
33
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
973
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
Balance at April 1,
|
|
$
|
|
|
Employer contributions
|
|
|
953
|
|
Actual gain on plan assets
|
|
|
35
|
|
Benefits paid
|
|
|
(26
|
)
|
Exchange rate adjustments
|
|
|
14
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
976
|
|
|
|
|
|
|
Plan
asset allocation
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Government securities
|
|
|
70-80
|
%
|
|
|
75
|
%
|
Corporate Debt
|
|
|
10-20
|
%
|
|
|
15
|
%
|
Other
|
|
|
1-10
|
%
|
|
|
10
|
%
|
The Companys plan assets are being managed by the
respective insurance companies in India and Sri Lanka.
76
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Pension
liability
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
PBO
|
|
$
|
973
|
|
|
$
|
575
|
|
Fair value of plan assets
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status recognized
|
|
$
|
(3
|
)
|
|
$
|
575
|
|
Amount recorded in stockholders equity
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
303
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
The amount in accumulated other comprehensive income (loss) that
is expected to be recognized as a component of net periodic
benefit cost over the fiscal year ending March 31, 2009 is
$28. The Company expects to contribute $361 to its gratuity
plans during the fiscal year ending March 31, 2009.
Estimated
future benefits payments
|
|
|
|
|
Fiscal year ending March 31:
|
|
|
|
|
2009
|
|
$
|
113
|
|
2010
|
|
|
187
|
|
2011
|
|
|
247
|
|
2012
|
|
|
296
|
|
2013
|
|
|
414
|
|
2014-2018
|
|
|
2,580
|
|
The Company sponsors a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code (the 401(k)
Plan). The 401(k) Plan covers substantially all employees in the
United States who meet minimum age and service requirements and
allows participants to contribute a portion of their annual
compensation on a pretax basis. Company contributions to the
401(k) Plan may be made at the discretion of the board of
directors. During the years ended March 31, 2008, 2007 and
2006, the Company did not contribute to the 401(k) Plan.
|
|
(13)
|
Related
Party Transactions
|
In December 2000, in connection with the hiring of an executive
officer, the Company issued an interest-free loan of 2,935 Sri
Lankan rupees, or approximately $29, due and payable when the
fair market value of the Companys common stock reaches $20
per share following its IPO. The loan balance was repaid in full
during March 2007.
During the fiscal years ended March 31, 2008, 2007 and
2006, the Company purchased approximately $387, $1,048, and
$942, respectively, in services from Lotus Travel Services. The
managing director of Lotus Travel Services is a relative of
an executive officer of the Company.
During the fiscal years ended March 31, 2008, 2007 and
2006, the Company made capital and operating lease payments for
equipment of approximately $0, $230 and $291, respectively, to
Alliance Finance Company. Relatives of an executive officer of
the Company are directors of Alliance Finance Company.
|
|
(14)
|
Commitments,
Contingencies and Guarantees
|
The Company leases office space under operating leases, which
expire at various dates through the year 2013. Certain leases
contain renewal provisions and generally require the Company to
pay utilities, insurance, taxes, and other operating expenses.
77
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Future minimum lease payments under non-cancelable operating
leases at March 31, 2008 are:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Fiscal year ending March 31:
|
|
|
|
|
2009
|
|
$
|
4,425
|
|
2010
|
|
|
4,344
|
|
2011
|
|
|
3,114
|
|
2012
|
|
|
1,591
|
|
2013
|
|
|
540
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,014
|
|
|
|
|
|
|
The operating lease commitment for the fiscal year ending
March 31, 2009 is net of $103 of sublease income. Total
rental expense was approximately $5,957, $3,417 and $2,598 for
the fiscal years ended March 31, 2008, 2007 and 2006,
respectively.
The Company is constructing a facility as part of a planned
campus on a 6.3 acre site in Hyderabad, India which
includes planned construction of approximately
340,000 square feet, over the next three fiscal years at a
total estimated cost of $31,000, of which $7,698 was spent as of
March 31, 2008. As of March 31, 2008, the Company had
outstanding fixed capital commitments of $11,022, net of
advances related to this facility construction.
The Company has deposits under lien of $238 against a bank
guarantee issued by a bank in favor of Andhra Pradesh Industrial
Infrastructure Corporation Limited which would be forfeited if
the Company fails to meet certain hiring criteria with
established timelines at its Hyderabad facility.
The Company indemnifies its officers and directors for certain
events or occurrences under charter and indemnification
agreements while the officer or director is, or was serving, at
its request in a defined capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification obligations is unlimited. The costs incurred to
defend lawsuits or settle claims related to these
indemnification obligations have not been material. As a result,
the Company believes that its estimated exposure on these
obligations is minimal. Accordingly, the Company had no
liabilities recorded for these obligations as of March 31,
2008.
The Company is insured against any actual or alleged act, error,
omission, neglect, misstatement or misleading statement or
breach of duty by any current or former officer, director or
employee while rendering information technology services. The
Company believes that its financial exposure from such actual or
alleged actions, should they arise, is minimal and no liability
was recorded at March 31, 2008.
The Company is not a party to any pending litigation or other
legal proceedings that are likely to have a material adverse
affect on its financial statements.
|
|
(15)
|
Derivative
Financial Instruments and Trading Activities
|
The Company enters into foreign currency derivative contracts to
mitigate the risk of changes in foreign exchange rates on
intercompany transactions and forecasted transactions
denominated in foreign currencies, particularly between the
Indian rupee and the U.S. dollar and the U.K. pound
sterling. The notional principal amounts of these foreign
currency derivative contracts as of March 31, 2008 and 2007
were $73,101 and $0, respectively. During the fiscal year ended
March 31, 2008, the Company entered into foreign currency
derivative contracts which met the criteria for hedge accounting
as cash flow hedges pursuant to SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
.
Changes in the fair values of these hedges are deferred and
recorded as a component of accumulated other comprehensive
income (loss) until the hedged transactions occur and are then
recognized in the consolidated statements of income in the same
line item as the hedged item, whether it be to cost of sales or
78
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
operating expenses. During the fiscal year ended March 31,
2007, changes in the fair value of the portion of derivatives
not designated as cash flow hedges were recognized in costs of
revenue in the consolidated statements of income.
In connection with the cash flow hedges, the Company has
recorded an unrealized loss of $931, net of tax as a component
of accumulated other comprehensive income (loss) within
stockholders equity as of March 31, 2008.
Foreign currency (gains) losses on settlement of cash flow
hedges were ($272), $202 and $133 during the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
|
|
(16)
|
Business
Segment Information
|
The Companys Chief Operating Decision Maker (CODM) reviews
discrete financial information for the Companys operations
in the following operating segments: (i) the communications
content and technology operating segment, which includes
communications and technology and media and information; and
(ii) the banking financial services and insurance operating
segment. The CODM reviews historical forecast, summary and
detailed revenue and margin information to monitor the operating
performance and assess overall profitability of the Company.
Discrete financial information is not available or reviewed by
the CODM for any of the industries contained within these
operating segments. The Company aggregates the two operating
segments into a single reportable segment, information
technology services.
Geographic
information:
Total revenue is attributed to geographic areas based on
location of the client. Geographic information is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
113,447
|
|
|
$
|
92,356
|
|
|
$
|
66,020
|
|
Europe
|
|
|
51,125
|
|
|
|
31,887
|
|
|
|
10,627
|
|
Other
|
|
|
626
|
|
|
|
417
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived assets, net of accumulated depreciation:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,843
|
|
|
$
|
1,371
|
|
India
|
|
|
11,758
|
|
|
|
3,848
|
|
Sri Lanka
|
|
|
3,194
|
|
|
|
2,281
|
|
United Kingdom
|
|
|
38
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Consolidated long-lived assets, net
|
|
$
|
16,833
|
|
|
$
|
7,541
|
|
|
|
|
|
|
|
|
|
|
79
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(17)
|
Quarterly
Results of Operations (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenue
|
|
$
|
45,040
|
|
|
$
|
42,455
|
|
|
$
|
40,257
|
|
|
$
|
37,446
|
|
|
$
|
35,272
|
|
|
$
|
33,673
|
|
|
$
|
30,090
|
|
|
$
|
25,625
|
|
Costs of revenue
|
|
|
24,904
|
|
|
|
23,307
|
|
|
|
23,038
|
|
|
|
21,598
|
|
|
|
19,402
|
|
|
|
18,360
|
|
|
|
16,231
|
|
|
|
14,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,136
|
|
|
|
19,148
|
|
|
|
17,219
|
|
|
|
15,848
|
|
|
|
15,870
|
|
|
|
15,313
|
|
|
|
13,859
|
|
|
|
11,587
|
|
Operating expenses
|
|
|
14,521
|
|
|
|
13,281
|
|
|
|
12,510
|
|
|
|
12,660
|
|
|
|
11,788
|
|
|
|
11,244
|
|
|
|
10,173
|
|
|
|
9,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,615
|
|
|
|
5,867
|
|
|
|
4,709
|
|
|
|
3,188
|
|
|
|
4,082
|
|
|
|
4,069
|
|
|
|
3,686
|
|
|
|
2,314
|
|
Other income
|
|
|
1,163
|
|
|
|
1,096
|
|
|
|
801
|
|
|
|
189
|
|
|
|
3
|
|
|
|
288
|
|
|
|
237
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
6,778
|
|
|
|
6,963
|
|
|
|
5,510
|
|
|
|
3,377
|
|
|
|
4,085
|
|
|
|
4,357
|
|
|
|
3,923
|
|
|
|
2,995
|
|
Income tax expense (benefit)
|
|
|
1,519
|
|
|
|
1,706
|
|
|
|
943
|
|
|
|
689
|
|
|
|
450
|
|
|
|
(4,317
|
)
|
|
|
130
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,259
|
|
|
$
|
5,257
|
|
|
$
|
4,567
|
|
|
$
|
2,688
|
|
|
$
|
3,635
|
|
|
$
|
8,674
|
|
|
$
|
3,793
|
|
|
$
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
0.50
|
|
|
$
|
0.22
|
|
|
$
|
0.17
|
|
Net income per share Diluted
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.20
|
|
|
|
0.13
|
|
|
|
0.19
|
|
|
|
0.47
|
|
|
|
0.21
|
|
|
|
0.16
|
|
On April 3, 2008, the Company purchased multiple foreign
currency forward contracts designed to hedge fluctuation in the
Indian rupee against the U.S. dollar and U.K. pound
sterling. The contracts, which meet the criteria for hedge
accounting as cash flow hedges pursuant to
SFAS No. 133, have an aggregate notional amount of
approximately 682 million Indian rupees (approximately
$16,900) and will expire on a monthly basis over a
24-month
period ending on March 31, 2010. The Company has the
obligation to settle these contracts based upon the Reserve Bank
of India published Indian rupee exchange rates. The weighted
average Indian rupee rate associated with these contracts is
approximately 40.32.
80
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
|
|
(1)
|
Evaluation
of Disclosure Controls and Procedures
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures.
As of March 31, 2008, we carried out an evaluation, under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level in
(i) enabling us to record, process, summarize and report
information required to be included in our periodic SEC filings
within the required time period and (ii) ensuring that
information required to be disclosed in the reports that we file
or submit under the Securities Exchange Act is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
|
|
(2)
|
Report of
Management on Internal Control over Financial
Reporting
|
This Annual Report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm, KPMG LLP,
regarding our internal control over financial reporting due to a
transition period established by the rules of the SEC for newly
public companies.
|
|
(3)
|
Changes
in Internal Controls Over Financial Reporting
|
There have been no changes in our internal control over
financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
81
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Item 11.
|
Executive
Compensation
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following are filed as part of this Annual Report on
Form 10-K:
The following consolidated financial statements are included in
Item 8:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
53
|
|
Consolidated Balance Sheets at March 31, 2008 and
March 31, 2007
|
|
|
54
|
|
Consolidated Statements of Income for the Years ended
March 31, 2008, 2007 and 2006
|
|
|
55
|
|
Consolidated Statements of Stockholders Equity (Deficit)
for the Years ended March 31, 2008, 2007 and 2006
|
|
|
56
|
|
Consolidated Statements of Cash Flows for the Years ended
March 31, 2008, 2007 and 2006
|
|
|
57
|
|
Notes to Consolidated Financial Statements
|
|
|
58
|
|
|
|
2.
|
Financial
Statement Schedules
|
The financial statement schedule entitled Schedule
II Valuation and Qualifying Accounts is filed
as part of this Annual Report on
Form 10-K
under this Item 15.
All other schedules have been omitted since the required
information is not present, or not present in amounts sufficient
to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements or the Notes thereto.
82
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Virtusa Corporation and Subsidiaries:
Under date of May 29, 2008, we reported on the consolidated
balance sheets of Virtusa Corporation and Subsidiaries (the
Company) as of March 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders
equity (deficit) and cash flows for each of the years in the
three-year period ended March 31, 2008, which are contained
in the March 31, 2008 annual report on
Form 10-K.
In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedule of Valuation and Qualifying
Accounts in this
Form 10-K.
This financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in note 2 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payments effective April 1, 2005.
Boston, Massachusetts
May 29, 2008
83
Virtusa
Corporation and Subsidiaries
Schedule II Valuation and Qualifying
Accounts
For the years ended March 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Deductions/
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Other
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Accounts receivable allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2006
|
|
$
|
89
|
|
|
$
|
326
|
|
|
$
|
|
|
|
$
|
415
|
|
Year ended March 31, 2007
|
|
$
|
415
|
|
|
$
|
202
|
|
|
$
|
(197
|
)
|
|
$
|
420
|
|
Year ended March 31, 2008
|
|
$
|
420
|
|
|
$
|
440
|
|
|
$
|
(207
|
)
|
|
$
|
653
|
|
84
The following exhibits are filed as part of and incorporated by
reference into this Annual Report:
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
3
|
.1
|
|
Amended and Restated By-laws of the Registrant (previously filed
as Exhibit 3.1 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
3
|
.2
|
|
Form of Seventh Amended and Restated Certificate of
Incorporation of the Registrant (previously filed as
Exhibit 3.3 to the Registrants Registration Statement
on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen certificate evidence shares of the Registrants
common stock (previously filed as Exhibit 4.1 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.2
|
|
Fourth Amended and Restated Registration Rights Agreement by and
among the Registrant and the Investors named therein, dated as
of March 29, 2007 (previously filed as Exhibit 4.2 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.1
|
|
Warrant by and between the Registrant and Silicon Valley Bank,
dated as of February 27, 2002, as amended (previously filed
as Exhibit 10.2 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.2
|
|
Lease Agreement by and between the Registrant and W9/TIB Real
Estate Limited Partnership, dated June 2000, as amended by a
First Amendment thereto, dated as of November 2000, and a Second
Amendment and Extension of Lease thereto, dated as of
December 30, 2003 (previously filed as Exhibit 10.3 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.3+
|
|
Amended and Restated 2000 Stock Option Plan and forms of
agreements thereunder (previously filed as Exhibit 10.4 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.4+
|
|
2005 Stock Appreciation Rights Plan and form of agreements
thereunder (previously filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.5
|
|
Material Service Provider Agreement by and between the
Registrant and JPMorgan Chase Bank, N.A., dated as of
December 6, 2004, as amended (previously filed as
Exhibit 10.6 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.6+
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors (previously filed as Exhibit 10.7 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.7*
|
|
Provision of IT Services for BT Contract by and between the
Registrant and British Telecommunications plc, dated as of
March 29, 2007, as amended by Amendment Number 1 to
Contract, dated as of February 1, 2008, as amended by
Amendment Number 2 to Contract, dated as of March 27, 2008,
as amended by Amendment No. 3 to Contract, dated as of
March 31, 2008, as amended by Amendment No. 4 to
Contract dated as of March 31, 2008.
|
|
10
|
.8*
|
|
Amended and Restated Credit Agreement between Registrant and
Citizens Bank of Massachusetts, dated as of September 29,
2006, including Amended and Restated Revolving Credit Note,
Amended and Restated Security Agreement and Negative Pledge
Agreement, each dated as of September 29, 2006, as amended
by the First Amendment to Amended and Restated Credit Agreement,
dated as of September 30, 2007, as amended by the Second
Amendment to Amended and Restated Credit Agreement, dated as of
December 31, 2007, as amended by the Third Amendment to
Amended and Restated Credit Agreement, dated as of
February 7, 2008, as amended by the Fourth Amendment to
Amended and Restated Credit Agreement, dated as of
March 31, 2008.
|
85
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
10
|
.9+
|
|
Executive Agreement between the Registrant and Kris Canekeratne,
dated as of April 5, 2007 (previously filed as
Exhibit 10.10 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.10+
|
|
Executive Agreement between the Registrant and Danford F. Smith,
dated as of April 5, 2007 (previously filed as
Exhibit 10.11 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.11+
|
|
Executive Agreement between the Registrant and Thomas R. Holler,
dated as of April 5, 2007 (previously filed as
Exhibit 10.12 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.12+
|
|
Executive Agreement between the Registrant and Roger Keith
Modder, dated as of April 5, 2007 (previously filed as
Exhibit 10.13 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.13+
|
|
Executive Agreement between the Registrant and T.N. Hari, dated
as of April 5, 2007 (previously filed as Exhibit 10.14
to the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.14
|
|
Co-Developer Agreement and Lease Deed between the Registrant and
APIICL, a state government agency in India, dated as of March
2007 (previously filed as Exhibit 10.15 to the
Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.15*+
|
|
2007 Stock Option and Incentive Plan, including Form of
Incentive Stock Option Agreement, Form of Non-Qualified Stock
Option Agreement for Company Employees, Form of Non-Qualified
Stock Option Agreement for Non-Employee Directors and Form of
Employee Restricted Stock Award Agreement.
|
|
10
|
.16
|
|
Fifth Amended and Restated Stockholders Agreement by and among
the Registrant and the Stockholders named therein, dated as of
March 29, 2007 (previously filed as Exhibit 10.17 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.17
|
|
Agreement for Civil and Structural Works, including the General
Conditions of the Contract by and between Virtusa (India)
Private Limited and Shapoorji Pallionji & Company
Limited, dated as of July 2, 2007 (previously filed as
Exhibit 10.18 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.18+
|
|
2007 Executive Variable Incentive Cash Compensation Program
(previously filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.19+
|
|
Non-Employee Director Compensation Policy (previously filed as
Exhibit 10.20 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.20+
|
|
Virtusa Corporation Variable Cash Compensation Plan (previously
filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.21
|
|
LEASE DEED by and between Andhra Pradesh Industrial
Infrastructure Corporation Limited and Virtusa (India) Private
Limited dated as of August 22, 2007 previously filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.22*
|
|
Indenture of Lease by and between Orion Development PVT. Ltd.
and Virtusa (Private) Limited dated as of May 17, 2007
|
|
21
|
.1*
|
|
Subsidiaries of Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
31
|
.1*
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
86
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
31
|
.2*
|
|
Certification of principal accounting and financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1**
|
|
Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
32
|
.2**
|
|
Certification of principal accounting and financial officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
|
|
+
|
|
Indicates a management contract or compensation plan, contract
or arrangement.
|
|
|
|
Confidential treatment has been requested for certain provisions
of this Exhibit.
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Furnished herewith. This certification shall not be deemed filed
for any purpose, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933,
amended or the Exchange Act of 1934, as amended.
|
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 3rd day of June,
2008.
Virtusa Corporation
Kris Canekeratne
Chairman and Chief Executive Officer (Principal
Executive Officer)
Date: June 3, 2008
POWER OF
ATTORNEY AND SIGNATURES
We the undersigned officers and directors of Virtusa
Corporation, hereby severally constitute and appoint Kris
Canekeratne and Thomas R. Holler, and each of them singly, our
true and lawful attorneys, with full power to them and each of
them singly, to sign for us and in our names in the capacities
indicated below, any amendments to this Annual Report on
Form 10-K,
and generally to do all things in our names and on our behalf in
such capacities to enable Virtusa Corporation to comply with the
provisions of the Securities Act of 1934, as amended, and all
the requirements of the Securities Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated on the 3rd day of June, 2008.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
/s/ Kris
Canekeratne
Kris
Canekeratne
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Danford
F. Smith
Danford
F. Smith
|
|
President, Chief Operating Officer and Director
|
|
|
|
|
|
|
|
/s/ Thomas
R. Holler
Thomas
R. Holler
|
|
Executive Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Andrew
P. Goldfarb
Andrew
P. Goldfarb
|
|
Director
|
|
|
|
|
|
|
|
/s/ Robert
E. Davoli
Robert
E. Davoli
|
|
Director
|
|
|
|
|
|
|
|
/s/ Izhar
Armony
Izhar
Armony
|
|
Director
|
|
|
88
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
|
|
/s/ Ronald
T. Maheu
Ronald
T. Maheu
|
|
Director
|
|
|
|
|
|
|
|
/s/ Martin
Trust
Martin
Trust
|
|
Director
|
|
|
|
|
|
|
|
/s/ Rowland
Moriarty
Rowland
Moriarty
|
|
Director
|
|
|
89
Exhibit Index
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
3
|
.1
|
|
Amended and Restated By-laws of the Registrant (previously filed
as Exhibit 3.1 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
3
|
.2
|
|
Form of Seventh Amended and Restated Certificate of
Incorporation of the Registrant (previously filed as
Exhibit 3.3 to the Registrants Registration Statement
on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen certificate evidence shares of the Registrants
common stock (previously filed as Exhibit 4.1 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.2
|
|
Fourth Amended and Restated Registration Rights Agreement by and
among the Registrant and the Investors named therein, dated as
of March 29, 2007 (previously filed as Exhibit 4.2 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.1
|
|
Warrant by and between the Registrant and Silicon Valley Bank,
dated as of February 27, 2002, as amended (previously filed
as Exhibit 10.2 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.2
|
|
Lease Agreement by and between the Registrant and W9/TIB Real
Estate Limited Partnership, dated June 2000, as amended by a
First Amendment thereto, dated as of November 2000, and a Second
Amendment and Extension of Lease thereto, dated as of
December 30, 2003 (previously filed as Exhibit 10.3 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.3+
|
|
Amended and Restated 2000 Stock Option Plan and forms of
agreements thereunder (previously filed as Exhibit 10.4 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.4+
|
|
2005 Stock Appreciation Rights Plan and form of agreements
thereunder (previously filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.5
|
|
Material Service Provider Agreement by and between the
Registrant and JPMorgan Chase Bank, N.A., dated as of
December 6, 2004, as amended (previously filed as
Exhibit 10.6 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.6+
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors (previously filed as Exhibit 10.7 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.7*
|
|
Provision of IT Services for BT Contract by and between the
Registrant and British Telecommunications plc, dated as of
March 29, 2007, as amended by Amendment Number 1 to
Contract, dated as of February 1, 2008, as amended by
Amendment Number 2 to Contract, dated as of March 27, 2008,
as amended by Amendment No. 3 to Contract, dated as of
March 31, 2008, as amended by Amendment No. 4 to
Contract dated as of March 31, 2008.
|
|
10
|
.8*
|
|
Amended and Restated Credit Agreement between Registrant and
Citizens Bank of Massachusetts, dated as of September 29,
2006, including Amended and Restated Revolving Credit Note,
Amended and Restated Security Agreement and Negative Pledge
Agreement, each dated as of September 29, 2006, as amended
by the First Amendment to Amended and Restated Credit Agreement,
dated as of September 30, 2007, as amended by the Second
Amendment to Amended and Restated Credit Agreement, dated as of
December 31, 2007, as amended by the Third Amendment to
Amended and Restated Credit Agreement, dated as of
February 7, 2008, as amended by the Fourth Amendment to
Amended and Restated Credit Agreement, dated as of
March 31, 2008.
|
|
10
|
.9+
|
|
Executive Agreement between the Registrant and Kris Canekeratne,
dated as of April 5, 2007 (previously filed as
Exhibit 10.10 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
90
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
10
|
.10+
|
|
Executive Agreement between the Registrant and Danford F. Smith,
dated as of April 5, 2007 (previously filed as
Exhibit 10.11 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.11+
|
|
Executive Agreement between the Registrant and Thomas R. Holler,
dated as of April 5, 2007 (previously filed as
Exhibit 10.12 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.12+
|
|
Executive Agreement between the Registrant and Roger Keith
Modder, dated as of April 5, 2007 (previously filed as
Exhibit 10.13 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.13+
|
|
Executive Agreement between the Registrant and T.N. Hari, dated
as of April 5, 2007 (previously filed as Exhibit 10.14
to the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.14
|
|
Co-Developer Agreement and Lease Deed between the Registrant and
APIICL, a state government agency in India, dated as of March
2007 (previously filed as Exhibit 10.15 to the
Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.15*+
|
|
2007 Stock Option and Incentive Plan, including Form of
Incentive Stock Option Agreement, Form of Non-Qualified Stock
Option Agreement for Company Employees, Form of Non-Qualified
Stock Option Agreement for Non-Employee Directors and Form of
Employee Restricted Stock Award Agreement.
|
|
10
|
.16
|
|
Fifth Amended and Restated Stockholders Agreement by and among
the Registrant and the Stockholders named therein, dated as of
March 29, 2007 (previously filed as Exhibit 10.17 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.17
|
|
Agreement for Civil and Structural Works, including the General
Conditions of the Contract by and between Virtusa (India)
Private Limited and Shapoorji Pallionji & Company
Limited, dated as of July 2, 2007 (previously filed as
Exhibit 10.18 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.18+
|
|
2007 Executive Variable Incentive Cash Compensation Program
(previously filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.19+
|
|
Non-Employee Director Compensation Policy (previously filed as
Exhibit 10.20 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.20+
|
|
Virtusa Corporation Variable Cash Compensation Plan (previously
filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.21
|
|
LEASE DEED by and between Andhra Pradesh Industrial
Infrastructure Corporation Limited and Virtusa (India) Private
Limited dated as of August 22, 2007 previously filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference)
|
|
10
|
.22*
|
|
Indenture of Lease by and between Orion Development PVT. Ltd.
and Virtusa (Private) Limited dated as of May 17, 2007
|
|
21
|
.1*
|
|
Subsidiaries of Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
31
|
.1*
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2*
|
|
Certification of principal accounting and financial officer
pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
91
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
32
|
.1**
|
|
Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
32
|
.2**
|
|
Certification of principal accounting and financial officer
pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002, 18 U.S.C. 1350
|
|
|
|
+
|
|
Indicates a management contract or compensation plan, contract
or arrangement.
|
|
|
|
Confidential treatment has been requested for certain provisions
of this Exhibit.
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Furnished herewith. This certification shall not be deemed filed
for any purpose, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933,
amended or the Exchange Act of 1934, as amended.
|
92
Exhibit 10.7
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
CONTRACT NUMBER: 678650.
CONTRACT RELATING TO: PROVISION OF IT SERVICES TO BT
This CONTRACT is made this 29th day of March, 2007
BETWEEN
(1) BRITISH TELECOMMUNICATIONS PLC(registered in England and Wales under Company Number: 1800000)
whose registered office is 81 Newgate Street, London, EC1A 7AJ
(BT)
(2) Virtusa UK Limited (registered in England under Company Number 05640127 whose registered office
is 1 Callaghan Square Cardiff CF10 5BT (the Supplier)
(referred together in the Contract as the Parties)
For the sum of L1 payable to it by BT, Supplier shall complete and deliver to BT such work and/or
equipment and/or services (as the case may be) as BT may order from time to time within the Term in
accordance with the Contract which comprises this signed front sheet and the following appended
documents:
|
|
|
1.
|
|
DEFINITIONS
|
2.
|
|
SCHEDULE 1: COE GENERIC REQUIREMENTS
|
3
|
|
SCHEDULE 2: CONDITIONS OF CONTRACT
|
4
|
|
SCHEDULE 3: MODEL CLAUSES FOR DATA PROTECTION
|
5
|
|
SCHEDULE 4: BT SECURITY REQUIREMENTS AND POLICY
|
6
|
|
SCHEDULE 5: NOT APPLICABLE
|
7
|
|
SCHEDULE 6: IT SERVICES
|
8
|
|
SCHEDULE 7: NOT APPLICABLE
|
9
|
|
SCHEDULE 8: CHANGE CONTROL PROCESS
|
10
|
|
SCHEDULE 9: CONFIDENTIALITY AGREEMENT
|
11
|
|
SCHEDULE 10: GENERIC STANDARDS
|
and which, in the case of conflict, shall have precedence in the order listed unless expressly
stated otherwise in the Schedule.
|
|
|
|
|
|
|
|
|
|
|
SIGNED for and on behalf of SUPPLIER
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SIGNED for and on behalf of BT
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SIGNATURE
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/S/ KRIS CANEKERATNE
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SIGNATURE
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/S/ MERYL BUSHELL
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NAME KRIS CANEKERATNE
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NAME MERYL BUSHELL
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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POSITION
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POSITION
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CHIEF
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IN COMPANY
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DIRECTOR
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IN COMPANY
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PROCUREMENT OFFICER
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INDEX
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PAGES
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DEFINITIONS
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2
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SCHEDULE 1- REQUIREMENTS
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6
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1. INTRODUCTION
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6
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2. DESCRIPTION AND SCOPE OF WORK
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6
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3. SUPPLY RELATIONSHIP-INTENTIONALLY DELETED
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6
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4. PLACE OF WORK
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6
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5. ORDER OF PRECEDENCE
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6
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SCHEDULE 2- CONDITIONS
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7
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1. TERM
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7
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2. ORDER OF PRECEDENCE
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7
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3. QUALITY OF SERVICES
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7
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4. QUALITY REQUIREMENTS
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7
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5. COMPLIANCE WITH LAWS AND REGULATIONS
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8
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6. ASSIGNMENT AND SUBCONTRACTING
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8
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7. SUPPLIER OBLIGATIONS
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9
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8. SERVICE LEVELS
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9
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9. CONTRACT PERSONNEL
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9
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10. INDUCTION AND TRAINING
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10
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11. KEY PERSONNEL
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10
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12. ACCESS, ASSISTANCE AND PROGRESS REPORTS
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10
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13. MISTAKES IN INFORMATION
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11
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14. BT ITEMS AND PROPERTY
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11
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15. FORCE MAJEURE
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12
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16. SOURCING WITH HUMAN DIGNITY
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13
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17. ENVIRONMENTAL IMPACT
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13
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18. ELECTRONIC TRADING
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14
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19. GROUP COMPANIES
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14
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20. BT RESTRUCTURING
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15
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21. REGULATORY MATTERS
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16
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22. EURO CONFORMANCE
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17
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23. CONFIDENTIALITY
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17
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24. BENCHMARKING
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19
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25. VARIATIONS
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19
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26. SUSPENSION OF WORK
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20
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27. WORK SITE AND SECURITY
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21
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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PAGES
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28. RISK ASSESSMENT
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23
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29. BT SECURITY POLICY REQUIREMENTS
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23
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30. PROTECTION OF PERSONAL DATA
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24
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31. TRANSFER OF UNDERTAKINGS
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26
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32. TAX AND NATIONAL INSURANCE
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27
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33. INTELLECTUAL PROPERTY
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27
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34. ESCALATION
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30
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35. WARRANTY
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31
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36. TITLE AND RISK
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33
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37. RIGHT TO REJECT
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34
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38. EXPORT
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34
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39. DOCUMENTATION
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35
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40. DELIVERY
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35
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41. DEFAULT/LIQUIDATED DAMAGES
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35
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42. TOOLING
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36
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43. TERMINATION
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36
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44. TRANSITION
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39
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45. EXIT STRATEGY COOPERATION
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41
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46. INDEMITY
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42
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47. LIMITATION OF LIABILITY
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43
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48. INSURANCE
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43
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49. PUBLICITY
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44
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50. SOFTWARE
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44
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51. SOFTWARE LICENCE
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44
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52. ESCROW
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45
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53. NOTICES
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46
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54. PRICING
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46
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55. PAYMENT AND INVOICING
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46
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56. GENERAL
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46
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57. NON-ASSIGNMENT
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47
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58. OPERATIONAL GOVERNANCE
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47
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SCHEDULE 3 MODEL CLAUSES FOR DATA PROTECTION
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48
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1. DEFINITIONS
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49
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2. DETAILS OF THE TRANSFER
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49
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3. THIRD-PARTY BENEFICIARY CLAUSE
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49
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4. OBLIGATIONS OF THE DATA EXPORTER
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50
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5. OBLIGATIONS OF THE DATA IMPORTER
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51
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6. LIABILITY
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52
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7. MEDIATION AND JURISDICTION
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53
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8. COOPERATION WITH SUPERVISORY AUTHORITIES
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53
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9. GOVERNING LAW
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54
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10. VARIATION OF THE CONTRACT
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54
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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PAGES
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11. OBLIGATION AFTER THE TERMINATION PERSONAL DATA PROCESSING
SERVICES
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54
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SCHEDULE 3 APPENDIX A
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56
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SCHEDULE 3 APPENDIX B
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57
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SCHEDULE 4 THE BT SECURITY POLICY FOR SUPPLIER
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58
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1. DEFINITIONS
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58
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2. BT SECURITY REQUIREMENTS AND SUPPLIERS OBLIGATIONS
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59
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3. ACCESS
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61
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4. SECURITY REVIEW
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61
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5. TERMINATION
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62
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6. RIGHTS AFTER TERMINATIONS
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62
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7. ACCESS TO SUPPLIER SYSTEMS
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62
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8. BUSINESS CONTINUITY
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65
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SCHEDULE 4 APPENDIX 1- BT SECURITY POLICY (SEE SEPARATE PDF FILE)
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68
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SCHEDULE 4 APPENDIX 2 - BT HUMAN RESOURCES RECRUITMENT POLICY
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69
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1. SUPPLIERS SELECTION PROCESS
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69
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2. VETTING OF CONTRACT PERSONNEL
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69
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3. REFERENCING
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71
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4. QUALITY OF CONTRACT PERSONNEL
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72
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SCHEDULE 4 APPENDIX 2 - ANNEX 1 CRIMINAL DISCLOSURE DECLARATION
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73
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SCHEDULE 5 INTENTIONALLY LEFT BLANK
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74
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SCHEDULE 6- IT SERVICES
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75
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1. SCOPE OF WORK
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75
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2. ORDERING PROCESS
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75
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3. GENERIC CONTACT PERFORMANCE REQUIREMENTS
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76
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4. MANAGEMENT INFORMATION
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77
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5. HOURS OF SERVICE
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77
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6. THIRD PARTY SOFTWARE LICENCE
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77
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7. QUALITY REQUIREMENTS
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78
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8. PRICING AND PRICING ARRANGMENTS
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78
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9. NOT USED
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79
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10. PRICE SATISFACTION
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79
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11. INTENTIONALLY DELETED
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79
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12. CONTINUOUS IMPROVEMENT
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79
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13. EXIT TRANSITION CO-OPERATION
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80
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|
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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PAGES
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14. EXIT COSTS
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81
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15. ACCEPTANCE
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82
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|
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SCHEDULE 6 APPENDIX 1 (PRICING)
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85
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1. IT SERVICES PRICING PRINCIPLES
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85
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2. PRICING MODELS
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92
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SCHEDULE 6- APPENDIX 2 WORK PACKAGE
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100
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1. DEFINITIONS
|
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100
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|
2. PROJECT BACKGROUND
|
|
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100
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|
3. DESCRIPTION AND SCOPE OF SERVICES
|
|
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100
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|
4. DELIVERABLES AND TRAINING AND DELIVERABLES
|
|
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102
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|
5. BT PROVIDED ITEMS
|
|
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102
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|
6. SUPPLIER PROVIDED EQUIPMENT
|
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102
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|
7. MAINTENANCE AND SUPPORT
|
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102
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|
8. BT SYSTEMS
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102
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|
9. NETWORK AND IT REQUIREMENTS
|
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103
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|
10. TIMETABLE
|
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103
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11. SITE
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103
|
|
12. ACCEPTANCE
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104
|
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13. PERSONNEL
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104
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|
14. REPORTING
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104
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15. CHARGES
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|
|
105
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|
16. BT OBLIGATIONS
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|
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105
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|
17. RISKS AND ASSUMPTIONS
|
|
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105
|
|
18. QUALITY STANDARDS AND ASSURANCE, AND CODES OF PRACTICE
|
|
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105
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|
19. PERFORMANCE MEASUREMENT
|
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105
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|
20. ADDITIONAL
|
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105
|
|
21. WORK PACKAGE PRICE
|
|
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105
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|
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SCHEDULE 6- APPENDIX 2 WORK PACKAGE TEMPLATE-APPENDIX A
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106
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|
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|
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SCHEDULE 6- APPENDIX A, ANNEX 1
|
|
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108
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|
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SCHEDULE 7- INTENTIONALLY LEFT BLANK
|
|
|
108
|
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SCHEDULE 8- CHANGE CONTROL PROCEDURE
|
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111
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|
1. PRINCIPLES
|
|
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111
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|
2. PROCEDURES
|
|
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111
|
|
|
|
|
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SCHEDULE 9- CONFIDENTIALITY AGREEMENT
|
|
|
113
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|
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|
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SCHEDULE 10- GENERIC STANDARDS
|
|
|
114
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|
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
|
|
|
|
|
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|
PAGES
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|
1. CONTACT RESPONSE
|
|
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114
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2. TABLE OF COMPLIANCE
|
|
|
114
|
|
3. EMBEDDED BT GENERIC STANDARD 11 FOR COMPLETION
|
|
|
114
|
|
4. BT GENERIC STANDARDS 13 AND 18 FOR ACCESS AND COMPLETION
|
|
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114
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|
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
DEFINITIONS
In the Contract, the following expressions, where used, shall have the meanings respectively
ascribed to them:
ACCEPTANCE means written acknowledgement by BT that Services, or part of them, have been
completed in accordance with the Specifications, subject to any deficiencies stated in such
acknowledgement. Accept and Accepted shall be construed accordingly;
ACCEPTANCE TEST means formal testing conducted to determine if the Work satisfies the criteria
for Acceptance to enable BT to Accept the Work or any part;
BT means British Telecommunications plc, its successors and assigns;
BTS COMMERCIAL CONTACT means such person whose identity and contact details may be notified to
the Suppliers Commercial Contact from time to time;
BT DATA or BTS DATA means all data, information, addresses, telephone numbers, text, drawings,
diagrams, images or sound embodied in any electronic or tangible medium, and ( i ) which are
supplied or in respect of which access is granted to the Supplier by BT pursuant to this Contract,
or ( ii ) which the
Supplier is required to generate under this Contract, or ( iii ) which is obtained by the Supplier
on behalf of BT for the purposes of this Contract;
BT GROUP COMPANY means in relation to BT, a company which is a subsidiary or a holding company of
it, or any company which is a subsidiary of any such holding company, holding company and
subsidiary having the meanings ascribed to them in section 736 Companies Act 1985 as amended;
BT PROJECT MANAGER means the BT operational representative the identity of who to be advised as
and when an order is placed through Work Package and/or Purchase Order;
BT SYSTEM means any equipment, databases, software and any other material owned and/or provided
by the Customer which BT uses or interfaces with in order to provide the Services;
BT ITEMS means all items provided by BT to the Supplier and all items held by the Supplier which
belong to BT in connection with this Contract;
CHANGE CONTROL PROCEDURE means the procedure under which the BT may make a request for a change
to the Contract, including a change to the Services, all as described in Schedule 10;
Page 2 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
CHARGES means the sums payable for the Services as described in Schedule 12 of this Contract
and/or within each Work Package and/or Purchase Order;
COMMENCEMENT DATE means April 1st, 2007;
CONTRACT means this Contract including the schedules and appendices attached to it;
CONTRACT PERSONNEL means the Suppliers employees, subcontractors and agents (and their
employees, subcontractors and agents) engaged in the performance of the Contract;
CENTRES OF EXCELLENCE means one of the domains to which the Services are mapped into;
CREATED INFORMATION all Information generated in the course of or arising from the performance of
the Contract;
CUSTOMER means BT external customer and who receive the benefit of the Services;
DESIGN INFORMATION means any Information provided by BT concerning the purpose, manufacture,
design or configuration of Services;
EFFECTIVE DATE means the commencement date of the applicable Work Package;
EQUIPMENT means all components, materials, plant, tools, test equipment, documentation, firmware,
Software, spares and parts and things comprised in Services;
EXTENDED TERM means extension of the Initial Term on twelve (12) monthly basis;
FINANCIAL YEAR means the period beginning April to the end of the following March;
FUNCTIONAL SPECIFICATION the Suppliers functional specification for the Software as supplied
to BT or as published by the Supplier;
INFORMATION means information whether in tangible or any other form, including, without
limitation, specifications, reports, data, notes, documentation, drawings, software, computer
outputs, designs, circuit diagrams, models, patterns, samples, inventions, (whether capable of
being patented or not) and know-how, and the media (if any) upon which such information is
supplied;
Page 3 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
INITIAL TERM means a period of five years, commencing on the Commencement Date, or such longer
period as provided by the Contract;
INTELLECTUAL PROPERTY RIGHT(S) means any patent, petty patent, trade marks, service marks, trade
names, copyright, database rights, design right, community design right, semiconductor topography
right, registered design, rights in know-how, or any similar right in any part of the world and
shall include any applications for the registration of any patents or registered designs or similar
rights capable of registration in any part of the world;
KEY PERFORMANCE INDICATORS or KPIS means the performance indicators which BT shall use as a
means of measuring and monitoring the performance of the Supplier of this Contract, as may be
amended by agreement in writing from time to time;
LIQUIDATED DAMAGES means the liquidated damages payable to BT in the event of a failure as set
out in each Work Package or payment by BT of liquidated damages under clause 1.7 of Schedule 6 of
this Contract.
OFF-SITE TESTS means all tests, specified in the Contract to be carried out on Services prior to
delivery to the Site;
OFFSHORE WORKING DAY means 8 hours in any business day.;
PURCHASE ORDER means the order issued by BT to Supplier detailing the Charges, the Equipment, the
Services and any other relevant information being ordered by BT and shall be deemed accepted when
duly authorised and issued by BT under this Contract;
REPLACEMENT WORK means re-allocation of the Work provided by the Supplier under this Contract to
BT or another supplier as notified by BT;
SERVICES means the service or where appropriate part of a service described in this Contract and
Schedule 5, 6 and 7 which include all Equipment, Information and Work supplied to BT by Supplier;
SERVICE LEVELS, SLAS, SERVICE LEVEL AGREEMENT means the document attached to the Contract in the
Work Package defining the service levels applicable to the Services;
SITE means location(s) or premise(s) specified by BT, upon which the Supplier is to provide
services, install and/or deliver Services or perform Work;
SOFTWARE means all computer programs including but not limited to all source code and object code
whether in machine readable, optically readable or any other format comprised in Services and the
media on which it is supplied;
Page 4 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SPECIFICATION any specification of Services provided by BT, and agreed to by the Supplier in each
Work Package and/or Purchase Order under this contract.
STATEMENT OF REQUIREMENTS means the project plan document or statement of work issued by BT to
the Supplier, and agreed to in writing by Supplier, detailing all of the responsibilities and
deliverables by Supplier to BT;
SUBCONTRACTOR means any person, partnership or corporation with whom the Supplier places a
contract and/or an order for the supply of any equipment, item, service or for any work in relation
to the Contract, and Subcontract shall be construed accordingly;
SUPPLIERS BACKGROUND INFORMATION means any Information owned or controlled by the Supplier;
SUPPLIERS COMMERCIAL CONTACT such person whose identity and contact details may be notified to
BTs Commercial Contact from time to time;
SUPPLIERS EQUIPMENT means all items except BT Items brought onto Site by the Supplier in
connection with, but not for incorporation in the Services, and which have not been supplied by BT;
SUPPLIER SYSTEM means any equipment, databases, software and any other material owned and/or
provided by the Supplier which the Supplier uses or interfaces with in order to provide the
Services;
SYSTEMS means the combination of telecommunications and computer hardware, computer software,
computer peripherals and other items which the Supplier has and/or may develop and/or supply
hereunder in order to perform the Services including the Suppliers business organisation and
processes;
TERM means both Initial Terms and Extended Term
UK WORKING DAY means between the hours of 08:00 and 18:00, Monday to Friday;
WORK means work the Contract requires to be undertaken for BT.
WORK PACKAGE means a request for Services, in the form attached hereto as Schedule 6, issued by
any BT Group Company to the Supplier pursuant to which the Supplier is to provide Services to such
BT Group Company in accordance with the specifications set forth therein if accepted by the
Supplier, such acceptance to be evidenced by a signature of the authorised representative of the
Supplier.
Page 5 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SCHEDULE 1 REQUIREMENTS
1. INTRODUCTION
1.1 This Contract governs the relationship between the Parties for the supply of Services by the
Supplier to BT. It is intended as a broad agreement between the Parties under which BT shall
procure Services from the Supplier. Each Work shall be performed in accordance with BTs COE
Generic Requirements and the Conditions of the Contract, including BT Generic Standards
(hereinafter collectively referred to as Terms and Conditions) and all the Schedules appended
herein in this Contract.
1.2 These Schedules shall be supplemented or varied to meet the requirements of BT through agreed
Statement of Requirements and authorised Work Packages and/or Purchase Order.
2 DESCRIPTION AND SCOPE OF WORK
2.1 The Supplier shall provide the following provision of Services in the Initial Term and Extended
Term (as the case may be) in order to support the range of BT products and services:
2.1.1 INTENTIONALLY LEFT BLANK.
2.1.2 A range of IT Services to BT, including, but not exclusively, all or some of the IT Services
listed below in Schedule 6 (IT Services).
2.1.3 INTENTIONALLY LEFT BLANK
2.1.4 INTENTIONALLY LEFT BLANK
2.2 Further particulars of the Services are described in Schedule 6 herein.
3 SUPPLY RELATIONSHIP-INTENTIONALLY DELETED
4 PLACE OF WORK
Work shall be undertaken at the BT and/or Customer site and/or Suppliers Site/s as required by BT
and confirmed in the Work Package and/or Purchase Order.
5 ORDER OF PRECEDENCE
To the extent that the following documents form part of or apply to the Contract, in the case of
conflict they shall have the following order of precedence:
1 signed Purchase Order or Work Package (as the case may be)
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2 the Contract
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IN CONFIDENCE
SCHEDULE 2 CONDITIONS OF CONTRACT
1 TERM
1.1 The Contract shall commence on the Commencement Date and shall remain in force for the Term
(Initial Term) unless extended or terminated in accordance with its provisions.
1.2 BT shall have
the option to extend the Term by a further period of twelve (12) months each time, such option to be exercised by BT giving reasonable period of written notice
(Extended Term) to that effect to the Suppliers Commercial Contact on or before prior to the end
of the initial Term or Extended Term (as the case may be) effective upon the prior written consent
of Supplier. In
the event the Contract is extended, BT reserves the right to contract on the terms and conditions
in this Contract and/or by mutual agreement agree with the Supplier amended terms and conditions.
1.3 For the avoidance of doubt, BT shall be under no obligation to place any orders and/or Work
under the Contract.
2 ORDER OF PRECEDENCE
For the avoidance of doubt in the event of discrepancies or conflict between the documents
comprising this Contract, the terms of these documents shall prevail in the order shown on the
signed front sheet of the Contract.
3 QUALITY OF SERVICES
3.1 Services shall comply in all material respects with the:
(a) Specifications. The warranty for any deliverable produced by the Services shall be as set forth
in Section 35; and
(b) latest applicable issue from time to time of UK, European and International Standards and other
documents referred to in the Contract.
3.2 The Supplier shall co-operate in any quality assessment required by BT from time to time and
allow BT or its representatives access to its premises (and those of any Subcontractor) for this
purpose.
4 QUALITY REQUIREMENTS
4.1 The Supplier shall work to a Quality Management System that meets the requirement of BS/ISO9000
or equivalent, such as CMMiL3 or above. A body approved by any of the National Accreditation
Councils must issue the certificate, if applicable.
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IN CONFIDENCE
4.2 The Supplier will carry out and be able to supply evidence of periodic quality checks (at least
quarterly) to ensure the consistency of delivery of the Services, and the provision of management
information as agreed.
4.3 If the Supplier, having had at the Commencement Date a Quality Management System certified to
comply with the requirements of BS/ISO9001 (EN 29001 or other equivalent) by an accredited
certification body, ceases to maintain the certification, then the Supplier, for avoidance of
doubt, shall be in breach of the Contract. (This shall also apply to any sub-contractors that may
be used).
4.4 Additionally, the Supplier shall consider steps to meet the requirements of BS15000. Supplier
shall provide a report of its current status regarding same.
5 COMPLIANCE WITH LAWS AND REGULATIONS
5.1 The Supplier and the Services shall comply with all relevant laws and regulations from time to
time, with any Site regulations that may be notified to the Supplier, and with the latest
applicable issue of Working with BT (Distribution Guidelines) available
at:http://www.selling2bt.bt.com/working/distribution/default.asp
5.2 The Supplier shall notify BT if it becomes aware of any non-compliance or receives any
allegation of non-compliance with any relevant laws and regulation by any person in connection with
the Services. Without prejudice to the foregoing, the Supplier shall provide BT with such
assistance as BT may reasonably request to investigate any breach or suspected breach or correct
any breach of the relevant laws and regulations. The Supplier shall on BTs request, promptly take
all reasonable action that is necessary and open to the Supplier in order to minimise the impact of
the breach and any suspected breach of the relevant laws and regulations.
5.3 The Supplier shall provide to BT such information in such format as BT shall from time to time
reasonably require concerning the weight and material composition of any packaging forming part of
or accompanying Services.
6 ASSIGNMENT AND SUBCONTRACTING
6.1 The Supplier shall not assign or subcontract the whole or any part of the Contract without BTs
prior written consent, which, if given, shall not affect the Suppliers obligations or liabilities
under the Contract.
6.2 The Supplier shall allow BT or its nominated representative(s) access to its Subcontractors for
discussions in relation to the Contract provided
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IN CONFIDENCE
that the Supplier is informed of the proposed agenda and the
outcome of the discussions.
7 SUPPLIER OBLIGATIONS
7.1 The Supplier shall perform the Services in accordance with the Specifications in the Work
Packages and all other applicable provisions of this Contract. The warranty for any deliverable
produced by the Services shall be as set forth in Section 35.
7.2 The Supplier shall provide BT with a reasonable number of copies of any promotional literature
relating to the Services which the Supplier may produce from time to time.
7.3 The Supplier shall give BT reasonable advance written notice of any change in or modification
of the Services or of the Suppliers intention to discontinue any part of the Services.
7.4 Subject to Section 35 below, the Services when properly used will conform and operate in all
respects with the Statement of Requirements and the technical and functional Specifications for the
Warranty Period.
7.5 The Supplier shall not accept any request for procurement of Services from BT employees without
obtaining express consent from BT through duly authorised and signed Work Package and/or Purchase
Order.
8 SERVICE LEVELS
8.1 The Supplier shall ensure that the Services are performed substantially by Contract Personnel
of the Supplier.
8.2 The Supplier shall provide the Services in accordance with the Service Levels in the individual
Work Package and/or Purchase Order requirements, unless otherwise agreed.
8.3 If at any time after the Effective Date of the individual Work and/or Purchase Order
requirements the Services are not supplied in accordance with the Service Levels, the Supplier
shall, without prejudice to BTs other rights and remedies make the necessary arrangements as
agreed in the Individual work Package.
8.4 The remedies provided in this Clause headed Service Levels are without limitation to any
other remedies BT or the Supplier may have under this Contract or at common law or equity in
connection with Service non compliance.
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IN CONFIDENCE
9 CONTRACT PERSONNEL
9.1 The Supplier shall ensure that all Contract Personnel are competent, appropriately qualified
and meet with BTs reasonable satisfaction.
9.2 The Supplier shall not (and shall ensure so far as possible that Contract Personnel shall not)
during the Term or during a period of six months immediately after, either on its own behalf or on
behalf of any other person, firm, company or organisation directly or indirectly induce or seek to
induce any person, firm or company who at any time during the Term is or was a BT customer or in
the habit of dealing with BT, and with whom the Supplier has had dealings because of or in
connection with the performance of the Contract, to remove his or its business from BT.
9.3 Neither Supplier nor BT shall directly or indirectly induce, encourage, or seek to induce any
employee of the other Party to leave such Partys employment during the Term or during a period of
six months immediately after, either on its own behalf or on behalf of any other person, firm,
company or organisation.
9.4 A Party shall not be in breach of this provision if it recruits any of the other Partys
employees pursuant to an advertisement or a recruitment campaign not specifically targeted at the
employees of the other Party.
10 INDUCTION AND TRAINING
The Supplier shall provide the necessary induction and introductory training before new personnel
are actively deployed on any Work to the reasonable satisfaction of BT.
11 KEY PERSONNEL
11.1 The BT Project Manager may at the outset of or from time to time as agreed in writing with the
Supplier, during the currency of any project inform the Supplier in writing of the names of any
Contract Personnel BT considers are to perform key roles in relation to the assignment (Key
Personnel).
11.2 The Supplier shall not change or remove or permit the change or removal of any Key Personnel
without obtaining the prior written consent of the BT Project Manager. This clause shall however
not apply to a case of retirement, resignation or termination of employment of any key personnel
for whatever reason by the Supplier.
11.3 The Supplier shall remove from any assignment such Contract Personnel as BT may from time to
time require forthwith upon written notice including justification given by the BT Project Manager
to the
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IN CONFIDENCE
Supplier where BT in its sole discretion considers circumstances justify it, or otherwise, in any
case:
(a) upon the expiry of at least one weeks written notice given by the BT Project Manager to the
Supplier during the first eight weeks of any relevant assignment; or
(b) upon the expiry of at least four weeks written notice thereafter.
12 ACCESS, ASSISTANCE AND PROGRESS REPORTS
12.1 The Supplier shall:
(a) give to BT (or any person authorised by BT) such access at all reasonable times to the
Suppliers and any Subcontractors premises as BT may require from time to time to assess the
progress of the Contract;
(b) provide such reports to BT and attend such meetings on the performance of the Contract as may
be reasonably required by BT; and
(c) nominate a representative, familiar with all relevant aspects of the Contract, to attend all
such meetings.
12.2 The Supplier shall maintain full and accurate records (the Records) of all the Services
performed in connection with this Contract. The Supplier shall retain the Records for a period of
six years after termination or expiry of the Contract. Records shall pertain to areas including,
but not limited to, Corporate Tax, VAT, employment, source codes, invoices etc.
12.3 The Supplier shall grant to BT, any auditors (internal or external as appointed by BT) and/or
their respective authorised agents the right of access to the Records and/or any Site and/or the
Materials and/or the Systems and all supporting documentation and shall provide all reasonable
assistance at all times during the Term of this Contract and for any reasonable period thereafter
for the purposes of carrying out an audit of the Suppliers compliance with this Contract including
but not limited to all activities, charges, performance, security and integrity in connection
therewith. Provided that such audit shall (i) occur at BTs cost and expense and only on reasonable
prior written notice to Supplier, (ii) be subject to confidentiality provisions herein (iii) be
limited to BTs records and related contracts and used solely to determine Suppliers compliance
with this Agreement. For the avoidance of doubt, Supplier shall not be obligated to disclose any
information of any kind related directly or indirectly to any other client of Supplier or any other
information subject to a confidentiality agreement.
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IN CONFIDENCE
13 MISTAKES IN INFORMATION
13.1 The Supplier shall inform BT in writing of any mistakes in Design Information within a
reasonable time of receiving it.
14 BT ITEMS AND PROPERTY
14.1 All BT Items shall remain the property of BT and the Supplier shall:
(a) return them to BT upon completion or termination of the Contract or earlier reasonable
request by BT;
(b) keep them securely and good condition, segregated and clearly marked as BT
property; and
(c) be fully liable for any loss of or damage to them.
14.2 Upon receipt of any BT Items, the Supplier shall satisfy itself that they are adequate for the
purpose for which they are being provided, and within 14 days of receipt shall notify BT of any
defects or deficiencies.
14.3 The Supplier shall not, without the prior written consent of BT, use BT Items for any purpose
other than as necessary for the performance of the Contract, or allow any third party to use, take
possession of, or have any rights or lien over BT Items.
14.2 The Supplier shall not have, and shall ensure that Subcontractors shall not have, a lien on BT
Items for any sum due. The Supplier shall take all reasonable steps to ensure the title of BT and
the exclusion of such lien are brought to the notice of all Contract Personnel dealing with any BT
Items.
14.4 If there is any threatened seizure of any BT Items, or if the Supplier (or any Subcontractors
in possession of such BT Items) goes into receivership, administration or liquidation (or the
equivalent of any of these) the Supplier shall:
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IN CONFIDENCE
(a) notify BT immediately;
(b) draw to the attention of the relevant official that BT Items belong to BT and do not form part
of the Suppliers assets; and
(c) allow BT to enter the Suppliers premises or those of any Contract Personnel where BT Items are
stored and take possession of them.
15 FORCE MAJEURE
15.1 Neither party shall be liable to the other party for any delay in the performance of the
Contract directly caused by any force majeure event beyond its reasonable control (the Delay
Period) provided such party shall have first given the other party written notice within seven
days after becoming aware that such delay was likely to occur.
15.2 If the Supplier is so delayed, and the Delay Period exceeds 14 days, BT shall have the option
by written notice to the Supplier to terminate the Contract immediately in whole or in part and
have no liability for the whole or part so terminated.
15.3 For the avoidance of doubt, the provisions of this Condition shall not affect any right to
terminate the Contract under the Condition headed Termination.
16 SOURCING WITH HUMAN DIGNITY
The following expressions are used in this Condition:
GS18 the BT Sourcing with Human Dignity Generic Standard and Principles of Implementation at
the Website.
Response a response to the GS18 questionnaire at the Website; and
Website the website at
http://www.selling2bt.com/working/humandignity/default.asp
The Supplier shall:
(a) aspire to GS18 standards with a view to the Supplier and Contract Personnel achieving them;
(b) if requested by BT, provide BT with a full Response within two months of the date of the
request;
(c) promptly submit to BT a revised Response upon any material change in the previous Response at
any time during the Term;
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IN CONFIDENCE
(d) where required work with BT towards the achievement of the GS18 standards (and use its
reasonable endeavours to ensure all Contract Personnel will so work with BT and the Supplier); and
(d) co-operate with BT and permit BT and its authorised representatives on reasonable notice access
to the Suppliers premises and records in order to assess compliance with this provision and the
level of achievement of GS18 (and use its reasonable endeavours to ensure BT has similar rights in
relation to Contract Personnel co-operation, premises and records).
17 ENVIRONMENTAL IMPACT
The following expressions are used in this Condition:
Response a
response to the GS13 questionnaire (version 9) at the Website.
Website the website at
https://secure.selling2bt.bt.com/ext/html/gs13/
The Supplier shall:
(a) if requested by BT, provide BT with a full Response within two months of the date of the
request;
(b) promptly submit to BT a revised Response upon any material change in the previous Response at
any time during the Term; and
(c) when BT identifies areas that require environmental improvement within the bounds of this
contract requirement, the Supplier shall work with BT towards achieving continuous improvement in
such areas.
18 ELECTRONIC TRADING
18.1 BT shall send and the Supplier shall accept orders under the Contract only, subject to
paragraph 3 of this Condition, by secure e-mail.
The Supplier shall:
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IN CONFIDENCE
(a) provide a functional SMTP e-mail account for the receipt of orders;
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(b)
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ensure its respective e-mail client conforms to S/MIME and other
general e-mail standards;
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(c)
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provide to BT a Class 2 digital certificate for the encryption of
e-mails to it, such certificate being issued by a reputable
certification provider and complying the requirements of the Electronic
Communication Bill section 7; and
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(d) use all reasonable commercial efforts to maintain efficient secure e-mail transmission and
reception at all times.
18.2 If, despite having used all reasonable commercial efforts, either Party is unable to transmit
or receive secure e-mails in accordance with this Condition, it shall promptly inform the other
Party, whereupon, for the duration of such inability, BT shall submit orders to the Supplier
conventionally.
19 GROUP COMPANIES
19.1 For the purposes of this Condition, BT Group Company shall mean any company from time to
time in the same group (as defined by s.53 Companies Act 1989) as BT.
19.2 At the joint request of BT and any BT Group Company, the Supplier shall fulfil any order
received by such BT Group Company during the Term for Services the same as or substantially similar
to the Services. Such fulfilment shall be on the same terms and conditions (mutatis mutandis)
(excluding this Condition) and at the same or, at the Suppliers discretion, lower price(s) as are
set out in the Contract.
19.3 BT shall have no liability to the Supplier for or in connection with any order placed by any
BT Group Company nor shall BT have its rights under the Contract prejudiced by the acts or
omissions of any BT Group Company.
19.4 Notwithstanding anything to the contrary in the Contract, BT shall have the right to disclose
to any BT Group Company on a confidential basis all relevant Information in respect of the
Contract.
20 BT RESTRUCTURING
20.1 For the purpose of this Condition:
BT Affiliate means a company in which BT owns from time to time, directly or indirectly, at least
20% of the voting share capital.
Nominee means any:
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IN CONFIDENCE
(a) company in the BT Group of companies from time to time;
(b) BT Affiliate;
(c) unaffiliated new company that may be formed by BT pursuant to a corporate
reorganisation/restructuring, including any company in the same Group as such new company; or
(d) third party which by purchase, lease, outsourcing agreement or otherwise, assumes the
operation, administration and/or management of any substantial portion of the business of BT
affected by the Contract.
20.2 At BTs written request, the Supplier agrees to the novation of the Contract (Novation) from
BT to any Nominee as may be nominated by BT (the Transferee).
20.3 The Supplier and BT shall promptly do all acts and things necessary to effect the Novation,
including the signing of a novation agreement, in such form as BT shall reasonably require, which
agreement shall effect, without limitation:
(a) an assumption by the Transferee of all rights, obligations and liabilities of BT under the
Contract (including rights, licences, obligations and liabilities that are accrued or expressed to
be non-transferable, personal or otherwise but excluding the right to novate as conferred by this
Condition); and
(b) a release by the Supplier of BT from all obligations and liabilities (including accrued
obligations and liabilities) of BT under the Contract
20.4 Following the Novation, nothing in the Contract (including, without limitation, any software
licences) shall prevent the Transferee as a contractor to BT from using the Services to provide BT
with goods and/or services.
20.5 At BTs written request, the Supplier agrees to the replication of the Contract for any
Nominee nominated by BT, so creating one or more additional agreements, each between the Supplier
and such Nominee and each identified by its own contract number, but containing the terms and
conditions of the Contract (mutatis mutandis) including, without limitation, the same or lower
prices, but excluding the right to replicate as conferred by this Condition. BT shall provide
copies of the replicated agreement(s) for execution by the Supplier and shall procure their
execution by the relevant Nominee(s).
20.6 If the Contract includes a commitment to purchase a stated or determinable quantity of goods,
services or rights, or prices that vary
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IN CONFIDENCE
based on the quantities purchased, the total purchases by BT and/or the Nominees under the Contract
and/or the replicated agreements will be aggregated in determining the quantity or prices.
20.7 Notwithstanding anything to the contrary in the Contract, BT shall have the right to disclose
to any Nominee on a confidential basis all relevant information regarding the Contract.
21 REGULATORY MATTERS
21.1 The Supplier shall comply with all Regulatory Matters (including, without limitation, any
actions that BT may require in accordance with any formal or informal undertaking given in response
to, or with the object of avoiding being made, any orders, provisional orders, determinations,
directions, decisions or interventions by a relevant regulatory authority) that are notified to the
Supplier Regulatory Contact from time to time by the BT Regulatory Contact in so far as they relate
to the performance of the Contract by the Supplier.
21.2 The Supplier shall ensure that it and Contract Personnel undertake and comply with such
training and guidance as the BT Regulatory Contact may provide or specify from time to time in
relation to Regulatory Matters.
21.3 The Supplier shall promptly provide such information to BT as shall be necessary for BT to
respond fully and to the timescale required to any request or requirement for information from a
government or any regulatory body, to the extent that such information relates to the performance
of the Contract by the Supplier.
21.4 BT shall reimburse the Supplier for all costs and expenses incurred by it in the performance
of its obligations under Paragraphs 2 and/or 3 and/or 4 of this Condition to the extent that such
costs and expenses:
(a) would not have been incurred by the Supplier but for this Condition;
(b) are incurred solely, necessarily and exclusively in relation to such
obligations;
(c) are
reasonable;
(d) are validated to BTs reasonable
satisfaction;
(e) are not provided for under another term of the Contract;
and
(f) do not result from acts or omissions of the Supplier which contravene or conflict with any
Regulatory Matters previously notified to the Supplier by the BT Regulatory Contact.
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IN CONFIDENCE
21.5 The Supplier shall permit BT and/or its authorised agents such access to the Suppliers
premises and such access to and copies of its Information (and to and of those of any Contract
Personnel) as is reasonable for BT to assess and/or validate the Suppliers performance of its
obligations and/or its costs and expenses under or in relation to this Condition.
22 EURO CONFORMANCE
22.1 For the purpose of this Condition, Financial Services means those Services that process
financial information.
22.2 The Supplier warrants that all Financial Services, in processing Financial Information, comply
with:
(a) all laws and regulations applicable to all relevant currencies (including, without limitation,
EC Regulations 1103/97 and 974/98); and
(b) if the UK becomes a participating Member State (as defined in EC Regulation 1103/97), all
laws and regulations then applicable to sterling and/or to the euro (Euro Conformance).
22.3 Notwithstanding anything to the contrary in the Contract, and without prejudice to any of BTs
other rights and remedies, BT shall not be obliged to accept nor to pay for financial Services if
the Supplier is unable to demonstrate their Euro Conformance to BTs reasonable satisfaction.
23 CONFIDENTIALITY
23.1 Subject to the Condition
headed Intellectual Property, either party receiving Information
(the Recipient) from the other shall not without the others prior written consent use such
Information except for Contract purposes or disclose such Information to any person other than BTs
employees, agents and contractors or Contract Personnel who have a need to know and who are bound
by equivalent obligations of confidentiality. Any breach of such obligations by Contract Personnel
or BTs employees, agents or contractors (as the case may be) shall be deemed to be a breach by the
Supplier or BT respectively.
23.2 Paragraph 1 of this Condition shall not apply to Information that is:
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IN CONFIDENCE
(a) published except by a breach of the Contract; or
(b) lawfully known to the Recipient at the time of disclosure and is not subject to any obligations
of confidentiality; or
(c) lawfully disclosed to the Recipient by a third party without any obligations of
confidentiality; or
(d) replicated by development independently carried out by or for the Recipient by an employee or
other person without access to or knowledge of the Information.
Notwithstanding the foregoing, either Party may disclose, only with the prior written consent of
the other party, not to be unreasonably withheld, such terms as are required to be disclosed under
strictures of confidentiality for fund raising or financing efforts to investors and lenders and
bona fide potential investors and lenders (except no consent is needed to provide to a partys
auditors or attorneys) provided, however, that the receiving parties are bound by confidentiality
terms no less restrictive than the terms set forth herein. In addition, the Agreement and terms
hereof may be disclosed as otherwise but only to the extent required pursuant to applicable law,
regulation or stock market or stock exchange rule; provided that, to the extent practicable, a
Party proposing to make such a disclosure as required by law, rule or regulation shall inform the
other Party a reasonable time prior to such required disclosure, shall provide the other
Party with a copy of the text of such proposed disclosure sufficiently in advance of the proposed
disclosure to afford such other Party a reasonable opportunity to review and comment upon the
proposed disclosure (including, if applicable, the redacted version of this Agreement) and shall
reasonably consider, consistent with applicable law, rule and regulation (including interpretations
thereof), the requests of the other Party regarding confidential treatment for such disclosure.
23.3 The Supplier shall not publicise the Contract without BTs prior written consent and shall
ensure that any subcontractor is bound by similar confidentiality terms to those in this Condition.
23.4 Either party that has during the course of the Contract received Information in a recorded
form from the other (or has recorded received Information) shall return or destroy (at the option
of the disclosing party) such records upon:
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IN CONFIDENCE
(a) expiry or termination of the Contract;
or
(b) upon earlier request
unless such
records are part of the Services.
23.5 This Condition shall survive the Contract.
24 BENCHMARKING
The Supplier shall:
(a) undertake its own benchmarking exercises annually at a date to be agreed upon by the Parties;
(b) undertake such further regular benchmarking exercises as may be required by BT from time to
time, having first agreed with BT the related processes and comparable suppliers;
(c) promptly provide written reports to BT on such exercises with an audit trail;
(d) provide evidence to BT that the quality, price and delivery of Services is world class;
(e) permit BTs authorised representatives access to the Suppliers premises and to its records to
inspect and verify such exercises, evidence and reports and/or to allow BT to conduct its own
benchmarking exercises, provided that such benchmarking exercises shall (i) occur at BTs cost and
expense and only on reasonable prior written notice to Supplier, (ii) be subject to confidentiality
provisions herein (iii) be limited to BTs records and related contracts and used solely to
determine Suppliers compliance with this Agreement. For the avoidance of doubt, Supplier shall not
be obligated to disclose any information of any kind related directly or indirectly to any other
client of Supplier or any other information subject to a confidentiality agreements; and
(f) fully co-operate with BT during any benchmarking exercise undertaken by BT.
The Suppliers obligations under this Condition shall be performed at the Suppliers cost and
expense, except as stated in 24 (e).
25 VARIATIONS
25.1 BT shall have the right from time to time during Term by written notice to require the
Supplier to alter, amend, add to or otherwise vary any part of the Services (Variation) and the
Supplier shall carry out such
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IN CONFIDENCE
Variation as agreed in writing by Supplier which agreement shall not be unreasonably withheld. No
Variation required by BT shall render the Contract null and void.
25.2 The price(s) payable by BT for Services subject to the Variation shall be increased or
decreased by a fair and reasonable amount and any dependent contractual time-scales shall be
adjusted by a fair and reasonable amount. The Supplier shall satisfy BT of the reasonableness of
any change in prices and/or time-scales and undertakes:
(a) to afford facilities to BTs nominated representative to visit the Suppliers premises for the
purpose of examining the process involved in the execution of the Variation and estimating or
ascertaining the cost of executing it; and,
(b) to provide BT with such particulars of costings in connection with the Variation as may be
required by BT and to permit them to be verified by a representative of BT through inspection of
its books, accounts and other documents and records, provided that such inspection shall (i) occur
at BTs cost and expense and only on reasonable prior written notice to Supplier, (ii) be subject
to confidentiality provisions herein (iii) be limited to BTs records and related contracts and
used solely to determine Suppliers compliance with this Agreement. For the avoidance of doubt,
Supplier shall not be obligated to disclose any information of any kind related directly or
indirectly to any other client of Supplier or any other information subject to a confidentiality
agreements
25.3 No Variation shall be carried out unless requested in writing by BTs Commercial Contact or
requested by Supplier but agreed to by BTs Commercial Contact in writing. Any Variation carried
out other than in accordance with this Condition shall be the sole responsibility of the Supplier
and shall not result in any increase in the price(s) payable by BT or in any variation in
time-scales.
26 SUSPENSION OF WORK
26.1 BT may suspend Work at any time and will pay to the Supplier all reasonable resulting expenses
incurred by the Supplier (other than those arising from the Suppliers own default) provided that;
(a) no payment shall be made for any period of suspension, prevention or delay of less than 2
consecutive days; and
(b) the Supplier has within 10 days after the event giving rise to the claim, given written notice
to BT of its intention to make such a claim; and
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IN CONFIDENCE
(c) the Supplier makes such claim giving full details of each item claimed and the reason for such
cost within 30 days after the event giving rise to the claim.
26.2 The Supplier
may suspend Work if BT fails, neglects or refuses to conform with the following
provisions in the Contract:
a) Non-Solicitation in Condition 9.3
b) Payment
Obligation in Condition 55
c) Confidentiality in Condition 23
and BT will pay to the Supplier all reasonable resulting costs and expenses incurred by the
Supplier (other than those arising from the
Suppliers own default). Notwithstanding the above the Supplier shall promptly notify BTs
Commercial Contact in the event the Supplier finds BT not in conformance with a, b, or c above.
Both Parties shall invoke the escalation procedure in accordance with the heading Escalation to
resolve the non-conformance within 10 days. Where the non-conformance is not resolved within 10
days through the escalation procedure, the Supplier may suspend Work in relation to the Work
Package as provided above.
27 WORK SITE AND SECURITY
27.1 The Supplier shall be deemed to have examined the Site and BT shall not be liable for any
claim from the Supplier in relation to its misinterpretation of any Site-related matter, or any
other matter in respect of which the Supplier could reasonably have satisfied itself by a visit to
the Site, reference to BT or otherwise.
27.2 The Supplier shall before the commencement of any relevant Work inform BT of the number of
employees to be brought onto the Site.
27.3 The Supplier shall designate one or more competent representatives to supervise the carrying
out of the Work on the Site (the Suppliers Representative), whose names shall be notified to BT
in writing, and who shall be present on the Site continuously between 0800 and 1800 Monday to
Friday excluding all relevant UK public holidays (the Working Hours). Any orders or instructions
BT gives to the Suppliers Representative shall be deemed to have been given to the Supplier.
27.4 Where Work is to be carried out on a BT Site, BT shall wherever possible and reasonable
provide such facilities during Working Hours or such reasonable working hours as may be applicable
to each Site as are agreed between BT and the Supplier. The Supplier shall satisfy BT
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IN CONFIDENCE
that the power arrangements meet any safety provisions as may be applicable to the Site. Any
statement of satisfaction by or on behalf of BT shall be without prejudice to the obligations and
liabilities of the Supplier.
27.5 The Supplier shall give at least 7 days written notice to BT of the dates and times on which
it proposes to deliver any Services or Suppliers Equipment to the Site and shall upon despatch of
Services or Suppliers Equipment to Site notify BT of their details in writing.
27.6 No Services or Suppliers Equipment shall be removed from any Site without BTs written
consent and, if given, the Supplier shall provide a receipt to BT or BTs site representative
listing full details of the Services or Suppliers Equipment removed. The Supplier shall ensure
that no BT Items, facilities or materials are used or removed from any Site without BTs written
consent and shall immediately notify BT of any known or suspected breach of security and give BT
full co-operation in any investigation.
27.7 The Supplier shall remove Suppliers Equipment and any defective Services leaving the Site
clean and in good condition, either:
(a) immediately before submitting Services for Acceptance; or
(b) at any time before Acceptance, subject to 20 days written notice from BT.
27.8 The Supplier shall hand to BT any existing BT Items or materials recovered as a result of the
Work if they are not to be used to meet the requirements of the Contract or deliver them to such
place as directed by BT.
27.9 If the Supplier fails to remove Suppliers Equipment from Site as specified above, then BT may
remove it at the Suppliers risk and expense.
27.10 The Supplier shall ensure that Contract Personnel comply with all security, safety and works
regulations and such other local instructions as may be notified by BT or BTs customer whilst on
any Site.
27.11 BT may remove from and refuse entry and re-admission to a Site any person who is, in the
reasonable opinion of BT, not complying with the requirements of this Condition or not a fit person
to be allowed on Site.
27.12 BT may at its discretion, search any Contract Personnel or their vehicles or equipment upon
any BT Site or upon entry to and departure from any Site. The Supplier shall use its best
endeavours to ensure that Contract Personnel are aware of and comply with these requirements and
that no Contract Personnel unwilling to so comply will be employed on any Site.
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IN CONFIDENCE
27.13 The Supplier shall (and shall ensure Contract Personnel shall):
(a) access only those parts of Sites strictly necessary for the purposes of the
Contract; and
(b) comply with the BT Security Access Policy set out at:
http://www.selling2bt.com/working/third_party_access/default.asp ; and
(c) use any equipment or lines provided by BT only for the purposes of the Contract, and, in
particular shall not use BT equipment or lines for personal use.
27.14 The Supplier shall undertake a risk assessment and use appropriate physical and electronic
security measures to use all reasonable endeavours to safeguard any BT Items against loss or theft.
BT shall have the right to examine such arrangements and associated security procedures and to
inspect all BT Items being held by or on behalf of the Supplier, and the Supplier shall use such
additional reasonable security measures as BT shall from time to time require.
27.15 The Supplier shall supply on request details (name, address, date of birth) of any Contract
Personnel who might have access to a Site.
27.16 BT may examine any Information relating to the handling, processing, transportation and
storage of information or property of or supplied by BT and held by the Supplier under the
Contract, which Information shall be kept by the Supplier for at least one year after the
termination or expiry of the Contract.
27.17 BT shall not be responsible for safeguarding any property or money of Contract Personnel.
28 RISK ASSESSMENT
28.1 The Supplier shall provide a Risk Register for each Work Package/ project, which will form
part of any subsequent contractual commitment.
28.2 The register shall as a minimum identify the risk, likely impact, probability evaluation and
mitigation actions that will be taken to reduce the risk.
28.3 The register shall also identify any specific Supplier responsibility exclusions, which will
vary dependent on the type of service provided.
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IN CONFIDENCE
29 BT SECURITY POLICY REQUIREMENTS
29.1 The Supplier shall comply with the requirements of BTs security requirements, as defined in
BT Security Policy in Schedule 4 herein.
29.2 The Supplier shall not have or be permitted access to interconnection with BT Systems and
access to BT Information (Access) other than for the Purposes (as defined in Schedule 4) in
accordance with the Contract.
29.3 BT allows (so far as it can and is able to do so) the Supplier, while the Supplier is
Authorised (as defined in Schedule 4) Access solely for the Purposes as defined in Schedule 4.
29.4 The Supplier shall take all reasonable steps to prevent unauthorised Access.
29.5 The Supplier shall provide BT with a generic risk management statement (in terms of risk
management strategy and contingency plans) in connection with any services provided remotely from
BT site, either in the UK or Offshore, to ensure continuity of service in the event of natural
disaster, terrorist attack, war or similar.
29.6 In the event of conflict between this Condition and Schedule 4 in this Contract, the terms of
Schedule 4 shall prevail.
29.7 This Condition shall survive the Contract.
30 PROTECTION OF PERSONAL DATA
30.1 Other than at BTs request, where required to provide the Services, or where required by law
the Supplier shall not disclose or allow access to any personal data as defined in the Data
Protection Act 1998 (the Data Protection Act) relating to the Services (BT Personal Data)
whether provided or acquired by the Supplier during the course of the negotiations leading to or on
the execution and during the Term of this Contract, other than to a person placed by the Supplier
under a like obligation who is employed or engaged by the Supplier or within the control of the
Supplier in the performance of the Contract.
30.2 The Supplier shall store or process BT Personal Data only at sites and in a manner
specifically advised to BT in writing in advance and only in accordance with the Data Protection
Act. BT shall have the right to reasonably object to such storage or processing at any time in
which case the Supplier shall store or process data only at sites or in a manner expressly agreed
with BT.
30.3 The Supplier shall not use BT Personal Data for any purpose other than the performance of the
Services and shall return any BT Personal
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IN CONFIDENCE
Data to BT immediately upon request at any time providing such return does not prevent the Supplier
from fulfilling its obligations under this Contract. Upon expiry or termination of this Contract
for whatever reason, the Supplier shall return to BT or at BTs option destroy (and certify that it
has destroyed) all BT Personal Data.
30.4 The Parties acknowledge that, in respect of all BT Personal Data controlled by BT and
processed by the Supplier for the purpose of the provision of Services under this Contract BT alone
shall determine the purposes for which and the manner in which such BT Personal Data will be
processed (as defined in the Data Protection Act) by the Supplier.
30.5 Where, in connection with this Contract, the Supplier processes BT Personal Data on behalf of
BT as a data processor, the Supplier shall:
(a) process BT Personal Data only on instructions of BT
and to the extent necessary for the performance of this Contract;
(b) not disclose BT Personal
Data to any person except as required or permitted by this Contract or with BTs written consent;
and
(c) implement appropriate technical and organisational measures to protect those personal data
against accidental or unlawful destruction or accidental loss, alteration, unauthorised disclosure
or access, and against all other unlawful forms of processing.
(d) Subject to the indemnification processes and terms set forth in
Section 33.11, 33.12 and 46.1 hereto, the Supplier shall at its own expense defend, indemnify and
hold harmless BT against all third party actions, claims, demands and proceedings and all damages,
costs and expenses incurred in connection therewith made or brought against BT by any person in
respect of any loss or damages to that person relating to the misuse of the personal data of that
person by the Supplier, its officers, contractors, sub-contractors, agents, servants, or employees
or other person within its control.
30.6 The Supplier shall, with regard to personal data:
(a) comply and ensure that all its employees, agents and sub-contractors comply with all relevant
provisions of any BT codes of practice (mutatis mutandis) notified to the Supplier from time to
time, the Computer Misuse Act 1990 and the Data Protection Act; and
(b) keep and ensure all its employees, agents and Sub-Contractors keep all Information secure and
confidential, act only on BTs instructions with respect to it, and comply with such further
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IN CONFIDENCE
reasonable requirements from time to time of BT for the security of it; and
(c) prior to any transfer of personal data, enter into or procure that the Sub-contractor
delivering the Services will enter into contracts for the transfer of personal data, which in
respect of the European Economic Area (the EEA) shall be on the basis of the Model Contract Terms
as issued by the European Commission pursuant to the Data Protection Directives or such other data
protection model contract terms
as may be agreed between the Parties from time to time and in respect of countries outside the EEA
on terms consistent with the legal requirements of such countries.
30.7 Where, in connection with this Contract, the Supplier processes BT Personal Data on behalf of
BT as a data processor, the Supplier shall without delay execute Model Clauses in Schedule 3 for
each and every Work Package and/or Purchase Order.
30.8 Other than as provided in this Clause 30, the Supplier agrees not to export any personal data
outside the EEA without BTs prior written consent.
31 TRANSFER OF UNDERTAKINGS
31.1 Within 7 days following a written request by BT at any time, the Supplier shall, at its own
expense, provide in writing to BT or to such third parties as BT may direct, all Information
concerning:
(a) any actual, threatened or potential litigation by or in relation to its employees;
(b) its employees terms and conditions of employment; and
(c) such other Information as BT considers necessary to ensure compliance with the Transfer of
Undertakings (Protection of Employment) Regulations or any similar or related legislation (TUPE)
following the termination or expiry of the Contract in relation to the provision of services the
same as or similar to services comprised in the Services (Similar Services).
31.2 The Supplier warrants that all Information supplied under Paragraph 1 of this Condition is
complete and correct.
31.3 The Supplier indemnifies:
(a) BT (without prejudice to any other right
of BT); and
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IN CONFIDENCE
(b) at BTs request, any subsequent contractor to BT providing Similar Services
against all liability arising as a result of the operation of TUPE or otherwise in relation to the
acts or omissions of the Supplier with respect to its employees during the Term, subject to the
indemnification processes and terms set forth in Section 33.11, 33.12 and 46.1.
31.4 The Supplier shall use its reasonable endeavours to ensure that the composition of its
workforce is not altered so as to affect materially the application of TUPE or the extent of such
application.
31.5 The provisions of this Condition shall survive the expiry or termination of the Contract, and
their existence, or BTs exercise of any rights under them, shall not constitute or imply any
admission by BT that TUPE is applicable or not.
32 TAX AND NATIONAL INSURANCE
The Supplier shall make
all appropriate PAYE deductions for tax and National Insurance
contributions from the remuneration it pays its personnel (none of whom shall be employees of BT)
and the Supplier indemnifies BT in respect of any claims that may be made by the relevant
authorities against BT in respect of tax demands or National Insurance or similar contributions
relating to the Suppliers personnel or, where the Supplier is a partnership, relating to any
partner in the Supplier.
33 INTELLECTUAL PROPERTY
33.1 In this Condition, New Information means all Information generated in the course of or
arising from the performance of the Contract.
33.2 BT shall exclusively own the New Information and all Intellectual Property Rights in it.
Whenever the Supplier becomes aware of any invention or design comprised in the New Information as
may reasonably be thought patentable or registrable the Supplier shall provide sufficient
information to BTs Commercial Contact (or such other person or address as BT may notify) to enable
BT both to ascertain its technical and commercial significance, and, if required by BT, to apply
for Intellectual Property Right protection.
33.3 The Supplier assigns to BT the copyright, design right and any other Intellectual Property
Right in the New Information which shall vest in BT absolutely as and when such copyright, design
right or other right comes into existence. All documentation or other items or media consisting of
or containing New Information shall belong to BT. The Supplier shall mark each item of the New
Information accordingly.
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IN CONFIDENCE
33.4 The Supplier shall, at the request and expense of BT, to do or ensure that is done, everything
that BT may reasonably require to apply for and to obtain Intellectual Property Rights in any New
Information and to vest in BT absolutely any such Intellectual Property Rights, or any application.
33.5 The Supplier shall use reasonable care to ensure that nothing is done to prejudice the grant
or creation of any Intellectual Property Right in respect of any of the New Information or to
prejudice the exercise of any such Intellectual Property Rights.
33.6 The Supplier warrants that it has the right and power to grant to BT the rights and licences
granted under the Contract.
33.7 The Supplier grants a non-exclusive irrevocable licence to BT whether by itself or by third
parties on its behalf, free of any payment, to copy, disclose, publish, sell and use (with the
right to sublicense any such rights) the Services without restriction. If the exercise of these
rights and/or BTs rights in the New Information requires licences to use the Suppliers Background
Information or the Intellectual Property Rights of any third party, then the Supplier shall be
deemed to hereby grant or shall procure such licences for BT at no cost to BT.
33.8 Where BT has instructed the Supplier to procure third party components including software for
BT use in the performance of the Services, which is sub-licensed to BT, the Supplier shall grant BT
in the sub-
licence similar warranties and indemnities as provided in the third party contract between the
Supplier and third party until such time BT ceases use of the third party component.
For the purposes of this sub-paragraph,
THIRD PARTY SOFTWARE will mean any Software that is owned by a person other than Supplier or BT
and is used to provide the Services.
THIRD PARTY SOFTWARE LICENCE will mean a license agreement that authorises BT or Supplier to use
Third Party Software.
The Parties will identify in each Work Package or Purchase Order such additional Third Party
Software as may be required for Supplier to perform a particular Work. Supplier shall perform the
following actions in order to ensure Supplier has the necessary right to use Third Party Software
in order to perform Services for BT under this Agreement (Third Party Consents) in the following
order of precedence:
33.8.1 Solely for Services to be performed within the BT or on other premises, Supplier shall (i)
work with BT to obtain the necessary Third Party
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IN CONFIDENCE
Consents; and (ii) execute any additional agreements or assurances with such third party which may
be necessary to secure such Third Party Consents. BTs failure to obtain any such Third Party
Consents shall not be a breach of this Agreement; provided however, Supplier shall have no
obligation to perform the Services dependent on such Third Party Software.
33.8.2 For Third Party Software as to which Supplier has an existing license for its own use,
Supplier shall use all reasonable efforts to secure all necessary Third Party Consents including
without limitation the right to use the Third Party Software for the benefit of BT.
33.8.3 For Third Party Software as to which Supplier does not have an existing licence for its own
use, Supplier shall use commercially reasonable efforts to secure all necessary Third Party
Consents including without limitation the right to use the Third Party Software for the benefit of
BT. The parties may execute a Work Package or a Variation to effect the foregoing. Alternatively,
Supplier and BT may agree that BT procure such Third Party License Agreement.
33.8.4 For Third Party Software as to which BT has an existing Third Party License for its own use
and as to which Supplier does not already have a licence of its own permitting Supplier to use the
Third Party Software to provide the Services or is unable to obtain under subsection (2) above,
Supplier shall (i) work with BT to obtain the necessary Third Party Consents; and (ii) execute any
additional agreements or assurances with such third party which may be necessary to secure such
Third Party Consents. BTs failure to obtain any such Third Party Consents shall not be a breach of
this Contract; provided however, Supplier shall have no obligation to perform the Services
dependent on such Third Party Software.
33.9 Supplier may not enter into oral or written agreements with any individual or business entity
for or in the name of BT or BT Nominee or Affiliated Companies of BT. Supplier shall not cancel,
substitute, terminate, change or add to any such Third Party Software Licence without BTs prior
written consent, which consent may be withheld in BTs sole discretion.
33.10 The Supplier indemnifies BT against all actions, claims, proceedings, damages, costs, and
expenses arising from any actual or alleged infringement of Intellectual Property Rights (excluding
Third Party Software used as part of any Work which was pre-approved by BT and for which Supplier
has not entered into a Third Party Software License) or breach of confidentiality by BTs
possession or use or sale, lease or hire of any of the Services anywhere in the world.
Notwithstanding anything to the contrary, Supplier will indemnify and pay to BT with
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IN CONFIDENCE
respect to such third party claims under this Section and under this Agreement regarding
indemnification obligations of Supplier, all such damages, costs and expenses finally awarded
against BT to such third party by a court of competent jurisdiction after all appeals have been
exhausted or at the time of a final settlement of such claims or final award or out of court
settlement, if applicable.
33.11 BT shall notify the Supplier in writing of any such allegation received by BT and shall not
make any admissions unless the Supplier gives prior written consent.
33.12 At the Suppliers request and expense, BT shall permit the Supplier to conduct and control
all negotiations and litigation. BT shall give all reasonable assistance and the Supplier shall pay
BTs costs and expenses so incurred.
33.13 The Supplier may at its expense modify or replace the Services to avoid any alleged or actual
infringement or breach. The modification or replacement must not affect the performance of the
Services. If neither of these remedies are reasonably available to the Supplier, the Supplier may
require BT to cease using the infringing Work and the Supplier will issue BT a pro-rated refund
based on a Contract Term year depreciation schedule for the infringing Work (as appropriate). Where
BT is required to return the Services to the Supplier and such return requires goods to cross an
international border, the rejected Services shall be returned to the Supplier on a CIP basis and
the Supplier shall reimburse to BT the reasonable costs of transportation, delivery, importation
and any necessary international trade formalities with which BT must comply. The Supplier may at
its option, collect rejected Services. Replacement Services shall be delivered on a FCA basis and
the Supplier shall reimburse to BT the reasonable costs of transportation, delivery, importation
and any necessary international trade formalities with which BT must comply.
33.14 This indemnity shall not apply to apply to infringements or breaches arising directly from:
(a) compliance with the Design Information to the extent that such compliance directly or
indirectly results in the infringement. This exception does not apply to infringements resulting
from a BT requirement that the Services comply with a national or international standard; or
(b) the combination of the Services with other items not supplied under the Contract.
(c) any alteration or modification of any Services not provided or authorised by Supplier in
writing, if the infringement would not have
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IN CONFIDENCE
occurred but for the alteration or modification by a party other than Supplier
(d) any claim covered by paragraph 33.15 below or any intellectual property of BT, to the extent
that such intellectual property caused such infringement.
33.15 Without prejudice to sub-paragraph 12(a) of this Condition, BT warrants that compliance with
the Design Information will not cause infringement or breach.
33.16 This Condition shall survive the Contract.
34. ESCALATION
In the event that a material dispute relating to the Contract arises, the parties, shall escalate
the dispute to the persons named or holding the positions (or their equivalents) at the Levels
stated below and for the time periods stated below. If, despite each Levels good faith discussions
and negotiations for the time period stated below, such Level is still unable to resolve the
dispute within the period stated below for such Level to the mutual satisfaction of the parties,
the parties shall escalate the dispute to the next Level for the periods stated below, and so on
until the procedure is exhausted. If the dispute is not resolved within the periods stated below
(and any applicable agreed cure period), then the parties may pursue all other remedies provided at
law or under this Contract. During the time of escalation per the process set forth below, neither
party shall resort to litigation unless the other party is unwilling or unable to engage in the
escalation process.
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For BT
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For the Supplier
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Time of Negotiation/Level
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Level 1
|
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Commercial Contact
|
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Client Services Manager
|
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5 business days
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Level 2
|
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Head of domain
|
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Vice President
|
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5 business days
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Client Services
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Level 3
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VP Global Sourcing of Centre of
|
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General Manager
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5 business days
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Excellence
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Level 4
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Chief Procurement Officer
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Chief Operating Officer
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5 business days
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Level 5
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Group CFO
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Chief Executive Officer
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10 business days
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IN CONFIDENCE
35 WARRANTY
35.1 The Supplier shall at its own cost promptly remedy (by, at BTs option and by mutual
agreement, repair, replacement or modify) any non-conformance of the Services from the Specification
during the Warranty Period solely due to the fault of the Supplier as notified by BT in writing
during the 180 day period (the Warranty Period) of their respective delivery to BT due to:
(a) poor or defective workmanship or materials;
(b) faulty design which deviates from the Specification, (other than a design made or furnished or
specified by BT and for which the Supplier has previously disclaimed responsibility in writing
within a reasonable time of receipt); or
(c) any negligent act or negligent omission by the Supplier or Contract Personnel.
If BT notifies Supplier in writing of any such non-conformance during the Warranty Period,
Suppliers sole and exclusive obligation, and BTs sole and exclusive remedy shall be for Supplier
to promptly repair, replace or modify such non-conformance at no additional expense to BT to comply
with the warranty stated above, without prejudice to BTs rights under the heading Termination.
35.2 Subject to the warranty terms above, the Supplier shall use all reasonable care to:
(a) ensure that any remedied part of Services is compatible with all Services; and
(b) complete the remedy to comply with the warranty above within the time-scales specified in the
Contract (or, if none are specified, within a reasonable time); and
(c) ensure that defective Services are not remedied on BT premises without BTs consent, unless,
for operational or technical reasons they can only be removed or replaced with difficulty; and
(d) cause the minimum of disruption to BT and/or its customers in effecting any remedy. The time at
which any remedy is to be effected shall be agreed with BT and BT may at its discretion direct the
Supplier to work outside normal working hours at no cost to BT.
35.3 All repaired or replacement Services shall benefit from the provisions of this Condition and a
new Warranty Period shall apply to them from their respective date of delivery to BT.
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IN CONFIDENCE
35.4 The Supplier shall, upon receipt of Services returned under this Condition, immediately
investigate those Services and take all necessary corrective action to prevent recurrence of the
defects in Services. The Supplier shall report monthly in writing to BTs Commercial Contact the
outcome of all such investigations. The report shall contain such additional information and be in
such format as BT shall reasonably require from time to time including but not limited to:
a) a summary of the Services rejected by BT under this Condition, along with the results of the
investigation.
b) the details of any corrective action taken to prevent a recurrence of defects.
c) without prejudice to the rights of BT under this Condition, the reasons for any Services
returned not being accepted under the terms of this guarantee and a breakdown of those Services by
the code number quoted on any applicable fault label supplied.
35.5 Subject to Clause 33, the Supplier warrants that it has the right to supply the Software and
grant licences for the Software as described in this Contract and will indemnify and hold harmless
BT against any claim that it is not so entitled.
35.6 The Supplier warrants that the Software will after acceptance by BT and during the Warranty
Period provide the facilities and functions set out in their Functional Specifications, and that
the documentation provided by the Supplier for the Software will provide instruction to enable BT
to make full and proper use of such facilities and functions.
35.7 In the event of a
breach of warranty during the Warranty Period solely due to the fault of
the Supplier, the Supplier shall correct or replace free of charge to BT, for the applicable
Warranty Period commencing from Acceptance of the installation of the
Software, any non-conformance
of the Software for the Functional Specification in the Statement of Requirements or any part
thereof. Where an error in Services in accordance with 35.1 or Software is discovered to be a
consequence of
(a) an amendment or customisation made to the Software or Service by or on behalf of BT without the
Suppliers prior consent;
(b) the combination, operation, or use of the Software with any other software or materials not
approved by Supplier or use of the Software on incompatible hardware or software environment not
recommended by Supplier;
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IN CONFIDENCE
(c) operation or use of the Software otherwise than for the purposes or in accordance with this
Contract and documentation provided by the Supplier,
(d) BTs hardware malfunction,
(e) third party software;
then the Supplier may levy a reasonable charge for its time expended correcting the said error.
35.8 The Supplier shall use good quality materials, techniques and standards and execute this
Contract with the care, skill and diligence required in accordance with the best computing practice
and industry standards.
35.9 The Supplier hereby represents, warrants and covenants that the Software, when delivered to
BT, does not and will not contain any computer code that would disable the Software or impair in
any way its operation based on the elapsing of a period of time, exceeding an authorised number of
copies, advancement to a particular date or other numeral, or other similar self-destruct
mechanisms (sometimes referred to as time bombs, time locks, or drop dead devices) or that
would permit the Supplier to access the Software to cause such disablement or impairment (sometimes
referred to as a trap door device).
35.10 The Supplier agrees that in the event of a breach or alleged breach of
Section 35.9 that BT shall not have an adequate remedy at law, including monetary damages, and that
BT shall consequently be entitled to seek a temporary restraining order, injunction, or other form
of equitable relief against the continuance of such breach, in addition to any and all remedies to
which BT shall be entitled.
35.11 This Condition shall survive the Contract.
36 TITLE AND RISK
36.1 Without prejudice to BTs right to reject under the Contract, the title in Services shall pass
to BT upon the earlier of Acceptance or payment (and for any part of a Service, including any
payment thereon) and shall be free from any claims or encumbrance whatsoever, with the exception of
Software for which a licence is granted in accordance with the Contract.
36.2 If any Services are rejected by BT or the Contract is terminated, title to any Services not
accepted by BT and any materials or things which have not been incorporated in any part of accepted
Services, shall re-vest in the Supplier on the expiration of 30 days from the date on which
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IN CONFIDENCE
such termination or rejection takes effect unless BT gives notice to the Supplier within such
period that it intends to either issue any certificate of commercial service in respect of the
rejected Services or otherwise retain title in them.
36.3 Any payment made by BT for Services, materials or things which re-vest in the Supplier is a
sum due to BT from the Supplier.
36.4 The Supplier shall deliver to BT any Services the title in which BT has elected to retain
provided that BT pays for the fees and expenses incurred up the time of delivery of the Services
under this Condition and if it shall fail to do so BT may enter the Suppliers premises and remove
such Services and recover the cost of so doing from the Supplier, subject to BT paying a fair and
reasonable price for such Services.
36.5 The risk of loss of or damage to Services shall pass to BT upon Acceptance, which Acceptance
shall be defined in each Project.
37 RIGHT TO REJECT
37.1 BT shall have the right to reject the whole or any part of the Services prior to Acceptance
that it reasonably considers are not in accordance with the Specification in the Statement of
Requirements.
37.2 The Supplier shall at its own risk and expense, then use all reasonable endeavours to replace
or repair rejected Services with Services that comply with the Statement of Requirements within 14
days (or any other reasonable period specified by BT) of notice of rejection from BT.
37.3 Written acknowledgement of receipt of Services by BT at the delivery point shall not affect
BTs rights subsequently to reject those Services. In the event a defect is identified in the Services delivered and prior to Acceptance,
the Supplier shall at its own risk and expense, use all reasonable endeavours to replace or repair
rejected Services with Services that comply with the Statement of Requirements within 14 days (or
any other reasonable period agreed with the parties) of notice from BT of the deficiency.
38 EXPORT
The Supplier:
(a) warrants that it has obtained all necessary licences, authorities, consents and permits for the
unrestricted export of Services to BT, and export or re-export to such countries as BT shall have
notified to the Supplier at any time before delivery to BT; and
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IN CONFIDENCE
(b) indemnifies BT against all costs, claims, or demands resulting directly or indirectly from any
breach of such warranty, subject to the provisions of Section 33.11, 33.12and 46.1.
39 DOCUMENTATION
In this Condition, Documentation means the installation, user and maintenance guides and/or other
documentation supplied under the Contract relating to the use and/or operation of Services.
39.1 The Supplier grants to BT non-exclusive, royalty free, world-wide rights, by or on behalf of
BT to copy and disclose, make adaptations of (and copy and disclose such adaptations) of the
Documentation for its and, where not otherwise expressly restricted, third parties use of
Services.
40. DELIVERY
40.1 The Supplier shall deliver Services in accordance with the Contract for time of delivery. If
no such time is specified in the Contract, the Supplier shall deliver Services as agreed between
the parties or, in the
absence of agreement, at such time as BT may specify but not limited to in the Work Package or
Purchase Order (as the case may be).
40.2 The Supplier shall deliver Services ordered by BT in accordance with the Requirements schedule
to the Contract.
40.3 The Supplier shall not, without the prior written consent of BT, deliver any part order (by
quantity or by item). If Services are not available for delivery at the due time, the Supplier
shall (without prejudice to BTs rights under the Contract) immediately inform BT by telephone,
facsimile or e-mail and confirm such communication in writing.
41 DEFAULT/LIQUIDATED DAMAGES
41.1 Subject to the provisions of the Condition headed Force Majeure, and, if the Supplier does
not deliver, install, or complete (as the case may be) any Services by the due date subject to any
Variation and terms of any Work Package and/or Purchase Order, the Supplier shall be in breach of
the Contract (but not necessarily material breach), and, where the relevant Work Package or this
Contract provides for the payment of liquidated damages, shall pay to BT on request such an amount
of liquidated damages as described in the relevant Work Package.
41.2 Payment of, or BTs right to liquidated damages under this Condition shall not affect any of
BTs rights under the Condition headed Termination.
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IN CONFIDENCE
41.3 Without prejudice to any other obligation of the Supplier, in respect of each activity
specified in Schedules, 6 and, the Supplier shall perform the Work Package in accordance with the
corresponding contract performance requirement.
42 TOOLING
42.1 For the purposes of this Condition, Tooling means any equipment and/or software developed,
produced or used at any time in relation to the production of Services and owned or paid for or to
be paid for or supplied by BT.
42.2 All Tooling shall be BT Items and shall remain the property of BT. Where Tooling is not
already owned by BT, it shall become the property of BT from the date of the first payment by BT
for it.
42.3 BT shall have the right, at any reasonable time on reasonable written notice to the Supplier,
to inspect, or to take possession of, any or all Tooling.
42.4 The Supplier shall at all times maintain the Tooling in good condition and fit for its
intended purpose and shall, within 7 days of receipt of written notice from BT, procure or modify
any Tooling in accordance with BTs reasonable instructions.
42.5 The Supplier shall, within 7 days of the expiry or termination (for whatever reason) of the
Contract or within 7 days of receipt of a written request from BT, physically transfer the Tooling
to BT or such third party as BT may notify to the Supplier in writing.
42.6 The Supplier shall regularly update and provide to BT a Tooling inventory, (including without
limitation, details of description, quantity, location, rate of production, and the expected life
of the Tooling) taking into account modifications to it from time to time.
42.7 The Supplier shall be solely responsible for the actions stated in paragraphs 4 to 6 of this
Condition, including in situations where the Tooling is in the possession of a Subcontractor or
other agent or nominee of the Supplier.
42.8 This Condition shall survive the Contract.
43 TERMINATION
43.1 If either party to the Contract commits a material breach or persistent material breaches of
the Contract or Supplier or its group companies commits any material breach of any other agreement
with any BT Group Company from time to time, the non-breaching party shall serve written notice on
the breaching party (i) requiring such breach to be
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IN CONFIDENCE
remedied within thirty (30) business days, and (ii) the commencing the escalation process procedure
in clause 34 (such cure period and escalation period to run concurrently). If the breaching party
fails to remedy the material breach within thirty (30) business days of written notice from the
non-breaching party, then the other party shall have the right to:
(a) terminate the Contract; and
(b) make a claim against the breaching party for all direct damages resulting from such breach,
subject to, and in accordance with the terms herein.
43.2 BT shall have the right at any time to terminate the Contract immediately and to make a claim
against Supplier for, all direct damages resulting if the Supplier shall become insolvent or cease
to trade or compound with its creditors; or a bankruptcy petition or order is presented or made
against the Supplier; or where the Supplier is a partnership, against any one partner, or if a
trustee in sequestration is appointed in respect of the assets of the Supplier or (where
applicable) any one partner; or a receiver or an administrative receiver is appointed in respect of
any of the Suppliers assets; or a petition for an administration order is presented or such an
order is made in relation to the Supplier; or a resolution or petition or order to wind up the
Supplier is passed or presented or made or a liquidator is appointed in respect of the Supplier
(otherwise than for reconstruction or amalgamation).
43.3 [***]
Change of Control means any of the following transactions which result in a third party acquiring
Control (as defined below) of the Supplier or its direct or indirect holding company (or its or
their business or assets): (A) a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Supplier (or its direct or indirect
holding company); (B) the acquisition by any person or group (including by way of a tender or
exchange offer or issuance by the Supplier ) (or its direct or indirect holding company), directly
or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares in the
Supplier (or its direct or indirect holding company) or (C) a sale or other disposition by the
Supplier (or its direct or indirect holding company) of assets or earning power aggregating a
majority of the assets or earning power of the Supplier (or its direct or indirect holding
company), excluding all sales of equity pursuant to an initial public or subsequent public offering
by Supplier (or its direct or indirect holding company) or (D) or any agreement to do any of the
foregoing.
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IN CONFIDENCE
Control shall mean the legal or beneficial ownership of more than 50% of the voting or equity
interests or assets of the Supplier (or its direct or indirect holding company); or the power or
right to direct or cause the direction of the management and/or affairs of the Supplier (or its
direct or indirect holding company) or its or their business (including acting as the general
partner of a limited partnership).
43.4 Except as otherwise expressly provided in individual Work Packages and Purchase Orders, [***],
BT may terminate Work carried out under an individual Purchase Order and/or Work Package.
Termination of Work carried out under individual Purchase Orders and/or Work Package shall not
affect the status of Work carried out or to be carried out under other Purchase Orders and/or Work
Package issued under the Contract. For the avoidance of doubt, any termination by BT under this
Clause shall not affect BTs obligations under Clause 55 and Schedule 6.
43.5 Where BT terminates the Contract under paragraph 43.4 and does not have any other right to
terminate the Contract, in addition to Suppliers rights and BTs obligations under Clause 55 and
Schedule 6, the following shall apply:
(a) BT shall subject to subparagraph (b) below, pay the Supplier such for Services performed to the
date of termination and pay such amounts as may be necessary to cover its reasonable costs and
outstanding and unavoidable commitments (and reasonable profit thereon) necessarily and solely
incurred in properly performing the Contract in relation to Applicable Services (as defined below)
prior to termination.
(b) BT shall not pay for any such costs or commitments that the Supplier is able to mitigate and
shall only pay costs and commitments that BT has validated to its satisfaction. BT shall not be
liable to pay for any Applicable Services that, at the date of termination, BT is entitled to
reject (including any Services for which BT may have put into service) or has already rejected.
BTs total liability under sub-paragraph (a) above shall not in any circumstances exceed the price
that would have been payable by BT for Applicable Services if the Contract had not been terminated.
(c) In this paragraph 4, Applicable Services means Services in respect of which the Contract has
been terminated under this paragraph, which were ordered by BT under the Contract before the date
of termination, and for which payment has not at that date become due from BT.
(d) Except as expressly set forth in Clauses 43.4 and 43.5,
sub-paragraphs (a) and (b) above encompass the total liability of
BT for
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IN CONFIDENCE
termination pursuant to this paragraph 4, and BT shall be liable for no other costs, claims,
damages, or expenses resulting from such termination.
43.6 Notwithstanding anything contained above, in the event of termination of this Contract for any
reason whatsoever, BT shall be liable to pay the Supplier all undisputed invoices for the Services
rendered up to the date of such termination.
43.7 Each right of BT under this Condition is without prejudice to any other right of BT under this
Condition or otherwise.
44 TRANSITION
Where the Supplier undertakes Work which requires transition:
44.1 The Supplier shall complete transition of the Work (as detailed in the relevant Statement of
Requirements) within three (3) months (the Transition Period) of commencement of the Work.
44.2 The start date for the transition work shall be identified as Effective Date which date shall
be mutually agreed in Statement of Requirements.
44.3 The Supplier shall initiate transition for critical work areas identified by BT, ahead of the
transition start date, by making a transition team available by a date to be mutually agreed by
both Parties and confirmed in Statement of Requirements.
44.4 Project Plan
If it is not feasible to migrate all the Work identified in the relevant Statement of Requirements
simultaneously the Supplier should propose a project plan to indicate when the Work is to be
migrated. The plan should be structured to maximise the cost and efficiency benefits that can be
achieved.
44.5 Transition Plan:
44.5.1 A transition plan shall be agreed between BT and the Supplier, which shall include such
details as Activities, Elapsed Timescales, Milestones, Dependencies and Acceptance criteria for
successful completion of the transition work.
44.5.2 BT and the Supplier shall hold regular joint management reviews of the transition process.
The transition plan shall be used to monitor the progress of the transition Work.
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44.6 REMEDIES:
44.6.1 In the event of the transition work not being completed within the Transition Period solely
to a default by the Supplier, BT shall have the following options:
(a) Either, agree an extension of the transition period by up to a maximum of 2 months, for which
the Supplier shall provide additional resource required to complete transition at no extra costs to
BT.
(b) Upon 30 business days written notice and failure to cure by Supplier, BT may terminate the
Contract.
The remedies listed above may apply, subject always to a maximum total amount of the costs incurred
by BT as a result of this default. BT wishes to retain the right to terminate however the total
remedy amount described above will be the Suppliers sole financial liability and BTs sole
financial remedy for failure to achieve completion of transition within the Transition Period.
44.6.2 In the event of the transition work not being completed within the Transition Period as a
result of a delay caused by a BT dependency, BT shall ensure that any reasonable extra costs
incurred by the Supplier are reimbursed to a maximum total amount of the extra costs incurred by
the Supplier.
44.7 Timescales
The agreement shall be in two
parts:
(a) Transition, and
(b) Ongoing Work
Commencement of Ongoing Work shall be dependent on the Supplier demonstrating that they meet the
transition Acceptance criteria as set forth in the Work Package.
44.8 Transition Escalation
In the event of a breakdown or failure in transition that does or could reasonably be expected to
result in a remedy claim for failure on the part of either BT, the Supplier or both the escalation
process will be as follows:
BT: BT Transition Manager
The Supplier: Program Manager
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It will be the responsibility of these managers to consider the instance of failure, agree an
appropriate course of action to correct the failure, assess any financial impact on the
disadvantaged party and agree a suitable remedy. In the event that this cannot be agreed, it will
be referred to respective Executive Sponsors for final resolution.
45 EXIT STRATEGY COOPERATION
45.1 If the Contract is terminated by BT, or not renewed with the Supplier beyond the Initial Term,
and if required by BT, the Supplier shall co-operate fully with BT and with any third party
nominated by BT, at no additional cost to BT, except for undisputed invoices, in facilitating the
provision of replacement work (Replacement Work). Such co-operation shall include, without
limitation:
(a) the supply by the Supplier of such Suppliers Background Information as is reasonably necessary
to enable Replacement Work to be provided in a similar manner to that in which Services had or
should have been provided by the Supplier; and
(b) the granting by the Supplier to BT or, at BTs option, a third party, of a licence to use such
Suppliers Background Information solely in relation to the provision of Replacement Work for a
period expiring five years after the date of termination (or part termination) of the Contract; and
(c) the undertaking by the Supplier of reasonable endeavours to procure for BT or BTs nominated
contractor the grant or transfer of all licences and permissions under third party Intellectual
Property Rights which may from time to time be reasonably necessary for the provision of
Replacement Work to the extent that such third party Intellectual Property Rights have been used in
the provision of Services by the Supplier.
For the avoidance of doubt, the Replacement Work shall include for Work under a Work Package and/or
Purchase Order, which had ceased or lapsed over a period of time.
For the purpose of this clause (Transition Co-operation) Suppliers Background Information shall
mean all Information owned or controlled by the Supplier or companies in the same group (as defined
by s.53 Companies Act 1989) as the Supplier.
45.2 To ensure a smooth transition at the end of the Contract, BT requires the Supplier to maintain
Documentation relating to the processes and procedures used in the execution of the Contract for
the Work for the lifetime of the Contract.
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45.3 Further to the above, the Supplier shall use all reasonable endeavours to maintain the Key
Personnel throughout the Replacement Work period and in the event the Supplier fails, refuses
and/or neglects to maintain the same, the Supplier shall reimburse BT any cost incurred by BT for
any delay on the part of Supplier in completing the Replacement Work.
45.4 For the avoidance of doubt, such Documentation shall be subject to the Condition titled
Intellectual Property of the Conditions of Contract schedule.
45.5 The Supplier agrees to vacate BTs premises within a reasonable period and deliver to BT those
BT assets in the Suppliers custody.
45.6 The provisions of sub-clause 45.1 above shall survive the termination of the Contract.
46 INDEMNITY
46.1 Without prejudice to any other rights or remedies available to BT, the Supplier shall
indemnify BT against all third party claims and proceedings, damages, costs and expenses arising or
incurred proximately caused by the:
(a) death or personal injury of any Contract Personnel in relation to the performance of the
Contract, except to the extent caused by BTs negligence; or
(b) death or personal injury of any other person to the extent arising as a result of the
negligence or wilful acts or omissions of the Supplier or Contract Personnel in relation to the
performance of the Contract; except to the extent caused by BTs negligence ; or
(c) loss of or damage to any BT property to the extent arising as a result of the negligence or
wilful acts or omissions of the Supplier or Contract Personnel in relation to the performance of
the Contract; or
(d) any complaint made pursuant to the Employment Rights Act 1996 (as amended, replaced,
consolidated or re-enacted from time to time) by any Contract Personnel whether in the Employment
Tribunal or civil courts or otherwise, or, without limitation, as a result of any claim or demand
by any Contract Personnel in respect of any other claim whatsoever within the jurisdiction of an
Employment Tribunal or wrongful dismissal, breach of contract or any other claim arising at common
law, sex, race or disability discrimination or equal pay (in all cases, whether arising under UK or
European law); or
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(e) under Part 1 of the Consumer Protection Act 1987 (or any equivalent product liability
legislation) in relation to Services;
provided that Supplier shall pay all such damages, costs and expenses arising from such claim as
finally awarded against BT to such third party by a court of competent jurisdiction after all
appeals have been exhausted or at the time of a final settlement of such claims or final award or
out of court settlement, if applicable, subject to the terms set forth in Paragraph 33.11 and
33.12.
46.2 This Condition shall survive the Contract.
47 LIMITATION OF LIABILITY
47.1 Subject to Paragraph 3 of this Condition, neither party shall be liable to the other under the
Contract for any indirect or consequential loss or damage.
47.2 Subject to Paragraph 3 of this Condition the total liability of either party to the other
under the Contract shall not exceed the greater of either:
(a) [***]
(b) [***] of the total of all sums paid or due to the Supplier for Services performed in the
previous 12 months from the date of the claim.
47.3 Paragraphs 1 and 2 of this Condition shall not
apply to loss or damage arising out of or in connection with:
(a) death or personal injury or loss
or damage for which liability cannot be limited or excluded by law; or
(b) the wilful failure or
gross negligence of either party in performing its contractual obligations; or
(c) paragraph
46.1(d) of the Condition headed Indemnity; or
(d) the Conditions headed Liquidated Damages,
Intellectual Property, or Confidentiality.
47.4 This Condition shall survive the Contract.
48 INSURANCE
48.1 The Supplier shall at its own expense maintain for the Term such insurance as is legally
required and appropriate in respect of its obligations, including, without limitation, third party
liability insurance with an indemnity limit of not less than [***] for each and every claim and in
the annual aggregate to the extent that if any claim (a settled
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claim in excess of [***] made by a third party against the Supplier materially erodes the third
party liability insurance, the Supplier shall promptly notify BT of such claim and, if the Services
include specialist or professional services, professional indemnity insurance with an indemnity
limit of not less than [***] for each and every claim and in the annual aggregate.
48.2 If the Supplier cannot evidence such insurance to BT on request, BT may arrange such insurance
and recover the cost from the Supplier.
48.3 The Supplier shall notify BTs Commercial Contact as soon as it is aware of any event which
may give rise to an obligation to indemnify BT under the Contract, or to a claim under any
insurance required by the Contract.
48.4 This Condition shall not limit the Suppliers liability under the Contract.
49 PUBLICITY
49.1 The parties agree that their respective marketing and public relations representatives will
work together in good faith to create jointly approved releases. Subject to obtaining BTs written
consent (not to be unreasonably withheld or delayed)Supplier may name BT in a press release as a
client and as a client in marketing materials, display BTs logo or logos on Suppliers website,
and use a client brief describing the Services provided to BT by Supplier.
50 SOFTWARE
The Supplier warrants that:
(a) all Software is free from all forms of:
(i) electronic possession, logic bombs viruses and worms that could have been detected by
using the latest (at the date of despatch) commercially available virus detection software; and
(ii) spyware and adware
(which expressions shall have meanings as they are generally understood within the computing
industry);
(b) after Acceptance by BT, subject to the terms of Section 35, the Software will perform in all
respects in accordance with the Functional Specification for the Warranty Period; and
(c) it has and shall employ only good quality materials, techniques and standards in performing the
Contract and at all times apply the
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
standards of care, skill and diligence required of
good computing practice.
51 SOFTWARE LICENCE
51.1 The Supplier grants to BT a non-exclusive, non-transferable, perpetual, irrevocable licence to
BT for BT by itself, or by third parties on its behalf to use, copy, install, maintain, modify,
enhance and adapt the Software in accordance with the licence type specified in the Requirements
section of the Contract, effective from the date such Software is respectively delivered to BT.
51.2 Notwithstanding any other provision of the Contract, the Supplier grants to BT non-exclusive,
royalty free, world-wide rights to any Software supplied under the Contract to the effect that BT
has:
(a) all the rights of a lawful user (as defined in the Copyright (Computer Programs) Regulations
1992) of the Software; and
(b) the rights to copy, disclose and use for any purpose any Information
which:
(i) has been derived by BT from observing, studying or testing the functioning of the
Software;
(ii) relates to the ideas and principles which underline any element of the Software; and
(iii) is not subject to the
Suppliers (or its licensors) copyrights in the United Kingdom; and
(c) the rights to:
(i) use Information obtained from de-compiling the Software to write independent, interoperable
programs and to supply such Information to third parties for that purpose; and
(ii) copy and adapt the Software for the purposes of error correction, repair and maintenance and,
where necessary, for the lawful use of the Software, and the right to engage a third party for
those purposes.
For the avoidance of doubt, nothing in the Contract shall prevent BT from selling or deploying
products, systems and services that are developed by BT using the Software.
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
52 ESCROW
The Supplier shall at BTs request and the Suppliers expense, enter to an IPR deposit arrangement
in respect of all Software with BT and an agent acceptable to BT. The Supplier shall ensure all
relevant Information and documentation is deposited (including, without limitation, all source code
and listings) as would be enable a competent computer programmer readily to understand and maintain
the Software. Without affecting any other rights it may have, BT shall have the right, free of all
charges, to use such source code, Information and documentation, when released, in order to use or
maintain (including to upgrade) the Software, to modify or have modified the Software, and to
license such modified Software to or have it maintained by third parties.
53 NOTICES
Written notices under the Contract may be delivered by hand, post, facsimile transmission or e-mail
to BTs Commercial Contact or the Suppliers Commercial Contact (as the case may be) and shall be
deemed to be given upon receipt (except notices sent by facsimile transmission, which shall be
deemed to be given upon transmission).
54 PRICING
The price(s) payable by BT for Supplies, unless otherwise expressly stated in the Contract, shall
be inclusive, where relevant, of all packing, delivery to Site, any licence fees, installation,
testing and commissioning and all other charges associated with Supplies, but shall exclude VAT.
55 PAYMENT
OBLIGATIONS; MINIMUM COMMITMENTS; INVOICING
55.1 Certain obligations of the parties relating to minimum commitments and discount structures are
set forth in Schedule 6.
55.2 BT will pay due invoices submitted in accordance with this Condition within 60 days of the
later of either the date of the invoice or the date upon which the invoice (including electronic
copy of invoices) is received by BT. All payments shall be made in pounds sterling.
55.3 When payment becomes due, the Supplier shall forward invoices to, unless otherwise specified
by BT in the Purchase Order:
BT Accounts Payable Team
PO Box 371
Parkway Business Centre
Manchester
M14 0WE
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
55.4 Each invoice shall specify: its date; the Contract number; the order reference; line
reference; the relevant BT item code(s) if appropriate; the correct price; the full description of
the Supplies to which the invoice relates (as defined in the Contract); the portion of the Supplies
for which payment is due and, if appropriate, the cumulative amount invoiced to date. The agreed
payment currency and the Incoterm must be specified in relation to any non-UK transaction. Any
discounts should be separately shown with a clear indication of what the discount is for.
56 GENERAL
56.1 The invalidity or unenforceability for any reason of any provision of the Contract shall not
prejudice or affect the validity or enforceability of its other provisions.
56.2 The headings to the Contract provisions are for reference only and shall not affect their
interpretation.
56.3 No delay, neglect or forbearance by either party in enforcing any provision of the Contract
shall be deemed to be a waiver or in any way prejudice any rights of that party.
56.4 No waiver by either party shall be effective unless made in writing or constitute a waiver of
rights in relation to any later breach of the Contract.
56.5 In relation to its subject-matter, the Contract is the entire agreement between the parties
and governs their relationship to the exclusion (to the extent permitted by law) of any other terms
and conditions, including, without limitation, those upon which any quotation or tender response
has been given to BT.
56.6 The Contract is governed by English law and subject to the exclusive jurisdiction of the
English courts.
56.7 The Supplier shall not be, nor in any way represent itself as, an agent of BT and shall have
no authority to enter into any obligation on behalf of BT or to bind BT in any way.
56.8 Any estimated contract value stated on the front sheet of the Contract is for BT
administrative purposes only and shall not constitute or imply any commitment by BT.
56.9 Except as expressly set out in the Contract no assignment of or licence under any Intellectual
Property Right or trade mark or service mark (whether registered or not) is granted by the
Contract.
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
56.10 A person who is not a party to the Contract may not enforce any of its terms under the
Contracts (Rights of Third Parties) Act 1999.
56.11 This Condition shall survive the Contract.
57. NON-ASSIGNMENT
Supplier shall not assign or transfer any, right, obligation or interest hereunder without the
prior written consent of BT, which consent shall not be unreasonably withheld or delayed; provided
also that the successor/assignee of any such assignment agrees to be bound by all the terms of this
Contract.
58. OPERATIONAL GOVERNANCE
The parties agree, within one month of contract date, to use commercially reasonable efforts to
establish a program management plan (PMO) for the Contract.
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SCHEDULE 3 MODEL CLAUSES FOR DATA PROTECTION
THIS SCHEDULE MUST BE COMPLETED AND SIGNED BY THE PARTIES.
STANDARD CONTRACTUAL CLAUSES (PROCESSORS)
For the purposes of Article 26(2) of Directive 95/46/EC for the transfer of personal data to
processors established in third countries which do not ensure an adequate level of data protection
Name of the data exporting organisation: British Telecommunications plc, 81 Newgate Street, London, EC1A 7AJ
tel.:
fax:
;
e-mail:
A company registered in England & Wales Number:
(the data EXPORTER)
and
Name of the data importing organisations:
[the Supplier]
Tel:
e-mail:
fax:
A company registered in England & Wales Number:
[the Sub-Contractor if any]
Address tel.:
fax:
;
e-mail:
A company
registered in [India] Number:
(jointly and severally, the data IMPORTER)
HAVE AGREED on the following contractual Clauses (the Clauses) in order to
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IN CONFIDENCE
adduce adequate safeguards with respect to the protection of privacy and fundamental rights and
freedoms of individuals for the transfer by the data exporter to the data importer of the personal
data specified in Appendix A.
1. DEFINITIONS
For the purposes of the Clauses:
(a) personal data, special categories of data, process/processing, controller, processor,
data subject and supervisory authority shall have the same meaning as in Directive 95/46/EC of
the European Parliament and of the Council of 24 October 1995 on the protection of individuals with
regard to the processing of personal data and on the free movement of such data (the Directive).
(b) the data exporter shall mean the controller who transfers the personal data;
(c) the data importer shall mean the processor who agrees to receive from the data exporter
personal data intended for processing on his behalf after the transfer in accordance with his
instructions and the terms of these Clauses and who is not subject to a third countrys system
ensuring to adequate protection;
(d) the applicable data protection law shall mean the legislation protecting the fundamental
rights and freedoms of natural persons and, in particular, their right to privacy with respect to
the processing of personal data applicable to a data controller in the Member State in which the
data exporter is established:
(e) technical and organisational security measures shall mean those measures aimed at protecting
personal data against accidental or unlawful destruction or accidental loss, alteration,
unauthorized disclosure or access, in particular where the processing involves the transmission of
data over a network, and against all other unlawful forms of processing.
2. DETAILS OF THE TRANSFER
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IN CONFIDENCE
The details of the transfer and in particular the special categories of personal data where
applicable are specified in Appendix I which forms an integral part of the Clauses.
3. THIRD-PARTY BENEFICIARY CLAUSE
(a) The data subject can enforce against the data exporter this Clause, Clause 4(b) to (h), Clause
5(a) to (e), and (g), Clause 6(l) and (2),
Clause 7, Clause 8(2), and Clauses 9, 10 and 11, as
third-party beneficiaries.
(b) The data subject can enforce against the data importer this Clause, Clause 5(a) to (e) and (g),
Clause 6(1) and (2), Clause 7, Clause 8(2), and Clauses 9, 10 and 11, in cases where the data
exporter has factually disappeared or has ceased to exist in law.
(c) The parties do not object to a data subject being represented by an association or other body
if the data subject so expressly wishes and if permitted by national law.
4. OBLIGATIONS OF THE DATA EXPORTER
The data exporter agrees and warrants:
(a) that the processing, including the transfer itself, of the personal data has been and will
continue to be carried out in accordance with the relevant provisions of the applicable data
protection law (and, where applicable, has been notified to the relevant authorities of the Member
State where the data exporter is established) and does not violate the relevant provisions of that
State;
(b) that he has instructed and throughout the duration of the personal data processing services
will instruct the data importer to process the personal data transferred only on the data
exporters behalf and in accordance with the applicable data protection law and these clauses;
(c) that the data importer shall provide sufficient guarantees in respect of the technical and
organisational security measures specified in Appendix B to this contract;
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IN CONFIDENCE
(d) that after assessment of the requirements of the applicable data protection law, the security
measures are appropriate to protect personal data against accidental or unlawful destruction or
accidental loss, alteration, unauthorised disclosure or access, in particular where the processing
involves the transmission of data over a network, and against all other unlawful forms of
processing, and that these measures ensure a level of security appropriate to the risks presented
by the processing and the nature of the data to he protected having regard to the state of the art
and the cost of their implementation;
(e) that he will ensure compliance with the security measures:
(f) that, if the transfer involves special categories of data, the data subject has been informed
or will be informed before, or as soon as possible after, the transfer that his data could be
transmitted to a third country not providing adequate protection;
(g) that he agrees to forward the notification received from the data importer pursuant to Clause
5(b) to the data protection supervisory authority if he decides to continue the transfer or to lift
his suspension;
(h) to make available to the data subjects upon request a copy of the Clauses set out in this
Annex, with the exception of Appendix B which shall be replaced by a summary description of the
security measures.
5. OBLIGATIONS OF THE DATA IMPORTER
The data importer agrees and warrants:
(a) to process the personal data only on behalf of the data exporter and in compliance with his
instructions and the clauses; if he cannot provide such compliance for whatever reasons, he agrees
to inform promptly the data exporter of his inability to comply, in which case the data exporter is
entitled to suspend the transfer of data and/or terminate the contract;
(b) that they have no reason to believe that the legislation applicable to him prevents them from
fulfilling the instructions
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IN CONFIDENCE
received from the data exporter and his obligations under the Contract and that in the event of a
change in this legislation which is likely to have a substantial adverse effect on the warranties
and obligations provided by the Clauses, they will promptly notify the change to the data exporter
as soon as they are aware, in which case the data exporter is entitled to suspend the transfer of
data and/or terminate the contract;
(c) that they have implemented the technical and organisational security measures specified in
Appendix B before processing the personal data transferred;
(d) that they shall promptly notify the data exporter about:
(i) any legally binding request for disclosure of the personal data by a law enforcement authority
unless otherwise prohibited, such as a prohibition under criminal law to preserve the
confidentiality of a law enforcement investigation;
(ii) any accidental or unauthorised access; and
(iii) any request received directly from the data subjects without responding to that request,
unless he has been otherwise authorised to do so;
(e) to deal promptly and properly with all inquiries from the data exporter relating to his
processing of the personal data subject to the transfer and to abide by the advice of the
supervisory authority with regard to the processing of the data transferred;
(f) at the request of the data exporter to submit his data processing facilities for audit of the
processing activities covered by the clauses which shall be carried out by the data exporter or an
inspection body composed of independent members and in possession of the required professional
qualifications bound by a duty of confidentiality, selected by the data exporter, where applicable,
in agreement with the supervisory authority;
(g) to make available to the data subject upon request a copy of the Clauses set out in this Annex,
with the exception of Appendix B
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IN CONFIDENCE
which shall be replaced by a summary description of the security measures in those cases where the
data subject is unable to obtain a copy from the data exporter.
6. LIABILITY
1. The parties agree that a data subject, who has suffered damage as a result of any violation of
the provisions referred to in Clause 3 is entitled to receive compensation from the data exporter
for the damage suffered.
2. If a data subject is not able to bring the action referred to in paragraph I arising out of a
breach by the data importer of any of his obligations referred to in Clause 3 against the data
exporter because the data exporter has disappeared factually or has ceased to exist in law or
became insolvent, the data importer agrees that the data subject may issue a claim against the data
importer as if he were the data exporter.
3. The parties agree that if one party is held liable for a violation of the clauses committed by
the other party, the latter will, to the extent to which it is liable, indemnify the first party
for any cost, charge, damages, expenses or loss it has incurred.
Indemnification is contingent upon:
(a) the data exporter promptly notifying the data importer of a claim; and
(b) the data importer being given the possibility to cooperate with the data exporter in the
defense and settlement of the claim.
7. MEDIATION AND JURISDICTION
1. The data importer agrees that if the data subject invokes against him third-party beneficiary
rights and/or claims compensation for damages under the clauses, the data importer will accept the
decision of the data subject:
(a) to refer the dispute to mediation, by an independent person or, where applicable, by the
supervisory authority;
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IN CONFIDENCE
(b) to refer the dispute to the courts in the Member State in which the data exporter is
established.
2. The data importer agrees that, by agreement with the data subject, the resolution of a specific
dispute can he referred to an arbitration body if the data importer is established in a country
which has ratified the New York Convention on enforcement of arbitration awards.
3. The parties agree that the choice made by the data subject will not prejudice his substantive or
procedural rights to seek remedies in accordance with other provisions of national or international
law.
8. COOPERATION WITH SUPERVISORY AUTHORITIES
1. The data exporter agrees to deposit a copy of this contract with the supervisory authority if it
so requests or if such deposit is required under the applicable data protection law.
2. The parties agree that the supervisory authority has the right to conduct an audit of the data
importer which has the same scope and is subject to the same conditions as would apply to an audit
of the data exporter under the applicable data protection law.
9. GOVERNING LAW
The Clauses shall be governed by the law of the Member State in which the data exporter is
established, namely England and Wales.
10. VARIATION OF THE CONTRACT
The parties undertake not to vary or modify the terms of the Clauses.
11. OBLIGATION AFTER THE TERMINATION OF PERSONAL DATA PROCESSING SERVICES
1. The parties agree that on the termination of the provision of data processing services, the data
importer shall, at the choice of the data exporter, return all the personal data transferred and
the copies thereof to the data exporter or shall destroy all the personal data and certify to the
data exporter that he has done so, unless legislation imposed upon the data importer prevents him
from returning or destroying all or part
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IN CONFIDENCE
of the personal data transferred. In that case, the data importer warrants that he will guarantee
the confidentiality of the personal data transferred and will not actively process the personal
data transferred anymore.
2. The data importer warrants that upon request of the data exporter and/or of the supervisory
authority, he will submit his data processing facilities for an audit of the measures referred to
in paragraph 1.
ON BEHALF OF THE DATA EXPORTER:
Name (written out in full):
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IN CONFIDENCE
SCHEDULE 3 APPENDIX A
THIS APPENDIX MUST BE COMPLETED AND SIGNED BY THE PARTIES
DATA EXPORTER
The data exporter is British Telecommunications plc who has
DATA IMPORTER
The data importer is
DATA SUBJECTS
The personal data transferred concern the following categories of data subjects:
CATEGORIES OF DATA
The personal data transferred concern the following categories of data:
(ARROW)
SPECIAL CATEGORIES OF DATA (IF APPROPRIATE)
No data classified as Sensitive Personal Data will be processed
outside the
EEA.
PROCESSING OPERATIONS
The personal data transferred will be subject to the following basic processing activities:
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DATA EXPORTER
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IN CONFIDENCE
SCHEDULE 3 APPENDIX B
THIS APPENDIX MUST BE COMPLETED AND SIGNED BY THE PARTIES
Description of the technical and organisational security measures implemented by the data importer
in accordance with Clauses 4(d) and 5(c) (Schedule 3):
Generic measures for each service line in Appendix A [1 though 6]
Operational Organizational Measures
Technical and Security Measures
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IN CONFIDENCE
SCHEDULE 4 THE BT SECURITY POLICY FOR SUPPLIER
This Schedule consists of this Cover Page of BT Security Requirements and BT Security Policy
appended hereto.
The Supplier shall ensure that the provision of the Services and/or the performance of the Services
under this Contract shall not cause the BT Group of Companies to breach its BT Security Policy and
ISO17799 as set out in the Schedule.
Good security practices are essential to protect both company and customer related information.
This is why, the BT Group of Companies, are committed to securing compliance with relevant
legislation, protecting confidentiality and maintaining customer confidence by adopting British
Standard 7799 and ISO 17799, which is as follows:
BT SECURITY REQUIREMENT
While information is the cornerstone of our ability to provide superior service, our most important
asset is our customers trust. Keeping information secure, and using it only as it is intended to
be used, is a top priority for all of us at BT. In order to establish and maintain the levels of
information security during the Term of this Contract on the part of the Supplier, Supplier and
its Contract Personnel must comply with the BT Security Policy. To the extent that the terms of
this Schedule conflict with terms of this Contract between Supplier and BT, the terms of this
Schedule shall prevail.
1 DEFINITIONS
The following expressions are used in this Schedule:
Access means interconnection with BT Systems and access to BT Information.
Authorised means having undergone and being fully compliant with NAIF.
BT Information means all information (including BT customer information) used or accessible to
the Supplier in association with providing the Service.
BT Security Contact means BT Security Operations Centre (0800321 999) or such other person whose
details shall be notified by BT to the Supplier from time to time.
BT Security Policy means the annexe in Schedule 1.
BT Systems means [insert brief description of relevant BT systems] and/or such other systems as
may be agreed in writing from time to time by the BT and the Supplier.
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IN CONFIDENCE
BT Human Resources Policy means guidelines at www. [TBC] issued by BT in regards to appointment
of Contract Personnel who will work for BT under this Contract.
Disaster Recovery Plan means the Suppliers plans to maintain Service in the event of natural or
man made incident that affects their ability to provide Service from the primary location and/or
site.
ISO17799 means the International Security Standard.
NAIF Network Authorisation and Interconnect Facility is a procedure to register all UK and
Global network interconnects between BT and external companies. An interconnect request is
initiated by a BT Project Manager by completing a BT web based form.
Process means operational procedures.
Purposes means the proper performance by the Supplier of its obligations under and in accordance
with the Contract.
Standards means all the relevant standards associated with information management security.
For the avoidance of doubt without prejudice to the definition of BT in the condition headed
definitions, in this schedule BT shall include British Telecommunications PLC.
Target means systems, applications, switches, routers, and any other related equipment.
2 BT SECURITY REQUIREMENTS AND SUPPLIERS OBLIGATIONS
The Supplier warrants that it shall take all reasonable steps to comply with BT Security Policy as
well as the detailed policies as follows which shall form the basis of Suppliers information
management and
security policy and the Supplier shall demonstrate to BT that it has either achieved compliance
with ISO17799 or is working towards such achievement.
2.1 The Supplier shall comply with BT policy on information classification, handling and disposal.
2.2 The Supplier shall comply with BTs physical and logical access controls.
2.3 The Supplier shall not use BT Information for any purpose other than for the Purposes and
performance of the Services.
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2.4 The Supplier shall take reasonable steps (subject to the provision of the Contract) to preserve
the integrity of BT Information and to prevent any corruption or loss of BT Information.
2.5 The Supplier shall permit BT or its authorised representatives access at any time to any
premises or computer equipment at or from which Access can be obtained in order to verify
compliance with the Contract by performing physical and logical audits as well as penetration
testing to ensure compliance with BT Security Policy and Standards.
2.6 BT requires the Supplier to maintain systems which detect and record any attempted damage,
amendment or unauthorised access to BT Information.
2.7 The Supplier authorises BT to investigate any security breach, including the confiscation for
evaluation of any suspected or infringing hardware.
2.8 The Supplier shall train all the Contract Personnel in security awareness to BT standards, with
special emphasis on the secure handling and management of passwords, tokens and information.
Contract Personnel may be expected to complete the BT CBT training modules or equivalent, as
advised by BT during the Term of the Contract.
2.9 The Supplier shall use its best endeavours to ensure that any link, email or any communication
whatsoever that convey information relating to this Contract and/or the Services and traverse a
non-BT owned network, the said information must be protected by encryption to the standards defined
in the BT Security Policy particularly 3 DES 128 bit.
2.10 The Supplier shall appoint a single point of contact for any security issues i.e. a senior
manager or CIO responsible for security.
2.11 When requested by BT, the Supplier shall make available for review the Suppliers Disaster
Recovery Plan with respect to this Contract and recovery plan exercise, practice, rehearsal or
drill results.
2.12 The Supplier shall make available for review the Suppliers operational procedures relevant to
this Contract to determine the Suppliers compliance with BT Security Policy.
2.13 The Supplier shall conduct recruitment checks, subject to the restrictions (legal or
otherwise) and customary practices applicable in the jurisdiction in which the recruitment checks
are conducted, to comply with BT Human Resources Policy found in Appendix 2 of this
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Schedule and supply BT with documentary evidence of such checks as and when requested by BT.
2.14 The Supplier shall notify the BT Security Contact of any changes to its Access method through
the firewalls, including the provision of network address translation.
2.15 The Supplier shall notify BT immediately should any Contract Personnel be removed for any
reason whatsoever from this Contract thus enabling BT to disable, transfer or modify the access
rights to systems and information.
2.16 The Supplier shall not (and, where relevant, shall procure that any Contract Personnel shall
not) without the prior written consent of the BT Security Contact connect any equipment not
supplied by BT to any BT LAN port.
2.17 The Supplier shall inform the BT Security Contact immediately upon its becoming aware of any
actual or suspected unauthorised Access or misuse of BT Systems or BT Information or breach of any
of the Suppliers obligations under this Condition.
2.18 The Supplier consents to BTs gathering information relating to Access. This information may
be collected, retained, and analysed to identify potential security risks and may include, but is
not limited to, trace files, statistics, network addresses, and the actual information or screens
accessed or transferred.
2.19 The supplier shall ensure that all BT information, contract personnel and networks involved
with this contract are logically and physically separated in a secure manner from all other
information, personnel or networks created or maintained by the Supplier.
3 ACCESS
3.1 BT allows (so far as it can and is able to do so) the Supplier, while the Supplier is
Authorised Access solely for the Purposes.
3.2 In relation to Access, the Supplier shall (and,
where relevant, shall procure that all Contract Personnel shall):
(a) ensure each individual user has a unique user identification and password known only to such user.
(b) promptly provide to BT such reports as BT shall from time to time require concerning the
Suppliers use and security of Access and any related matters.
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(c) ensure that physical access to computer equipment having Access or storing or having access to
BT Information is password-protected to reflect the Suppliers obligations.
(c) ensure onward bridging or linking to BT computer systems is prevented unless authorised by BT
and complies with Security Standards as defined in the BT Security Policy.
(d) ensure no viruses or malicious code (as the expressions are generally understood in the
computing industry) are introduced to and that there is no corruption of BT Systems or BT
Information.
4 SECURITY REVIEW
4.1 The Supplier is cognisant of BTs requirement to carry out regular assessment of Suppliers
compliance of BT Security Policy which would include all elements of physical and logical audits,
penetration testing and items listed in Clause 2 and 3 above of the Suppliers Systems (Security
Review). The Supplier shall facilitate this assessment by permitting BT to collect, retain and
analyse information to identify potential security risks and may include but not limited to trace
files, statistics, network addresses and the actual information or screens accessed or transferred.
4.2 In the event, BT identifies a threat, to the confidentiality, integrity or availability of BT
Information in Suppliers Process or Systems, Supplier shall promptly correct any threat of
security risk in the Suppliers Process or Systems that is revealed in the Security Review, as soon
as reasonably practicable under the circumstances.
4.3 Supplier shall co-operate in any Security Review, providing reasonable access, accommodation,
facilities and assistance to BT employees all Suppliers Systems as reasonably necessary to verify
the integrity of security of Suppliers Systems including permitting interview of any sales,
engineering or other operational personnel of Supplier to ensure compliance of BT Security Policy
to Suppliers premises.
5 TERMINATION
5.1 In the event, the Supplier fails, neglects and/or refuses to rectify the Security Risk as
identified in the Security Review during the Term of the Contract within thirty (30) days of
written notice of such breach from BT, BT may terminate this Contract for material breach without
prejudice to any other rights BT may have against the Supplier under this Contract for breach
and/or default.
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5.2 The Supplier shall indemnify BT from and against any third party costs, losses, damages,
proceedings, claims, expenses or demands incurred or suffered by BT which arise as a result of
third party claims against BT as a result of this breach by the Supplier of its obligations under
this Schedule;
provided that Supplier shall pay all such damages, costs and expenses arising from such claim as
finally awarded against BT to such third party by a court of competent jurisdiction after all
appeals have been exhausted or at the time of a final settlement of such claims or final award or
out of court settlement, if applicable, subject to the terms set forth in Paragraph 33.11 and
33.12.
6 RIGHTS AFTER TERMINATION
If the Supplier has during the course of the Contract received Information in a recorded form from
BT (or has recorded received Information), the Supplier shall return or destroy such records upon:
(a) expiry or termination of the Contract; or
(b) upon earlier request unless such records are part of the Services.
7 ACCESS TO SUPPLIER SYSTEMS
7.1 If Contract Personnel is granted access to the Suppliers Systems that hold, process or access
BT Information the Supplier shall:
a) ensure each individual Contract Personnel has a unique user identification and password known
only to such user for their sole use.
b) promptly provide to BT such reports as BT shall from time to time require concerning the
Suppliers use and security of access to Supplier Systems.
c) allow access to BT Information and application system functions in Supplier System to the
minimum required to enable the Contract Personnel perform their duties.
d) allow access to Contract Personnel holding or accessing BT Information using a secure login
process.
e) establish formal procedures to control the allocation and de-allocation of access rights to
Contract Personnel who have access to BT Information and/or system functions
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f) ensure that the allocation and use of powerful privileges and access to sensitive tools and
facilities in Supplier Systems are controlled and limited to only those users who have a business
need.
g) ensure that the allocation of user passwords to Supplier Systems that hold or access BT
Information is controlled through a formal auditable management process.
h) conduct regular reviews of user access rights.
i) ensure that remote and home working activities are only permitted where authorised by BT and
subject to appropriate security controls within the Suppliers organisation including but not
limited to remote access by users is subject to strong authentication.
j) demonstrate that users follow good security practices in the management of their passwords.
k) ensure that a password management system is in place to provide a secure and effective
interactive facility that ensures quality passwords.
l) ensure that user sessions are terminated
after a defined period of inactivity.
m) ensure that audit logs are generated
to record user activity and security-relevant events.
n) ensure that monitor audit and event logs is performed by Suppliers staff independent of those
users being monitored.
o) make available audit logs where required by
the requirements in the Order to BT for review.
p) use encryption techniques ( as a minimum 3 DES 128 bit) to protect the confidentiality and
integrity of sensitive information.
q) harden all systems holding, processing or accessing BT Information to BT standards
(available from the BT Standards web site on request).
r) ensure that development, test and live environments are segregated from the other work
areas in Suppliers buildings.
s) implement controls
to detect malicious software and protect against the malicious software.
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7.2 The Supplier must demonstrate that Contract Personnel who hold and use data on PCs and mobile
computing devices are responsible for ensuring that the PCs and mobile computing device are
protected from unauthorised access. BT Information with classification In Confidence and above
information must be encrypted on all mobile computing devices
7.3 The Supplier shall ensure that all Supplier Systems have formal security incident management
procedures with defined responsibilities.
7.4 Any un-authorised software is identified and removed from Supplier Systems holding, processing
or accessing BT Information.
7.5 Access to diagnostic and management ports as well as diagnostic tools must be securely
controlled to BTs reasonable satisfaction.
7.6 Access to audit tools must be restricted.
7.7 Enhanced independent code reviews are be performed (including penetration testing) on all
Supplier Systems.
7.8 Suppliers servers must not be deployed on un-trusted networks without appropriate security
controls.
7.9 Changes to any Targets must be controlled and subject to formal change control procedures. All
documentation relating to Targets must be protected from un-authorised access or amendment.
7.10 Security procedures and controls must be used to secure equipment holding, accessing or
processing BT Information used in Supplier Systems but outside the Suppliers premises.
8 BUSINESS CONTINUITY
8.1 When requested by BT, the Supplier shall make available for inspection the Suppliers business
continuity plan and disaster recovery plans with respect to this Contract and recovery plan
exercise, practice, rehearsal or drill results.
8.2 The Supplier must demonstrate that they have conducted a thorough business impact analysis and
risk analysis which takes an holistic view of possible disruption to their ability to meet BTs
business requirements on the occurrence of a force majeure event that has or is likely to have an
effect on the Services or on
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the occurrence of disaster from natural or man made incident that affects their ability to provide
Service from the primary location and/or site. Consideration of the following 8 dimensions of their
operations should be demonstrable to BT.
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8.3
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ASPECT OF
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CORPORATE
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RESILIENCE
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EXAMPLES OF RISKS (BUT NOT EXCLUSIVELY)
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NETWORKS
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Single points of failure or nodes which are insufficiently
protected, either physically or with disaster recovery
solutions
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SYSTEMS
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a critical system which is supported from only a single
building, has no disaster recover fall back capability,
has no feasible workaround if down, running on unsupported
software or is supported by only a very few people with
highly specialised skills.
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PEOPLE AND PROCESES
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a critical process can only be operated by a few people
with specialist skills or knowledge; people operating in
areas with environmental or civil unrest threats
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PROPERTY
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|
A key process can be operated from only one or two
specific locations; the building/site is of sub-standard
construction or poorly maintained or there is an
environmental hazard to buildings (nearby danger of fire,
flood, civil disturbance, traffic congestion preventing
access etc)
|
|
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SUPPLY CHAIN
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A dependency on a single supplier for a service/product
without which the service/product could not be (this
includes internally traded services/products) delivered to
time and quality that BT expects.
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DATA
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Information necessary to support BT business is poor
quality, not sufficiently available or not sufficiently
secure
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CUSTOMERS
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Will the business be able to survive the loss of a major
contract or conversely deliver on a significant increase
in business without loss of quality?
|
8.4 Supplier must produce a report of risks resulting from a business impact analysis/risk
assessment (BIA/RA) which is supplied to BT in a form defined by BT at the time such that it is
suitable for inclusion in the BT risk review process.
8.5 For risks of a severity level which is determined by BT at the material time, the Supplier must
be able to show a plan to mitigate the risk within a time period agreed with BT.
8.6 The Supplier must produce an end-to-end business continuity plan for all key processes
supporting BT within a single framework of business continuity. The plans for all key buildings
which buildings from where Services are provided with
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associated risk assessment
and fallback exercise results must be available for BT to inspect.
8.7 The Suppliers business continuity strategy should be compliant with BS25999 or an equivalent
local country standard. Supplier has a continued focus on strengthening the resiliency of its
business. To that end, Supplier has a Risk Management Team focused on business continuity. Supplier
has also engaged with a leading third party risk management consulting firm to assist Supplier to
build a standards based business continuity framework in alignment with the new BS 25999 standard.
As the BS25999 standard has only recently become finalized, Supplier has already established a goal
to become compliant with the recently finalized BS25999 by December 31, 2007.
Supplier is currently ISO 27001 certified. This certification ensures compliance with not only
information security but also business continuity best practices.
8.8 The Supplier must be able to demonstrate that business continuity is embedded in its culture
through regular communications and ensuring ownership within operational teams as well as through
central co-ordination.
8.9 The Suppliers BIA/RA and business continuity plans must be reviewed, maintained and tested
regularly (at least annually). The results of such review and testing must be available to BT on
request.
8.10 The Supplier must be able to demonstrate that any partner companies, sub-contractor,
outsourcing agencies or other suppliers on which it depends to deliver BT requirements are
resilient and have a similar and sufficient degree of business continuity requirements as are
imposed on the Supplier by this Contract. These processes shall include incident reporting
including internal escalation within the Suppliers company, together with immediate escalation and
reporting of defined events to BT in accordance with the Schedule headed Governance.
8.11 The Supplier shall immediately notify BT Security Contact if it becomes aware of anything that
may have a material adverse effect on the Suppliers ability to perform its obligations under this
Contract or is experiencing an incident of a severity where it is judged that it is possible that
BT business may be impacted.
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IN CONFIDENCE
8.12 The Supplier must be able to demonstrate a robust incident management strategy which must be
regularly exercised. The BT Security Contact must be notified of planned exercises to give BT the
opportunity to attend and observe these exercises as appropriate, and the results of such exercises
made available to BT.
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IN CONFIDENCE
SCHEDULE 4 APPENDIX 1 BT SECURITY POLICY
[***]
[***]
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SCHEDULE 4 APPENDIX 2 BT HUMAN RESOURCES RECRUITMENT POLICY
1. SUPPLIERS SELECTION PROCESS
The Supplier shall:
1.1 Confirm that, as a minimum requirement, their recruitment policy and processes align with BTs
pre-employment checks, policy and processes, in particular in relation to basic ID checks,
references, health declaration and criminal convictions, as detailed below;
1.2 Warrant that the Contract Personnel provided to perform Work under the Contract meet, and
continue to meet for the duration of their assignment under the terms of this Contract, BTs
minimum pre-employment requirements;
1.3 ensure that no individual who has previously held a BT contract of employment, and has left BT
on redundancy terms, is assigned to a BT Work Package in the same capacity (grade or job type) or
location that they were employed in on their last official day with BT. In any event, where any
person who has taken redundancy from BT is assigned back to BT through the Supplier, a minimum of
28 days must have elapsed between their last official day with BT and the first day of assignment
to BT.
1.4 Provide BT with documentary evidence of the requirements detailed herein on request from BT.
2. VETTING OF CONTRACT PERSONNEL
2.1 The Supplier shall ensure that the following checks have been undertaken prior to contract
personnel being assigned to the Contract. Full details shall be retained on file and made available
to BT at BTs request.
A) IDENTITY to be verified by current Photographic ID such as current Passport or photographic
Driving Licence.
B) PROOF OF RESIDENCE verified by one of the following e.g. Utility Bill, National Insurance or
Medical Card, Tenancy Agreement or equivalent.
C) RIGHT TO WORK IN THE COUNTRY THAT THE WORK IS TO BE PERFORMED If Work is to be performed in
the UK, the right to work must be verified in line with the Immigration and Asylum Act 1996
regulations and a valid Work Permit must be produced for non-UK nationals where there is no
standard right of employment agreement in place.
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For all other countries where Work is to be performed, the Supplier shall ensure that it meets any
specific legal and or regulatory requirements as appropriate.
D) EDUCATIONAL AND PROFESSIONAL QUALIFICATIONS (IF REQUESTED BY BT AS PART OF A WORK PACKAGE) The
Supplier shall ensure that all documents presented by the Contract Personnel are original copies
and that copies are held on file and available for inspection by BT on request.
E) CRIMINAL CONVICTIONS DISCLOSURE Prior to an offer of employment being made, the Supplier shall
ensure that all potential Contract Personnel sign a statement declaring whether they have any
criminal convictions, or are subject to any ongoing criminal investigations. Where the individual
makes any such declaration, the Supplier shall assess the situation and, if in any doubt, refer the
application to BT for joint review and agreement.
In relation to Work performed on-site in the UK, the Supplier shall ensure that all contract
personnel sign a Criminal Disclosure Certificate that has been issued within the past two years. If
the Supplier fails to ensure that Contract Personnel do not meet this requirement within 30 days of
the start of the assignment, BT shall have the right to remove such personnel from the Contract
without prior notice and the Supplier shall be liable for providing a replacement at its own cost.
F) HEALTH DECLARATION The Supplier shall ensure that potential Contract Personnel sign a health
declaration form sufficient to enable a full assessment of health to be undertaken by the Supplier.
2.2 BT shall have the right of access to all documentation relating to the recruitment process and
to appoint a BT representative to assist and/or monitor the recruitment process e.g. interview
selection, on request.
2.3 The Supplier shall complete a summary checklist confirming that all the above checks have been
made, and appropriate documentation (original) has been evidenced and copies held on file. The
summary checklist shall include as a minimum:
- Candidate Name.
- Line Manager.
- Vacancy Job Title and
BT Work Package, Purchase Order or Project name.
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IN CONFIDENCE
- Photographic proof of identity.
- Proof of residence.
- Proof of right to work.
- Educational and professional qualifications.
- Criminal Convictions Disclosure completed and signed.
- Health Declaration completed and signed.
- Signature and full details of duly authorised Supplier representative to verify the above.
2.4 The Supplier shall ensure that all Contract Personnel assigned to this Contract are
contractually obligated, under their conditions of employment, to notify the Supplier immediately
of any material change in their personal circumstances that may impact on the status of their
employment including, but not limited to, for example: criminal convictions and/or cases pending,
health declaration, right to work in the country where Work is to be performed etc.
3. REFERENCING
3.1 The Supplier shall follow the referencing procedure outlined below at all times. Each item must
be viewed as progressive, failure to comply with each item, in order shown, shall result in
rejection of a potential assignee to the Contract. All Contract Personnel shall be fully referenced
by the Supplier for a period of 3 years in writing.
a) Exceptionally, and only by agreement with BT, where BT requires contract personnel at short
notice (and this cannot be done prior to commencement of assignment) the Supplier must ensure that
verbal references are taken and recorded on file, specifying name of referee, date reference was
taken, responses given and the name of the consultant who took the reference. BT reserves the right
to request evidence that verbal references have been taken.
b) The Supplier shall undertake an interview to establish the background of the potential Contract
Personnel to BT. The Supplier shall investigate the individuals employment history, including
previous employers, nature and periods of work or unemployment e.g. students, housewife or
receiving government benefit. If the Supplier is not fully satisfied at the time of interview and
the information given cannot be substantiated, then the Supplier must reject the individual from
being assigned to the Contract.
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c) The Supplier shall follow up the individuals references by requesting written confirmation from
previous employers. The only exception to this shall be where the previous individuals employer(s)
has been declared as bankrupt. If this is the case, the Supplier shall seek further employment
references and verification of character.
d) Where a character/personal reference is sought, the Supplier must ensure this is obtained from a
person with an authoritative status such as that of a professional or managerial nature. These
references shall be verbally verified, such verbal verification being appropriately recorded and
held on file.
e) If the individual so assigned was a Contract Personnel for an existing client of the Supplier,
the Supplier must seek to ensure the individual has been fully referenced in accordance with this
clause. BT reserves the right to audit any of the above at any time, throughout the duration of the
contract.
f) The Supplier shall complete a referencing certificate for all Contract Personnel assigned to the
Contract. A copy shall be retained in the Contract Personnels work record / personnel file to
complete the audit trail.
4. QUALITY OF CONTRACT PERSONNEL
4.1 Skills and Experience
4.1.1 Contract Personnel must be willing to undertake the full range of responsibilities required
by individual Work Packages/Purchase Orders and in accordance with the full terms and condition of
this Contract.
4.1.2 It shall be the responsibility of the Supplier to provide personnel with the necessary
skills, qualifications, experience and personal qualities in order that they are fully equipped to
undertake the full requirements outlined in the job dimension and individual role as defined by the
BT Work Package/Purchase Order.
4.1.3 The Supplier must show a commitment to equal opportunities in their recruitment to all people
meeting the requirements of the job irrespective of their race, religion, sex, age, marital status
or disability.
4.1.4 All Contract Personnel shall be expected to demonstrate a high level of commitment and
motivation to work well as part of a team, to be measured by periodic individual appraisals
undertaken by the Supplier.
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IN CONFIDENCE
4.1.5 All Contract Personnel deployed against the Contract must meet the necessary standards of
conduct and appearance as reasonably required by BT.
4.2 Individual Appraisals: The Supplier shall issue individual appraisals on its own forms, to
measure the performance and progress of Contract Personnel. These forms shall be issued after the
initial 6 months period and then again at 12 months, and subsequently at twelve monthly intervals.
If the assignment is of less than 6 months, an appraisal shall be issued at the end of the
Assignment. The format and content of the Suppliers individual appraisal shall be approved and
agreed with BT.
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IN CONFIDENCE
SCHEDULE 4 APPENDIX 2 ANNEX 1
IN STRICTEST CONFIDENCE
CRIMINAL DISCLOSURE DECLARATION
Have you ever been found guilty by a court or court martial of any offence or is there any case
against you pending?
Yes
o
No
o
IF YES PLEASE PROVIDE DETAILS:-
SIGNED:
DATE
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SCHEDULE 5 INTENTIONALLY LEFT BLANK
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SCHEDULE 6 IT SERVICES
1 SCOPE OF WORK
1.1 The Supplier shall provide a range of IT Services to BT, and to any BT programmes without
restriction to group or division under this Contact. Supplier shall thus have the right to provide
IT Services to, or for, all BT programmes. Specific requirements and terms of any engagement shall
be detailed in individual Statement of Requirements or Work Packages that may be agreed from time
to time during the Term of the Contract.
1.2
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Software Product Maintenance and Support
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IT related Professional Services
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2nd and 3rd line Software support
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3rd party software development services
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Applications support
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Applications management
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Database administration
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Business analysis
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Databuild
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IT consultancy
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Helpdesk
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IT programme management
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Software maintenance
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IT project managements
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Systems integration
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Technical specialists
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Validation, Verification and
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1.4 The Work shall be performed subject to BTs Statement of Requirements and the Terms and
Conditions of the Contract, including BT Generic Standards and BT Security Requirements.
2 ORDERING PROCESS
2.1 BT specific requirements for provision of IT Services under the Contract shall be detailed in
individual Statement of Requirements produced by the BT project manager.
2.2 At BTs request, the Supplier shall provide a formal quotation, in line with the overall Terms
and Conditions of the Contract, for the provision of Services detailed in the individual Statement
of Requirements. Such quotations shall bear a unique reference for identification purposes.
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2.3 For any time and materials (T&M) based RFQs, pricing information must be provided by the
Supplier using the pricing template attached at Appendix 1 along with any supplementary
information.
2.4 For any fixed price (FP) based RFQs, pricing information must be provided by the Supplier
using the cost information template in Appendix 1.
2.5 Where the Supplier submits a quotation for a Requirement which falls outside of the maximum
prices outlined in paragraph 4 above, the Supplier shall provide detailed reasons supported by
detailed costings.
2.6 A request from BT for a quotation (RFQ) shall not constitute an offer by BT to enter into a
Contract for provision of Services, but is an invitation to the Supplier to submit a proposal to
BT.
2.7 The Suppliers proposal in response to a RFQ shall constitute an offer to BT, which shall be
open for acceptance by BT for a period of 90 days from the date of the proposal.
2.8 In the event that BT accepts an offer, BT shall formally notify the Supplier by issue of an
individually numbered Purchase Order. No commitment shall be deemed to have been made by BT prior
to the issue of a Purchase Order, duly authorised by BT Corporate Procurement Partners.
2.9 In the event that BT rejects an offer, then BT shall not have any liability for any costs
incurred for work done by the Supplier in preparing a proposal in response to a RFQ.
2.10 Work carried out under an individual Purchase Order may be terminated in accordance with the
Condition headed Termination. Termination of Work carried out under individual Purchase Orders
shall not affect the status of Work carried out or to be carried out under other Purchase Orders
let under the Contract.
2.11 The Work shall be performed subject to the BT Statement of Requirements and the terms and
conditions of this Contract.
3 GENERIC CONTRACT PERFORMANCE REQUIREMENTS
3.1 BTs project specific performance requirements shall be defined in the individual Work Package
where required.
3.2 BT and the Supplier shall agree on Service Level Agreements (SLAs) in the Work Package which
may provide for liquidated damages/remedies upon failure to comply with the SLAs as agreed to by
the parties in the Work Package.
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3.3 BT requires the Supplier to measure, document and report performance monthly
3.4 Persistent Failure by the Supplier to meet Performance Requirements or project specific SLAs
as stated in the Work Package, , shall result in the Supplier being in breach of Contract (but not
necessarily material breach) and BT shall be entitled to recover Liquidated Damages in accordance
with the Condition of Contract entitled Default and Liquidated Damages. Where BT contributes to any
delay or failure of the SLA, project time-scales will be revised to take account of the impact of
BTs contribution to the delay or of the failure of the SLA. Liquidated Damages will then be
recalculated to take into account BTs contribution to the delay.
4 MANAGEMENT INFORMATION
In addition to the Performance Monitoring reports and Governance reporting, the Supplier shall
provide the following information to the BT Commercial Contact on a monthly basis in the format
advised by BT:
- Performance against budget including total billed to date by project and job, balance
outstanding against order value by project and job, value of any applicable discounts;
- Number of contractors compared to the Suppliers FTE by project;
- Meetings with BT project managers and new prospects discussed;
- Resource utilisation including total number of resource deployed by
project;
- Churn of resource against BT projects
- Projects/Work in delay;
- Status reports on skill-sets register.
5 HOURS OF SERVICE
5.1 Unless otherwise specified in the Statement of Requirements or Purchase Order, the Supplier may
provide the Services during the normal offshore working day.
5.2 Where there is an operational need identified in the Statement of Requirements for Work
performed offshore to be performed according to UK Working Day hours this will be at no extra
charge to BT.
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6 THIRD PARTY SOFTWARE LICENCE
The Supplier will provide generic hardware and all software required for performance of the
Services subject to the terms of Suppliers Hardware and Software Policy to be provided by Supplier
and mutually agreed upon by BT and Supplier.
6.1 In the event, the Supplier does not have the relevant licences; the Supplier shall use
reasonable endeavours to procure the relevant licences with immediate effect to enable them to
discharge their obligation during the performance of the Services for BT. All cost sustained in
procurement of these licences shall be borne by the Supplier being part of its obligation under
this Clause, or as agreed in writing by the parties.
7 QUALITY REQUIREMENTS
7.1 The Supplier shall work to a Quality Management System that meets the requirement of BS/ISO9000
or equivalent, such as CMMiL3 or above. A body approved by any of the National Accreditation
Councils must issue the certificate, if applicable.
7.2 BT requires its Suppliers to have recognised industry specific quality accreditation (e.g. SEI
CMM, ISO TickIT. BS15000). The Supplier shall provide details of its current accreditation.
7.3 The Supplier will carry out and be able to supply evidence of periodic quality checks (at least
quarterly) to ensure the consistency of delivery of the Supplies, and the provision of management
information as agreed.
7.4 If the Supplier, having had at the Commencement Date a Quality Management System certified to
comply with the requirements of BS/ISO9001 (EN 29001 or other equivalent) by an accredited
certification body, ceases to maintain the certification, then the Supplier, for avoidance of
doubt, shall be in breach of the Contract. (This shall also apply to any sub-contractors that may
be used).
7.5 At the end of each Work Package the supplier will carry out and document an End of Stage
assessment and, following live implementation, will contribute to the Post Implementation Review
(PIR). Lessons learnt for both reviews must be applied to future work packages.
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8 PRICING AND PRICING ARRANGEMENTS
8.1 In consideration of the Supplier undertaking the Work, BT shall pay the Supplier such amounts
as specified in the Purchase Order.
8.2 For T&M based Work, the amount to be paid by BT for the Work shall be calculated in accordance
with the day-rates, expenses and discount formula set out in the agreed Pricing Schedule.
8.3 For T&M based work, the Suppliers quotation in response to a RFQ from BT shall map resource to
be utilised for the Work to the Skills Framework for the Information Age (SFIA) skills categories
and levels, including day-rates contained in the Pricing Schedule and the quantity of resource to
be utilised for the Work.
8.4 For fixed price based work, the Supplier, on BTs request shall provide adequate information as
to allow BT to validate the quoted price, to ensure that the price for such fixed price work is
fair and reasonable. The information that would be provided could include effort breakdown or a
level of price breakdown, rates applied, price for third party components e.g. hardware, third
party software, risk provisions etc. Any request for such information by BT shall be made prior to
the award of work to the Supplier. For the avoidance of doubt, BT is not entitled to request
information regarding Suppliers internal cost structures and / or information related to the
Suppliers margins or information that attempts to achieve such result.
8.5 For the Supplier to accept entirely the necessity of this Contract to deliver value for money
for BT whilst at the same time enabling a fair return to the Supplier. Supplier shall demonstrate
value for money and the Supplier shall work closely with BT prior to Work Package and or Purchase
Order award to develop an appropriate mechanism which may include one of the following:
Benchmarking, SLA, Performance Scorecard or Partnership Scorecard according to Contract Performance
Requirements, value for money model etc., and during the life of the Contract to report on
performance against the chosen methodology
9 NOT USED
10 PRICE SATISFACTION
10.1 Where any Work is undertaken by the Supplier on a non-competitive basis, the Supplier
undertakes to provide information in accordance with Appendix 1.
11 INTENTIONALLY DELETED
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12 CONTINUOUS IMPROVEMENT
12.1 Maintenance and support contracts will target year on year price reductions through efficiency
gains. The Supplier shall demonstrate and detail how this will be achieved for the following
Financial Year 2 months prior to the beginning of the following Financial Year.
12.2 On an individual Work Package basis BT may require the Supplier to provide to BT a Performance
Indicator (PI) for the ensuing year on or before the first anniversary of the commencement of any
Contract, and on each successive anniversary for the duration of the Contract. The PI shall be a
stretching, but achievable objective that represents an improvement over the Performance Target.
For each successive year for the duration of the Contract following the first anniversary of the
commencement of the Contract, the Suppliers actual achieved performance shall be calculated as an
average of such performance in each component eight quarters) and where such performance so
calculated exceeds the relevant Performance Target that Performance Target shall be amended to the
actual achieved level.
13 EXIT TRANSITION CO-OPERATION
13.1 If the Contract is terminated by BT pursuant to Clause 5 (Performance Monitoring) above, or
not renewed with the Supplier beyond the initial Term, and if required by BT, the Supplier shall
co-operate fully with BT and with any third party nominated by BT, at no additional cost to BT,
except for undisputed invoices, in facilitating the provision of Replacement Work. Such
co-operation shall include, without limitation:
13.1.1 the supply by the Supplier of such Suppliers Background Information as is reasonably
necessary to enable Replacement Work to be provided in a similar manner to that in which Supplies
had or should have been provided by the Supplier, subject to the confidentiality provisions of the
Contract; and
13.1.2 the granting by the Supplier to BT or, at BTs option, a third party, of a licence to use
such Suppliers Background Information solely in relation to the provision of Replacement Work for
a period expiring five years after the date of termination (or part termination) of the Contract;
and
13.1.3 the undertaking by the Supplier of reasonable endeavours to procure for BT or BTs nominated
contractor the grant or
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transfer of all licences and permissions under third party Intellectual Property Rights which may
from time to time be reasonably necessary for the provision of Replacement Work to the extent that
such third party Intellectual Property Rights have been used in the provision of Supplies by the
Supplier.
13.2 For the purpose of this clause (Transition Co-operation) Suppliers Background Information
shall mean all Information owned or controlled by the Supplier or companies in the same group (as
defined by s.53 Companies Act 1989) as the Supplier.
13.3 To ensure a smooth transition at the end of the Contract, BT requires the Supplier to maintain
Documentation relating to the processes and procedures used in the execution of the Contract for
the Work for the lifetime of the Contract.
13.4 For the avoidance of doubt, such Documentation shall be subject to the Condition titled
Intellectual Property of the Conditions of Contract schedule.
13.5 Where the Supplier is the gaining Supplier:
13.5.1 As part of any such transition, BT may require the gaining Supplier to act initially as the
Prime Contractor and take full contractual responsibility for provision of the Work, prior to the
losing Supplier being managed out.
13.5.2 The Supplier shall complete transition of the Work within 3 months of the commencement of
the Work
13.5.3 Where the Supplier is transitioning Work from an incumbent supplier (this could be BT or
another external supplier to BT), the Supplier shall detail the support requirements needed from
the incumbent supplier to complete the transition. This should include but not be limited to:
number and type of resource, period required, location, availability etc.
13.5.4 The gaining Supplier shall be responsible for the continuity of service and management of
any resultant transition when gaining new Work either from BT or an existing 3rd party Supplier.
13.5.5 Transition of new Work shall be at the gaining Suppliers risk and expense.
13.5.6 The gaining Supplier will be required to provide a top level plan which shall address the
following areas:
- Key dates/timescales
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- Documentation
- Sharing/release of information
13.6 Where the Supplier is the losing Supplier:
13.6.1 shall commit to working with BTs gaining Supplier to ensure successful transition of Work
in the event of them not being retained as BTs Supplier for a specific area of Work.
13.7 Any transition related costs shall be subject to audit and validation by BT.
13.8 The Supplier agrees to vacate BTs premises within a reasonable period and deliver to BT those
BT assets in the Suppliers custody.
13.9 The provisions of sub-clause 6.1. above shall survive the termination of the Contract.
14 EXIT COSTS
14.1 In some cases the Supplier may be required to transition Work to BT or another external
supplier to BT. Where the existing contractual arrangement for the Work allows or does not prohibit
exit charges, the Supplier shall include detailed exit costs and an exit strategy plan within their
quote for each Work Package.
15 ACCEPTANCE
15.1 In this Condition:
Acceptance Test(s) means formal testing to determine if the Supplies satisfy the criteria for
Acceptance for BT to Accept the Supplies or any part of them, including without limitation, any
First Repeat Test or Second Repeat Test as defined in this Condition.
Certificate of Service means a certificate issued by BT in respect of Supplies or any part of the
Supplies, which, although having failed to pass the Acceptance Tests, BT requires to be put into
commercial service. Commercial Service shall be construed accordingly.
15.2 The Supplier shall provide BT with written Acceptance Test methodology in respect of the
Supplies on or before [as agreed in Work Package and/or Purchase Order]. BT shall approve or reject
such methodology within 14 days of receipt. If rejected, the Supplier shall
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amend the methodology as necessary until approved by BT (such approval not to be unreasonably
withheld).
15.3 Supplies shall not undergo any Acceptance Test until:
(a) Supplies have passed any required off-site tests;
(b) the Supplier can demonstrate to BTs reasonable satisfaction following its own testing that the
Supplies should pass the Acceptance Tests;
(c) BT has approved the Acceptance Test methodology; and
(d) any required inter-working is achieved and combinations of hardware and software have been
fully integrated and proven as a system.
15.4 The Supplier shall give at least 14 days written notice to BT of Supplies being ready for
Acceptance Tests.
15.5 Acceptance Tests shall take place in the presence of BTs nominated representative(s).
15.6 If Supplies pass the Acceptance Tests, BT shall issue to the Supplier an Acceptance
certificate, which shall, if Supplies are being tested severally, not constitute an admission that
Supplies have been completed in every respect. The Acceptance procedure shall be repeated for each
portion of the Supplies.
15.7 If any Supplies fail the Acceptance Test:
(a) BT shall notify the Supplier in writing accordingly within 10 days of completion of the tests,
stating the reasons for the failure; and
(b) the Supplier shall promptly make such alterations to Supplies as are necessary to pass repeat
Acceptance Tests within 10 days of such notice (the First Repeat Test); and
(c) if Supplies fail the First Repeat Test, the Supplier shall promptly make such further
alterations to Supplies as are necessary to pass a further repeat Acceptance Test (the Second
Repeat Test) within 10 days of notice of failure of the First Repeat Test.
15.8 If any Acceptance Test is not completed by the due date, or Supplies fail the Second Repeat
Test, BT may (at its option):
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(a) bring Supplies into Commercial Service at any time and/or claim liquidated damages for delayed
Supplies as set forth in the Work Package; or
(b) terminate the Contract from the date specified by written notice to the Supplier.
15.9 If any Acceptance Test is not completed by the due date or Supplies fail any Acceptance Test,
BT shall, upon giving written notice to the Supplier, have access to Supplies for its own testing
and evaluation purposes but shall take reasonable care not to hinder the Supplier in achieving
Acceptance, although the Supplier shall be responsible for any delay.
15.10 If Supplies fail any Acceptance Test, BT may put them into Commercial Service and issue a
Certificate of Service, which shall include a list of remaining portions of Supplies and all
relevant deficiencies to be remedied by the Supplier as are then known to BT.
15.11 Supplies put into Commercial Service on any date:
(a) benefit from the provisions of the Condition headed Warranty as if the period of such
warranty had commenced on such date and had been extended by the period between such date and
Acceptance of all Supplies; and
(b) shall be made accessible to the Supplier for remedial work to achieve Acceptance and be at the
Suppliers risk.
15.12 During Commercial Service, the Supplier shall, if required by BT, and at the Suppliers own
additional cost, work outside its normal working hours in order to remedy any deficiencies.
15.13 BTs rights under this Condition are without prejudice to any other rights or remedies it may
have, and to any of the Suppliers obligations.
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SCHEDULE 6 APPENDIX 1 (PRICING)
1. IT SERVICES PRICING PRINCIPLES
The following principles shall be applied to prices quoted by the Supplier for IT Services provided
under the Contract. In order to demonstrate their compliance with these principles, the Supplier
will provide information to BT to support their quotation, as applicable.
1.1. COST TRANSPARENCY
The Supplier shall provide corporate level general financial information as follows:
1.1.1. Subject to the confidentiality provisions in this Contract the Supplier shall provide the
following information at a corporate level for benchmarking purposes. This shall be provided to the
extent of the publicly available information as published in Annual and quarterly financial
statements.
ELEMENTS
Revenues
Gross Profit
Sales & Marketing Expenses
General and Administrative Exp
Research & Development costs
Amortizations Operating Income
(Note : Transparency / ensuring an appropriate price for individual projects is covered by Section
2.2)
1.1.2. All day rates shall be based on the Suppliers identified standardised Cost Recovery
Assumption.
For the avoidance of doubt, Cost Recovery Assumption is defined as the number of days assumed by
the Supplier that they will need to charge for the resource to fully recover the cost of the
resource, including pay, benefits, overheads and margin. The Cost Recovery Assumption makes
allowance for all leave entitlement, including annual leave, public holidays and casual leave, plus
any training and sick
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absence, where the Supplier cannot charge the customer for the resource.
[***]
All T&M engagements shall use a common currency of Person-days of effort. Person-days of Effort
shall mean the total number of days required to successfully deliver the Work Package, irrespective
of the number of resource used, inclusive of any shift working or overtime.
1.2. VALUE FOR MONEY
For each proposal it presents the Supplier shall demonstrate the value of its offer to BT:
1.2.1. For fixed price (FP) based Work, BT may assess the value of the Suppliers offer by
benchmarking the Suppliers quotation to a comparable T&M based price, [***] with an expectation
that FP Work will be price beneficial to BT. In accordance with clause 8.4 in Schedule 6 the
Supplier will cooperate with BT in providing sufficient information for BT to assess the value of
the Suppliers offer.
1.2.2. The Supplier shall co-operate with BT to provide world class pricing and value for money in
accordance with the Condition titled Best Price in Schedule 6 of the Contract;
1.2.3. [***]
1.3. 90:10 PRINCIPLES
All projects will maximise off shore resource to provide the most cost effective pricing and
explain the justification for on-shore resources at the time of, and as reflected in, the quote
submission or Work Package.
1.3.1. For time and materials (T&M) based Work, the Work shall be based on an assumption that
[***]% of the Suppliers overall engagement on Work under the Contract, by resource numbers, shall
be performed offshore ([***]). Exceptions to the [***] principles may be agreed by the parties on a
case by case basis at the time of agreement of the applicable Service.
1.4. SHORT-TERM ONSHORE WORK
1.4.1. Where the Supplier cannot perform the work within the planned onshore resource allowance as
agreed between the parties in a Work Order due to unplanned exigencies or emergency requirements,
and required placement of resources for short period Onsite, [***]
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1.4.2. The total cost for the onshore assignment shall not exceed the published onshore T&M rate of
the resource for the duration of the assignment.
1.4.3. The Supplier shall be responsible for air travel and associated visa or work permit expenses
1.4.4. Short-term shall be defined as less than 1 month. Beyond 1 month, the resource allocations
in the Work Order shall be modified through Change Control
1.5. All prices are to be in GB Pounds sterling and in line with
Schedule 12
(Pricing)
1.6. YEAR ON YEAR COST REDUCTION
Maintenance and support contracts will target year on year price reductions through
efficiency gains.
1.7 [***]
2. PRICING MODELS
BT may request the Supplier to provide a quotation based on one or more of the pricing models
detailed below for any Work Package requirement.
The Supplier should provide a quote on the basis of the pricing model identified by BT, but may
offer an alternative model for consideration by BT in addition to that requested by BT.
2.1. TIME AND MATERIALS BASED PRICING
2.1.1. The Supplier shall provide a rate card based on a standard definition of roles, mapped to
the Skills for the Information Age (SFIA) matrix in terms of Category, Sub-Category, Skill and
Level. The rate card shall detail day rates for all roles that may be provided by the Supplier
under the terms of the Contract. The rate card shall be provided in the format shown in Table 1
below.
(For information on the Skills Framework for the Information Age
(SFIA)
matrix please refer to the SFIA web-site at: http://www.SFIA.org.uk).
2.1.2. For T&M based pricing the Suppliers quotation shall use the rates specified in Suppliers
Contract T&M rate card set out in Table 1 below. Such rates shall be the maximum rates that the
Supplier may charge for T&M based Work under the Contract for the first Annual Period.
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2.1.2.1. For Go To Market opportunities, the T&M rate card shall be regarded as indicative and the
actual rates shall be agreed on an opportunity basis.
2.1.3. For individual T&M based quotations for work packages defined by BT, the Supplier shall:
2.1.3.1. provide a maximum (Capped) price for complete performance of the Work as defined in the
Work Package, excluding Change Control.
2.1.3.2. provide price build information to enable maximum price calculations for individual work
packages; such information shall include the resource profile and cost for the Work, estimated
business expenses, infrastructure charges (if applicable) and any specific chargeable items not
included elsewhere;
2.1.3.3. provide pricing information in a standard T&M pricing template provided by BT;
2.1.3.4. provide pricing that ensure the overall engagement conforms to
[***] principles; subject to 1.3.
2.1.3.5. Provide a statement of the level of risk and flexibility, in percentage terms, that has
been built into the Maximum price for the Work.
2.1.4. T&M based Work shall be charged only for the number of Person-days of Effort used in
performance of the Work up to the maximum agreed Person-days of Effort for the Work Package. BT
shall pay no more for the Work than the Capped Price estimated by the Supplier. Any change to the
Capped Price for the Work shall be subject to review and prior authorisation by BTs Commercial
Contact via change control.
2.1.5. All T&M rates to be exclusive of VAT and Business Travel and Expenses, [***]
2.1.5.1. [***]
2.1.6. All day rates shall be based on the principle of a professional working day, assuming a
normal 8 hour working day;
2.1.6.1. [***]
2.1.7. For the avoidance of doubt, Business Travel and Expenses does not include travel to and from
the normal place of work;
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
2.1.8. All Business Travel and Expenses shall be calculated in accordance with BT Policy for BT
Business Travel and Expenses attached at Appendix 1;
2.1.9. Any onshore assignments for offshore resource of more than 3 months may be charged at
onshore rates. [***]
2.1.10. The Supplier should clearly demonstrate how BT will benefit from any additional efficiency
which is to be achieved, such as any economies of scale benefits that can be accrued from increase
in volume of Work and resource provided, or revised scope of work.
2.1.11. Any T&M engagement is based on the team profile agreed with the BT Project Manager at the
commencement of the Work. Unless the resource team had resource nominated as Key Personnel, the
Supplier shall be responsible for maintaining the agreed team profile without increase cost to BT
for the duration of the Work irrespective of any grade increase of the individuals providing the
Work. In the event of renewal of the Work Package, no increase in grade of the roles within the
team profile shall be permitted without prior agreement of the BT Project Manager.
2.1.12. BT shall expect the supplier to provide resource onshore for any hot housing associated
with a 90 day development cycle. Such resource to be deployed in accordance with the Short-term
Onshore Work principles [***].
2.1.13. In the event that the hothouse goes beyond [***] as a result of the Suppliers inability to
deliver BTs requirements BT shall not be charged for the additional time [***].
2.1.14. In addition to this, the Air fare expenses and initial travel to Hot house location may be
charged as expenses up to a maximum cap of [***] per person. Any higher amounts if incurred shall
be charged with prior approval from BT.
2.2. FIXED PRICE
Where the Supplier provides a Fixed Price (FP) quotation for a Work Package, the following shall
apply:
2.2.1. For multi-year FP engagements, payments shall be made monthly in arrears;
2.2.2. For short-term FP engagements, payments shall be made in arrears against agreed deliverables;
2.2.3. All prices are to be fixed in Pounds sterling, and in line with
Schedule 12 (Pricing)
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
2.2.4. Where the FP proposal covers a multi-year engagement, each price shall be detailed as shown
in Fig. 1
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TOTAL
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FP
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Q1
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Q2
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Q3
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Q4
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P.A.
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YEAR 1
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L
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L
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YEAR 2
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L
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L
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YEAR 3
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TOTAL
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2.2.5. Any items or services not included in the Fixed Price must be clearly identified, and
pricing information detailed separately.
2.2.6. The Supplier shall provide sufficient data with each FP proposal for benchmarking purposes,
to demonstrate adherence to the pricing principles defined in section 1 of this Schedule. Such
information shall include:
2.2.6.1.1. total effort (in number of Person-days of Effort)
2.2.6.1.2. resource profile of team (in terms of numbers and roles)
2.2.6.1.3. risk/contingency assumptions included within the total number of days
effort
2.2.6.1.4. offshore:onshore ratio of resource
2.2.6.1.5. Project Plan, Milestones, quality gates and Acceptance Criteria
2.2.6.1.6. A price breakdown including the following as applicable:
- Resource element
- Non-resource element
- Infrastructure element
- Risk margin
- Other elements
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ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
Table 1. [***]
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
BT POLICY FOR BT BUSINESS TRAVEL AND EXPENSES
GUIDELINES FOR CONTRACTORS PERSONNEL
The provisions of this policy and any information relating to it, e.g. rates and charges, are
strictly confidential and subject to the confidentiality conditions of the Contract.
1. TRAVEL
The cost effectiveness and appropriateness of making the journey by air, sea, rail, or road should
be considered.
Air
For journeys by air, STANDARD/ECONOMY CLASS SHOULD BE USED.
For journeys with carriers in Africa and for travel within Central and South America, travel should
be first class where available.
The policy above sets out the class of travel to be used. Exceptionally where it is considered that
a higher class of travel is appropriate, for example where it is operationally essential and the
business need determines it is cost effective, this may be authorised by the BT Project Manager.
Rail & Ferry
For journeys by rail, STANDARD CLASS should normally be used. Exceptionally on InterCity routes
where a journey is being made at peak travelling time and is of at least two hours duration for
each individual journey, the BT Project Manager may authorise first class travel in advance if it
will provide significantly greater privacy and quiet for people working on the train.
First Class travel may also be authorised when:
- an overnight Sleeper is the most cost effective mode of transport and is as an alternative to an
overnight stay
- upgrading during the journey is appropriate e.g. during transport difficulties, because of
changes in travel plans and / or business needs or when standard class accommodation is full.
Reasonable judgement should be made at the time
- special tickets are available which are at the same price or cheaper than standard class.
IN CONFIDENCE
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SUBJECT TO CONTRACT
- where the two hour journey criterion is not met but a person is joining a BT colleague, who is
authorised to travel first class, to work on the train.
The cost of necessary seat reservations will be reimbursed.
For ferry travel advantage should be taken of multiple tickets where they are available.
Road
The shortest most practical route must be used for all journeys. Deviations from the route to pick
up or drop off authorised passengers may be claimed. In addition to the appropriate rate of
mileage, garaging, parking fees and tolls will be reimbursed. Receipts should be obtained wherever
possible. Driving and parking fines and penalties will not be reimbursed.
Mileage Rates
Mileage may only be claimed for travel in connection with BT business specific to the Contract.
[***]
Exceptionally, and only with prior line manager authorisation, higher rate mileage may be claimed
for short journeys of less than 30 miles return. In these instances the following mileage rates
will apply:
[***]
Hire Cars
Hire cars should be used only in connection with BT business specific to the Contract. Vehicles are
not to be used for private purposes. However incidental private use is allowed e.g. to obtain a
meal whilst working away from home. The business mileage fuel costs and hire charges incurred will
be reimbursed.
Generally only vehicles up to 1.4 litres capacity should normally be hired. Vehicles with a greater
capacity may only be hired where a justified business need is identified e.g. there are three or
more passengers or significant luggage or equipment is to be carried or a particularly long
motorway journey is involved.
Taxis
Taxis should only be used exceptionally, where due to the time of travel, nature of journey,
personal safety considerations or the carriage of heavy luggage, public transport does not provide
a reasonable option. To avoid surcharges and waiting time, taxis should not normally be pre-booked.
Receipts should be obtained in all instances.
2. OVERNIGHT ACCOMMODATION
IN CONFIDENCE
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SUBJECT TO CONTRACT
The actual, reasonable receipted costs of hotel accommodation, breakfast and evening meal (table
dhote, hotel restaurant or equivalent) may be claimed. Personal expenditure such as bar bills,
videos and newspapers will not be reimbursed.
For longer term stays, consideration should be given to more cost effective arrangements e.g.
rented accommodation. In such cases, the principle of reimbursement of reasonable expenditure
applies. Reimbursement may cover costs such as rent, council tax, utility charges and appropriate
meals out.
3. OTHER EXPENSES
All other expenses including but not limited to the purchase of equipment or software, hospitality
expenditure or any form of expenditure not directly incurred by the contractor must be claimed
using the appropriate BT internal process.
4. AUDITING OF EXPENSES
The Supplier shall make available their full reconciliated monthly expense statements within 8
weeks of the end of the month in which such expenses have been incurred.
Evidence of expenses incurred for all amounts, mandatory for greater than L5, shall be made
available for BTs inspection.
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
SCHEDULE 6 APPENDIX 2 WORK PACKAGE TEMPLATE
Contains Guidance notes on putting together a Work Package. The sections highlighted pink are
mandatory for completion.
CONTRACT NO: [
]
SUPPLIER QUOTATION REFERENCE: [
]
[TITLE] (the PROJECT)
1. DEFINITIONS
[Please insert here any additional definitions used for the purposes of the Work Package. Those
definitions set out in the Contract shall continue to apply.]
2. PROJECT BACKGROUND
[Provide a brief overview of the Project. This enables someone unfamiliar with the engagement to
understand the context]
3. DESCRIPTION AND SCOPE OF SERVICES
3.1 TO BE COMPLETED BY BT [REFER TO STATEMENT OF REQUIREMENTS DOCUMENT IF PROVIDED SEPARATELY]
[Provide here full details of the Services (as that term is defined in the Contract) to be
performed by the Supplier.
The Services must be described in enough detail so that someone unfamiliar with the Project could
understand what both parties obligations are.]
3.1.1 HOURS OF SERVICE
[BT should identify the Hours of Service including any week-end or Bank Holiday requirements
(Indian and UK).]
3.1.2 SHIFT PATTERNS
[Shift patterns to be detailed as appropriate.
The BT Project team should include a high level process flowchart as appropriate.]
3.2 TO BE COMPLETED BY THE SUPPLIER AS PART OF THEIR RESPONSE.
3.2.1 UTILISATION OF SUPPLIERS BACKGROUND INFORMATION
IN CONFIDENCE
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SUBJECT TO CONTRACT
[Supplier must set out details of the Suppliers Background Information that the Supplier believes
it will utilise during the performance of the Services (and production of the
Services/Deliverables) under this Work Package. In the event that the Supplier becomes aware,
during the course of the Work Package, that additional pieces of Suppliers Background Information
will be used in the provision of the Services/Deliverables the Supplier must draw these to BTs
attention upon delivery of the Deliverables in question.]
3.2.2 TRANSFER OF DATA
In the event that the Services include cross-border data flows. Please note that:
(i) The Supplier must advise BTs Commercial Contact in writing, in advance, of the manner by which
the Supplier intends to store or process BT Personal Data (Condition
);
(ii) This is particularly important if any of the BT Personal Data is to be exported outside the
European Economic Area (Condition
), as defined in the Contract.
must notify BT in advance, in the relevant Work Package, of [Suppliers] intention to export BT
Personal Data outside the European Economic Area;
(iii) BT must give its prior written consent to the exportation of BT Personal Data (i.e. any BT
data, not just sensitive personal data) outside the European Economic Area (Condition
)). Such consent must be confirmed in writing by BT prior to commencement of
any Services through the execution of Appendix A as part of this Work Package.
IMPORTANT NOTE:
Please note that in the event of cross-border data flows the parties shall need to sign up to and
agree to be bound by the EU Model Clauses at Schedule 3 to the Contract
[If this Work Package is likely to include Services that result in cross-border data flows please
contact Group Legal Procurement Team for guidance.]
IN CONFIDENCE
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SUBJECT TO CONTRACT
4. DELIVERABLES AND TRAINING IN DELIVERABLES
4.1 SUPPLIER DELIVERABLES
[Provide full details of the Services (as that term is defined in the Contract) (if any) and
Software (as that term is defined in the Contract) (if any) to be delivered by the Supplier as part
of the Services. If there are no deliverables please state No Deliverables/Software will be
provided by the Supplier under this Work Package. It should be specified in the Work Package
whether the Supplier is primarily responsible for Deliverable and where BT is primarily
responsible, e.g. where the Suppliers role has been to assist or support BT.]
[If training in the Deliverable(s) is to be performed by the Supplier as part of the Services, then
detail it here. If not applicable put No training in the Deliverables will be supplied by the
Supplier under this Work Package.]
4.2 BT DELIVERABLES
[Provide full details of the deliverables (if any) and software (if any) to be delivered by BT as
part of the Services that the Suppliers Services are dependent upon. Also include details of BT
and/or third party deliverables and software in Section 15 (BT Obligations).]
5. BT PROVIDED ITEMS
[Please insert details of any Equipment (as such term is defined in the Contract) that the Supplier
is receiving from BT (including BT Supplied Items), documentation e.g. process documents, customer
data, scripts etc.]
[Please also insert details of any Third party software that the Supplier is receiving from BT.]
[In addition please include details of any Work Package specific training that BT will provide the
Supplier including duration, people numbers etc.]
6. SUPPLIER PROVIDED EQUIPMENT
[Please insert details of any Equipment (as defined in the Contract) the Supplier is providing to
BT]
7. MAINTENANCE AND SUPPORT
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
[If Maintenance and support of Deliverables is to be performed by the Supplier as part of the
Services then detail here, if not applicable then put, No Maintenance or Support for Deliverables
created under this Work Package is provided by the Supplier under this Work Package.]
8. BT SYSTEMS
[You will need to ensure that BT has adequate LEAD TIME for it to provide all necessary
Authorisation and related written consents regarding connection to BT Systems, prior to Project
commencement. This is likely to take at least a week. Check with BT Project Manager on the security
procedure to be followed to obtain Authorisation and continue to have Access. Include the BT
Security Contact in these discussions.]
The Supplier must at all times comply with the BT Security Policy in force at the time of the Work
Package. BT must promptly supply this to the Supplier. The Supplier may decline to proceed with a
Project if compliance with the BT Security Policy is, in the Suppliers opinion, not practical or
feasible.
(Please note that the BT Security Policy may require the parties to execute an Interconnect
Agreement prior to connecting to BT Systems.)
The Supplier must obtain prior written consent from the BT Security Contact prior to connecting any
equipment not supplied by BT to any BT LAN port, e.g. when connecting Supplier laptops to a BT LAN
port.
The Supplier must NOT commence work until Authorisation is granted. If you have any queries
regarding the process to be followed to obtain Authorisation please contact the Group Legal
Procurement Team.
Include in the Work Package a full list of BT Systems that will be used by Contract Personnel (ie
[Supplier] personnel and subcontractors) during the Project. Please note that this must include ANY
connection to BT Systems, for example in order to print or receive e-mail. If you are unclear about
what should be included in the list of BT Systems please raise this with the BT Security Contact
and obtain advice in writing.
9. NETWORK AND IT REQUIREMENTS
[Include any IT requirements including any bandwidth requirements and specific disaster
requirements.]
10. TIME TABLE
[If the Services are to be provided within a mutually agreed time then detail the timetable for the
performance of the Services (and, if applicable, dates for delivery of Deliverables). There should
be a start date and there may or may not be a target completion date.
IN CONFIDENCE
Page 107 of 126
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
Where appropriate a formal project plan should be developed with the Supplier and appropriate
remedies agreed for failure to meet agreed time-scales.]
11. SITE
Services relating to this Work Package shall be carried out at the following site(s):
BT or Supplier to insert details of where the Supplier will perform the Services and if applicable
deliver any Deliverables.
[This may be left blank for the Supplier to present its recommendations but must be completed prior
to final agreement and placement of the Work Package].
12. ACCEPTANCE
[Acceptance procedures should be inserted, and the process the parties will undertake to determine
whether the criteria have been met if they have been agreed in advance of work commencing under the
Work Package.
[Acceptance criteria and procedures need to be specified where the Supplier will receive
deliverables from third parties and/or BT.]
13. PERSONNEL
13.1 SKILL SET REQUIREMENTS
[BT should identify the specific skills required to perform the Services including any formal
qualifications and / or accreditation requirements.]
13.2 CONTACT DETAILS
BTs Commercial Contact will be [
]
BTs Programme Lead/point of escalation will be [
] (if applicable)
BT Project Manager will be [
]
BTs Security Contact will be [
]
The Suppliers Work Package Contact will be [
]
The Suppliers Programme Lead/point of escalation will be [
] (if applicable)
13.3 KEY PERSONNEL
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
The Personnel identified below are key to the Services required and are classified as Key Personnel
(to be agreed between the Parties) as described in the Contract.
- BT Key Personnel
- [List]
- Supplier Key Personnel
- [List]
14. REPORTING
[Detail here the specific reporting requirements e.g. timescales, deliverables, SLA/KPIs etc., and
the frequency at which the Work Package representatives are to meet including any project
management arrangements.]
15. CHARGES
[Detail here the pricing matrix and methodology against which the Supplier is required to submit
prices for Services and how this is calculated. Include details of what is included in the Price
and anything that is specifically excluded. Note that all costs exclude VAT.]
16. BT OBLIGATIONS
[Specify any particular obligations on BTs part i.e. what the Supplier is dependent upon. Include
details of BT and/or third party deliverables and software.]
17. RISKS AND ASSUMPTIONS
[List all descriptions and conditions which may have a material impact upon the Suppliers ability
to meet its obligations.]
18. QUALITY STANDARDS & ASSURANCE, AND CODES OF PRACTICE
[BT to include any Work Package specific quality standards, codes of practice etc.]
19. PERFORMANCE MEASUREMENT
[Work Package specific Service Levels (SLAs) and Key Performance Indicators (KPIs) to be
identified here. Service Credits shall normally be applicable to KPIs. Consider risk and reward
schemes as appropriate to drive performance.]
20. ADDITIONAL
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
[Please insert here any additional points that are not covered above including any additional
variations to the Contract.]
21. WORK PACKAGE PRICE
[ALL PRICING INFORMATION TO BE PRESENTED IN LINE WITH THE CONTRACT PRICING SCHEDULE, UNLESS
OTHERWISE AGREED]
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
SCHEDULE 6 APPENDIX 2 WORK PACKAGE TEMPLATE
APPENDIX A [ONLY REQUIRED WHERE PERSONAL DATA BEING TRANSFERRED OUTSIDE THE EEA
Under the terms of the Contract and the Work Package hereof, the Supplier has requested BTs
consent to [subcontracting/offshoring] certain services to
[
] who are located at [
]. The parties have worked together to ensure that data
protection and IT Security are acceptable before commencing.
The parties have, in relation to various data protection and security matters concerning the
sub-contracting/offshoring of these services, reached agreement and now wish to confirm the terms
on which BT provides its consent.
AND IT IS AGREED AS FOLLOWS:
WITH EFFECT FROM EFFECTIVE DATE OF THE WORK PACKAGE HEREOF, THE FOLLOWING TERMS AND CONDITIONS
SHALL FORM A BINDING PART OF THE WORK PACKAGE AND COMPLEMENT CLAUSE 3.2 ABOVE.
a) Consent
BT hereby consents under Clause 3.2 of the Work Package [Title of the Project] above to the
services as described in [Appendix___/Clause 4 above] (the Work Package Services) to this Work
Package and provided under the ContracT being subcontracted/offshored to [
] and located
in [India].
The parties acknowledge and agree that certain personal data which forms part of the personal data
described in Condition with the heading Protection of Personal Data of the Contract is processed
in connection with these Work Package Services (Data) and will be transferred to [
]
located outside the EEA. Notwithstanding that the Data will remain stored and hosted in the United
Kingdom, the parties further acknowledge and agree that the Eighth Data Protection Principle under
the Data Protection Act 1998 is relevant to the processing of the Data. Further the parties have
agreed to be bound by the terms of the Commission Decision of 27th December 2001 on standard
contractual clauses for the transfer of personal data to processors established in third countries,
under Directive 95/46/EC as evidenced in Schedule 3 of the Contract. These standard contractual
clauses have been replicated and signed by both parties and form Annex 1 to this Work Package. BT
reserves the right to substitute terms and conditions relating to the transfer of personal data to
processors established outside of the European Economic Area if, and by agreement of the parties,
(such agreement not to be unreasonably withheld or delayed), such terms are commercially more
acceptable to the parties and provide the same level of protection for personal data.
B) OBLIGATIONS OF THE SUPPLIER
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
The Supplier acknowledges that BT is the data controller of the Data for the purposes of the Data
Protection Legislation.
The provisions relating to confidentiality in Condition [
] of the Contract shall apply
in relation to the Suppliers processing of the Data. In particular, the Data shall not without the
prior written consent of BT, be disclosed or transferred to any person other than to [
] or their personnel who have a valid reason for viewing or holding the Data.
The Supplier undertakes to procure that all such personnel in [India] who will be viewing or who
will have access to the Data in the course of providing services to BT will enter into a legally
binding individual confidentiality declaration with the Supplier before commencing work in relation
to the services.
Prior to personnel being given access to Data, the Supplier will provide appropriate training to
all personnel who will be dealing with or processing Data in relation to the relevant obligations
under the Data Protection Legislation and security and confidentiality procedures including any
security and confidentiality procedures reasonably requested by BT for the protection of Data and
will provide refresher training when reasonably necessary.
C) DATA PROTECTION PROVISIONS
i. BT, as the data controller for the purposes of the Data Protection Act, taking into account the
contractual obligations imposed on the Supplier by the Contract and this Work Package Agreement,
the technical and organisational security measures which are in place and the other circumstances
relating to the Work Package Services confirms that it considers that an adequate level of
protection for the Data and for the rights of data subjects is in place.
ii. The Supplier agrees to ensure that all such technical and organisational security measures as
set out in Annex [B] are maintained throughout the duration of the term of the Contract and Work
Package Agreement except as such arrangements are varied by agreement between the Parties.
Accordingly, the Parties agree that any transfer of Data will be compliant with Data Protection
Act.
iii. BT may suspend or terminate its consent and this Work Package for a serious breach or serious
non-compliance with Data Protection legislation in connection with this consent. If either Party
becomes aware of any breach of or non-compliance with the Data Protection legislation in connection
with the Sub-Contracted Services that Party shall promptly inform the other Party and the Parties
shall, as soon as reasonably practicable, conduct a review of the matter and implement any changes
in processes or procedures established by the review
IN CONFIDENCE
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ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
SCHEDULE 6 APPENDIX 2 WORK PACKAGE TEMPLATE
APPENDIX A
ANNEX 1
EU MODEL CLAUSES
PART 1
MANDATORY: TO BE COMPLETED AND SIGNED BY THE PARTIES
DATA EXPORTER
The data exporter is British Telecommunications plc
DATA IMPORTER
The data importer is
DATA SUBJECTS
The personal data transferred concern the following categories of data subjects:
CATEGORIES OF DATA
The personal data transferred concern the following categories of data:
(ARROW)
SPECIAL CATEGORIES OF DATA (IF APPROPRIATE)
No data classified as Sensitive Personal Data will be processed outside the EEA.
PROCESSING OPERATIONS
The personal data transferred will be subject to the following basic processing activities:
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Authorised signature
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DATE:
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IN CONFIDENCE
Page 113 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
SUBJECT TO CONTRACT
PART 2
MANDATORY: TO BE COMPLETED AND SIGNED BY THE PARTIES.
Description of the technical and organisational security measures implemented by the data importer
in accordance with Clauses 4(d) and 5(c) (Schedule 3):
Generic measures for each service line in Annex 1 Part 1 [1 through 6]
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Operational Organisational Measures
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Technical and Security Measures
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DATA EXPORTER
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DATA IMPORTER
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Name:
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Name
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Authorised signature
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Authorised signature
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DATE:
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DATE:
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IN CONFIDENCE
Page 114 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
SCHEDULE 7 INTENTIONALLY LEFT BLANK
Page 115 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SCHEDULE 8 CHANGE CONTROL PROCEDURE
1. PRINCIPLES
(a) If at any time either party sees a need to change the Services that party may request or
recommend such change only in accordance with the Change Control Procedure.
(b) Neither BT nor the Supplier shall unreasonably withhold its agreement to any change provided
that BT shall not be obliged to agree to any change increasing the charges or requiring BT to incur
material expenditure.
(c) Until such time as a change is made in accordance with the Change Control Procedure, the
Supplier shall, unless otherwise agreed in writing, continue to supply the Services as if the
request or recommendation had not been made.
(d) Any discussions which may take place between BT and the Supplier in connection with a request
or recommendation before the authorisation of a resultant change to the Services shall be without
prejudice to the rights of either party.
(e) Any work undertaken by the Supplier, its sub-contractors or agents which has not been
authorised in advance by a change to the Services and which has not been otherwise agreed in
accordance with the provision of paragraph 1(c) shall be undertaken entirely at the expense and
liability of the Supplier.
2. PROCEDURES
(a) Discussion between BT and the Supplier concerning a change to the Services shall result in any
one of the following:
(i) a request to change the Services by BT; or
(ii) no further action being taken;
(iii) a recommendation to change the Services by the Supplier.
(b) Where a written request for an amendment is received from BT, the Supplier shall immediately on
receipt issue a written acknowledgement to BT and, unless otherwise agreed, submit a Change Control
Note (CCN) to BT within three weeks of the date of the request.
(c) A recommendation to amend by the Supplier shall be submitted as a CCN direct to BT at the time
of such recommendation.
(d) Each CCN shall contain:
(i) the title of the change;
Page 116 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
(ii) the originator and date of the request or recommendation for the
change;
(iii) the reason for the change;
(iv) full details of the change including any specifications;
(v) the price, if any, of the change;
(vi) a timetable for implementation together with any proposals for acceptance of the change;
(vii) a schedule of payments if appropriate;
(viii) details of the likely impact, if any, of the change on other aspects of the Services
including but not limited to:
(A) the term of the Contract;
(B) the personnel to be provided;
(C) the charges;
(D) the payment profile;
(E) the documentation to be provided;
(F) the training to be provided;
(G) service levels;
(H) working arrangements; and
(I) other contractual issues;
(ix) the date of expiry of validity of the CCN; and
(x) provision for signature by BT and the Supplier.
(e) For each CCN submitted BT shall, within the period of the validity of the CCN:
(i) allocate a sequential number to the CCN;
(ii) evaluate the CCN and, as appropriate:
(A) request further information;
(B) approve the CCN; or
(C) notify the Supplier of the rejection of the CCN; and
Page 117 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
(iii) arrange for two copies of an approved CCN to be signed by or on behalf of BT and the
Supplier.
(f) A CCN signed by both parties shall constitute an amendment to this Contract pursuant to
condition 22 headed Variations.
Page 118 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SCHEDULE 9 CONFIDENTIALITY AGREEMENT
IMPORTANT NOTE: This form must be completed by all non-BT people who undertake Work for BT before
they have access to BT information or BT computer systems.
You may, as a supplier or as an employee or subcontractor of a supplier to BT, have access to BT
information or BT computer systems.
BT requires you:
- to keep all BT information (whether or not it is marked NOT TO BE SHOWN OUTSIDE BT, INTERNAL,
IN CONFIDENCE, or IN STRICTEST CONFIDENCE) confidential and not to disclose it, unless you
first have BTs written permission;
- if you have access to BT customer or personal information, to comply with the provisions of the
Data Protection Act 1998;
- to access BT computer systems and BT electronic information only if you have been authorised to
do so. Unauthorised access may result in your being prosecuted under the Computer Misuse Act 1990;
- to access and use BT computer systems and BT information only as is necessary to do your job
properly;
- to read and understand BT Security Requirement and Security Policy;
- to comply with other BT instructions and security policies that may be notified from time to
time; and
- not to connect any equipment not supplied by BT to any BT LAN port.
If you are in any doubt as to these requirements or the policies of BT Group Security, further
advice and information can be obtained from your BT contact.
PERSONAL DECLARATION
I have read and understand the above requirements and agree to be bound by them.
Signed Date:
Print full name and home address:
Name:
Address:
Page 119 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
SCHEDULE 10 GENERIC STANDARDS
The latest issues are attached as follows:
- BT Generic Standard 11 Safety Management Issue 7.2
- BT Generic Standard 13 Environmental Impact Issue 9
- BT Generic Standard 18 Sourcing with Human Dignity Standard Issue 2
1 CONTRACT RESPONSE
To each attached Generic Standard the Supplier is required to make a declaration of Compliant,
Partially compliant or Non-compliant as appropriate.
This declaration shall be followed by a concise supporting statement describing the way in which
the Supplier complies, or why the Supplier does not and identifying methods and tools used.
Compliance with the attached Generic Standards does not confer immunity from legal obligations. The
Supplier should note that BT reserves the right to validate the information provided.
2 TABLE OF COMPLIANCE
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Compliant
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Partially Compliant
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Non-compliant
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Generic Standard 11
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(X)
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Generic Standard 13
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(X)
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Generic Standard 18
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(X)
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3 BT GENERIC STANDARD 11 FOR COMPLETION
4 BT GENERIC STANDARDS 13 AND 18 FOR ACCESS AND COMPLETION
On the Contract Commencement date the Supplier shall access the following URLs and complete the
following two questionnaires:
https://secure.selling2bt.bt.com/ext/html/gs13/
http://www.selling2bt.com/html/working/humandignity/question.asp
Page 120 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES
ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
The Supplier must complete the questionnaires within a two month time period and ensure that the
file is emailed as the instructions indicate.
Page 121 of 126
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
AMENDMENT
number 1 dated 1
st
February 2008
TO
CONTRACT
number 678650 (Contract)
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Between
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(1) British Telecommunications plc (BT) and
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(2) Virtusa UK Limited (the Consultant)
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BT and the Consultant agree that:
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the Contract is amended as set out below;
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the value of the Contract remains unchanged and
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all other Contract provisions remain unchanged.
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Amendment details:
Payment Terms Change from [***] days to [***] days.
Condition 55.2 of contract 678650 will be superseded by the following:
55.2 BT will pay due Invoices submitted in accordance with this condition within [***] days
of the later of either date of the invoice or the date upon which the invoice (including
electronic copy of the invoices) is received by BT, All payments shall be made in pounds
sterling.
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SIGNED
for and on behalf of BT
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SIGNED
for and on behalf of the Supplier
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Signed /s/ Liam Callaway
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Signed /s/ Paul Greenan
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Name Liam Callaway
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Name Paul Greenan
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Position Buyer IT Services
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Position: Financial Controller
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
AMENDMENT
number 2 dated 27
th
March 2008
TO
CONTRACT
number 678650 (Contract)
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Between
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(1) British Telecommunications plc (BT) and
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(2) Virtusa UK Limited (the Consultant)
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BT and the Consultant agree that:
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the Contract is amended as set out below; and
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the estimated value of the Contract remains unchanged; and
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all other Contract provisions remain unchanged.
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Amendment details:
Discount Structures: Minimums; Targets
Whereas; BT and Supplier have entered into a Work Package, a new Schedule has been agreed to
Contract 678650 BT Training TM SOW ver2008-02-14v.7 herein after referred to as Schedule
11 pursuant to which the Supplier will or has provided resources to undergo training, on
delivery processes, domain and technologies of relevance to BT through 31 March 2008;
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1.
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With respect to the Schedule 11, the parties hereby agree to the following:
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a.
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[***].
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b.
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[***] under and in accordance with Schedule 6, Appendix 1 (Pricing)
condition 1.7 Discount Structures; Minimums, Targets of the terms of Contract
678650, during the period of 1 April 2007 through 31 March 2008.
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c.
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[***].
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2.
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Schedules to this Amendment
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a.
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Schedule 11 BT Training TM SOW ver2008-02-14v.7
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3.
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Capitalized terms used herein but not defined herein shall have the meanings set forth
in the Contract.
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4.
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Except as other wise modified herein, all terms of the Contract remain in full force
and effect.
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5.
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The parties have executed this Amendment by their authorized signatories as of the date
first written above.
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
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SIGNED
for and on behalf of BT
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SIGNED
for and on behalf of the Supplier
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Signed /s/ Abbi Hewitt
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Signed /s/ Paul Greenan
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Name Abbi Hewitt
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Name Paul Greenan
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Position Buyer
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Position Financial Controller
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
AMENDMENT NO. 03 TO CONTRACT #678650
Whereas; British Telecommunications plc (registered in England and Wales under Company Number:
1800000) whose registered office is 81 Newgate Street, London, EC1A 7AJ (
BT
) and Virtusa
UK Limited (registered in England under Company Number 05640127 whose registered office is 1
Callaghan Square Cardiff CF10 5BT (the
Supplier
) entered into a Contract for the
Provision of IT Services to IT dated as of 29 March 2007 No. 678650 (the
Contract
);
Whereas; BT and Supplier now seek to amend the Contract as further set forth herein;
NOW THEREFORE, for valuable consideration, the sufficiency of which is hereby acknowledged and
confirmed by both parties hereto, the parties agree as follows:
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1.
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Capitalized terms used herein but not defined herein shall have the meanings set forth
in the Contract.
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2.
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Additional Definitions:
For purposes of this Amendment,
Qualifying Business
shall mean: with respect
to the first, second and third Annual Periods of the Amendment Term, [***] of all
Eligible Annual Fees with respect to such period, and for the fourth Annual Period of
the Amendment Term, [***] of all Eligible Annual Fees. For the avoidance of doubt,
spend with Supplier under the terms herein that is contracted through a third party on
behalf of BT shall contribute to Qualifying Business.
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3.
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Term. The term of this Amendment shall begin on April 1, 2008 (
Effective
Date
) and shall continue until 31 March 2012 (the
Amendment Term
).
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4.
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Qualifying Business Fee Commitment.
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a.
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BT intends to engage Supplier to perform Qualifying Business under Work
Packages that are entered into from time to time by the parties for services to be
performed during the Amendment Term. In exchange for BTs commitment hereunder to
spend a minimum of [***] in service fees (excluding taxes and other pass through
expenses like travel and other reimbursable expenses) related to Qualifying
Business under the terms herein during the Amendment Term, Supplier is willing to
extend certain discounts on service fees billed for Qualifying Business and make
certain other discount concessions to the Contract as further set forth herein.
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b.
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Supplier and BT will enter into additional Work Packages for Qualifying
Business, subject to the terms herein. Each Work Package will include without
limitation, the terms customarily set forth in a Work Package, including
assumptions, deliverables, allocation of responsibilities and other customary
terms.
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5.
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FINANCIAL ARRANGEMENT AND DISCOUNT STRUCTURE
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a.
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BT has agreed to a minimum spend of [***] in service fees [***], during the Amendment
Term (
Total Committed QBF Spend
) (QBF as defined in Section 5(b)(i)) on
Qualifying Business with Supplier in exchange for certain discounts applied by Supplier
as further set forth herein.
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b.
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In exchange for the Total QBF Committed Spend,
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(i)
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For all service fees (excluding taxes and other pass through
expenses like travel and other reimbursable expenses) for Qualifying Business
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Page 1 of 4
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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(
Qualifying Business Fees
or
QBF
) charged under each
Work Package (and designated by the parties as Qualifying Business), Supplier
shall [***] in effect under the Agreement at the time of the Work Package,
whether for time and materials work or fixed price engagements, for all
Qualifying Business Fees of up to an aggregate amount equal to the percentages
of Eligible Annual Fees in any fiscal quarter as specified in paragraph 2 above
(
Qualifying Business Fee Cap
);
provided that
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a.
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if BTs spend for Qualifying Business with Supplier
falls below [***] in any Annual Period before BT has fulfilled its Total
QBF Committed Spend (measured from the Effective Date through such Annual
Period), BT shall refund the Pre-Paid Discount with respect to such Annual
Period, based on the difference between the discount on [***] and discount
of [***] applied against the actual Qualifying Business Fees for such
Annual Period; and
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b.
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if BT does not achieve the Total QBF Committed Spend
hereunder at the expiration of the Amendment Term, BT shall refund the
difference between the pre-paid discount of [***] and the actual amount of
discount that BT earned as a result of its Qualifying Business Fees
hereunder, to the extent not already refunded to Supplier.
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For the avoidance of doubt, if BT is required to refund any Pre-Paid Discount
per the terms above, BT will not lose the right to earn the aggregate Pre-Paid
Discount refunded, subject to the terms herein.
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BT shall pay all such refunds within [***] days of expiration of the Annual
Period or Amendment Term as the case may be.
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Supplier shall measure the amount of Pre-Paid Discount earned by BT in each
fiscal quarter based on the aggregate amount of Qualifying Business Fees in such
quarter multiplied by the [***] discount as stated in Section 5(b)(i), and
Supplier shall deduct from the Pre-Paid Discount such earned amounts on a
quarterly basis. To the extent BT earns in excess of the Pre-Paid Discount
during the Amendment Term, Supplier shall continue to measure the amount of
Qualifying Business Fees each fiscal quarter until the termination of the
applicable Annual Period. Within [***] days of the end of such Annual Period in
which BT has exceeded the Pre-Paid Discount Amount and any applicable Annual
Period thereafter during the Amendment Term, Supplier will then issue to BT a
credit under the Contract (as amended hereby) in an amount equal to the value of
the sum of Qualifying Business Fees billed to BT with an invoice date during
such Annual Period multiplied by the [***] discount as stated above (
QBF
Credit Sum
). Suppler will issue such credit against monthly invoices
issued by Supplier and agreed with BT in the periods immediately following the
applicable Annual Period. Upon expiration or termination of the Contract where
the parties do not renew the Contract, to the extent of any remaining QBF Credit
Sum, Supplier shall promptly pay to BT any remaining QBF Credit Sum in respect
of the final Annual Period (or part thereof).
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Page 2 of 4
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
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(ii)
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Supplier shall pre-pay the aggregate discount hereunder on
Qualifying Business Fees, based on the Total QBF Committed Spend of [***], of
[***] to BT (the
Pre-Paid Discount
) no later than March 31, 2008;
provided that
such Pre-Paid Discount shall be refundable to Supplier on
a pro-rata basis, to the extent that such Pre-Paid Discount is not earned
hereunder by BT under the terms herein.
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(iii)
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All Qualifying Business Fees (up to the Qualifying Business
Fee Cap) billed hereunder by Supplier with an invoice date during each Annual
Period shall be applied and included in the calculation of Eligible Annual Fees
and Annual Total Volume Discount for the applicable Annual Period under the
Contract. Further, the calculation of Qualifying Business Fees billed hereunder
shall be subject to the terms and conditions in the Contract (as amended
hereby) as applied to Eligible Annual Fees (including Section 1.7.2 (a), (b)
and (c) thereof). By way of example only, if [***] of Qualifying Business Fees
were invoiced to BT during an Annual Period under a Work Package for Qualifying
Business, [***] would be counted as Eligible Annual Fees under the Contract,
but no taxes or any reimbursable expenses would be included in the calculation
of Qualifying Business Fee or Eligible Annual Fees.
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(iv)
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Subject to the terms herein, service fees billed under time and
materials and fixed price engagements shall all be Qualifying Business Fees
hereunder.
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(v)
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Invoice Schedule: All fees invoiced under Work Packages are
non-cancellable and non-refundable, except as otherwise stated herein.
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(c)
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(i) In addition, The Discount Table in Section 1.7.2 of the Contract is hereby
deleted and replaced with the following:
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Minimum Commitment of Eligible Annual Fees Target Eligible Annual Fees and
Annual Total Volume Discount Rate
|
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For the avoidance of doubt, all examples in Section 1.7.2 of the Contract shall be
correspondingly modified by the amended discount levels and numbers in this Amendment, but
the manner and application of the discount remains unchanged.
|
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6.
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Except as other wise modified herein, all terms of the Contract remain in full force
and effect.
|
Page 3 of 4
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES
EXCHANGE ACT; [***] DENOTES OMISSIONS.
IN CONFIDENCE
The parties have executed this Amendment by their authorized signatories as of the date
first written above.
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SIGNED
for and on behalf of
SUPPLIER
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SIGNED
for and on behalf of
BT
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Virtusa UK Limited
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Signature
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/s/ Paul Greenan
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Signature
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/s/ David Cole
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Name
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Paul Greenan
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Name
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David Cole
|
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Position
Company
|
|
Financial Controller
|
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Position
Company
|
|
Senior Procurement Manager
|
Page 4 of 4
AMENDMENT
number 004 dated 31st March 2008
TO
CONTRACT
number 678650 (Contract)
|
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Between
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(1) British Telecommunications plc ( BT) and
|
|
|
|
(2) Virtusa UK Limited (the Supplier)
|
BT and the Supplier agree that:
|
|
the Contract is amended as set out below;
|
|
|
the estimated value of the Contract remains unchanged; and
|
|
|
all other Contract provisions remain unchanged.
|
Amendment Details:
1. All defined terms, unless otherwise defined in this Amendment, shall have the meanings
given them in the Contract.
2. The Definitions section of the Contract shall be amended so that the definition of Work
Package shall read as follows:
Work Package
means a written request for Services, in the form attached hereto as
Schedule 6, issued by any BT Group Company to the Supplier pursuant to which the Supplier is
to provide Services to such BT Group Company in accordance with the specifications set forth
therein indicated in such request which has been accepted by both parties as evidenced as
follows:
Each party may create binding Work Packages, and amendments or change requests to such Work
Packages, by the electronic approval of documents by e-mail as follows:
2.1
Work Packages
:
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2.1.1
|
|
a Work Package shall consist of an electronic document submitted
to BT by the Supplier which contains:
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(i)
|
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a Supplier Quotation Reference
Number (i.e. VIR_BTGS_CMP_029_V3);
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2.1.2
|
|
a Work Package shall be deemed binding and countersigned upon BTs
issuance of a Purchase Order which references the Supplier Quotation
Reference number.
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2.1.3
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All Work Package terms and conditions shall be subject to the terms and
conditions of the Contract dated as of 29
th
March 2007, contract
number 678650, by and between BT and Virtusa UK Limited (Virtusa). Other
than any specific terms and conditions agreed by both parties in the Work
Package.
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2.2
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Amendments or Change Requests to Work Packages
:
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2.2.1
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a Work Package Amendment shall consist of an amendment
electronic document submitted to BT by the Supplier which references:
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(i)
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a Supplier Quotation Reference Number (i.e.
VIR_BTGS_CMP_029_V3);
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2.2.2
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a Work Package shall be deemed binding and countersigned upon
BTs Issuance of a Purchase Order which references the Supplier Quotation Reference number.
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2.2.3
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All Work Package terms and conditions shall be subject to the terms
and conditions of the Contract dated as of 29
th
March 2007,
contract number 678650, by and between BT and Virtusa UK Limited
(Virtusa). Other than any specific terms and conditions agreed by
both parties in the Work Package.
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3.
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Except as specifically modified or amended by this Amendment, the terms and
conditions of the Contract shall remain in full force and effect. In the event of any
conflict between the terms and conditions of this Amendment and the Contract, the terms and
conditions of this Amendment shall take precedence over the Contract.
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4.
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Capitalized terms used herein but not defined herein shall have the meanings set forth
in the Contract.
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5.
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Except as other wise modified herein, all terns of the Contract remain in full force and
effect.
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6.
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The parties have executed this Amendment try their authorised signatories as of the date
first written above.
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SIGNED
for and on behalf
of BT
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SIGNED
for and on behalf
of the Supplier
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Signed
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/s/ Abbi Hewett
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Signed
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/s/ Paul Greenan 31/03/08
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Name
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Abbi Hewett
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Name
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Paul Greenan
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Position
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Buyer
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Position
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Financial Controller
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Exhibit 10.8
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is made as of September 29, 2006, by and between
VIRTUSA CORPORATION, a Delaware corporation, having its chief executive office at 2000 West Park
Drive, Westborough, Massachusetts 01581 (the Borrower), and CITIZENS BANK OF MASSACHUSETTS, a
Massachusetts chartered bank having its head office at 28 State Street, Boston, Massachusetts 02109
(Citizens or the Lender).
The Borrower has requested the Lender to extend credit in the form of loans and letters of
credit, and the Lender is willing to make loans to the Borrower and is willing to issue Letters of
Credit, in each case on the terms and subject to the conditions set forth herein.
In consideration of the premises and for other goad and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
SECTION I.
DEFINITIONS
1.1.
Definitions
All capitalized terms used in this Agreement, in the Note, in the other Loan Documents or in
any certificate, report or other document made or delivered pursuant to this Agreement (unless
otherwise defined therein) shall have the meanings assigned to them below:
Accounts Receivable and Accounts.
All rights of the Borrower to payment of a monetary
obligation (i) for property that has been or is to be sold, leased, licensed, assigned, or
otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a secondary
obligation incurred or to be incurred, or (iv) arising out of the use of a credit or charge card or
information contained on or for use with the card; and all sums of money and other Proceeds due or
becoming due thereon, all notes, bills, drafts, acceptances, instruments, documents and other
debts, obligations and liabilities, in whatever form,
owing to the Borrower with respect thereto, all guarantees and security therefor, and the
Borrowers rights pertaining to and interests in such property, including the right of stoppage in
transit, replevin or reclamation; all chattel paper; all amounts due from Affiliates of the
Borrower; all insurance proceeds; all other rights and claims to the payment of money, under
contracts or otherwise; and all other property constituting accounts as such term is defined in
the Uniform Commercial Code,
Affiliate.
With reference to any Person, (i) any director, officer or employee of that Person,
(ii) any other Person controlling, controlled by or under direct or indirect common control of that
Person, (iii) any other Person directly or indirectly holding 10.0% or more of any class of the
capital stock or other equity interests (including options, warrants, convertible securities and
similar rights) of that Person and (iv) any other Person 10.0% more of any class of
1
whose capital stock or other equity interests (including options, warrants, convertible securities
and similar rights) is held directly or indirectly by that Person.
Agreement.
This Credit Agreement, including the Exhibits and Schedules hereto, as the same may
be supplemented, amended or restated from time to time.
Assignee.
Sec Section 9.1.
Borrower.
See Preamble.
Borrowers Accountants.
KPMG LLP, or such other independent certified public accountants as
are selected by the Borrower and are reasonably acceptable to the Lender.
Borrowing Base.
As at the date of any determination thereof, an amount equal to (a) 75.0% of
the unpaid net amount of all Eligible Accounts, minus (b) FX Reserves.
Borrowing Base Report.
A report signed by any Responsible Officer and in substantially the
form of Exhibit E hereto.
Business Day.
Any day, other than a Saturday, Sunday or legal holiday, on which banks in
Boston, Massachusetts are open for the conduct of a substantial part of their commercial banking
business.
Capital Expenditures.
Without duplication, any expenditure for fixed or capital assets,
leasehold improvements, capital leases, installment purchases of machinery and equipment,
acquisitions of real estate and other similar expenditures including (i) in the ease of a purchase,
the entire purchase price, whether or not paid during the fiscal period in question, (ii) in the
case of a capital lease, the capitalized amount (as determined under GAAP) of the obligations under
such lease to pay rent and other amounts, and (iii) expenditures respect to any construction in
progress account of the Borrower.
Closing Date.
The first date on which the conditions set forth in Sections 3.1 and 3.2 have
been satisfied and any Loans are to be made hereunder.
Code.
The Internal Revenue Code of 1986 and the rules and regulations thereunder,
collectively, as the same may from time to time be supplemented or amended and remain in effect.
Collateral.
All of the property, rights and interests of the Borrower and its Subsidiaries
that are or are intended to be subject to the security interests and liens created by the Security
Documents.
Commitment Fee.
See Section 2.5.
Consolidated Current Liabilities.
The aggregate amount of Indebtedness of the Borrower and its
Subsidiaries that may properly be classified as current liabilities in accordance with
2
GAAP and in any event including, without limitation, any direct or indirect indebtedness and other
liabilities of the Borrower and its Subsidiaries that are payable on demand or within one (1) year
from the creation thereof:
Consolidated Net Income.
For any fiscal period, the consolidated net income of the Borrower
and its Subsidiaries for such period, as determined in accordance with GAAP, except that in no
event shall such consolidated net income include: (i) any gain or loss arising from any write-up of
assets, except to the extent inclusion thereof shall be approved in writing by the Lender; (ii)
earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (iii) any
extraordinary or nonrecurring gains; (iv) any deferred or other credit representing any excess of
the equity of any Subsidiary at the date of acquisition thereof over the amount invested in such
Subsidiary; (v) the net earnings of any business entity (other than a Subsidiary) in which the
Borrower or any Subsidiary has an ownership interest, except to the extent such net earnings shall
have actually been received by the Borrower or such Subsidiary in the form of cash distributions;
(vi) the proceeds of any life insurance policy; and (vii) any reversal of any contingency reserve,
except to the extent that provision for such contingency reserve shall be made from income arising
during such period.
Consolidated Tangible Net Worth.
At any date as of which the amount thereof shall be
determined, the consolidated total assets of the Borrower and its Subsidiaries, minus (a)
Consolidated Total Liabilities, and minus (b) the sum of any amounts attributable to (i) the book
value, net of applicable reserves, of all intangible assets of the Borrower and its Subsidiaries,
including, without limitation, goodwill, trademarks, copyrights, patents and any similar rights,
and unamortized debt discount and expense, (ii) all reserves not already deducted from assets or
included in Consolidated Total Liabilities, (iii) any write-up in the book value of assets
resulting from any revaluation thereof subsequent to the date of the Audited Financial Statement,
(iv) the value of any minority interests in Subsidiaries, (v) intercompany accounts with
Subsidiaries and Affiliates (including receivables due from Subsidiaries and Affiliates and loans
or advances to employees), (vi) the value, if any, attributable to any capital stock or other
equity interests of the Borrower or any Subsidiary held in treasury, and (vii) the value, if any,
attributable to any notes or subscriptions receivable due from equity holders in respect of capital
stock or other equity interests.
Consolidated Total Liabilities.
At any date as of which the amount thereof shall be
determined, all obligations that should, in accordance with GAAP, be classified as liabilities on
the consolidated balance sheet of the Borrower and its Subsidiaries, including in any event all
Indebtedness.
Contra Customer.
Any customer or other Person with whom the Borrower has a contract or
agreement of any kind (including an account payable) and in respect of which there is an Account
included in Eligible Accounts.
Default.
An Event of Default or any event or condition that, but for the requirement that time
elapse or notice be given, or both, would constitute an Event of Default.
Drawdown Date.
The Business Day on which any Loan is made or is to be made.
3
Eligible Account(s)
. An Account Receivable which:
(a) Is not unpaid 90 or more days after invoice date and is not more than 60 days past due
under the original terms of sale;
(b) Arose in the ordinary course of business of the Borrower as a result of either (i)
services which have been performed for the account debtor or (ii) the absolute sale of goods which
have been shipped to the account debtor (and not on a bill-and-hold, guaranteed sale,
sale-or-return, sale-on-assignment, sale-on-approval, consignment or other repurchase or return
basis);
(c) Is the legal, valid and binding obligation of the account debtor thereunder is assignable,
is owned by the Borrower free and clear of all Encumbrances (except in favor of the Lender) and is
subject to a valid, perfected first security interest of the Lender (and if the account debtor is
the United States of America or any agency or instrumentality thereof, the right to payment has
been assigned to the Lender in compliance with the Assignment of Claims Act of 1940, as amended)
and is not evidenced by a promissory note or other instrument;
(d) Has not been materially reduced and is not subject to material reduction, as against the
Borrower, its agents or the Lender, by any offset, counterclaim, adjustment, credit, allowance or
other defense and as to which there is no (and no basis for any) return, rejection, loss or damage
of or to the goods or services giving rise thereto, or any request for credit or adjustments known
to the Borrower; provided, however, that if an Account Receivable, otherwise meeting the definition
of Eligible Account, has been materially reduced or is subject to material reduction solely because
of a failure of the Borrower to timely meet contract milestones and for no other reason (i.e.
retainage) or because of a warranty claim and for no other reason, such Account Receivable shall
be an Eligible Account, to the extent it has not been so materially reduced or is not subject to
material reduction;
(e) Is not in dispute or uncollectible for any reason, including, without limitation, return,
rejection, repossession, loss of or damage to the goods or services giving rise thereto or other
dispute, arty bankruptcy, insolvency, adverse credit rating or other financial difficulty of the
account debtor, or any impediment to the assertion of a claim or commencement of an action against
the account debtor (including as a consequence of the failure of the Borrower to be qualified or
licensed in any jurisdiction where such qualification or licensing is required), all as determined
by the Lender in its sole discretion;
(f) Is not owing from any Affiliate of the Borrower;
(g) Is owing from an account debtor located in the United States, or, if not located in the
United States, whose Accounts Receivable are covered by credit insurance satisfactory to the Lender
in its sole discretion or supported by a standby letter of credit in favor of the Lender
satisfactory to the Lender in its sole discretion;
(h) Is owing from an account debtor at least 75.0% of whose accounts payable owing to
the Borrower are Eligible Accounts;
4
(i) Is not owing from a Person who is the account debtor on more than 35.0% of all Eligible
Accounts, unless consented to by the Lender in writing; provided, that the foregoing limitation
shall not apply to account debtors (i) located in the United States with public debt issued and
outstanding rated BBB- or better by Standard & Poors, a division of The McGraw-Hill Companies,
Inc., and/or Bbb3 or better by Moodys Investor Services Inc. or (ii) if not located in the United
States, whose Accounts Receivable are covered by credit insurance satisfactory to the Lender in its
sole discretion or supported by a standby letter of credit in favor of the Lender satisfactory to
the Lender in its sole discretion;
(j) If owing from any Contra Customer, will be eligible only to the extent it exceeds the
amount of the Borrowers accounts payable, or other indebtedness permitted hereunder that is
payable, to such Contra Customer; and
(k) Has not been designated by the Lender in its reasonable discretion by notice to the
Borrower as unacceptable for any reason.
Encumbrances.
See Section 7.3.
Environmental Laws.
Any and all applicable federal, state and local environmental, health or
safety statutes, laws, regulations, rules and ordinances (whether now existing or hereafter enacted
or promulgated), and all applicable judicial, administrative and regulatory decrees, judgments and
orders, including common law rulings and determinations, relating to injury to, or the protection
of real or personal property or human health or the environment, including, without limitation, all
requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal
of emissions, discharges, releases or threatened releases of Hazardous Materials into the
environment or relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of such Hazardous Materials.
ERISA.
The Employee Retirement Income Security Act of 1974 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or amended and remain
in effect.
ERISA Affiliate.
Any trade or business, whether or not incorporated, that is treated as a
single employer with the Borrower under Section 41 4(b) (c), (m) or (o) of the Code and Section
4001(a) (14) of ERISA.
ERISA Event.
(a) Any reportable event, as defined in Section 4043 of ERISA or the
regulations issued thereunder, with respect to a Plan unless the 30-day notice requirement with
respect to such event has been waived by the PBGC; (b) the adoption of any amendment to a Plan that
would require the provision of security pursuant to Section
401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of
an accumulated finding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA,
whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of
ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e)
the
5
incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or
the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan
or Multiemployer Plan; (f) the receipt by the Borrower of any ERISA Affiliate from the PBGC or a
plan administrator or any notice relating to the intention to terminate any Plan or Plans or to
appoint a trustee to administer any Plan; (g) the receipt by the Borrower or any ERISA Affiliate of
any notice concerning the imposition of Withdrawal Liability (as defined in Part I of Subtitle E of
Title IV of ERISA) with respect to any Multiemployer Plan or a determination that a Multiemployer
Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of
ERISA; (ii) the occurrence of a prohibited transaction with respect to which the Borrower or any
of the Subsidiaries is a disqualified person (within the meaning of Section 4975 of the Code) or
with respect to which the Borrower or any such Subsidiary could otherwise be liable; and (i) any
other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be
expected to result in liability of the Borrower.
Event of Default.
Any event described in Section 8.1.
FX Documents.
Any and all documents entered into by the Borrower in connection with FX
Transactions.
FX Reserves.
At anytime of determination of the Borrowing Base, an amount equal to 15.0% of
the face amount (in United States Dollars) of all foreign exchange contracts entered into in
connection with FX Transactions.
FX Transactions.
Any transactions arranged or facilitated by Lender on behalf of Borrower or
its Subsidiaries involving the purchase or sale of foreign currencies either on a current or
deferred basis.
GAAP.
Generally accepted accounting principles, consistently applied.
Guarantees.
As applied to any Person (a guarantor), all guarantees, endorsements and other
contingent or surety obligations with respect to Indebtedness or other obligations of any other
Person (the primary obligor), whether or not reflected on the consolidated balance sheet of the
guarantor, including any obligation of the guarantor,
direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or
payment of such Indebtedness or other obligation or to purchase (or to advance or supply funds for
the purchase of) any security for the payment thereof, (b) to purchase or lease property,
securities or services for the purpose of assuring the owner of such Indebtedness or other
obligation of the payment thereof, (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any
letter of credit or letter of guaranty issued to support such Indebtedness or other obligation.
Hazardous Materials.
Any substance (i) the presence of which requires or may hereafter require
notification, investigation, removal or remediation under any Environmental Law; (ii) which is or
becomes defined as a hazardous waste, hazardous material or hazardous substance or
pollutant or contaminant under any present or future Environmental Law or
6
amendments thereto including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and any applicable local statutes
and the regulations promulgated thereunder; (iii) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is or becomes
regulated pursuant to any Environmental Law by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, any applicable state of the
United States, or any political subdivision thereof, or (iv) without limitation, which contains
gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls (PCBs).
Indebtedness.
As applied to the Borrower and its Subsidiaries, without duplication, (i) all
obligations for borrowed money or other extensions of credit whether secured or unsecured, absolute
or contingent, including, without limitation, unmatured reimbursement obligations with respect to
letters of credit or guarantees issued for the account of or on behalf of the Borrower and its
Subsidiaries and all obligations representing the deferred purchase price of property, other than
accounts payable arising in the ordinary course of business, (ii) all obligations evidenced by
bonds, notes, debentures or other similar instruments, (iii) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or acquired by the Borrower or
any of its Subsidiaries whether or not the obligations secured thereby shall have been assumed,
(iv) that portion of all obligations arising under leases that is required to be capitalized on the
consolidated balance sheet of the Borrower and its Subsidiaries, (v) all Guarantees, (vi) all
obligations that are immediately due and payable out of the proceeds of or production from property
now or hereafter owned or acquired by the Borrower or any of its Subsidiaries, and (vii) all other
obligations which, in accordance with GAAP,
would be included as a liability on the consolidated balance sheet of the Borrower and its
Subsidiaries, but excluding anything in the nature of capital stock, capital surplus and retained
earnings.
Audited Financial Statement.
See Section 4.6.
Interest Expense.
For any fiscal period, the consolidated interest expense (including imputed
interest and capitalized lease obligations) and amortized debt discount on indebtedness of the
Borrower and its Subsidiaries for such period.
Investment.
As applied to the Borrower and its Subsidiaries, the purchase or acquisition of
any share of capital stock, partnership interest, evidence of indebtedness or other equity security
of any other Person (including any Subsidiary), any loan, advance or extension of credit (excluding
Accounts Receivable arising in the ordinary course of business) to, or contribution to the capital
of, any other Person (including any Subsidiary), any real estate held for sale or investment, any
securities or commodities futures contracts held, any other investment in any other Person
(including any Subsidiary), and the making of any commitment or acquisition of any option to make
an Investment.
Lease.
That certain lease, dated as of June, 2000, between the Borrower and W9/TIB Real Estate
Limited Partnership in respect of the premises occupied by the Borrower in Westborough,
Massachusetts, as amended to date by the First Amendment dated as of November 2000 and Second
Amendment and Extension of Lease dated as of December 30, 2003.
7
Lease Letters of Credit.
Any Letters of Credit issued for the purpose of securing the
Borrowers obligations under the Lease, including, without limitation, any issued prior to the date
hereof.
Lender.
See Preamble.
Letter of Credit Applications.
Applications for Letters of Credit in such form as may be
required by the Lender from time to time which are executed and delivered by the Borrower to the
Lender pursuant to Section 2A, as the same may be amended or supplemented from time to time.
Letter of Credit Fee.
See Section 2.5.
Letter of Credit Pledge Agreement.
See Section 2A.1(b).
Letter of Credit Sublimit. The sum of $1,500,000.00.
Letters of Credit.
See Section 2A.1(a).
Loan Documents.
This Agreement, the Note, the Letters of Credit, the Letter of Credit
Applications, the Security Documents and the FX Documents, together with any
agreements, instruments or documents now or hereafter executed and delivered pursuant to or in
connection with any of the foregoing.
Loans.
The loans made or to be made by the Lender to the Borrower pursuant to Section II of
this Agreement, including Revolving Credit Loans and unpaid Reimbursement Obligations.
Maximum Drawing Amount.
The maximum aggregate amount from time to time that beneficiaries may
draw under outstanding Letters of Credit.
Multiemployer Plan.
Any plan which is a Multiemployer Plan as defined in Section 4001(a) (3)
of ERISA.
Note Record.
Any internal record, including a computer record, maintained by the Lender with
respect to any Loan.
Note.
See Section 2.2(a).
Notice of Borrowing.
The notice, substantially in the form of Exhibit B hereto, to be given by
the Borrower to the Lender to request a Revolving Credit Loan.
Obligations.
The aggregate outstanding principal balance of and interest (and premium. if any)
on the Loans (including, without limitation, interest accruing at the then applicable rate provided
herein after the maturity of the Loans and interest accruing at the then applicable rate provided
herein after the filing of any petition in bankruptcy, or the commencement of any
8
insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding) and all other obligations of
the Borrower to the Lender of every kind and description pursuant to or in connection with the Loan
Documents and FX Transactions, deposit accounts, cash management accounts and services, hedging
transactions, interest rate caps, collars and similar interest rate protection products, and all
other banking products and services, direct or indirect, absolute or contingent, primary or
secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or
by what agreement or instrument, if any, in each case whether on account of principal interest,
premium, reimbursement obligations, fees, indemnities, coats, expenses or otherwise (including,
without limitation, all fees and disbursements of counsel that are required to be paid by the
Borrower pursuant to any of the Loan Documents), and including obligations to perform acts and
refrain from taking action as well as obligations to pay money.
Participant.
See Section 9.2.
PBGC.
The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its
functions under ERISA.
Pension Plan.
Any Plan which is an employee pension benefit plan (as defined in ERISA).
Permitted Encumbrances.
See Section 7.3.
Person.
Any individual, corporation, partnership, limited liability company, trust,
unincorporated association, business or other legal entity, and any government or governmental
agency or political subdivision thereof.
Plan.
Any employee pension benefit plan or employee welfare benefit plan (each as defined
in Section 3 of ERISA) maintained by the Borrower or any Subsidiary.
Pledge Agreement.
That certain Pledge Agreement dated the date hereof pursuant to which
Borrower shall pledge to Lender the capital stock of its subsidiary, Virtusa Securities
Corporation.
Prime Rate.
The rate of interest announced from time to time by the Lender at its head office
as its Prime Rate. The Prime Rate is a reference rate and does not necessarily represent the
lowest or best rate being charged to any customer. Any change in the Prime Rate shall be effective
from and including the effective date of such change.
Prohibited Transaction.
Any prohibited transaction within the meaning of Section 406 of
ERISA or Section 4975 of the Code.
Qualified Investments.
As applied to the Borrower and its Subsidiaries, Investments in (1)
notes, bonds or other obligations of the United States of America or any agency thereof that as to
principal, and interest constitute direct obligations of or are guaranteed by the United States of
America and that have maturity dates not more than one year from the date of acquisition, (ii)
9
certificates of deposit, demand deposit accounts or other deposit instruments or accounts
maintained in the ordinary course of business (x) with Silicon Valley Bank, (y) with banks or trust
companies organized. under the laws of the United States or any state thereof that have capital and
surplus of at least $500,000,000.00 which certificates of deposit and other deposit instruments, if
not payable on demand, have maturities of not more than 180 days from the date of acquisition or
(z) with respect to deposit accounts for the purpose of funding ordinary course payroll obligations
to the Borrowers or its Subsidiaries overseas employees, with banks or trust companies organized
under the laws of India or Sri Lanka known by the Borrower to be reputable for such purposes,
subject to the limitation set forth in Section 6.2(b), (iii) commercial paper that, as of the date
of acquisition, has the highest credit rating obtainable from Moodys Investors Service, Inc. or
Standard & Poors, a division of The McGraw-Hill Companies, Inc. or their successors, and in each
case maturing not more than 270 days from the date of
acquisition, and (iv) any repurchase agreement secured by any one or more of the foregoing.
Reimbursement Obligation.
The Obligation of the Borrower to reimburse the Lender on account of
any drawing under any Letter of Credit as provided in Section 2A.2
Responsible Officer.
The chief financial officer of the Borrower and any other officer of the
Borrower designated by the chief financial officer to sign Borrowing Base Reports and Notices of
Borrowing.
Restricted Payment.
Any dividend, distribution, loan, advance, guaranty, extension of credit
or other payment (whether in cash, securities or other property) to or for the benefit of any
Person who holds an equity interest in the Borrower or any of its Subsidiaries, whether or not such
interest is evidenced by a security, and any other payment, whether in cash, securities or other
property, on account of the purchase, redemption, retirement, acquisition, cancellation or
termination of any capital stock of the Borrower or any of its subsidiaries, whether now or
hereafter outstanding, or of any options, warrants or similar rights to purchase such capital stock
or any security convertible into or exchangeable for such capital stock.
Revolving Credit Commitment.
The maximum dollar amount of credit which the Lender has agreed
to loan to the Borrower as Revolving Credit Loans or make available to the Borrower pursuant to
Letters of Credit upon the terms and subject to the conditions of this Agreement, initially
$3,000,000.00, as the Lenders Revolving Credit Commitment may be modified pursuant hereto and in
effect from time to time. A portion of the Revolving Credit Commitment up to the Letter of Credit
Sublimit shall be available to Borrower for issuance of Letters of Credit.
Revolving Credit Loans.
See Section 2.1(a).
Revolving Credit Maturity Date.
September 30, 2007.
Revolving Credit Outstandings.
At any time, the outstanding principal balance of Revolving
Credit Loans.
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Security Documents.
A security agreement, a negative pledge agreement with respect to
intellectual property of the Borrower and the Letter of Credit Pledge Agreement the Pledge
Agreement, and any subsequent pledge or security agreements granted by Borrower to Lender, each in
favor of the Lender to secure Obligations, in each case as amended and/or restated and in effect
from time to time, and any additional documents evidencing or perfecting the Lenders lien on the
Collateral.
Subsidiary.
With respect to any Person, any corporation, association, joint stock company,
business trust, partnership, limited liability company or other similar organization of which more
than 50.0% of the ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by such Person or a
Subsidiary of such Person; or any other such organization the management of which is directly or
indirectly controlled by such Person or a Subsidiary of such Person through the exercise of voting
power or otherwise; or any joint venture, whether incorporated or not, in which such Person has
more than a 50.0% ownership interest.
Total Revolving Credit Outstandings.
At any time, the sum of (i) The aggregate outstanding
principal balance of Revolving Credit Loans and (ii) The Maximum Drawing Amount of Letters of
Credit at such time.
1.2.
Rules of Interpretation.
(a) All terms of an accounting or financial character used herein but not defined herein shall
have the meanings assigned thereto by GAAP, as in effect from time to time, and all calculations
for the purposes of Section VI hereof shall be made in accordance with GAAP; provided that if any
time after the date hereof there shall occur any change in respect of GAAP from that used in the
preparation of the audited financial statements referred to in Section 4.6(a) in a manner that
would have a material effect on any matter which is material to Section VI, the Borrower and the
Lender will, within 10 Business Days after notice from the Lender or the Borrower, as the case may
be to that effect, and continue in good faith negotiations with a view towards making appropriate
amendments to the provisions hereof acceptable to the Lender to reflect as narrowly possible the
effect on Section VI as in effect on the date hereof; provided, further, that until such notice
shall have been withdrawn or the relevant provisions amended in accordance herewith, Section VI
shall be interpreted on the basis of GAAP as in effect and applied immediately before such change
shall have become effective.
(b) Except as otherwise specifically provided herein, reference to any document or agreement
shall include such document or agreement as amended modified or supplemented and in effect from
time to time in accordance with its terms and the terms of this Agreement.
(c) The singular includes the plural and the plural includes the singular. Whenever the
context may require, any pronoun shall include the corresponding masculine, feminine and neuter
forms.
(d) A reference to any Person includes its permitted successors and permitted assigns,
(e) The words include, includes and including are not limiting.
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(f) The words herein, hereof, hereunder and words of like import shall refer to this
Agreement as a whole and not to any particular section or subdivision of this Agreement.
(g) All terms not specifically defined herein or by GAAP that arc defined in the Uniform
Commercial Code as in effect in The Commonwealth of Massachusetts, shall have the meanings assigned
to them in such Uniform Commercial Code.
SECTION II
DESCRIPTION OF CREDIT
2.1.
Revolving Credit Loans.
(a) Upon the terms and subject to the conditions of this Agreement, and in reliance upon the
representations, warranties and covenants of the Borrower herein, the Lender agrees to make
revolving credit loans (the Revolving Credit Loans) to the Borrower at the Borrowers request
from time to time from and after the Closing Date and prior to the Revolving Credit Maturity Date,
provided that Total Revolving Credit Outstandings (after giving effect to all requested Revolving
Credit Loans and Letters of Credit) shall not at any time exceed the lesser of (i) the Borrowing
Base and (ii) the Revolving Credit Commitment. Subject to the terms and conditions of this
Agreement, the Borrower may borrow, repay, prepay and reborrow amounts, up to the limits imposed by
this Section 2.1, from time to time between the Closing Date and the Revolving Credit Maturity Date
upon request given to the Lender pursuant to Section 2.3. Each request for a Revolving Credit Loan
hereunder shall constitute a representation and warranty by the Borrower that the conditions set
forth in Sections 3.1 and 3.2 have been satisfied as of the date of such request.
(b) The Revolving Credit Commitment shall terminate at 5:00 p.m. Boston time on the Revolving
Credit Maturity Date.
2.2.
The Note.
(a) The Revolving Credit Loans shall be evidenced by a promissory note in the form of Exhibit
A hereto, dated as of the Closing Date (the Note).
(b) The Borrower irrevocably authorizes the Lender to make or cause to be made, at or about
the time of the Drawdown Date of any Loan or at the time of receipt of any payment of principal on
the Note, an appropriate notation on its Note Record reflecting (as the case may be) the making of
such Loan or the receipt of such payment. The outstanding amount of the Loans set forth on the Note
Record shall be prima facie evidence of the principal amount thereof owing and unpaid to the
Lender, but the failure to record, or any error in so recording, any such amount on the Lenders
Note Record
shall not limit or otherwise affect the obligations of the Borrower hereunder or under the
Note to make payments of principal of or interest on the Note when due.
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2.3.
Notice and Manner of Borrowing.
Whenever the Borrower desires to obtain a
Revolving Credit Loan hereunder, the Borrower shall give the Lender a telephonic notice promptly
confirmed by a written Notice of Borrowing, which notices shall be irrevocable and which must be
received no later than 2:00 p.m. Boston time on the date the requested Revolving Credit Loan is to
be made. Such Notice of Borrowing shall specify the effective date and amount of the Revolving
Credit Loan. If the written confirmation of any telephonic notification differs in any material
respect from the action taken by the Lender, the records of the Lender shall control absent
manifest error. If the Lender receives a Notice of Borrowing after the time specified in subsection
(a) above, such Notice shall not be effective.
2.4.
Interest Rates and Payment of Interest.
(a) Each Revolving Credit Loan shall bear interest on the outstanding principal amount thereof
at a rate per annum equal to the Prime Rate minus 0.25%, which rate shall change contemporaneously
with any change in the Prime Rate. Such interest shall be payable monthly in arrears on the first
Business Day of each month.
(b) If a Default shall occur, then at the option of the Lender (i) the unpaid balance of Loans
shall bear interest, to the extent permitted by law, compounded daily at an interest rate equal to
2.0% per annum above the interest rate applicable to each such Loan in effect on the day such
Default occurs, until such Default is cured or waived, and (ii) the Borrower shall pay to the
Lender a fee (in addition to the Letter of Credit Fee) equal to 1.0% per annum of the Maximum
Drawing Amount of all Letters of Credit outstanding during the period from the occurrence of such
Default until such Default is cured or waived.
(c) All agreements between the Borrower and the Lender are hereby expressly limited so that in
no contingency or event whatsoever, whether by reason of acceleration of maturity of the
Obligations or otherwise, shall the amount paid or agreed to be paid to the Lender for the use or
the forbearance of the Obligations exceed the maximum permissible under applicable law. As used in
this Section 2.4(c), the term applicable law shall mean the law of The Commonwealth of
Massachusetts in effect as of the date hereof provided, however, that in the event there is a
change in the law which results in a higher permissible rate of interest, then the Loan Documents
shall be governed by such new law as of its effective date. In this regard, it is expressly agreed
that it is the intent of Borrower and the Lender in the execution, delivery and acceptance of the
Loan Documents to contract in strict compliance with the laws of The Commonwealth of Massachusetts
from time to time in effect. If, under or from. any circumstances
whatsoever, fulfillment of any provision of any of the Loan Documents at the time of
performance of such provision shall be due, shall involve transcending the limit of such validity
prescribed by applicable law, then the obligation, to be fulfilled shall automatically be reduced
to the limits of such validity, and if under or from any circumstances whatsoever the Lenders
should ever receive as interest an amount which would exceed the highest lawful rate, such amount
which would be excessive interest shall be applied to the reduction of the principal balance of the
Obligations and not to payment of interest. This provision shall control every other provision of
all Loan Documents.
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2.5.
Fees and Charges.
(a) The Borrower shall pay to the Lender an annual commitment fee (the Commitment Fee),
computed on a daily basis and payable quarterly in arrears on the first Business Day of each
quarter, equal to (i) the excess of (x) the Revolving Credit Commitment at the time (without giving
effect to any Letters of Credit or requested Letters of Credit) over (y) Revolving Credit
Outstandings from time to time, multiplied by (ii) 0.1667%.
(b) The Borrower shall pay to the Lender a fee (the Letter of Credit Fee) at a rate per
annum equal to (i) the face amount of each outstanding Letter of Credit multiplied by (ii) 1.25%
with respect to Letters of Credit which are not expressly cash-secured. The Letter of Credit Fee
shall be 1.0% per annum with respect to any Letters of Credit which are expressly and fully secured
by a pledge of cash on deposit with Citizens. The Letter of Credit Fee shall be paid quarterly in
arrears on the first Business Day of each quarter. The Borrower shall also pay to the Lender on
demand standard documentation charges for the issuance of each Letter of Credit and the amount of
any taxes, fees, charges or other costs and expenses whatsoever incurred by the Lender in
connection with any Letter of Credit.
(c) Without limiting any of the Lenders other rights hereunder or by law, if any Loan or any
portion thereof or any interest thereon or any other amount payable hereunder or under any other
Loan Document is not paid within ten days after its due date, the Borrower shall pay to the Lender
on demand a late payment charge equal to 5.0% of the amount of the payment due.
(d) The Borrower authorizes the Lender to charge to its Note Record or to any deposit account
which the Borrower may maintain with the Lender the interest, fees, charges, taxes and expenses
provided for in this Agreement the other Loan Documents or any other document executed or delivered
in connection herewith or therewith.
2.6.
Payments and Prepayments of the Loans
(a) On the Revolving Credit Maturity Date, the Borrower shall pay in full the unpaid principal
balance of all outstanding Revolving Credit Loans, together with all unpaid interest thereon and
all fees and other amounts due with respect thereto,
(b) Revolving Credit Loans may be prepaid at any time, without premium or penalty. Any such
notice of prepayment shall be irrevocable. Prepayments of Revolving Credit Loans may be reborrowed
to the extent provided in Section 2.1.
(c) If at any time Revolving Credit Outstandings exceed the lesser of (i) the Borrowing Base
and (ii) the Revolving Credit Commitment, the Borrower shall immediately pay the amount of any such
excess to the Lender for application to the Revolving Credit Loans.
2.7.
Method of Payments
(a) All payments by the Borrower hereunder and under any of the other Loan Documents shall be
made in lawful money of the United States at the Lenders head office or at such other location
that the Lender may from time to time designate, in each case in immediately available funds, and
shall he deemed to have been made only when made in compliance with this Section.
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All such payments shall be made without set-off or counterclaim and free and clear of and without
deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings,
compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by
any jurisdiction or any political subdivision thereof or taxing or other authority therein unless
the Borrower is compelled by law to make such deduction or withholding. If any such obligation is
imposed upon the Borrower with respect to any amount payable by it hereunder or under any of the
other Loan Documents, the Borrower will pay to the Lender such additional amount in United States
Dollars as shall be necessary to enable the Lender to receive the same net amount which the Lender
would have received on such clue date had no such obligation been imposed upon the Borrower, The
Borrower will deliver promptly to the Lender certificates or other valid vouchers or other evidence
of payment reasonably satisfactory to the Lender for all taxes or other charges deducted from or
paid with respect to payments made by the Borrower hereunder or under such other Loan Document, The
Lender may, and the Borrower hereby authorizes the Lender to, debit the amount of any payment not
made by such time to the demand deposit accounts of the Borrower with the Lender or to its Note
Record.
(b) If the Revolving Credit Commitment shall have been terminated or the Obligations shall
have been declared immediately due and payable pursuant to Section 8.2 all funds received from or
on behalf of the Borrower (including as proceeds of Collateral) by the Lender in respect of
Obligations, shall be applied by the Lender in the
following manner and order: (i) first, to reimburse the Lender for any amounts payable
pursuant to Sections 10.2 and 11.3 hereof; (ii) second, to the payment of Commitment Fees, Letter
of Credit Fees and any other fees payable hereunder; (iii) third, to the payment of interest due on
the Loans and the Reimbursement Obligations; (iv) fourth, to the payment of the outstanding
principal balance of the Loans and the Reimbursement Obligations, pro rata to the outstanding
principal balance of each, and to provide the Lender with cash collateral for any issued and
outstanding Letters of Credit in an amount determined by Lender to be necessary to secure such
Obligations; (v) fifth, to the payment of any other Obligations payable by the Borrower, pro rata
to the outstanding principal balance of each; and (vi) any remaining funds shall be paid to whoever
shall be entitled thereto or as a court of competent jurisdiction shall direct.
2.8.
Computation of Interest and Fees; Due Date.
Interest and all fees payable hereunder shall
be computed daily on the basis of a year of 360 days and paid for the actual number of days for
which due. If the due date for any payment of principal is extended by operation of law, interest
shall be payable for such extended time. If any payment required by this Agreement becomes due on a
day that is not a Business Day such payment may be made on the next succeeding Business Day, and
such extension shall be included in computing interest and fees in connection with such payment.
2.9.
Increased Costs.
In case any change made after the Closing Date in any law, regulation,
treaty or official directive or the interpretation or application thereof by any court or by any
governmental authority charged with the administration thereof or the compliance with any guideline
or request of any central bank or other governmental authority (whether or not having the force of
law):
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(a) Subjects the Lender to any tax with respect to payments of principal or interest or any
other amounts payable hereunder by the Borrower or otherwise with respect to the transactions
contemplated hereby (except for taxes on the overall net income of the Lender imposed by the United
States of America or any political subdivision thereof), or
(b) Imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or
similar requirement against assets held by, or deposits in or for the account of, or loans by, the
Lender, or
(c) Imposes upon the Lender any other condition with respect to its obligations or performance
under this Agreement or in respect of any Letter of Credit, and the result of any of the foregoing
is to increase the cost to the Lender, reduce the income receivable by the Lender or impose any
expense upon the Lender with respect to any Loans or its obligations under this Agreement or in
respect of any Letter of Credit, the Lender shall notify the Borrower thereof. The Borrower agrees
to pay to the Lender the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon presentation by the
Lender of a
statement in the amount and setting forth in reasonable detail the Lenders calculation
thereof and the assumptions upon which such calculation was based, which statement shall be deemed
true and correct absent manifest error.
2.10.
Capital Requirements.
If after the date hereof the Lender determines that (i) the
adoption of or change in any law, rule, regulation or guideline regarding capital requirements for
banks or bank holding companies, or any change in the interpretation or application thereof (by any
governmental authority charged with the administration thereof or (ii) compliance by the Lender or
its parent bank holding company with any guideline, request or directive of any such entity
regarding capital adequacy (whether or not having the force of law), has the effect of reducing the
return on the Lenders or such holding companys capital as a consequence of the Lenders Revolving
Credit Commitment to make Loans hereunder or its obligations in respect of any Letter of Credit to
a level below that which the Lender or such holding company could have achieved but for such
adoption, change or compliance (taking into consideration the Lenders or such holding companys
then existing policies with respect to capital adequacy and assuming the full utilization of such
entitys capital) by any amount deemed by the Lender to be material, then the Lender shall notify
the Borrower thereof. The Borrower agrees to pay to the Lender the amount of such reduction of
return on capital as and when such reduction is determined, payable within 90 days after
presentation by the Lender of a statement in the amount and setting forth in reasonable detail the
Lenders calculation thereof and the assumptions upon which such calculation was based (which
statement shall be deemed true and correct absent manifest error) unless within such 90 day period
the Borrower shall have prepaid in full all Obligations to the Lender, in which event no amount
shall be payable to the Lender under this Section. In determining such amount, the Lender may use
any reasonable averaging and attribution methods.
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SECTION 2A
LETTERS OF CREDIT
2A.1
Issuance.
(a) Upon the terms and subject to the conditions hereof, the Lender, in reliance upon the
representations and warranties of the Borrower contained herein, agrees to issue letters of credit
(the Letters of Credit) prior to the Revolving Credit Maturity Date for the account of the
Borrower in such form as may be requested from time to time by the Borrower and agreed to by the
Lender, provided that the Maximum Drawing Amount of all Letters of Credit shall not at any time
exceed the Letter of Credit Sublimit (after giving effect to all requested Letters of Credit) and
the sum of the outstanding amount of Revolving Credit Loans and the Maximum Drawing Amount of all
Letters of Credit shall not at any time exceed the Revolving Credit Commitment; provided, further
that no
Letter of Credit shall have an expiration date later than the Maturity Date (unless extended
beyond such date by the Lender in its sole discretion).
(b)
The Borrower has executed and delivered to the Lender a letter of credit pledge agreement,
dated June 8, 2004 (the Letter of Credit Pledge Agreement), in connection with a letter of credit
issued in connection with the Lease (the Lease Letter of Credit) and has delivered to the Lender
cash collateral under the Letter of Credit Pledge Agreement equal to 100% of the Maximum Drawing
Amount under such Lease Letter(s) of Credit
. The Lease Letter of Credit shall not be deemed to be
issued under the Revolving Credit Commitment or Letter of Credit Sublimit. At least three (3)
Business Days prior to the proposed issuance date of any other Letter of Credit, the Borrower shall
deliver to the Lender (i) a Letter of Credit Application setting forth the Maximum Drawing Amount
of all Letters of Credit (including the requested Letter Of Credit, but excluding the Lease Letter
of Credit), the requested language of the requested Letter of Credit (which shall be reasonably
acceptable to Lender) and such other information as the Lender shall require, and (ii) if the
Letter of Credit is to be secured by cash collateral, a designation of cash collateral under the
Letter of Credit Pledge Agreement equal to 100.0% of the Maximum Drawing Amount of the requested
Letter of Credit. Each request for the issuance of a Letter of Credit hereunder shall constitute a
representation and warranty by the Borrower that the conditions set forth in Sections 3.1 and 3.2
have been satisfied as of the date of such request.
2A.2
Reimbursement Obligation of the Borrower
. In order to induce the Lender to issue, extend
and renew each Letter of Credit, the Borrower hereby agrees to reimburse or pay to the Lender, with
respect to each Letter of Credit issued, extended or renewed by the Lender hereunder on each date
that any draft presented under any Letter of Credit is honored by the Lender or the Lender
otherwise makes payment with respect thereto, the Borrower shall pay (i) the amount paid by the
Lender under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees,
charges or other costs and expenses whatsoever (including standard documentation charges for the
issuance of each Letter of Credit) incurred by the Lender in connection with any payment made by
the Lender under, or with respect to, such Letter of Credit. Interest on any and all amounts
remaining unpaid by the Borrower under this Section 2A2 at any time from the date such amounts
become due and payable (whether as stated in this Section 2A.2, by acceleration or otherwise) until
payment in full (whether before or after judgment) shall be payable to the Lender on demand at a
rate per annum equal to 2.0% above the interest rate applicable to Revolving Credit Loans at the
time in the absence of an Event of Default.
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2A.3
Letter of Credit Payments.
If any draft shall be presented or other demand for
payment shall be made under any Letter of Credit, the Lender shall notify the Borrower of the date
and amount of the draft presented or demand for payment and of the date and time when it expects to
pay such draft or honor such demand for payment. The responsibility of the Lender to the Borrower
shall be only to determine that the
documents (including each draft) delivered under each Letter of Credit in connection with such
presentment shall be in conformity in all material respects with such Letter of Credit. Any unpaid
Reimbursement Obligations with respect to Letters of Credit shall be deemed to be Revolving Credit
Loans and shall be charged to Borrowers Loan account.
2A.4
Obligations Absolute
(a) The Borrowers Reimbursement Obligations shall be absolute and unconditional under any and
all circumstances and irrespective of the occurrence of any Default or Event of Default or any
condition precedent whatsoever or any set-off; counterclaim or defense to payment which the
Borrower may have or have had against the Lender or any beneficiary of a Letter of Credit. The
Borrower further agrees that the Lender shall not be responsible for, and the Borrowers
Reimbursement Obligations shall not be affected by, among other things, the validity or genuineness
of documents or of any endorsements thereon, even if such documents should in fact prove to be in
any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower,
the beneficiary of any Letter of Credit or any financing institution or other party to which any
Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrower, against
the beneficiary of any Letter of Credit or any such transferee.
(b) The Lender shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however transmitted, in connection
with any Letter of Credit. The Borrower agrees that any action taken or omitted by the Lender under
or in connection with each Letter of Credit and the related drafts and documents, if done in good
faith, shall be binding upon the Borrower and shall not result in any liability on the part of the
Lender to the Borrower.
2A.5
Reliance by the Lender.
To the extent not inconsistent with Section 2A.4, the Lender
shall be entitled to rely on and shall be fully protected in relying upon, any Letter of Credit,
draft, writing, resolution, notice, consent, certificate, affidavit, letter, electronic facsimile
transmission, cablegram, telegram, telecopy, telex or teletype message, statement, order or other
document believed by it to be genuine and correct and to have been signed, sent or made by the
proper Person or Persons and upon advice and statements of legal counsel, independent accountants
and other experts selected by the Lender.
SECTION III
CONDITIONS OF LOANS AND LETTERS OF CREDIT
3.1.
Conditions Precedent to Initial Loans.
The obligation of the Lender to make the initial
Loans and to issue the initial Letter of Credit is subject to the satisfaction of the following
conditions precedent on or prior to the Closing Date:
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(a) The Lender shall have received the following agreements, documents, certificates and
opinions in form and substance satisfactory to the Lender and duly executed and delivered by the
parties thereto:
(i) This Agreement;
(ii) The Note, substantially in the form of Exhibit A hereto;
(iii) The Security Documents;
(iv) a UCC-l Financing Statement
covering the Collateral;
(v) UCC-3 Termination Statements to terminate Encumbrances (other than Permitted Encumbrances)
of Persons ether than the Lender of record against the Collateral;
(vi) Certificates of insurance or insurance binders evidencing compliance with Section 5.3
hereof and the applicable provisions of the Security Documents;
(vii) Borrowing Base Report as of the Closing Date;
(viii) A certificate of the Secretary or an Assistant Secretary of the Borrower with respect
to resolutions of its Board of Directors or other authorized Committee thereof, authorizing the
execution and delivery of the Loan Documents and identifying the officer(s) authorized to execute,
deliver and take all other actions required under this Agreement, and providing specimen signatures
of such officer(s);
(ix) The Certificate of Incorporation of the Borrower and all amendments and supplements
thereto, as flied in the office of the Secretary of State of its jurisdiction of formation,
certified by said Secretary of State as being a true and correct copy thereof;
(x) The By-laws of the Borrower and all amendments and supplements thereto, certified by the
Secretary or an Assistant Secretary of the Borrower as being a true and correct copy thereof;
(xi) A certificate of the Secretary of State of the Borrowers jurisdiction of incorporation
as to legal existence and good standing of the Borrower in such state;
(xii) A certificate of the Secretaries of State of each state in which the Borrower is doing
business as to the due qualification and good standing of the Borrower as a foreign, corporation in
such states;
(xiii) An opinion addressed to the Lender from Goodwin, Procter, LLP , counsel to the
Borrower;
(xiv) A certificate of the chief financial officer of the Borrower as to the solvency of the
Borrower, the accuracy of the Borrowers representations and warranties and such other matters
as the Lender may request;
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(xv) A report in substantially the form of Exhibit D hereto signed on behalf of the Borrower
by its chief financial officer with respect to the financial statements required to be delivered
pursuant to Section 4.6; and
(xvi) Such other documents, instruments, opinions and certificates, and completion of such
other matters, as the Lender may reasonably deem necessary or appropriate.
(b) No litigation, arbitration, proceeding or investigation shall be pending or threatened
which questions the validity or legality of the transactions contemplated by any Loan Document or
seeks a restraining order, injunction or damages in connection therewith, or which, in the judgment
of the Lender, might adversely affect the transactions contemplated hereby or might have a
materially adverse affect on the assets, business financial condition or prospects of the Borrower.
(c) All necessary filings and recordings against the Collateral shall have been completed and
the Lenders liens on the Collateral shall have been perfected, as contemplated by the Security
Documents.
(d) The Borrower shall have paid to the Lender all fees to be paid hereunder on or prior to
the Closing Date.
3.2.
Conditions Precedent to all Loans and Letters of Credit.
The obligation of the Lender to
make any Loan, including the initial Loan, and to issue any Letter of Credit is further subject to
the following conditions:
(a) Receipt by the Lender of a Borrowing Base Report, together with an Accounts Receivable
aging report and such other information regarding Accounts Receivable as the Lender may require,
all in form and substance satisfactory to the Lender, and the Notice of Borrowing with respect to
any Revolving Credit Loan or the Letter of Credit Application and Agreement with respect to any
Letter of Credit;
(b) The Borrower shall have satisfied the conditions set forth in Sections 2.1 and 2A.l
hereof;
(c) The outstanding Loans and Letters of Credit do not and, after giving effect to any
requested Loan or Letter of Credit, will not exceed the limitations set forth in Sections 2.1 and
2A.1(a) hereof;
(d) The representations and warranties contained in Section IV shall be true and accurate in
all material respects on and as of the date of such Notice of Borrowing or Letter of Credit
Application and on the effective date of the making of each Loan or
issuance of each Letter of Credit as though made at and as of each such date (except to the
extent that such representations and warranties expressly relate to an earlier date);
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(e) No Default or Event of Default shall have occurred and be continuing at the time of and
immediately after the making of such requested Loan or the issuance of such requested Letter of
Credit;
(f) The resolutions referred to in Section 3.1 shall remain in full force and effect; and
(g) No change shall have occurred in any law or regulation or interpretation thereof that, in
the reasonable opinion of counsel for the Lender, would make it illegal or against the policy of
any governmental agency or authority for the Lender to make Revolving Credit Loans hereunder or to
issue Letters of Credit hereunder (as the case may be).
The making of each Loan and the issuance of each Letter of Credit shall be deemed to be a
representation and warranty by the Borrower on the date of the making of such Loan or the issuance
of such Letter of Credit as to the accuracy of the facts referred to in subsection (c) of this
Section 3.2 and of the satisfaction of all of the conditions set forth in this Section 3.2.
SECTION IV.
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make Loans and to issue
Letters of Credit hereunder, the Borrower represents and warrants to the Lender that except as set
forth on Exhibit C attached hereto:
4.1.
Organization; Qualification; Business.
(a) Each of the Borrower and its Subsidiaries (all of which are listed in Exhibit C attached
hereto) (i) is a corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of formation, (ii) has all requisite power to own its property and conduct its
business as now conducted and as presently contemplated and (iii) is duly qualified and in good
standing as a foreign corporation and is duly authorized to do business in each jurisdiction (all
of which are listed on Exhibit C attached hereto) where the nature of its properties or business
requires such qualification, except where the failure to be so qualified would not have a material
adverse effect on the business, financial condition, assets or properties of the Borrower or of the
Borrower and its Subsidiaries taken as a whole.
(b) Since the date of the Audited Financial Statement, the Borrower has continued to engage in
substantially the same business as that in which it was then engaged and is engaged in no unrelated
business.
4.2.
Corporate Authority; No Conflicts.
The execution, delivery and performance of the Loan
Documents and the transactions contemplated thereby are within the power and authority of the
Borrower and have been authorized by all necessary corporate proceedings, and do not and will not
(a) contravene any provision of the Certificate of Incorporation or By-Laws of the Borrower or any
law, rule or regulation applicable to the Borrower, (b) contravene any provision of, or constitute
an event of default or event that, but for the requirement that time
21
elapse or notice be given, or both, would constitute an event of default under, any other
agreement, instrument, order or undertaking binding on the Borrower, or (c) result in or require
the imposition of any Encumbrance on any of the properties, assets or rights of the Borrower,
except in favor of the Lender.
4.3.
Valid Obligations.
The Loan Documents and all of their respective terms and provisions
are the legal, valid and binding obligations of the Borrower, enforceable in accordance with their
respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other
laws affecting the enforcement of creditors rights generally, and except as the remedy of specific
performance or of injunctive relief is subject to the discretion of the court before which any
proceeding therefore may be brought. The Security Documents have effectively created in favor of
the Lender legal, valid and enforceable security interests in the Collateral and such security
interests are fully perfected first priority security interests.
4.4.
Consents or Approvals.
The execution, delivery and performance of the Loan Documents and
the transactions contemplated herein do not require any approval or consent of, or filing or
registration with, any governmental or other agency or authority, or any other Person (including
without limitation any lessor or lessee of Borrowers properties), except under or as contemplated
by the Security Documents.
4.5.
Title to Properties; Absence of Encumbrances.
Each of the Borrower and its Subsidiaries
has good and marketable title to all of the properties, assets and rights of every name and nature
now purported to be owned by it, and good and valid leasehold title to all of the properties,
assets and rights of every name and nature now purported to be leased by it, including, without
limitation, such properties, assets and rights as are reflected in the Audited Financial Statements
(except such properties, assets or rights as have been disposed of in the ordinary course of
business since the date thereof), free from all Encumbrances except Permitted Encumbrances, and
free from all defects of title that might materially adversely affect such properties, assets or
rights, or Borrowers or its
Subsidiaries operations conducted with respect thereto, taken as a whole. All material leases
under which Borrower or its Subsidiaries is the lessor or lessee are in full force and effect and
there are no existing defaults or events that with the giving of notice or passage of time or both
could ripen into defaults, by the Borrower or, to the Borrowers knowledge, the lessor thereunder.
No third parties possess any rights with respect to any of Borrowers or its Subsidiaries owned or,
to the Borrowers knowledge, leased properties, the exercise of which would have a material adverse
effect on the Borrower or its Subsidiaries or their respective operations, taken as a whole. All
real property owned or leased by the Borrower (other than short-term residential rentals) is
described in Exhibit C hereto.
4.6.
Financial Statements; Indebtedness,
(a) The Borrower has furnished to the Lender its audited consolidated financial statements for
the years ended March 31, 2006, March 31, 2005 and March 31, 2004 (the Audited Financial
Statement). All such financial statements are prepared in accordance with GAAP applied on a
consistent basis throughout the periods specified and present fairly the financial position of the
Borrower and its Subsidiaries as of such dates and the results of the
22
operations of the Borrower and its Subsidiaries for such periods in all material respects. The
Borrower has also furnished to the Lender its pro forma consolidated balance sheet as of August 31,
2006 and projections of its future consolidated results of operations, all of which were reasonable
when made and continue to be reasonable at the date hereof.
(b) At the date hereof, the Borrower has no Indebtedness or other material liabilities, debts
or obligations, whether accrued, absolute, contingent or otherwise, and whether due or to become
due, including, but not limited to, liabilities or obligations on account of taxes or other
governmental charges, that are not set forth on the Audited Financial Statement, on Exhibit C
hereto or accrued in the ordinary course of business consistent with past practices since the date
of the Audited Financial Statement.
4.7.
Changes.
Since the date of the Audited Financial Statement, there have been no changes in
the assets, liabilities, financial, condition, business or prospects of the Borrower or any of its
Subsidiaries (including as a result of any applicable law or governmental regulation, ruling or
policy) other than changes in the ordinary course of business, the effect of which has not, in the
aggregate, been materially adverse to the Borrower and its Subsidiaries taken as a whole.
4.8.
Solvency.
The Borrower has and, after giving effect to the Loans, will have, assets (both
tangible and intangible) having a fair saleable value in excess of the amount required to pay the
probable liability on its then-existing debts (whether matured or unmatured, liquidated or
unliquidated, fixed or contingent); the Borrower has and will have access to adequate capital for
the conduct of its business and the discharge of its debts incurred in connection therewith as such
debts mature; the Borrower was not
insolvent immediately prior to the making of the Loans and immediately after giving effect
thereto, the Borrower will not be insolvent.
4.9.
Defaults.
As of the date of this Agreement, no Default exists.
4.10.
Taxes.
The Borrower and its Subsidiaries have filed all federal, state and other tax
returns required to be filed, and all taxes, assessments and other governmental charges due from
any of them have been fully paid, except for such taxes, assessments or charges that are being
contested in good faith by appropriate proceedings and with respect to which (a) adequate reserves
have been established and are being maintained in accordance with GAAP and (b) no lien has been
filed to secure such taxes, assessments or charges. All such contests at the date hereof are
described on Exhibit C hereto. The Borrower and its Subsidiaries have not executed any waiver that
would have the effect of extending the applicable statute of limitations in respect of tax
liabilities. The federal and state income tax returns of the Borrower and its Subsidiaries have not
been audited or, to the best of the Borrowers knowledge, otherwise examined by any federal or
state taxing authority. The Borrower and its Subsidiaries have established on their books reserves
adequate for the payment of all federal, state and other tax liabilities.
4.11.
Litigation.
There is no litigation, arbitration, proceeding or investigation pending,
or, to the knowledge of the Borrowers or any Subsidiarys officers, threatened, against the
Borrower or any Subsidiary that, if adversely determined, may reasonably be expected to result in a
material judgment not fully covered by insurance, may reasonably be expected to result in a
23
forfeiture of all or any substantial part of the property of the Borrower or its Subsidiaries, or
may reasonably be expected to have a material adverse effect on the assets, business or prospects
of the Borrower and its Subsidiaries taken as a whole.
4.12.
Subsidiaries.
All the Subsidiaries of the Borrower are listed on Exhibit C hereto. The
Borrower (or any Subsidiary, if applicable) is the owner, free and clear of all Encumbrances, of
all of the issued and outstanding stock or other equity interest of each Subsidiary. All shares of
such stock or other equity interest held by the Borrower have been validly issued and are fully
paid and nonassessable, and no rights to subscribe to any additional shares have been granted, and
no options, warrants or similar rights are outstanding
4.13.
Investment Company Act.
Neither the Borrower nor any of its Subsidiaries is subject to
regulation under the Investment Company Act of 1940, as amended.
4.14.
Compliance.
The Borrower has all necessary permits, approvals, authorizations, consents,
variances, licenses, franchises, registrations and other rights and privileges (including patents,
trademarks, trade names and copyrights) to allow it to own and operate its business and properties
without any violation of laws, regulations, authorizations and orders of public authorities
(including without limitation
Environmental Laws) or the rights of others, except to the extent that any such violation
would not have a material adverse effect on the business, financial condition or operation of the
Borrower and its Subsidiaries taken as a whole. The Borrower and each Subsidiary are duly
authorized, qualified and licensed under, and the Borrower, its Subsidiaries and all real
properties owned or leased by them are in compliance with, all applicable laws, regulations,
authorizations and orders of public authorities, including, without limitation, Environmental Laws,
except to the extent that any such failure to be so authorized, qualified, licensed or in
compliance would not have a material adverse effect on the business, financial condition or
operation of the Borrower and its Subsidiaries taken as a whole. The Borrower and each Subsidiary
have performed all obligations required to be performed by it under, and is not in default under or
in violation of its Certificate of Incorporation or By-laws or any other agreement, lease,
mortgage, note, bond, indenture license or other instrument or undertaking to which it is a party
or by which any of it or any of its properties are bound, except for violations none of which,
either individually or in the aggregate, would have any material adverse effect on the business,
condition (financial or otherwise) or assets of the Borrower and its Subsidiaries taken as a whole.
4.15.
ERISA.
The Borrower and its ERISA Affiliates are in compliance in all material respects
with ERISA and the provisions of the Code and the regulations and published interpretations
thereunder applicable to the Plans. No ERISA Event has occurred or is reasonably expected to occur,
including by reason of the consummation of the transactions contemplated by this Agreement that
when taken together with all other such ERISA Events, could reasonably be expected to result in
material liability to the Borrower or any of its ERISA Affiliates. None of the Plans had any
unfunded benefit liabilities (within the meaning of Section 4001(a)(18) of ERISA) as of the last
annual valuation dates applicable thereto.
24
4.16.
Environmental Matters.
(a) The Borrower and each of its Subsidiaries are in compliance with the terms and conditions
of all permits, licenses and authorizations required under any Environmental Law, and are also in
compliance with all applicable orders, decrees, judgments and injunctions, issued, entered,
promulgated or approved under any Environmental Law, except to the extent failure to comply would
not have a material adverse effect on the business, financial condition or operations of the
Borrower and it Subsidiaries.
(b) No written notice, notification, demand, request for information, citation, summons or
order has been issued and is outstanding, no complaint has been filed, no penalty has been assessed
and no investigation or review is pending or, to the best of the Borrowers knowledge, threatened
by any governmental or other entity (i) with respect to any alleged failure by the Borrower or any
of its Subsidiaries to have any permit, license or authorization required in connection with the
conduct of its business or to comply with any Environmental Laws, except to the extent such failure
would not have a material adverse effect on the business, financial condition or operations of the
Borrower and its
Subsidiaries or (ii) regarding the presence of any Hazardous Material at, on or under any
property now or previously owned, or, to the Borrowers knowledge, leased or used, by the Borrower
or any of its Subsidiaries or any other location to which Hazardous Materials generated or used by
the Borrower or any of its Subsidiaries from such property had been transported or which they have
been disposed of.
(c) No material oral or written notification of a release of a Hazardous Material has been
filed by or on behalf of the Borrower or any of its Subsidiaries and no property now or previously
owned, or, to the Borrowers knowledge, leased or used, by the Borrower or any of its Subsidiaries
is listed or, to the best of the Borrowers knowledge, proposed for listing on the National
Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or on any similar state list of sites requiring investigation or clean-up.
(d) There are no Encumbrances arising under or pursuant to any Environmental Law on any of the
real property or properties owned, or, to the Borrowers knowledge, leased or used, by the Borrower
or any of its Subsidiaries and no governmental actions have been taken or, to the best of the
Borrowers knowledge, are in process which could subject any of such properties to such liens or
Encumbrances or, as a result of which the Borrower or any of its Subsidiaries would be required to
place any notice or restriction relating to the presence of Hazardous Materials at any property
owned by it in any deed to such property.
(e) Neither the Borrower nor any of its Subsidiaries nor, to the best knowledge of the
Borrower, any previous owner, tenant, occupant or user of any property owned by the Borrower or any
of its Subsidiaries has (i) engaged in or permitted any operations or activities upon or any use or
occupancy of any owned, leased or used property, or any portion thereof, for the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining, dumping or disposal
of any Hazardous Materials on, under, in or about such property, except to the extent commonly used
in day-to-day operations of such property and in such case only in compliance in all material
respects with all Environmental Laws, or (ii) transported any Hazardous Materials to, from or
across such property except to the extent commonly used in day-to-day operations of such property
and, in such case, in compliance in all material respects with, all Environmental
25
Laws; nor to the best knowledge of the Borrower have any Hazardous Materials migrated from other
properties upon, about or beneath such property, nor, to the best knowledge of the Borrower, are
any Hazardous Materials presently constructed, deposited, stored or otherwise located on, under, in
or about such property except to the extent commonly used in day-to-day operations of such property
and, in such case, in compliance in all material respects with all Environmental Laws.
4.17.
Restrictions on the Borrower
. The Borrower is not party to or bound by any contract,
agreement or instrument, nor subject to any charter or other corporate restriction which will,
under current or foreseeable conditions, materially and adversely affect the business, property,
assets, operations or conditions, financial or otherwise of the Borrower or any of its
Subsidiaries.
4.18.
Labor Relations
. There is (i) no unfair labor practice complaint pending against the
Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened, before
the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or
under any collective bargaining agreement is so pending against the Borrower or any of its
Subsidiaries or, to the best knowledge of the Borrower, threatened, except for such complaints,
grievances and arbitration proceedings which, if adversely decided, would not have a material and
adverse effect on the condition (financial or otherwise), properties, business or results of
operations of the Borrower or any of its Subsidiaries, (ii) no strike, labor dispute, slowdown or
stoppage pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the
Borrower, threatened against the Borrower or any of its Subsidiaries, except for any such labor
action as would not have a material and adverse effect on the condition (financial or otherwise)
properties, business or results of operations of the Borrower or any of its Subsidiaries and (iii)
to the best knowledge of the Borrower, no union representation question exists with respect to the
employees of the Borrower or any of its Subsidiaries and, to the best knowledge of the Borrower, no
union organizing activities are taking place, except for any such question or activities as would
not have a material and adverse effect on the condition (financial or otherwise), properties,
business or results of operations of the Borrower or any of its Subsidiaries.
4.19.
Trade Relations
. There exists no actual or, to the best knowledge of the Borrower,
threatened termination, cancellation or limitation of, or any material modification or change in,
the business relationship between the Borrower or any of its Subsidiaries and any customer or any
group of customers whose purchases, individually or in the aggregate; are material to the business
of the Borrower and its Subsidiaries, taken as a whole, or with any material vendor, except in each
case, where the same could not reasonably be expected to have a material adverse effect on the
business, financial condition, assets or properties of the Borrower and its Subsidiaries, taken as
a whole.
4.20.
Margin Rules
. The Borrower does not own or have any present intention of purchasing or
carrying, and no portion of any Loan shall be used for purchasing or carrying, any margin
security or margin stock as such terms are used in Regulations T, U or X of the Board of
Governors of the Federal Reserve System.
26
4.21.
Disclosure
. No representation or warranty made by the Borrower in any Loan
Document and no document or information furnished to the Lender by or on behalf of or at the
request of the Borrower in connection with any of the transactions contemplated by the Loan
Documents contains any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained therein not misleading in light of the
circumstances in which they are made.
SECTION V
AFFIRMATIVE COVENANTS
The Borrower covenants that so long as any Loan, Letter of Credit or other Obligation remains
outstanding or the Lender has any obligation to lend or to issue any Letter of Credit hereunder:
5.1.
Financial Statements
. The Borrower shall furnish to the Lender:
(a) As soon as available to the Borrower, but in any event within 120 days after the end of
each fiscal year commencing with the fiscal year ending March 31, 2007, the Borrowers consolidated
and consolidating balance sheets as of the end of such fiscal year and related consolidated and
consolidating statements of income, retained earnings and cash flow for such year, prepared in
accordance with GAAP and audited and certified without qualification by the Borrowers Accountants
in the case of such consolidated statements, and certified by the chief financial officer of the
Borrower in the case of such consolidating statements; and, concurrently with such financial
statements, a copy of the Borrowers Accountants management report.;
(b) As soon as available to the Borrower, but in any event within 45 days after the end of
each fiscal quarter, the Borrowers consolidated and consolidating balance sheets as of the end of
and related consolidated and consolidating statements of income, retained earnings and cash flow
for, the fiscal quarter then ended and the portion of the year then ended prepared in accordance
with GAAP and certified by the chief financial officer of the Borrower, except for lack of
footnotes and subject to normal, recurring year-end adjustments that shall not in the aggregate be
material in amount;
(c) Concurrently with the delivery of each financial statement pursuant to subsections (a) and
(b) of this Section 5.1, a covenant compliance report in substantially the form of Exhibit D hereto
signed on behalf of the Borrower by its chief financial officer;
(d) Deleted;
(e) So long as any Loan is outstanding, as soon as available, but in any event within 20 days
after the end of each month, and so long as no Loan is outstanding, as soon as available, but in
any event within 30 days after the end of each fiscal quarter, a Borrowing Base Report, together
with an Accounts Receivable aging report and such other information regarding Accounts Receivable
as the Lender may require;
27
(f) As soon as available to the Borrower, but in any event within 90 days after the
beginning of each fiscal year, the Borrowers projections for such fiscal year, prepared on a
quarterly basis and including consolidated balance sheets and statements of income, retained
earnings and cash flows;
(g) Promptly after the receipt thereof by the Borrower, copies of any reports (including any
so-called management letters) submitted to the Borrower by independent public accountants in
connection with any annual or interim review of the accounts of the Borrower made by such
accountants;
(h)Deleted; and
(i) From time to time, such other financial data and information about the Borrower or its
Subsidiaries as the Lender may reasonably request.
5.2.
Conduct of Business
. The Borrower and each of its Subsidiaries shall:
(a) Duly observe and comply in all material respects with all laws, regulations, decrees,
orders, judgments and valid requirements of any governmental authorities applicable to its
corporate existence, rights and franchises, to the conduct of its business and to its property and
assets (including without limitation all Environmental Laws and ERISA), and shall maintain and keep
in full force and effect and comply in all material respects with all licenses and permits
necessary to the proper conduct of its business, except where the failure to comply in any instance
would not have a material adverse effect on the business, financial condition or operations of the
Borrower and its Subsidiaries taken as a whole; and
(b) Maintain their existence (except to the extent permitted pursuant to Section 7.4) and
remain or engage substantially in the same business as that in which they are now engaged and in no
unrelated business.
5.3
Maintenance and Insurance
.
(a) The Borrower and each of its Subsidiaries shall maintain their properties in good repair,
working order and condition, ordinary wear and tear and damage by fire or other casualty excepted,
as required for the normal conduct of their business.
(b) The Borrower and each of its Subsidiaries shall at all times maintain liability and
casualty insurance on its properties (including all Collateral) with financially sound and
reputable insurers in such amounts and with such coverages, endorsements, deductibles and
expiration dates as the officers of the Borrower in the exercise of their reasonable judgment deem
to be adequate, as are customary in the industry for companies of established reputation engaged in
the same or similar business and owning or operating similar properties and as shall be reasonably
satisfactory to the Lender. The Lender shall be named as loss payee only with respect to any
insurance policy in Borrowers name, additional insured and/or mortgagee under such insurance as
the Lender shall require from time to time, and the Borrower shall provide to the Lender lass
payable endorsements in form and substance reasonably satisfactory to the Lender. In addition, the
Lender shall be given thirty (30) days advance notice of any cancellation
28
of insurance. In the event of failure to provide and maintain insurance as herein provided, the
Lender may, at its option, provide such insurance and charge the amount thereof to the Borrower as
a Revolving Credit Loan. The Borrower shall furnish to the Lender certificates or other evidence
satisfactory to the Lender of compliance with the foregoing insurance provisions. The Lender shall
not, by the fact of approving, disapproving or accepting any such insurance, incur any liability
for the form or legal sufficiency of insurance contracts, solvency of insurance companies or
payment of law suits, and the Borrower hereby expressly assumes full responsibility therefore and
liability, if any, thereunder.
5.4
Taxes
. The Borrower shall pay or cause to be paid all taxes, assessments or governmental
charges on or against it or any of its Subsidiaries or its or their properties on or prior to the
time when they become due; except for any tax, assessment or charge that is being contested in good
faith by appropriate proceedings and with respect to which adequate reserves have been established
and are being maintained in accordance with GAAP if no Encumbrance shall have been flied to secure
such tax, assessment or charge.
5.5.
Inspection
. The Borrower shall permit the Lender and its designees, at any reasonable
time and at reasonable intervals of time, and upon reasonable notice (or if a Default shall have
occurred and is continuing, at any time and without prior notice), to (i) visit and inspect the
United States properties of the Borrower and its Subsidiaries, (ii) examine and make copies of and
take abstracts from the United States books and records of the Borrower and its Subsidiaries, and
(iii) discuss the affairs, finances, and accounts of the Borrower and its Subsidiaries with their
appropriate officers, employees and independent accountants, all at the expense of the Borrower.
Without limiting the generality of the foregoing, the Borrower will permit reviews, at least once
annually (and semi-annually until such time as Borrower has provided audited fiscal financial
statements to Lender as required pursuant to Section 5.1 of this Agreement) and during any period
in which Loans have remained outstanding for at least thirty (30) days, of the United States books
and records of the Borrower and its Subsidiaries to be carried out at the Borrowers expense by
commercial finance examiners (whether employed by the Lender or by third parties) designated by the
Lender. The Borrower shall also permit the Lender to arrange for verification of Accounts
Receivable, under reasonable procedures, directly with any account debtors or by other methods.
5.6.
Maintenance of Books and Records
. The Borrower shall keep adequate books and records of
account, in which true and complete entries will be made reflecting all of its and its
Subsidiaries business and financial transactions in accordance with GAAP and applicable law.
5.7.
Use of Proceeds
.
(a) The Borrower will use the proceeds of Revolving Credit Loans solely for the working
capital needs of the Borrower, including the payment of the costs and expenses of the transactions
contemplated hereby.
(b) No portion of any Loan shall be used for the purpose of purchasing or carrying any
margin stock or margin security as such terms are used in Regulations T, U and X of the Board
of Governors of the Federal Reserve System, or otherwise in violation of such regulations.
29
5.8.
Further Assurances
. At any time and from time to time the Borrower shall execute and
deliver such further documents and take such further action as may reasonably be requested by the
Lender to affect the purposes of the Loan Documents.
5.9.
Notification Requirements
. The Borrower shall furnish to the Lender:
(a) Promptly upon becoming aware of the existence of any condition or event that constitutes a
Default, written notice thereof specifying the nature and duration, thereof and the action being or
proposed to be taken with respect thereto;
(b) Promptly upon becoming aware of any litigation or of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Borrower or any of its
Subsidiaries of which they have notice, the outcome of which would or might have a materially
adverse effect on the assets, business or prospects of the Borrower alone or the Borrower and its
Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be
taken with respect thereto; and
(c) Promptly after any occurrence or after becoming aware of any condition affecting the
Borrower or any Subsidiary which might constitute a material adverse change in or which might have
a material adverse effect on the business, properties or condition (financial or otherwise) of the
Borrower alone or the Borrower and its Subsidiaries, taken as a whole, written notice thereof.
5.10.
ERISA Compliance and Reports
.
(a) Each Plan shall comply in all material respects with ERISA and the Code, except to the
extent failure to comply in any instance would not have a material adverse effect on the business,
financial condition or operations of the Borrower and its Subsidiaries taken as a whole.
(b) With respect to any Plan, the Borrower shall, or shall cause its ERISA Affiliates to
furnish to the Lender promptly as soon as possible and in any event within 10 days after the
Borrower or any of its ERISA Affiliates knows that any ERISA Event has occurred or expected to
occur, a statement of the chief financial officer of the Borrower describing such ERISA Event,
including copies of any notice concerning such ERISA Event received from the PBGC, a plan
administrator, or from a Multiemployer Plan sponsor, and the action, if any, the Borrower or such
ERISA Affiliate proposes to take with respect thereto promptly after the adoption of any Pension
Plan, the Borrower shall notify the Lender of such adoption.
5.11.
Environmental Compliance
.
(a) The Borrower and its Subsidiaries will comply in all material respects with all applicable
Environmental Laws in all jurisdictions in which any of them operates now or in the future, and the
Borrower and its Subsidiaries will comply in all material respects with all such Environmental Laws
that may in the future be applicable to the Borrowers or any Subsidiarys business, properties and
assets.
30
(b) If the Borrower or any Subsidiary shall (i) receive notice that any material violation of
any Environmental Law may have been committed or is about to be committed by the Borrower or any
Subsidiary, (ii) receive notice that any administrative or judicial complaint or order has been
filed or is about to be filed against the Borrower or any Subsidiary alleging a material violation
of any Environmental Law requiring the Borrower or any Subsidiary to take any action in connection
with the release of Hazardous Materials into the environment, (iii) receive any notice from a
federal, state or local government agency or private party alleging that the Borrower or any
Subsidiary may be liable or responsible for any material amount of costs associated with a response
to or cleanup of a release of Hazardous Materials into the environment or any damages caused
thereby, (iv) become aware of any investigative action or proceedings by a governmental agency or
authority commenced or threatened against the Borrower or any of its Subsidiaries regarding any
potential violation of Environmental Laws or any spill, release, discharge or disposal of any
Hazardous Material or (v) notify any governmental agency or authority regarding any potential
violation of Environmental Laws or any spill, release, discharge or disposal of any Hazardous
Material by the Borrower or any Subsidiary, the Borrower shall promptly notify the Lender thereof
(together with a copy of any such notice) and of any action being or proposed to be taken with
respect thereto and thereafter shall continue to furnish to the Lender all further notices,
demands, reports and other information regarding the foregoing.
5.12.
Loss or Depreciation of Collateral
. The Borrower shall, notify the Lender promptly of
the occurrence at any time of the following events if, individually or in the aggregate, the amount
involved in connection with such events exceeds $750,000.00: (i) rejection or return of any goods
or services giving rise to an Eligible Account to the extent such rejection or return is not in the
ordinary course of business, (ii) repossession, loss of or damage to any goods giving rise to any
Eligible Account; (iii) any request by an account debtor for credit, adjustment, set off or
counterclaim of or with respect to an Eligible Account; (iv) any adjustment by the Borrower of the
amount owing on an Eligible Account; (v) any goods, services or other dispute; (vi) any material
delay in the Borrowers performance of any of its obligations to any customer if the Borrower has
an Eligible Account with such customer; and (vii) any other material event affecting Eligible
Accounts or the value or amount thereof, including without limitation any event which would result
in an Eligible Account no longer qualifying as an Eligible Account.
5.13.
Operating Accounts
. Borrower shall continue to use Lender as the primary depository
bank for the Borrowers United States-based operating accounts.
SECTION VI
FINANCIAL COVENANTS
The Borrower covenants that so long as any Loan, Letter of Credit or other Obligation remains
outstanding, or the Lender has any obligation to make any Loan or issue any Letter of Credit
hereunder:
6.1.
Consolidated Tangible Net Worth
. The Borrower shall at all times maintain a Consolidated
Tangible Net Worth of not less than (a) $45,000,000.00 as of March 31, 2006, and
31
(b) for each fiscal quarter thereafter, an amount equal to (i) the amount of Consolidated Tangible
Net Worth required to be maintained for the preceding fiscal quarter, plus (ii) 50.0% of
Consolidated Net Income for such preceding fiscal quarter (for purposes of this clause (ii), only
positive Consolidated Net Income shall be included and any net losses shall be disregarded).
6.2.
Cash Requirements
.
(a) The Borrower and Virtusa Securities Corporation shall at all times maintain aggregate cash
and cash equivalents in United States based accounts, or otherwise on hand in the United States, of
not less than $10,000,000.00, net of any outstanding Loans or Reimbursement Obligations.
(b) The Borrower and its Subsidiaries shall at all times maintain cash and cash equivalents
including both foreign-based accounts and United States-based accounts of at least $15,000,000.00.
(c) The Borrower and its Subsidiaries shall not at any time hold cash and cash equivalents in
foreign-based accounts, or otherwise on hand outside the United States, in excess of
$20,000,000.00.
6.3
Maximum Net Loss
. The Borrower and its Subsidiaries shall not incur (i) a consolidated net
loss in an amount greater than $1,250,000.00 (plus FAS123R charges) in any fiscal quarter, or (ii)
a consolidated net loss in any two consecutive fiscal quarters.
6.4.
Capital Expenditures
. The Borrower shall not make aggregate Capital Expenditures equal to
or in excess of $7,500,000.00 during the fiscal year ending March 31, 2007 or any fiscal year
thereafter.
SECTION VII
NEGATIVE COVENANTS
The Borrower covenants that so long as any Loan, Letter of Credit or other Obligation remains
outstanding or the Lender has any obligation to make any Loan or to issue any Letter of Credit
hereunder, without the prior written consent of the Lender:
7.1.
Indebtedness
. Neither Borrower nor Virtusa Securities Corporation shall create, incur,
assume, guarantee or be or remain liable with respect to any Indebtedness other than the following:
(a) Obligations;
(b) Indebtedness existing as of the date of this Agreement and disclosed on Exhibit C hereto
but not any increase in the principal amounts thereof nor any renewals or refinancings thereof;
32
(c) Indebtedness for taxes, assessments or governmental charges to the extent that payment
therefore shall at the time not be required to be made in accordance with Section 5.4;
(d) Current trade liabilities on open account for the purchase price of services, materials
and supplies incurred by the Borrower in the ordinary course of business (not as a result of
borrowing), so long as all of such open account Indebtedness shall be promptly paid and discharged
when due or in conformity with customary trade terms and practices, except for any such open
account Indebtedness which is being contested in good faith by the Borrower, as to which adequate
reserves required by GAAP have been established and are being maintained and as to which no
Encumbrance has been placed on any property of the Borrower;
(e) Intentionally Omitted;
(f) Other Indebtedness incurred in the ordinary course of business and renewals and
refinancings thereof, provided that such Indebtedness does not exceed $1,000,000.00 in the
aggregate at any time outstanding; and
(g) Guarantees permitted under Section 7.2 hereof.
7.2.
Contingent Liabilities
. Neither the Borrower nor Virtusa Securities Corporation shall
create, incur, assume, guarantee or be or remain liable with respect to any Guarantees other than
(i) Guarantees existing on the date of this Agreement and disclosed on Exhibit C hereto, (ii)
Guarantees resulting from the endorsement of negotiable instruments for deposit or collection in
the ordinary course of business, (iii) Guarantees in an amount not to exceed $1,000,000.00 in the
aggregate at any time outstanding, and (iv) Guarantees of employee loans and obligations in an
amount not to exceed $1,000,000.00 in the aggregate at any time outstanding.
7.3.
Encumbrances
. Neither the Borrower nor Virtusa Securities Corporation shall create,
incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or
encumbrance of any kind, including the lien or retained security title of a conditional vendor,
upon or with respect to any of its property or assets (Encumbrances), or assign or otherwise
convey any right to receive income, including the sale or discount of Accounts Receivable with or
without recourse, except the following (Permitted Encumbrances):
(a) Encumbrances in favor of the Lender to secure Obligations;
(b) Encumbrances existing as of the date of this Agreement and disclosed in Exhibit C hereto;
(c) Intentionally Omitted;
(d) Encumbrances securing Indebtedness to the extent such Indebtedness is permitted by Section
7.1(f);
(e) Liens for taxes, fees, assessments and other governmental charges to the extent that
payment of the same may be postponed or is not required in accordance with the provisions of
Section 5.4;
33
(f) Landlords and lessors liens in respect of rent not in default or liens in respect of
pledges or deposits under workmens compensation, unemployment insurance, social security laws, or
similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to
litigation; mechanics, warehousemans, laborers and materialmens and similar liens, if the
obligations secured by such liens are not then delinquent; liens securing the performance of bids,
tenders, contracts (other than for the payment of money); and liens securing statutory obligations
or surety, indemnity, performance or other similar bonds incidental to the conduct of the
borrowers or a Subsidiarys business in the ordinary course and that do not in the aggregate
materially detract from the value of its property or materially impair the use thereof in the
operation of its business;
(g) Judgment liens securing judgments that (i) are not fully covered by insurance, and (ii)
shall not have been in existence for a period longer than 30 days after the creation thereof or, if
a stay of execution shall have been obtained, for a period longer than 30 days after the expiration
of such stay;
(h) Rights of lessors under capital leases to the extent such capital leases are permitted
hereunder;
(i) Easements, rights of way, restrictions and other similar charges or Encumbrances relating
to real property and not interfering in a material way with the ordinary conduct of the Borrowers
business; and
(j) Liens constituting a renewal, extension or replacement of any Permitted Encumbrance.
7.4.
Merger: Purchase. Sale or Lease of Assets; Reorganization; Liquidation
.
(a) The Borrower and its Subsidiaries shall not:
(i) Acquire the capital stock or other equity interests or all or substantially all of the
assets of another Person, whether or not involving a merger or consolidation with such other
Person, unless (w) such other Person is in substantially the same field of business as the Borrower
and substantially all of the assets acquired in such acquisition are used or useful to the business
of the Borrower by the Borrower, (x) the total purchase price far any single acquisition does not
exceed $4,000,000.00 (unless a greater amount is consented to by the Lender), (y) if a merger, the
Borrower or one of its Subsidiaries is the survivor of such merger and (z) both immediately before
and after giving effect to such acquisition, no Default shall exist;
(ii) Merge or consolidate into or with any other Person, or commence a reorganization, other
than (x) a merger of any Subsidiary with and into the Borrower, with the Borrower as the survivor
of such merger, (y) a merger or consolidation into or with another Person, or a reorganization, in
each case, where the holders of more than 50.0% of the ordinary voting power for the election of a
majority of the members of the board of directors of the Borrower prior to such transaction retain
such power after the transaction, or (z) a merger
permitted by Section 7.4(a)(i) above; or
34
(iii) Liquidate or dissolve, except that any wholly-owned Subsidiary may liquidate or
dissolve.
(b) The Borrower shall not sell, lease (as lessor) or otherwise dispose of any assets or
properties, other than sales of Qualified investments and inventory and obsolete or worn out
equipment, in each case in the ordinary course of business and consistent with past practices.
7.5.
Subsidiaries
. The Borrower shall not permit any of its Subsidiaries to issue any
additional shares of its capital stock or other equity securities, any options therefore or any
securities convertible thereto, other than to the Borrower. Neither the Borrower nor any of its
Subsidiaries shall sell, transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except to the Borrower or any of its wholly-owned subsidiaries.
7.6.
Restricted Payments
. The Borrower shall not pay, make, declare or authorize any
Restricted Payment other than:
(a) Compensation paid to employees, officers and directors in the ordinary course of business
and consistent with prudent business practices;
(b) Dividends payable solely in common stock;
(c) Dividends paid by any Subsidiary to the Borrower; and
(d) Redemptions of shares of capital stock of the Borrower which are restricted securities
(as defined in Rule 144 promulgated under the Securities Act of 1933) in an amount not to exceed
5.0% of the aggregate total voting stock of the Borrower issued and outstanding on a fully diluted
basis.
7.7.
Investments; Purchases of Assets
. The Borrower shall not make or maintain any Investments
or purchase or otherwise acquire any material amount of assets other than:
(a) Investments existing on the date hereof in Subsidiaries;
(b) Qualified Investments;
(c) Capital Expenditures to the extent
permitted by Section 6.4;
(d) Normal trade credit extended in the ordinary course of business and consistent with
prudent business practice;
(e) Advances to employees for business related expenses to be incurred in the ordinary course
of business and consistent with past practices in an amount not to exceed $500,000.00 in the
aggregate outstanding at any one time, provided that advances to any single employee shall not
exceed $50,000.00 in the aggregate;
35
(f) Investments in any Subsidiary of the Borrower in the ordinary course of business or any
other investment in a Subsidiary which does not exceed $10,000,000 in the aggregate; and
(g) Loans to any Person (including employees) not in the ordinary course of business not to
exceed $300,000.00 in the aggregate outstanding at any one time.
7.8.
ERISA Compliance
. Neither the Borrower nor any of its ERISA Affiliates nor any Plan shall
(i) engage in any Prohibited Transaction which would have a material adverse effect on the
business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole,
(ii) incur any accumulated funding deficiency (within the meaning of Section 412(a) of the Code
and Section 302 of ERISA), whether or not waived, (iii) permit to exist any material amount of
unfunded benefit liabilities (within the meaning of Section 4001.(a)(1 8) of ERISA), (iv)
terminate any Pension Plan in a manner which could result in the imposition of a lien on any
property of the Borrower or any of its Subsidiaries, (v) fail to make any required contribution to
any Multiemployer Plan or (vi) completely or partially withdraw from a Multiemployer Plan if such
complete or partial withdrawal will result in any material withdrawal liability under Title IV of
ERISA.
7.9.
Transactions with Affiliates
. Except as otherwise provided herein, the Borrower will not
directly or indirectly, enter into any purchase, sale, lease or other transaction with any
Affiliate except (i) transactions in the ordinary course of business on terms that are no less
favorable to the Borrower than those which might be obtained at the time in a comparable arms
length transaction with any Person who is not an Affiliate, including without limitation, any
transfer pricing, service fee or similar agreements between or among Borrower and its Affiliates,
(ii) employment contracts with senior management of the Borrower entered into in the ordinary
course of business and consistent with prudent business practices and (iii) for the avoidance of
doubt, transactions relating to Restricted Payments permitted under Section 7.6. Notwithstanding
the foregoing, the Borrower will not directly or indirectly, pay any management, consulting,
overhead, indemnity, guarantee or other similar fee or charge to any Affiliate; and
7.10.
Fiscal Year
. The Borrower and its Subsidiaries shall not change their March 31 fiscal
year ends without the prior written consent of the Lender.
SECTION VIII
DEFAULTS
8.1.
Events of Default
. There shall be an Event of Default hereunder if any of the following
events occurs:
(a) The Borrower or any Subsidiary shall fail to pay any principal of any Loan, any
Reimbursement Obligation or any interest, fees or other amounts owing by it under any Loan Document
or in respect of any Obligation when the same shall become due and payable, whether at maturity or
at any accelerated date of maturity or at any other date fixed for payment; or
36
(b) The Borrower or any Subsidiary shall fail to perform or comply with any term., covenant or
agreement applicable to it contained in Sections 5.1,5.2(b), 5.5, 5.6, 5.7, 5.9, 5.11, 6 and 7 of
this Agreement; or
(c) The Borrower or any Subsidiary shall fail to perform or comply with any term, covenant or
agreement applicable to it (other than as specified in subsections 8,1(a) or (b) hereof) contained
in this Agreement or any other Loan Document and such default shall continue for ten (10) Business
Days; or
(d) Any representation or warranty of the Borrower made in this Agreement or any other Loan
Document or in any certificate, notice or other writing delivered hereunder or thereunder shall
prove to have been false in any material respect upon the date when made or deemed to have been
made; or
(e) The Borrower or any of its Subsidiaries shall fail to pay when due (after any applicable
period of grace) any amount payable (i) under any Indebtedness exceeding $500,000.00 in principal
amount or (ii) under any agreement for the use a real or personal property requiring aggregate
payments in excess of $500,000.00 in any twelve month period, or fail to observe or perform any
term, covenant or agreement evidencing or securing such indebtedness or relating to such agreement
for the use of real or personal property; or
(f) The Borrower or any of its Subsidiaries shall (i) apply for or consent to the appointment
of or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official
of itself or of all or a substantial part of its property, (ii) be generally not paying its debts
as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv)
commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect),
(v) take any action or commence any case or proceeding under any law relating to bankruptcy,
insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law
providing for the relief of debtors, (vi) fail to contest in a timely or appropriate manner, or
acquiesce in writing to, any petition filed against it in an involuntary case under the United
States Bankruptcy Code or other law, or (vii) take any corporate action for the purpose of
effecting any of the foregoing; or
(g) A proceeding or case shall be commenced against the Borrower or any of its
Subsidiaries, without the application or consent of such Borrower or such Subsidiary in any court
of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or
composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian,
liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar
relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts or any other law providing for the relief of
debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a
period of 30 days; or an order for relief shall be entered in an involuntary case under the Federal
Bankruptcy Code, against the Borrower or such Subsidiary; or action under the laws of the
jurisdiction of incorporation or organization of the Borrower or any of its Subsidiaries similar to
any of the foregoing shall be taken with respect to the Borrower or such Subsidiary and shall
continue unstayed and in effect for a period of 45 days; or
37
(h) A judgment or order for the payment of money shall be entered against the Borrower or any
of its Subsidiaries by any court, or a warrant of attachment or execution or similar process shall
be issued or levied against property of the Borrower or such Subsidiary, that in the aggregate
exceeds $500,000.00 in value, the payment of which is not fully covered by insurance in excess of
any deductibles not exceeding $50,000.00 in the aggregate, and such judgment, order, warrant or
process shall continue undischarged or unstayed for 30 days; or
(i) There shall occur a cessation of a substantial. part of the business of the Borrower for a
period which materially adversely affects Borrowers capacity to continue its business on a
profitable basis; or the Borrower shall suffer the loss or revocation of any material license or
permit now held or hereafter acquired which is necessary to the continued or lawful operation of
its business; or Borrower shall be enjoined, restrained or in any other way prevented by a court,
governmental or administrative order from conducting all or any material part of its business; or
(j) The Borrower or any ERISA Affiliate shall fail to pay when due any material amount that
they shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA, unless such
liability is being contested in good faith by appropriate proceedings, the Borrower or the ERISA
Affiliate, as the case may be, has established and is maintaining adequate reserves in accordance
with GAAP and no lien shall have been filed to secure such liability; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to
administer any such Plan or Plans; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or
(k) Any of the Loan Documents shall be canceled, terminated, revoked or rescinded otherwise
than in accordance with the express terms thereof or with the express prior written agreement,
consent or approval of the Lender, or any action at law or in equity or other legal proceeding to
cancel, revoke or rescind any Loan Document shall be commenced by or on behalf of the Borrower, or
any court or other governmental or regulatory authority or agency of competent jurisdiction shall
make a determination that, or shall issue a judgment, order, decree or ruling to the effect that,
any one or mare of the Loan Documents is illegal, invalid or unenforceable in accordance with the
terms thereof, or any Encumbrance in favor of the Lender created under any of the Loan Documents
shall at any time (other than by reason of the Lender relinquishing such Encumbrance) cease in any
material respect to constitute a valid and, to the extent applicable, perfected Encumbrance on any
material portion of the Collateral.
8.2
Remedies
. Upon the occurrence of an Event of Default described in subsections 8.1(f) and
(g), immediately and automatically, and upon the occurrence of any other Event of Default, at any
time thereafter while such Event of Default is continuing, at the option of the Lender and upon the
Lenders declaration:
(a) The obligation of the Lender to make any further Loans and to issue any Letters of Credit
hereunder shall terminate;
38
(b) The unpaid principal amount of the Loans together with accrued interest, all
Reimbursement Obligations and all other Obligations shall become immediately due and payable
without presentment, demand, protest or further notice of any kind, all of which are hereby
expressly waived;
(c) The Borrower shall immediately pledge to Lender cash collateral in an amount determined by
Lender to be sufficient to fully secure any Obligations of Borrower to Lender with respect to any
issued Letters of Credit; and
(d) The Lender may exercise any and all rights it has under this Agreement, the other Loan
Documents or at law or in equity, and proceed to protect and enforce its rights by any action at
law or in equity or by any other appropriate proceeding.
No remedy conferred upon the Lender in the Loan Documents is intended to be exclusive of any
other remedy, and each and every 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 or by any
other provision of law. Without limiting the generality of the foregoing or of any of the terms and
provisions of any of the Security Documents, if and when the Lender exercises remedies under the
Security Documents with respect to Collateral, the Lender may, in its sole discretion, determine
which items and types of Collateral to dispose of and in what order and may dispose of Collateral
in any order the Lender shall select in its sole discretion, and the Borrower consents to the
foregoing and waives all rights of marshalling with respect to all Collateral.
SECTION IX
ASSIGNMENT AND PARTICIPATJON
9.1.
Assignment
.
(a) Citizens shall have the right to assign at any time any portion of its Commitment
hereunder and its interests in the risk relating to any Loans to other banks or financial
institutions (each an Assignee) and to furnish from time to time to prospective Assignees copies
of the Loan Documents and any information concerning the Borrower in its possession, provided that
if no Default or Event of Default shall have occurred and be continuing, each Assignee which is not
an Affiliate of Citizens or a Federal Reserve Bank shall be subject to prior approval by the
Borrower (such approval not to be unreasonably withheld, conditioned or delayed). Each Assignee
shall execute and deliver to Citizens and the Borrower a joinder agreement. Upon the execution and
delivery of such joinder agreement, (a) such Assignee shall, on the date and to the extent provided
in such joinder agreement, become a Lender party to this Agreement and the other Loan Documents
for all purposes of this Agreement and the other Loan Documents and shall have all rights and
obligations of a Lender with a Commitment as set forth in such joinder agreement, and Citizens
shall, on the date and to the extent provided in such joinder agreement, be released prospectively
from its obligations hereunder and under the other Loan Documents to a corresponding extent (and,
in the case of an assignment covering all of the remaining portion of Citizens rights and
obligations under this Agreement, Citizens shall cease
39
to be a party hereto but shall continue to be entitled to the benefits of Section 10.3 and to any
fees accrued for its account hereunder and not yet paid); (b) the assigning Lender, if it holds the
Note, shall promptly surrender the Note to the Borrower for cancellation, provided that if Citizens
has retained any Commitment, the Borrower shall execute and deliver to Citizens a new Note in the
amount of its retained Commitment; (c) the Borrower shall issue to such Assignee a Note in the
amount of such Assignees Commitment, dated the Closing Date or such other date as may be specified
by such Assignee and otherwise completed in substantially the form of Exhibit A (d) this Agreement
shall be deemed appropriately amended to reflect (i) the status of such Assignee as a party hereto
and (ii) the status and rights of the Lender hereunder; and (e) the Borrower shall take such action
as Citizens may reasonably request to perfect any security interests or mortgages in favor of the
Lender, including any Assignee which becomes a party to this Agreement.
(b) If the Assignee, or any Participant pursuant to Section 9.2 hereof; is organized under the
laws of a jurisdiction other than the United States or any state thereof: such Assignee shall
execute and deliver to the Borrower, simultaneously with or prior to such Assignees execution and
delivery of the counterpart joinder described above in Section 9.1(a), and such Participant shall
execute and deliver to the Lender granting the participation, a United Stares Internal Revenue
Service Form W 8EC1 or W 8BEN (or any successor form), appropriately completed, wherein such
Assignee or Participant claims entitlement to complete exemption from United States Federal
Withholding Tax on all interest payments hereunder and all fees payable pursuant to any of the Loan
Documents, The Borrower shall not be required to pay any increased amount to any Assignee or other
Lender on account of taxes to the extent such taxes would not have been payable if the Assignee or
Participant had furnished one of the Forms referenced in this Section 9.1(b) unless the failure to
furnish such a Form results from (i) a condition or event affecting the Borrower or an act or
failure to act of the Borrower or (ii) the adoption of or change in any law, rule, regulation or
guideline affecting such Assignee or Participant occurring (x) after the date on which any such
Assignee executes and delivers the counterpart joinder, or (y) after the date such Assignee shall
otherwise comply with the provisions of Section 9.1(a), or (z) after the date a Participant is
granted its participation.
(c) The Lender may at any time pledge all or any portion of its rights under the Loan
Documents, including any portion of the Note, to any of the twelve (12) Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or any
enforcement thereof shall release the Lender from its obligations under any of the Loan Documents.
9.2.
Participations
. The Lender shall have the right at any time and from time to time,
without the consent of or notice to the Borrower, to grant participations to one or more banks or
other financial institutions (each a Participant) in all or any part of any Loans and Letter of
Credit Participations owing to the Lender and the Note held by the Lender, and shall have the right
to furnish from time to time to prospective Participants copies of the Loan Documents and any
information concerning the Borrower in its possession. The Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment, modification or waiver of any
provision of the Loan Documents, provided that the documents evidencing any such participation may
provide that, except with the consent of such Participant, the Lender will not
40
consent to (a) the reduction in or forgiveness of the stated principal of or rate of interest on or
commitment fee with respect to the portion of any Loan subject to such participation, (b) the
extension or postponement of any stated date fixed for payment of principal or interest or
commitment fee with respect to the portion of any Loan subject to such participation, (a) the
waiver or reduction of any right to indemnification o the Lender hereunder, or (d) except as
otherwise permitted hereunder, the release of any Collateral. Notwithstanding the foregoing, no
participation shall operate to increase the total Commitments hereunder or otherwise alter the
substantive terms of this Agreement. In the event of any such sale by the Lender of participating
interests to a Participant, the Lenders obligations under this Agreement shall remain unchanged,
the Lender shall remain solely responsible for the performance thereof; the Lender shall remain the
holder of such Note for all purposes under this Agreement and the Borrower shall continue to deal
solely and directly with the Lender in connection with the Lenders rights and obligations under
this Agreement.
SECTION X.
GENERAL
10.1.
Notices
. Unless otherwise specified herein, all notices hereunder to any party hereto
shall be in writing and shall be deemed to have been given when delivered by hand, or when sent by
electronic facsimile transmission, or on the first Business Day after delivery to any overnight
delivery service, freight pre-paid, or five (5) days after being sent by certified or registered
mail, return receipt requested, postage pre-paid, and addressed to such party at its address
indicated below:
If to the Borrower, at
2000 West Park Drive
Westborough, Massachusetts 01581
Attention: Chief Financial Officer
Facsimile: (508) 366-9901
with a copy (which shall not constitute notice) to:
Goodwin Procter
Exchange Place
Boston, Massachusetts 02109
Attention: John J. Egan III, PC.
Facsimile: (617)
If to the Lender, at
53 State Street,
8
th Floor
Boston, Massachusetts 02109
Attention: Sharon Stone
Facsimile: (617) 742-9548
41
with a copy (which shall not constitute notice) to:
Bartlett Hackett Feinberg, P.C.
155 Federal Street
Boston, Massachusetts 02110
Attention: John L. Hackett, Esq.
Facsimile: (617) 422-0200
or at any other address specified by such parry in writing.
10.2.
Expenses
. Whether or not the transactions contemplated herein shall be consummated, the
Borrower promises to reimburse the Lender for all reasonable out-of-pocket fees and disbursements
(including all reasonable attorneys fees and collateral evaluation costs) incurred or expended in
connection with the preparation, filing or recording, interpretation or administration of this
Agreement and the other Loan Documents, or any amendment, modification, approval, consent or waiver
hereof or thereof, or in connection with the enforcement of any Obligations, the exercise,
preservation or enforcement of any rights, remedies or options of the Lender or the satisfaction of
any Obligations, or in connection with any litigation, proceeding or dispute in any way related to
the credit hereunder, including, without limitation, fees and disbursements of outside legal
counsel and the allocated costs of in house legal counsel, accounting, consulting, brokerage or
other similar professional fees or expenses; all fees, charges (including the Lenders per diem
charges) and expenses relating to any inspections, appraisals or examinations conducted in
connection with the Loans or any Collateral; and all costs and expenses relating to any attempt to
inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or
realize upon the Collateral, The amount of all such costs and expenses shall, until paid, bear
interest at the rate applicable to Revolving Credit Loans and shall be an Obligation secured by the
Collateral. The Borrower will pay any taxes (including any interest and penalties in respect
thereof), other than the Lenders federal and state income taxes, payable on or with respect to the
transactions contemplated by the Loan Documents (the Borrower hereby agreeing to indemnify the
Lender with respect thereto).
10.3.
Indemnification
. The Borrower agrees to indemnify and hold harmless the Lender, as well
as its respective shareholders, directors, officers, agents, attorneys, subsidiaries and
affiliates, from and against all damages, losses, settlement payments, obligations, liabilities,
claims, suits, penalties, assessments, citations, directives, demands, judgments, actions or causes
of action, whether statutorily created or under the common law, all reasonable costs and expenses
(including, without limitation, reasonable fees and disbursements of attorneys, experts and
consultants) and all other liabilities whatsoever (including, without limitation, liabilities under
Environmental Laws) which shall at any time or times be incurred, suffered, sustained or required
to be paid by any such indemnified Person (except any of the foregoing which result from the gross
negligence or willful misconduct of the indemnified Person) on account of or in relation to or any
way in connection with any of the arrangements or transactions contemplated by, associated with or
ancillary to this Agreement, the other Loan Documents or any other documents executed or delivered
in connection herewith or therewith, all as the same may be amended from time to time, or with
respect to any Letters of Credit, whether or not all or part of
42
the transactions contemplated by, associated with or ancillary to this Agreement, any of the other
Loan Documents or any such other documents are ultimately consummated. In any investigation,
proceeding or litigation, or the preparation therefore, the Lender shall select its own counsel
and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable
fees and expenses of such counsel. In the event of the commencement of any such proceeding or
litigation, the Borrower shall be entitled to participate in such proceeding or litigation with
counsel of its choice at its own expense, provided that such counsel shall be reasonably
satisfactory to the Lender. The Borrower authorizes the Lender to charge any deposit account or
Note Record which it may maintain with any of them for any of the foregoing. The covenants of this
Section 10.3 shall survive payment or satisfaction of payment of all amounts owing with respect to
the Note, any other Loan Document or any other Obligation.
10.4.
Survival of Covenants. Etc
. All covenants, agreements, representations and warranties
made herein, in the other Loan Documents or in any documents or other papers delivered by or on
behalf of the Borrower pursuant hereto or thereto shall be deemed to have been relied upon by the
Lender, notwithstanding any investigation heretofore or hereafter made by it, and shall survive the
making by the Lender of the Loans as herein contemplated and the termination of the Commitment, and
shall continue in full force and effect so long as any Obligation remains outstanding and unpaid or
the Lender has any obligation to make any Loans hereunder or has any obligation to issue any Letter
of Credit. Notwithstanding the foregoing, the provisions of Sections 10.2 and 10.3 shall continue
in full force and effect after the payment in full of all Obligations. All statements contained in
any certificate or other writing delivered by or on behalf of the Borrower pursuant hereto or the
other Loan Documents or in connection with the transactions contemplated hereby shall constitute
representations and warranties by the Borrower hereunder.
10.5.
Set-Off
. Regardless of the adequacy of any Collateral or other means of obtaining
repayment of the Obligations, any deposits, balances or other sums credited by or due from the head
office of the Lender or any of its branch offices to the Borrower may, at any time and from time to
time without notice to the Borrower or compliance with any other condition precedent now or
hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived)
be set off, appropriated, and applied by the Lender against any and all Obligations of the Borrower
in such manner as the head office of the Lender or any of its branch offices in its sole discretion
may determine, and the Borrower hereby grants the Lender a continuing security interest in such
deposits, balances or other sums for the payment and performance of all such Obligations.
ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL, WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHTS OF SETOFF WITH
RESPECT TO SUCH DEPOSITS, BALANCES, OTHER SUMS AND PROPERTY OF THE
BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
10.6.
No Waivers
. No failure or delay by the Lender in exercising any right, power or
privilege hereunder, under the Note or under any other Loan Document shall operate as a waiver
43
thereof; nor shall any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. No waiver shall extend to or affect
any Obligation not expressly waived or impair any right consequent thereon. No course of dealing or
omission on the part of the Lender in exercising any right shall operate as a waiver thereof or
otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the
Borrower to other or further notice or demand in similar or other circumstances. The rights and
remedies herein and in the Note and the other Loan Documents are cumulative and not exclusive of
any rights or remedies otherwise provided by agreement or law.
10.7.
Amendments, Waivers, etc
. Neither this Agreement nor the Note nor any other Loan
Document nor any provision hereof or thereof may be amended, waived, discharged or terminated
except by a written instrument signed by the Lender and also, in the case of amendments, by the
Borrower.
10.8.
Binding Effect of Agreement
. This Agreement shall be binding upon and inure to the
benefit of the Borrower, the Lender and their respective successors and assignees provided that the
Borrower may not assign or transfer its rights or obligations hereunder.
10.9.
Lost Note, Etc
. Upon receipt of an affidavit of an officer of the Lender as to the loss,
theft, destruction or mutilation of the Note or any Security Document which is not a public record
and, in the case of any such loss, theft, destruction or mutilation, upon cancellation of such Note
or Security Deposit, if available, the Borrower will issue, in lieu thereof, a replacement Note or
other Security Document in the same principal amount thereof and otherwise of like tenor.
10.10.
Captions; Counterparts
. The captions in this Agreement are for convenience of reference
only and shall not define or limit the provisions hereof. This Agreement and any amendment hereof
may be executed in several counterparts and by each party on a separate counterpart, each of which
when so executed and delivered shall be an original, but all of which together shall constitute one
instrument. In proving this Agreement it shall not be necessary to produce or account for mare than
one such counterpart signed by the party against whom enforcement is sought.
10.11.
Entire Agreement. Etc
. The Loan Documents and any other documents executed in
connection herewith or therewith express the entire understanding of the parties with respect to
the transactions contemplated hereby and supersede all prior agreements with respect to the subject
matter hereof.
10.12.
Waiver of Jury Trial
. EACH OF THE BORROWER, THE LENDER HEREBY WAIVES ITS RIGHT TO A
JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS
AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE
OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT
LIMITATION, ANY COURSE OF CONDUCT, COURSE
44
OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMIMSTRATION OR ENFORCEMENT OF
THE LOANS AND THE LOAN
DOCUMENTS, AND AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, EACH OF THE
BORROWER AND THE LENDER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION
REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR
ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER (a) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE
LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b)
ACKNOWLEDGES THAT THE LENDER HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS TO WHICH EACH IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE BORROWERS WAIVERS AND
CERTIFICATIONS CONTAINED HEREIN.
10.13.
Governing Law; Jurisdiction; Venue
. THIS AGREEMENT AND EACH OF THE OTHER LOAN
DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL
PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID COMMONWEALTH (EXCLUDING
THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER CONSENTS TO THE JURISDICTION OF
ANY OF THE FEDERAL OR STATE COURTS LOCATED IN SUFFOLK COUNTY IN THE COMMONWEALTH OF MASSACHUSETTS
TN CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE LENDER UNDER THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS AND CONSENTS TO SERVICE OP PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
BORROWER BY MAIL AT THE BORROWERS ADDRESS SET FORTH HEREIN. THE BORROWER IRREVOCABLY WAIVES ANY
OBJECTION IN WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT
IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM
IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
10.14
Severability
. The provisions of this Agreement are severable and if any one clause or
provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction,
then such invalidity or unenforceability shall affect only such clause or provision, or part
thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any
other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction.
10.15.
Amendment and Restatement
. This Agreement has been given by Borrower to Bank to amend
and restate the terms of a certain Credit Agreement dated June 23,2004 between Borrower and
Citizens (the Original Agreement). The Borrower does not intend for the amendment and restatement
of the Original Agreement by this Agreement to constitute, nor shall
45
it be deemed to constitute, a novation or extinguishment of the obligations of Borrower evidenced
by the Original Agreement and this Agreement shall in no event impair, limit, reduce or otherwise
discharge the liability of Borrower under the Original Agreement provided that the Bank and the
Borrower hereby agree that from and after the date hereof all such liability shall be evidenced by
and governed by the terms of this Agreement.
46
IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement under seal as of the
date first above written.
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WITNESS
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VIRTUSA CORPORATION
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/s/ Charles Speicher
Charles Speicher
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By:
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/s/ Kris Canekeratne
Chairman and Chief
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Corporate Controller
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Executive Officer
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CITIZENS BANK
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By:
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/s/ Sharon A. Stone
Sharon A. Stone
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Senior Vice President
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47
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
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$3,000,000.00
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September 29, 2006
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FOR VALUE RECEIVED, the undersigned (the Borrower) absolutely and unconditionally promises
to pay to the order of CITIZENS BANK OF MASSACHUSETTS (Payee) at 53 State Street, Boston,
Massachusetts 02109:
(a) on the Revolving Credit Maturity Date, the principal amount of THREE MILLION DOLLARS
($3,000,000.00) or, if less, the aggregate unpaid principal amount of Revolving Credit Loans and
Reimbursement Obligations owing to the Payee pursuant to the Credit Agreement of even date
herewith, as amended or supplemented from time to time (the Credit Agreement), by and among the
Borrower and the Payee; and
(b) interest on the principal balance hereof from time to time outstanding from the date
hereof through and including the date on which such principal amount is paid in full, at the times
and at the rates provided in the Credit Agreement.
This Note evidences borrowings under, is subject to the terms and conditions of and has been
issued by the Borrower in accordance with the terms of the Credit Agreement and is the Note
referred to therein. The Payee and any holder hereof is entitled to the benefits and subject to the
conditions of the Credit Agreement and may enforce the agreements of the Borrower contained
therein, and any holder hereof may exercise the respective remedies provided for thereby or
otherwise available in respect thereof, all in accordance with the respective terms thereof, This
Note is secured by the Security Documents described in the Credit Agreement.
All capitalized terms used in this Note and not otherwise defined herein shall have the same
meanings herein as in the Credit Agreement.
The Borrower has the right in certain circumstances and the obligation under certain other
circumstances to repay or prepay the whole or part of the principal of this Note on the terms and
conditions specified in the Agreement.
If any Event of Default shall occur, the entire unpaid principal amount at this Note and all
of the unpaid interest accrued thereon may become or be declared due and payable in the manner and
with the effect provided in the Credit Agreement.
The Borrower and every endorser and guarantor of this Note or the obligation represented
hereby waive presentment, demand, notice, protest and all other demands and notice in connection
with the delivery, acceptance, performance, default or enforcement of this Note, assent to any
extension or postponement of the time of payment or any other indulgence, to any substitution,
exchange or release of collateral and to the addition or release of any other party or Person
primarily or secondarily liable.
1
This Note shall be deemed to take effect as a sealed instrument under the laws of The
Commonwealth of Massachusetts and for au purposes shall be construed in accordance with such laws
(without regard to conflicts of laws rules).
This Note has been given by Borrower to Bank to amend and restate the terms of a certain
Revolving Credit Note dated as of June 23, 2004 by Borrower to Lender (the Original Note). The
Borrower does not intend for the amendment and restatement of the Original Note by this Note to
constitute, nor shall it be deemed to constitute, a novation or extinguishment of the obligations
of Borrower evidenced by the Original Note and this Note shall in no event impair, limit, reduce or
otherwise discharge the liability of Borrower under the Original Note provided that the Bank and
the Borrower hereby agree that from and after the date hereof all such liability shall be evidenced
by and governed by the terms of this Note
IN WITNESS WHEREOF, the Borrower has caused this Note to be signed under seal by its duly
authorized officer as of the day and year first above written.
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WITNESS
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VIRTUSA CORPORATION
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By:
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/s/ Thomas Holler
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2
AMENDED AND RESTATED SECURITY AGREEMENT
This AMENDED AND RESTATED SECURITY AGREEMENT (this Agreement) is made as of September 29,
2006 and is given to amend and restate the terms and conditions of and to confirm the grant of
security interest granted by VIRTUSA CORPORATION, a corporation organized under the laws of the
State of Delaware and having its chief executive office at 2000 West Park Drive, Westborough,
Massachusetts 01581 (the Borrower), to CITIZENS BANK OF MASSACHUSETTS, a Massachusetts bank
having a banking office at 28 State Street, Boston, Massachusetts 02109 (the Lender) in that
certain Security agreement dated June 23, 2004 (the Original Agreement).
The Borrower has requested the Lender to enter into a certain Amended and Restated Credit
Agreement of even date herewith (as the same may be amended, modified, supplemented, extended or
restated from time to time, the
Credit Agreement
) and to make loans and other credits to the
Borrower upon the terms and subject to the conditions set forth therein.
Lender has required as a condition precedent to its entering the Credit Agreement that the
Borrower execute and deliver this Agreement and to grant the security interests referenced herein
and confirm its grant of security interests made in the Original Agreement.
In order to induce the Lender to enter into the Credit Agreement and to make or continue to
make available to the Borrower loans and other extensions of credit upon the terms and subject to
the conditions set forth therein, and in consideration thereof, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower agrees as
follows:
Section 1.
Definitions
. All capitalized terms used herein or in any certificate, report or
other document delivered pursuant hereto shall have the meanings assigned to them below or in the
Credit Agreement (unless otherwise defined). Except as otherwise defined, terms defined in the
Uniform Commercial Code and used herein shall have the meanings set forth in the Uniform Commercial
Code;
provided,
however,
that the term instrument shall be such term as defined in Article 9 of
the Uniform Commercial Code rather than Article 3 of the Uniform Commercial Code.
Accounts
. All rights of the Borrower to payment of monetary obligation (i) for property that
has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services
rendered or to be rendered, (iii) for a secondary obligation incurred or to be incurred, or (iv)
arising out of the use of credit or charge card or information contained on or for use with the
card; and all sums of money and other proceeds due or becoming due thereon, all notes, bills,
drafts, acceptances, instruments, documents and other debts, obligations and liabilities, in
whatever form, owing to the Borrowers rights pertaining to and interest in such property,
including the right of stoppage in transit, replevin or reclamation; all chattel paper; all amounts
due from Affiliates of the Borrower; all insurance proceeds; all other rights and claims to the
payment of money, under contracts or otherwise; and all other property constituting accounts as
such term is defined in the Uniform Commercial Code.
1
Collateral
. All personal and fixture property belonging to the Borrower or in which the
Borrower has any rights, of every kind and description, tangible and intangible, whether now owned
or existing or hereafter arising or acquired; including, without limitation, all Accounts,
Equipment, General Intangibles, Inventory and Investment Property, together with
all goods,
instruments (including promissory notes) documents of title, policies and certificates of
insurance, commercial tort claims, chattel paper (whether tangible or electronic), deposit
accounts, letter of credit rights (whether or not the letter of credit is evidenced by a writing)
and other property owned by the Borrower or in which the Borrower has an interest and including,
without limitation, any cash that is now or may hereafter be in the possession, custody, or control
of the Lender or its participants or assigns for any purpose; any and all additions, substitutions,
replacements and accessions to foregoing and all supporting obligations relating to the forgoing;
and all Proceeds and Property and products of any of the foregoing; but excluding all Intellectual
Property.
Encumbrance
. Any mortgage, pledge, security interest, lien or other charge or encumbrance of
any kind or nature (including, without limitation, the lien or retained security title of a
conditional vendor) upon or with respect to any property.
Equipment
. All machinery, equipment, and fixtures, furniture, furnishings, trade fixtures,
specialty tools and parts, motor vehicles and materials handling equipment of the Borrower,
together with the Borrowers interest in, and right to, any and all manuals, computer programs,
data bases and other materials relating to the use, operation or structure of any of the foregoing;
and all other property constituting equipment as such term is defined in the Uniform Commercial
Code.
General Intangibles
. Except for the Intellectual Property, all rights of the Borrower under
contracts to enjoy performance by others or to be entitled to enjoy rights granted by others,
including without limitation any licenses; all payment intangibles; all obligations and
indebtedness of any kind (other than Accounts) owning to the Borrower from whatever source arising;
all contract rights; all rights of the Borrower as a bailor; all tax refunds; all right, title and
interest of the Borrower in and to all software, documents, books, records, files and other
information (on whatever medium recorded, and including without limitation computer programs,
tapes, discs, punch cards, data processing software and related property and rights) maintained by
the Borrower that reflect the conduct of the Borrowers business, such as financial records,
marketing and sales records, research and development records, and design, engineering and
manufacturing records; all rights under service bureau service contracts; all computer data and the
concepts and ideas on which said data is based; all data bases, all customer lists, and all other
property constituting general tangibles as such term is defined in the Uniform Commercial Code.
Intellectual Property
. All of the following, to the extent owned by (and not licensed to) the
Borrower (i) United States and foreign patents, patent applications and statutory invention
registrations, including reissues, divisions, continuations, substitutions, renewals, continuations
2
in part, extensions and reexaminations thereof, and all improvements thereto, (ii) software,
databases, copyrightable works, websites, copyrights (registered, renewed or otherwise) and
registrations, renewals and applications for registration or renewal thereof, (iii) trademarks,
trademark applications, service marks, service mark applications, trade dress, logos, slogans,
symbols, trade names, internet domain names, brand names, product names, fictitious names,
corporate names, and other source identifiers and all reissues, extensions and renewals thereof and
the goodwill of the business symbolized thereby and associated therewith, (iv) trade secrets,
know-how, technology, inventions and discoveries and (v) any and all right, title, and interest in
and to the foregoing, including the right to sue for past, present, and future infringement, in all
of such cases (i) through (v), whether used, held for use, supported, maintained, marketed or
otherwise.
Inventory
. All goods, merchandise and other personal property (including warehouse receipts
and other negotiable and non-negotiable documents of title covering any such property) of the
Borrower that are held for sale, lease or other disposition or to be furnished under contracts of
service (or that are so furnished), or for display or demonstration, or leased or consigned, or
that are raw materials, piece goods, work-in-process, finished goods or supplies or other materials
used or consumed or to be used or consumed in the Borrowers business, whether in transit or in the
possession of the Borrower or another, including without limitation all goods covered by purchase
orders and contracts with suppliers and all goods billed and held by suppliers and goods located on
the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or
other third parties; all plans, drawings, diagrams, schematics, assembly and display materials
relating to any of the foregoing; and all other property constituting inventory as such term is
defined in the Uniform Commercial Code.
Investment Property
. All the securities (whether certificated or uncertificated) of the
Borrower, including without limitation all stocks, bonds Treasury bills, certificates of deposits,
mutual or money market fun shares, security entitlements, securities accounts, commodity contracts
and commodity accounts; and all sums due or to become due on any of the foregoing, and all
securities, instruments or other property purchased or acquired as a result of the investment and
reinvestment thereof as hereinafter provided, and all other property constituting investment
property as such term is defined in the Uniform Commercial Code; excluding any capital stock, or
other equity interests of any Subsidiary of the Borrower.
Perfection Certificate
. A certificate signed by a Responsible Officer of the Borrower in the
form attached hereto as
Exhibit A
.
Proceeds
. All proceeds received of and all other profits, rentals and receipts, in whatever
form, or arising from any Collateral, including whatever is received or acquired upon the sale,
lease, exchange, assignment, licensing or other disposition of any Collateral; whatever is
received, collected on or distributed on account of any Collateral; all rights arising out of any
Collateral; all claims arising out of the loss, nonconformity, interference with the use of defects
or infringement of rights in, or damage to or destruction of, any Collateral; any insurance payable
by reason of the loss a damage or nonconformity of, defects or infringement of rights in, or damage
to or destruction of, any Collateral; any unearned premiums with respect to policies of insurance
in respect of any Collateral; and condemnation or requisition payments with respect to
3
any Collateral; and all other property constituting proceeds as such term is defined in the
Uniform Commercial Code; in each chase whether now or existing or hereafter arising.
Secured Obligations
. All obligations of the Borrower under or in respect of the Loan
Documents.
Security Interests
The security interests and liens granted pursuant to Section 2 hereof, as
well as all other security interests created or assigned as additional security for the Secured
Obligations pursuant to this Agreement.
Uniform Commercial Code
The Uniform Commercial Code as in effect in The Commonwealth of
Massachusetts,
provided,
that if by reason of mandatory provisions of law, perfection, or the
effect of perfection or non-perfection, of the Security Interests of any Collateral is governed by
the Uniform Commercial Code as in effect in a jurisdiction other than Massachusetts, Uniform
Commercial Code means the Uniform Commercial Code as in effect in such other jurisdiction for the
purposes of the provisions hereof relating to such perfection or effect of perfection or
non-perfection, as the case may be.
Section 2.
Grant
.
(a) To secure the full and punctual payment and performance of the Secured Obligations, the
Borrower hereby assigns and pledges to the Lender all of its rights, title and interest in, and
grants to the Lender a continuing security interest in, the Collateral of the Borrower. The
Security Interests are granted as security only and shall not subject the Lender to, or transfer to
the Lender or in any way affect or modify, any obligation or liability of the Borrower with respect
to any of the Collateral, or any transaction in connection therewith.
(b) Upon the execution of this Agreement, and from time to time thereafter, the Borrower shall
deliver to the Lender such Uniform Commercial Code financing statements, assignments, continuation
statements, amendments, instruments and notices and assignments under the Assignment of Claims Act
of 1940, as amended (collectively, the
Perfection Documents
), as may be reasonably required for
the Lender to perfect its Security Interest in all Collateral. Any such financing statements,
continuation statements or amendments may be prepared and filed by the Lender at any time in any
jurisdiction.
Section 3.
Representations, Warranties, and Covenants
. The Borrower hereby makes the following
representations and warranties, and agrees to the following covenants, each of which
representations, warranties and covenants shall be continuing and in force so long as this
Agreement is in effect:
3.1
Name; Location; Changes
.
(a) The name of the Borrower set forth in Section 1(a) of the Perfection Certificate is the
true and correct legal name of the Borrower, and except as otherwise disclosed to the Lender in the
Perfection Certificate, the Borrower has not done business as or used any other name.
4
(b) The state of organization of the Borrower set forth in section 1(d) of the Perfection
Certificate is the true and correct state of organization of the Borrower and the Borrower is duly
organized and in good standing in such state on the date hereof.
(c) The address of the Borrower set forth in Section 2(a) of the Perfection Certificate is the
Borrowers chief executive office and the place where its business records are kept. Except as
disclosed on the Perfection Certificate, all tangible Collateral of the Borrower other than
Investment Property is located at such chief executive office, and except as disclosed on the
Perfection Certificate, such Collateral has remained located at its current location for the four
consecutive months immediately prior to the date hereof.
(d) The Borrower will not change its name, identity or organizational structure, nature, or
jurisdiction or organization, or chief executive office or place where its business records are
kept, or move any tangible Collateral (other than Investment Property) to a location other than
those set forth in the Perfection Certificate, or merge into or consolidate with any other entity,
unless permitted under the Credit Agreement and unless the Borrower shall have given the Lender at
least 30 days prior written notice thereof and the Borrower shall have delivered to the Lender or
authorized Lender to file such new Uniform Commercial Code financing statements or other
documentation as may be necessary or required by the Lender to ensure the continued perfection and
priority of the Security Interests.
(e) The Borrower delivered a Perfection Certificate to the Lender with the Original Agreement.
All information set forth in such Perfection Certificate is true and correct in all material
respects. The Borrower agrees to supplement the Perfection Certificate promptly after obtaining
information which would require a correction.
3.2.
Ownership of Collateral; Absence of Liens and Restrictions
. The Borrower is, and in the
case of property acquired after the date hereof, will be, the sole legal and equitable owner of the
Collateral, holding good and marketable title to the same free and clean of all Encumbrances except
for the Security Interests and Permitted Encumbrances, and has good right and legal authority to
assign, deliver, and create a security interest in such Collateral in the manner herein
contemplated. The Collateral is genuine and is what it is purported to be. The Collateral is not
subject to any restriction that would prohibit or restrict the assignment, delivery or creation of
the security interests contemplated hereunder.
3.3
First Priority Security Interest
. This Agreement creates a valid and continuing lien on
and security interest in the Collateral, and upon the filing of Uniform Commercial Code financing
statements in the appropriate offices for the locations of Collateral listed in the Borrowers
Perfection Certificate, the Security Interests will be perfected (except to the extent a security
interest may not be perfected by filing under the Uniform Commercial Code), prior to all other
Encumbrances other than as disclosed in the Credit Agreement as Permitted Encumbrances, and is
enforceable as such against creditors of the Borrower, any owner of the real property where any of
the Collateral is located, any purchaser of such real property and any present or future creditor
obtaining a lien on such real property.
5
3.4
No Conflicts
. Neither the Borrower nor any of its predecessors has performed any acts or
is bound by any agreements which might prevent the lender from enforcing the Security Interest or
any of the terms of this Agreement or which would limit the Lender in any such enforcement. Except
as specifically disclosed in the Perfection Certificate, no financing statement under the Uniform
Commercial Code of any state or other instrument evidencing a lien that names the Borrower as
debtor is on file in any jurisdiction and the Borrower has not signed any such document or any
agreement authorizing the filing of any such financing statement or instrument.
3.5
Sales and Further Encumbrances
. The Borrower will not sell, grant, assign or transfer any
interest in, or permit to exist any Encumbrances on, any of the Collateral, except the Security
Interests as permitted by the Credit Agreement.
3.6
Fixture Conflicts: Required Waivers
. The Borrower intends, to the extent not inconsistent
with applicable law, that the Collateral shall remain personal property of the Borrower and shall
not be deemed to be a fixture irrespective of the manner and its attachment to any real estate. The
Borrower will deliver to the Lender such disclaimers, waivers or other documents as the Lender may
request to confirm the foregoing, executed by each person having an interest in such real estate.
3.7
Validity of Accounts
. Each Account constituting Collateral is and, to the best of the
Borrowers knowledge, shall be a valid, legal and binding obligation of the party purported to be
obligated thereon, enforceable in accordance with its terms and free of material set-offs, defenses
or counterclaims. The Borrower has no knowledge of any fact that would materially impair the
validity or collectibility of any of the Accounts constituting Collateral.
3.8
Inspection; Verification of Accounts
. The Borrower shall keep complete and accurate books
and records relating to the Collateral, and upon request of the Lender shall stamp or otherwise
mark such books and records in such manner as the Lender may reasonably request in order to reflect
the Security Interest. The Borrower will allow the Lender and its designees to examine, inspect and
make extracts from or copies of the Borrowers books and records, inspect the Collateral and
arrange for verification of Accounts constituting Collateral directly with any account debtors or
by other methods, upon reasonable notice and under reasonable procedures established by the Lender
after consultation with the Borrower.
3.9
Collection and Delivery of Proceeds; Lockboxes
.
(a) The Borrowers will diligently collect all of its Accounts constituting Collateral until
the Lender exercises its rights to collecting the Accounts pursuant to this Agreement. After the
occurrence and during the continuance of an Event of Default, all Proceeds of Accounts, Inventory
and other Collateral received by the Borrower, whether in the form of wire or ACH transfers, cash,
checks, notes, or other instruments, shall be held in trust for the Lender and, upon request of the
Lender, shall be delivered daily to the Lender, without commingling, in the identical form received
(properly endorsed or assigned where required to enable the Lender to collect the same), for
application to the Secured Obligations. If any Accounts are at any time evidenced by tangible
chattel paper, promissory notes, trade
6
acceptances or other instruments, the Borrower will promptly deliver the same to the Lender
appropriately endorsed to the Lenders order and, regardless of the form of such endorsement, the
Borrower hereby waives presentment, demand, notice of dishonor, protest, notice of protest, and all
other notices with respect thereto.
(b) The Borrower shall, at the request of the Lender at any time, notify account debtors, and
the Lender may itself, after the occurrence and during the continuance of a Default notify account
debtors directly, of the Security Interest of the Lender in any Account and that payment thereof is
to be made directly to the Lender for application to the Secured Obligations.
3.10
Insurance
. The Borrower shall at all times maintain liability and casualty insurance on
the Collateral with financially sound and reputable insurers in such amounts and with such
coverages, endorsements, deductibles and expiration dates as the officers of the Borrower in the
exercise of their reasonable judgment deem to be adequate, as are customary in the industry for
companies of established reputation engaged in the same or similar business and owning or operating
similar properties and as shall be reasonably satisfactory to the Lender. The Lender shall be named
as loss payee, additional insured and/or mortgagee under such insurance as the Lender shall require
from time to time, and the Borrower shall provide to the Lender lenders loss payable endorsements
in form and substance reasonably satisfactory to the Lender. In addition, the Lender shall be given
thirty (30) days advance notice of any cancellation of insurance. In the event of failure to
provide and maintain insurance as herein provided, the Lender may, at its option, provide such
insurance and charge the amount thereof to the Borrower as a Revolving Credit Loan. The Borrower
shall furnish to the Lender certificates or other evidence satisfactory to the Lender of compliance
with the foregoing insurance provisions. The Lender shall not, by the fact of approving,
disapproving or accepting any such insurance, incur any liability for the form or legal sufficiency
of insurance contracts, solvency of insurance companies or payment of lawsuits, and the Borrower
hereby expressly assumes full responsibility therefor and liability, if any, thereunder.
3.11
Maintenance and Use Payment of
Taxes
. The Borrower will preserve, protect and keep the
Collateral in good order and repair, ordinary wear and tear and damage by fire or other casualty
excepted, will not use the same in violation of law or any policy of insurance thereon, and will
pay promptly when due all taxes and assessments on such Collateral or on its use or operation,
except as otherwise permitted by the Credit Agreement.
3.12
General Intangibles
. The Borrower will use such measures as are appropriate to preserve
its rights in its General Intangibles constituting Collateral.
3.13
Investment Property
. Until the occurrence and continuance of an Event of Default
hereunder, the Borrower shall retain the right to vote any of the Investment Property constituting
Collateral in a manner not inconsistent with the terms of this Agreement and the Credit Agreement.
If the Borrower, as registered holder of such Investment Property, receives (i) any dividend, or
other distribution in cash or other property in connection with the liquidation or dissolution of
the issuer of such Investment Property, or in connection with the redemption or payment of such
Investment Property, or (ii) any stock certificate, option or right, or other distribution, whether
as an addition to, in substitution of, or in exchange for, such Investment
7
Property, or otherwise, the Borrower agrees to accept the same in trust for the Lender and to
deliver the same forthwith to the Lender or its designee, in the exact form received, with the
Borrowers endorsement or reassignment when necessary, to be held by the Lender as Collateral.
After the occurrence and during the continuance of an Event of Default, upon request of the Lender,
the Borrower will (i) deliver all of its Investment Property constituting Collateral and
represented by certificates, including without limitation all stock of its Subsidiaries, to the
Lender to hold pursuant to the terms of this Agreement (ii) register in the name of the Lender or
its designee any uncertificated Investment Property constituting Collateral or the Lenders
security interest therein on the books maintained by or on behalf of the issuer thereof or the
depository therefore and (iii) do all things necessary or desirable, as determined by the Lender,
to transfer control over any Investment Property to the Lender including, but not limited to,
registering the Lender as the holder of the securities entitlement or commodities contract as
appropriate, and entering into any control agreement, in form designated by the Lender, pursuant to
which the securities intermediary shall agree that it will comply with the entitlement orders
originated by the Lender without further consent of the Borrower, and entering into any control
agreement, in form designated by the Lender, pursuant to which the commodity intermediary shall
agree that it will apply any value distributed on account of any commodity contract as direct by
the Lender without further consent by the Borrower.
3.14
Electronic Chattel Paper and Transferable Records
: For any interest in an electronic
chattel paper or any transferable record, as that term is defined in Section 201 of the federal
electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform
Electronic Transactions Act as in effect in any jurisdiction applicable to the Borrower, any
Collateral or any transaction contemplated hereby, the Borrower shall take such action as the
Lender may reasonably request to vest in the Lender control under Section 9-105 of the Uniform
Commercial Code of such electronic chattel paper or control under Section 201 of the Federal
Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the
Uniform Electronic Transactions Act of such transferable record. The Lender agrees that it will
arrange, pursuant to procedures satisfactory to the Lender, so long as such procedures will not
result in the Lenders loss of control, for the Borrower to make alterations to the electronic
chattel paper or transferable record permitted under Section 9-105 of the Uniform Commercial Code
or, as the case may be, Section 201 of the Federal Electronic Signatures in Global and National
Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to
make without loss of control, unless an Event of Default has occurred and is continuing or would
occur after taking into account any action by the Borrower with respect to such electronic chattel
paper or transferable record.
3.15
Bailments, Etc
. If any Collateral is at any time in the possession or control of any
warehouseman, bailee or any of the Borrowers agents or processors, the Borrower shall, upon
request of the Lender, (i) notify such warehouseman, bailee, agent or processor of the Security
Interest and instruct such warehouseman, bailee, agent or processor to hold all such Collateral for
the Lenders account subject to the Lenders instructions, (ii) arrange for such warehouseman,
bailee, agent or processor to authenticate a record acknowledging that it holds possession of the
Collateral for the Lenders benefit, (iii) deliver any negotiable warehouse receipt, bill of lading
or other document of title issued with regard to the Collateral to the Lender appropriately
endorsed to the Lenders order, and (iv) arrange for the issuance in the name of the
8
Lender, in form reasonably satisfactory to the Lender, any nonnegotiable document of title covering
such Collateral.
3.16
Assignment of Claims Act
. If at any time any Accounts of the Borrower arise from
contracts with the United States of America or any department, agency or instrumentality thereof,
the Borrower shall execute all assignments and take all steps reasonably requested by the Lender in
order that all monies due to become due thereunder will be assigned and paid to the Lender under
the Assignment of Claims Act of 1940.
3.17
Notes and Instruments
. If at any time any amount payable under or in connection with any
of the Collateral is evidenced by any promissory note or other instrument, such note or instrument
shall be promptly delivered to the Lender, duly endorsed in a manner satisfactory to the Lender.
3.18
Further Assurances
. Upon the reasonable request of the Lender, and the sole expense of
the Borrower, the Borrower will promptly execute and deliver such further instruments and documents
and take such further actions as the Lender may deem desirable to obtain the full benefits of this
Agreement and of the rights and powers herein granted, including, without limitation, filing of any
financing statement, continuation statement, amendment or notice under the Uniform Commercial Code
or other applicable law. The Borrower authorizes the Lender to file such financing statements
without the signature of the Borrower to the extent permitted by applicable law, and to file a copy
this Agreement in lieu of a financing statement, and to take any and all actions required by any
earlier versions of the Uniform Commercial Code or by other law, as applicable in any relevant
Uniform Commercial Code jurisdiction, or by other laws applicable in any foreign jurisdiction. The
Borrower shall provide the Lender with any information the Lender shall reasonably request in
connection with the foregoing, including, without limitation, the type and jurisdiction of
organization of the Borrower, and any organizational identification number issued to the Borrower.
The Borrower shall also take all actions requested by the Lender in order to insure the continued
perfection and priority of the Lenders security interest in any of the Collateral and of the
preservation of its rights therein.
Section 4.
Notices and Reports Pertaining to Collateral
. The Borrower will, with respect to
the Collateral:
(a) promptly furnish to the Lender, from time to time upon request, reports in form and detail
reasonably satisfactory to the Lender;
(b) promptly notify the Lender of any Encumbrance (except Permitted Encumbrances) asserted
against the Collateral, including any attachment, levy, execution or other legal process levied
against any of the Collateral, and of any information received by the Borrower relating to the
Collateral, including the Accounts, the account debtors, or other persons obligated in connection
therewith, that may in any way adversely affect the value of the Collateral as a whole or the
rights and remedies of the Lender with respect thereto;
(c) promptly notify the Lender when it obtains knowledge of actual or imminent bankruptcy or
other insolvency proceeding of any material account debtor or issuer of
Investment property;
9
(d) concurrently with the reports required to be furnished under subsection (a), and
immediately if material in amount, notify the lender of any return or adjustment, rejection,
repossession, or loss or damage of or to merchandise represented by Accounts and of any credit,
adjustment, or dispute arising in connection with the goods or services represented by Accounts or
constituting Inventory;
(e) promptly after the Borrower establishes any Account with the United States of America or
any department, agency or instrumentality thereof, notify the Lender thereof;
(f) promptly upon acquiring any commercial tort claim, notify the Lender in a writing signed
by the Borrower, of the details thereof and grant to the Lender in such writing a security interest
therein and in all the Proceeds thereof, such writing to be in form and substance satisfactory to
the lender; and
(g) promptly upon receipt of any letter of credit issued to the Borrower as beneficiary
thereunder or upon acquiring an interest in any electronic chattel paper or any transferable
record, as that term is defined in section 201 of the Federal Electronic Signatures in Global and
National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act, notify the
Lender thereof.
Section 5.
Lenders Rights and Remedies in General
.
(a) So long as any Event of Default shall have occurred and is continuing: (i)the Lender may,
at its option, without notice or demand, cause all of the Secured Obligations to become immediately
due and payable and take immediate possession of the Collateral, and for that purpose the Lender
may, so far as the Borrower can give authority therefore, enter upon any premises on which any of
the Collateral is situated and remove the same therefrom or remain on such premises and in
possession of such Collateral for purposes of conducting a sale or enforcing the rights of the
Lender; (ii) the Borrower will, upon demand, assemble the Collateral, and make it available to the
Lender at a place and time designated by the Lender that is reasonably convenient to both parties;
(iii) the Lender may collect and receive all income and Proceeds in respect to any Collateral and
exercise all rights of the Borrower with respect thereto; (iv) the Lender may sell, lease or
otherwise dispose of any Collateral at a public or private sale, with or without having such
Collateral at the place of sale, and upon such terms and in such manner as the Lender may
determine, and the Lender may purchase any Collateral at any such sale. Unless such Collateral
threatens to decline rapidly in value or is of the type customarily sold on a recognized market,
the Lender shall send to the Borrower prior written notice (which, if given with in ten (10) days
of any sale, shall be deemed to be reasonable) of the time and place of any public sale of such
Collateral or of the time after which any private sale or other disposition thereof is to be made.
The Borrower agrees that upon any such sale such Collateral shall be held by the purchaser free
from all claims or rights of every kind and nature, including any equity of redemption or similar
rights, and all such equity of redemption and similar rights are hereby expressly waived and
released by the Borrower. In the event any consent, approval or
10
authorization of any governmental agency is necessary to effectuate any such sale, the Borrower
shall execute all applications or other instruments as may be required; and (v) in any jurisdiction
where the enforcement of its rights hereunder is sought, the Lender shall have, in addition to all
other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial
Code and other applicable law.
(b) The Lender may perform any covenant or agreement of the Borrower contained herein that the
Borrower has failed to perform and in so doing the Lender may expend such sums as it may reasonably
deem advisable in the performance thereof, including, without limitation, the payment of any taxes
or insurance premiums, payment to obtain a release of Encumbrance or potential Encumbrance,
expenditures made in defending against any adverse claim and all other expenditures which the
Lender may make for the protection of Collateral or which it may be compelled to make by operation
of law. All such sums and amounts so expended shall be repaid by the Borrower upon demand, shall
constitute additional Secured Obligations and shall bear interest from the date said amounts are
expended at the rate per annum provided in the Credit Agreement to be paid on Revolving Credit
Loans after the occurrence of an Event of Default. No such performance of any covenant or agreement
by the Lender on behalf of the Borrower, and no such advance or expenditure therefore, shall
relieve the Borrower of any Event of Default under the terms of this Agreement or the other Loan
Documents
(c) Prior to any disposition of Collateral pursuant to this Agreement the Lender may, at its
option, cause any of the Collateral to be repaired or reconditioned (but not upgraded unless
mutually agreed) in such manner and to the extent as to make it saleable.
(d) The Lender is hereby granted a license or other right to use, without charge, the
Borrowers labels, patents, copyrights, right of use of any name, trade secrets, trade names,
trademarks, and advertising matter, or any property of a similar nature, relating to the
Collateral, in completing production of, advertising for sale and selling any Collateral; and the
Borrowers rights under all licenses and all franchise agreements shall inure to the Lenders
benefit.
(e) The Borrower recognizes that the Lender may be unable to effect a public sale of all or a
part of the Investment Property by reason of certain prohibitions contained in the Securities Act
of 1933 (as amended from time to time, the
Securities Act
) or the securities laws of various
states (the
Blue Sky Laws
), but may be compelled to resort to one or more private sales to a
restricted group of purchasers who will be obligated to agree, among other things, to acquire the
Investment Property for their own account, for investment and not with a view to the distribution
or resale thereof. The Borrower acknowledges that private sales so made may be at prices and upon
other terms less favorable to the seller than if the Investment Property were sold at public sales.
The Borrower agrees that the Lender has no obligation to delay sale of any of the Investment
Property for the period of time necessary to permit the Investment Property to be registered for
public sale under the Securities Act or the Blue Sky Laws, and that private sales made under the
foregoing circumstances shall be deemed to have been made in a commercially reasonable manner.
(f) The Lender shall be entitled to retain and to apply the Proceeds of any disposition of the
Collateral, first, to its reasonable expenses provided for herein, including
11
attorneys fees and other legal expenses incurred by it in connection therewith; and second, to the
payment of the Secured Obligations in such order of priority as the Lender shall determine. Any
surplus remaining after such application shall be paid to the Borrower or to whomever may be
legally entitled thereto, provided that in no event shall the Borrower be credited with any part of
the Proceeds of the disposition of the Collateral until such Proceeds shall have been received in
cash from the Lender. The Borrower shall remain liable for any deficiency.
(g) The Borrower hereby appoints to the Lender and each of the Lenders designees or agents as
attorney-in-fact of the Borrower, irrevocably and with power of substitution, with full authority
in the name of the Borrower, the Lender or otherwise, for sole use and benefit of the Lender, but
at the Borrowers expense, so long as an Event of Default is continuing, to take any and all of the
actions specified above in this Section and elsewhere in this Agreement. This power of attorney is
a power coupled with an interest and shall be irrevocable for so long as any of the Secured
Obligations remain outstanding.
Section 6.
Lenders Rights and Remedies with Respect to Collateral
. The Lender may, at its
option, at any time and from time to time after the occurrence and during the continuance of an
Event of Default, without notice to or demand on the Borrower, take the following actions with
respect to the Collateral:
(a) with respect to any Accounts (i) demand, collect, and receipt of any amounts relating
thereto, as the Lender may determine; (ii) commence and prosecute any actions in any court for the
purposes of collection any such Accounts and enforcing any other rights in respect thereof, (iii)
defend, settle, or compromise any action brought and, in connection therewith, give such discharges
or releases as the Lender may deem appropriate; (iv) receive, open and dispose of mail addressed to
the Borrower and endorse checks, notes, drafts, acceptances, money orders, bills of lading,
warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the
goods giving rise to such Accounts or securing or relating to such Accounts, on behalf of and in
the name of the Borrower; and (v) sell, assign, transfer, make any agreement in respect of, or
otherwise deal with or exercise rights in respect of, any such Accounts or the goods or services
which have given rise thereto, as fully and completely as though the Lender were the absolute owner
there of for all purposes;
(b) with respect to any Equipment and Inventory (i) make, adjust and settle claims under any
insurance policy related thereto and place and pay for appropriate insurance thereon; (iii) make
repairs or provide maintenance with respect thereto; and (iv) pay any necessary filing fees and any
taxes arising as a consequence of any such filing. The Lender shall not thereby relieve the
Borrower of its obligation to make such expenditures; and
(c) with respect to any Investment Property (i) transfer it at any time to Lender, or to its
nominee, and receive the income thereon and hold the same as Collateral hereunder or apply it to
any matured Secured Obligations; and (ii) demand, sue for, collect or make any compromise or
settlement it deems desirable.
Except as otherwise provided herein, the Lender shall have no duty as to the collection or
protection of any Collateral nor as to the preservation of any rights pertaining
thereto, beyond the safe custody of any Collateral in its possession.
12
Section 7.
Set-Off
. Regardless of the adequacy of any Collateral or other means of obtaining
repayment of the Secured Obligations, any deposits, balances or other sums credited by or due from
the head office of the Lender or any of its branch offices to the Borrower and any property of the
Borrower now or hereafter in the possession, custody, safekeeping or control of the Lender or in
transit to the Lender may, at any time and from time to time after the occurrence of an Event of
Default, without notice to the Borrower or compliance with any other condition precedent now or
hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived)
be set -off, appropriated and applied by the Lender against any and all Secured Obligations of the
Borrower in such manner as the head office of the Lender or any of its branch offices in its sole
discretion may determine, and the Borrower hereby grants the Lender a continuing security interest
in such deposits, balances, other sums and property for the payment and performance of all such
Secured Obligations. ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCIS ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE SECURED OBLIGATIONS PRIOR TO EXERCISING ITS
RIGHTS OF SETOFF WITH RESPECT TO SUCH DEPOSITS, BALANCES, OTHER SUMS AND PROPERTY OF THE BORROWER
ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
Section 8.
Waivers
. The Borrower waives presentment, demand, notice, protest, notice of
acceptance of this Agreement, notice of any loans made, credit or other extensions granted,
Collateral received or delivered and any other action taken in reliance hereon and all other
demands and notices of any description, except for such demands and notices as are expressly
required to be provided to the Borrower under this Agreement or any other Loan Document. The
Borrower waives, to the fullest extent permitted by law, the benefit of all appraisement,
valuation, stay, extension and redemption laws now or hereafter in force and all rights of
marshaling in the event of any sale or disposition of any of the Collateral with respect to both
the Secured Obligations and any Collateral. The Borrower assents to any extension or postponement
of the time of payment or any other forgiveness or indulgence, to any substitution, exchange or
release of Collateral, to the addition or release of any party or person primarily or secondarily
liable, to the acceptance of partial payment thereon and the settlement, compromise or adjustment
of any thereof, all in such manner and at such time or times as the Lender may deem advisable. The
Lender may exercise its rights with respect to the Collateral without resorting, or regard, to
other collateral or sources of reimbursement for Secured Obligations. The Lender shall not be
deemed to have waived any of its rights with respect to the Secured Obligations or the Collateral
unless such waiver is in writing and signed by Lender. No delay or omission on part of the Lender
in exercising any right and no course of dealing shall operate as a waiver of such right or any
other right. A waiver on any one occasion shall not bar or waive the exercise of any right on any
future occasion. All rights and remedies of the Lender in the Secured Obligations or the
Collateral, whether evidenced hereby or by any other instrument or papers, are cumulative and not
exclusive of any remedies provided by law or any other agreement, and may be exercised separately
or concurrently.
Section 9.
Notices
. All notices, approvals, request, demands and other communications
hereunder shall be given in accordance with Section 10.1 of Credit Agreement.
13
Section 10.
Successors and Assigns.
This Agreement shall be binding upon and inure to the
benefit of the Borrower and its successors and assigns, and shall be binding upon and inure to the
benefit of and be enforceable by the Lender and its successor and assigns;
provided
that the
Borrower may not assign or transfer its rights or obligations hereunder. Without limiting the
generality of the foregoing sentence, the Lender may, in the manner and to the extent set forth in
the Credit Agreement, assign or otherwise transfer any agreement or any note held by it evidencing,
securing or otherwise executed in connection with the Secured Obligations, or sell participations
in any interest therein, to any other person or entity, and such other person or entity shall
thereupon become vested, to the extent set forth in agreement evidencing such assignment, transfer
or participation, with all the rights in respect thereof granted to the Lender herein.
Section 11.
Governing Law; Jurisdiction; Venue.
THIS AGREEMENT IS A CONTRACT UNDER THE LAW OF
THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF SAID COMMONWEALTH (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF
LAW). THE BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURT OF THE COMMONWEALTH OF
MASSACHUSETTS, SITTING IN SUFFOLK COUNTY, OR, AT THE LENDERS OPTION, THE UNITED STATES DISTRICT OF
MASSACHUSETTS, SITTING IN
BOSTON, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY SUIT TO ENFORCE THE RIGHTS OF
THE LENDER UNDER THIS AGREEMENT AND ANY CLAIMS OR DISPUTES BETWEEN THE BORROWER, ON THE ONE HAND,
AND THE LENDER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT. THE BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT AND CONSENTS TO SERVICE OF PROCESS
IN ANY SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SET FORTH IN SECTION 10.1 OF THE
CREDIT AGREEMENT. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE
THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS REFERRED TO IN THIS SECTION AND
IRREVOCABLY WAIVED AND AGREES NOT TO PLEAD OR CLAIM ANY SUCH ACTION THAT SUCH ACTION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.
Section 12.
Waiver of Jury Trial.
THE BORROWER AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT
OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR SECURED OBLIGATIONS HEREUNDER, THE
PERFORMANCE OF SUCH RIGHTS AND SECURED OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHTHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITAION, ANY
COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE
ADMINISTRATION OR ENFORCEMENT OF THIS AGREEMENT, AND AGREES THAT
14
IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CAN NOT
BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE BORROWER AND THE LENDER HEREBY WAIVE
ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO TN THE PRECEDING SENTENCE
ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION
TO, ACTUAL DAMAGES. THE BORROWER (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE
LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT THE LENDER HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BECAUSE OF, AMONG OTHER THINGS, THE BORROWERS WAIVERS AND
CERTIFICATIONS CONTAINED HEREIN.
Section 13.
General.
This Agreement may not be amended or modified except by a writing signed
by each of the Borrower and the Lender. This Agreement and any amendment hereof may be executed in
several counterparts and by each party on a separate counterpart, each of which when so executed
and delivered shall be an original, but all of which together shall constitute one instrument.
Section headings are for convenience of reference only and are not a part of this Agreement. In the
event that any Collateral or any deposit or other sum due from or credited by the Lender is held or
stands in the name of the borrower and another or others jointly, the Lender may deal with the same
for all purposes as if it belonged to or stood in the name of the Borrower alone.
15
IN WITNESS WHEREOF, the Borrower has caused this Agreement to be duly executed as an
instrument under seal as of the date first written above.
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VIRTUSA CORPORATION
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By:
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/s/ Charles Speicher
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Charles Speicher
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Corporate Controller
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ACCEPTED AS OF THE
DATE FIRST ABOVE WRITTEN
CITIZENS BANK OF MASSACHUSETTS
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By:
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/s/ Sharon A. Stone
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Sharon A. Stone
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Senior Vice President
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16
NEGATIVE PLEDGE AGREEMENT
THIS NEGATIVE PLEDGE AGREEMENT (this Agreement) is made this 29 day of September, 2006 by
VIRTUSA CORPORATION, a corporation organized under the laws of the State of Delaware and having its
chief executive office at 2000 West Park Drive, Westborough, Massachusetts 01581 (the Borrower),
in favor CITIZENS BANK OF MASSACHUSETTS, a Massachusetts bank having a banking office at 28 State
Street, Boston, Massachusetts 02109 (the Lender).
The Borrower has requested that the Lender enter into a certain Amended and Restated Credit
Agreement with Borrower of even date herewith (as the same may be
amended, modified, supplemented, extended or restated from time to time, the
Credit
Agreement
) and that Lender agree to make loans and other credits to the Borrower upon the terms
and subject to the conditions set forth therein.
Lender has required that Borrower enter into this Agreement as a condition precedent to
Lenders entering into the Credit Agreement.
In order to induce the Lender to enter into the Credit Agreement and to make or continue to
make loans and other credits available to the Borrower upon the terms and subject to the conditions
set forth therein, and in consideration thereof, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the Borrower agrees as follows:
Section 1.
Definitions.
All capitalized terms used herein or in any certificate, report or
other document delivered pursuant hereto shall have the meanings assigned to them below or in the
Credit Agreement (unless otherwise defined).
Intellectual Property.
All of the following, to the extent owned by (and not licensed to) the
Borrower: (i) United States and foreign patents, patent applications and statutory invention
registrations, including reissues, divisions, continuations, substitutions, renewals, continuations
in part, extensions and reexaminations thereof, and all improvements thereto, (ii) software,
database, copyrightable works, websites, copyrights (registered, renewed or otherwise) and
registrations, renewals and applications for registration or renewal thereof, (iii) trademarks,
trademark applications, service marks, service mark applications, trade dress, logos, slogans,
symbols, trade names, internet domain names, brand names, product names, fictitious names,
corporate names, and other source identifiers and all reissues, extensions and renewals thereof,
and goodwill of the business symbolized thereby and associated therewith, (iv) trade secrets,
know-how, technology, inventions and discoveries, and (v) any and all right, title, and interest in
and to the foregoing, including the right to sue for past, present and future infringement, in all
of such cases (i) through (v), whether used, held for use, supported, maintained, marketed or
otherwise.
Section 2.
Negative Pledge.
The Borrower hereby covenants that it shall not create, incur,
assume or suffer to exist any Encumbrance, other than Permitted Encumbrances, or any other negative
pledge, on or with respect to the Intellectual Property. The Borrower further
1
covenants and agrees that it shall not sell, transfer, assign or otherwise alienate the
Intellectual Property, other than for fair consideration in the ordinary course of Borrowers
business, without the prior written consent of Lender.
Section 3.
Notices.
All notices, approvals, requests, demands and other communications
hereunder shall be given in accordance with Section 10.1 of the Credit Agreement.
Section 4.
Governing Law: Jurisdiction; Venue.
THIS AGREEMENT IS A
CONTRACT UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH (EXCLUDING THE LAWS
APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER HEREBY CONSENTS AND AGREES THAT THE
SUPERIOR COURT OF THE COMMONWEALTH OF MASSACHUSETTS, SITTING IN SUFFOLK COUNTY, OR AT THE LENDERS
OPTION, THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS, SITTING IN BOSTON, SHALL HAVE EXCLUSIVE JURIDRICTION TO HEAR AND DETERMINE ANY SUIT
TO ENFORCE THE RIGHTS OF THE LENDER UNDER THIS AGREEMENT AND ANY CLAIMS OR DISPUTES BETWEEN THE
BORROWER, ON THE ONE HAND, AND THE LENDER, ON THE
OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT.
THE BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT AND CONSENTS TO SERVICE OF THE PROCESS IN ANY SUCH SUIT BEING MADE UPON
THE BORROWER BY MAIL AT THE
ADDRESS SET FORTH IN SECTION 10.1 OF THE CREDIT AGREEMENT. THE BORROWER IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH ACTION BROUGHT
IN THE COURT REFERRED TO IN THE SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN
ANY SUCH ACTION SUCH ACTION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
Section 5.
Waiver of Jury Trail.
THE BORROWER AND THE LENDER HEREBY KNOWINGLY, VOLUNTARY AND
INTENTIONALLY WAIVE THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF
ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR
OBLIGATIONS HEREUNDER, THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING,
WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER
RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THIS AGREEMENT, AND AGREES THAT IT WILL NOT SEEK
TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CAN NOT BE OR HAS NOT
BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE BORROWER AND THE LENDER HEREBY WAIVE ANY RIGHT THEY
MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL,
EXEMPLARY,
2
PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE
BORROWER (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDER HAS REPRESENTED
EXPRESSLY OR OTHERWISE, THAT THE LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT THE LENDER HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BECAUSE OF, AMONG OTHER THINGS, THE BORROWERS WAIVERS AND CERTIFICATIONS CONTAINED
HEREIN.
Section 6.
General.
This Agreement may not be amended or modified expect by a writing signed by
each of the Borrower and Lender. This Agreement shall be binding upon and inure to the benefit of
the Borrower and its successors and assigns, and shall be shall be binding upon and inure to the
benefit of and be enforceable by the Lender and its successors and assigns; provided that the
Borrower may not assign or transfer its rights or obligations hereunder. This Agreement and any
amendment hereof may be executed in several counterparts and by each party on a separate
counterpart, each of which when executed and delivered shall be an original, but all of which
together shall constitute one agreement. Section headings are for convenience of reference only and
are not a part of this Agreement. In the event that any deposit or sum due from or credited by the
Lender is held or stands in the name of the Borrower and another or others jointly, the Lender may
deal with the same for all purposes as if it belonged to or stood in the name of the Borrower
alone.
IN WITNESS WHEREOF, the Borrower has caused this Agreement to be duly executed as an
instrument under seal as of the date first written above.
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VIRTUSA CORPORATION
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By:
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/s/ Kris Canekeratne
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Kris Canekeratne
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Chairman and Chief Executive Officer
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ACCEPTED AS OF THE
DATE FIRST ABOVE WRITTEN
CITIZENS BANK OF MASSCHUSETTS
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By:
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/s/ Sharon A. Stone
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Sharon A. Stone
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Senior Vice President
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3
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This First Amendment (this Amendment) is made as of September 30, 2007 to that certain
Amended and Restated Credit Agreement dated September 29, 2006 (the Credit Agreement) between
CITIZENS BANK OF MASSACHUSETTS, now known as RBS CITIZENS, N.A. (Bank) and VIRTUSA CORPORATION,
a Delaware corporation with an address of 2000 West Park Drive, Westborough, Massachusetts 01581
(Borrower). Capitalized terms used and not defined in this Amendment shall have the meanings
ascribed to them in the Credit Agreement.
RECITALS
Borrower has requested that Bank agree to extend the Revolving Credit Maturity Date
through December 31, 2007 and that Bank agree to eliminate the annual field examination of
Borrowers books and records.
Bank is amenable to so extending the Revolving Credit Maturity Date and so amending the Credit
Agreement, but only on the terms and conditions set forth in the Credit Agreement as amended
hereby.
AGREEMENT
In consideration of the foregoing, of the undertakings of Borrower and Bank herein and for
other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. All references in the Credit Agreement and other Loan Documents to Bank shall be deemed to mean
RBS CITIZENS, N.A.
2. Effective September 30, 2007, the definition of the term Revolving Credit Maturity Date
contained in Section 1.1 of the Credit Agreement is deleted and replaced with the following text:
Revolving Credit Maturity Date
. December 31, 2007.
3. Section 5.5 of the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
5.5.
Inspection.
On the request of Lender from time to time, Borrower shall permit
the Lender and its designees, at reasonable times and intervals of time, and upon reasonable
written notice, to (i) visit and inspect the United States properties of the Borrower and its
Subsidiaries, (ii) examine and make copies of and take abstracts from the United States books and
records of the Borrower and its Subsidiaries, (iii) verify Accounts Receivables using its customary
practices and procedures, and (iv) discuss the affairs, finances, and accounts of the Borrower and
its Subsidiaries with their appropriate officers, employees and independent accountants, all at the
1
expense of the Borrower. In the absence of an existing Event of Default, any such examination shall
be at Lenders expense, and during the continuance of an Event of Default such examination shall be
at Borrowers expense.
4. Except as set forth on the disclosure schedule attached hereto as
Exhibit A
, Borrower
represents and warrants that all of the representations and warranties made by Borrower in the
Credit Agreement and other Loan Documents are and continue to be true and correct on the date
hereof, except to the extent that any of such representations and warranties relate by their terms
solely to a date prior to date of this Amendment. Except as set forth on the disclosure schedule
attached hereto as
Exhibit A
, Borrower hereby ratifies and confirms all of its covenants
and agreements contained in the Credit Agreement and represents that it is not aware of any default
of any of the terms and provisions of the Credit Agreement.
5. Borrower further represents and warrants that this Amendment is its valid and binding
obligation, enforceable against it in accordance with its terms, except as may be affected by
bankruptcy and other similar laws of general application affecting the rights and remedies of
creditors.
6. Borrower shall promptly execute and deliver such further documents, instruments and agreements
and take such further action as Bank may reasonably request, in its sole discretion, to effect the
purposes of this Amendment and the Credit Agreement and other Loan Documents, including, but not
limited to the execution and delivery of all documents necessary or reasonably required by Bank to
ensure that Bank has perfected liens on all assets of Borrower to the extent originally provided
under the Credit Agreement and the other Loan Documents. Borrower hereby appoints any officer or
agent of Bank as Borrowers true and lawful attorney in fact, with power of substitution to endorse
the name of Borrower or any of their officers or agents in such regard, exercisable by Bank during
the continuance of an Event of Default.
7. Except as otherwise expressly provided in this Amendment, nothing in this Amendment shall extend
to or affect in any way any of the Obligations or any of the rights and remedies of Bank arising
under the Credit Agreement and other Loan Documents, and Bank shall not be deemed to have waived
any or all of such rights and remedies with respect to any Event of Default or event or condition
which, with notice or the lapse of time, would become an Event of a Default and which, upon
Borrowers execution and delivery of this Amendment, might otherwise exist or which might hereafter
occur.
8. By execution of this Amendment, Borrower acknowledges and confirms that it does not, as of the
date of this Amendment, have any offsets, defenses or claims against Bank or any of its officers,
agents, directors or employees whether asserted or unasserted to the Obligations.
9. To the extent possible and except for the specific changes to the Credit Agreement effected
hereby, this Amendment shall be construed to be consistent with the provisions of the Credit
Agreement. In the event of any inconsistency between the provisions of this Amendment and any other
document (including, without limitation, any Loan Document), instrument, or
2
agreement entered into by and between Bank and Borrower, the provisions of this Amendment shall
govern and control. This Amendment shall be binding upon Bank and Borrower, and their
representatives, successors, and assigns, and shall inure to the benefit of Bank and Borrower and
their respective successors and assigns. This Amendment and all documents, instruments, and
agreements executed in connection herewith incorporate all of the discussions and negotiations
between Borrower and Bank, either expressed or implied, concerning the matters included herein and
in such other documents, instruments and agreements, any statute, custom, or usage to the contrary
notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the
provisions hereof. No modification, amendment, or waiver of any provision of this Amendment, or any
provision of any other document, instrument, or agreement between any Borrower and Bank shall be
effective unless executed in writing by the party to be charged with such modification, amendment,
or waiver.
10. Borrower acknowledges and agrees that it shall promptly pay to Bank the full amount of all
reasonable out-of-pocket costs and expenses of Bank incurred by Bank in preparation and
documentation of this Amendment and all documents ancillary hereto or incurred by Bank after the
date of this Amendment in connection with administration of the Obligations or enforcement of any
rights of Bank under the Credit Agreement and other Loan Documents or otherwise in respect of any
of the Obligations.
11. If any clause or provision of this Amendment is determined to be illegal, invalid or
unenforceable under any present or future law by the final judgment of a court of competent
jurisdiction, the remainder of this Amendment will not be affected thereby. It is the intention of
the parties that if any such provision is held to be invalid, illegal or unenforceable, there will
be added in lieu thereof an enforceable provision as similar in terms to such provision as is
possible, and that such added provision will be legal, valid and enforceable.
12. This Amendment is delivered to Bank in The Commonwealth of Massachusetts and it is the desire
and intention of the parties that this Amendment and the Loan Documents be in all respects
interpreted according to the laws of The Commonwealth of Massachusetts. Borrower specifically and
irrevocably consents to the personal and subject matter, jurisdiction and venue of any court of The
Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex or in the District
Court of the United States for the District of Massachusetts with respect to all matters concerning
this Amendment or the Loan Documents or the enforcement of any of the foregoing.
13. This Amendment may be executed in one or more counterparts, each of which will be deemed an
original document, but all of which will constitute a single document. This Amendment will not be
binding on or constitute evidence of a contract between the parties until such time as a
counterpart of this document has been executed by each of the parties and delivered to Bank.
3
WITNESS our hands and seals effective as of September 30, 2007.
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WITNESS (to all)
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BORROWER:
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VIRTUSA CORPORATION
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/s/ [ILLEGIBLE]
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By: /s/ Thomas R. Holler
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[SEAL]
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duly authorized
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Thomas R. Holler
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Executive VP & CFO
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BANK:
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RBS CITIZENS, N.A.
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/s/ [ILLEGIBLE]
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By: /s/ Victoria Lazzell
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Victoria Lazzell, Senior Vice President
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4
EXHIBIT A
Disclosure Schedule to First Amendment to Amended and Restated Credit Agreement
5
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This Second Amendment (this Amendment) is made as of December 31,2007 to that certain Amended and
Restated Credit Agreement dated September 29,2006, as previously amended by First Amendment to
Amended and Restated Credit Agreement dated as of September 30,2007 (the Credit Agreement)
between CITIZENS BANK OF MASSACHUSETTS, now known as RBS CITIZENS, N.A. (Bank) and VIRTUSA
CORPORATION, a Delaware corporation with an address of 2000 West Park Drive, Westborough,
Massachusetts 01581 (Borrower). Capitalized terms used and not defined in this Amendment shall
have the meanings ascribed to them in the Credit Agreement.
RECITALS
Borrower has requested that Bank agree to extend the Revolving Credit Maturity Date through March
31, 2008 and that Bank agree to eliminate the pledge of the capital stock of its subsidiary,
Virtusa Securities Corporation.
Bank is amenable to so extending the Revolving Credit Maturity Date and so amending the Credit
Agreement, but only on the terms and conditions set forth in the Credit Agreement as amended
hereby.
AGREEMENT
In consideration of the foregoing, of the undertakings of Borrower and Bank herein and for other
good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Effective December 31, 2007, the definition of the term Revolving Credit Maturity Date
contained in Section 1.1 of the Credit Agreement is deleted and replaced with the following text:
Revolving Credit Maturity Date
. March 31, 2008.
2. Effective December 31, 2007, the definition of the term Security Documents contained in
Section 1.1 of the Credit Agreement is deleted and replaced with the following text:
Security Documents.
A security agreement, a negative pledge agreement with respect
to intellectual property of the Borrower and the Letter of Credit Pledge Agreement, and any
subsequent pledge or security agreements granted by Borrower to Lender, each in favor of the Lender
to secure Obligations, in each case as amended and/or restated and in effect from time to time, and
any additional documents evidencing or perfecting the Lenders lien on the Collateral.
3. Borrower and Bank hereby agree that the Pledge Agreement shall be cancelled and of no further
force and effect as of December 31,2007. Bank shall cancel and return the Pledge Agreement to
Borrower promptly after the date of this Amendment.
1
4. Except as set forth on the disclosure schedule attached hereto as
Exhibit A,
Borrower
represents and warrants that all of the representations and warranties made by Borrower in the
Credit Agreement and other Loan Documents are and continue to be true and correct on the date
hereof, except to the extent that any of such representations and warranties relate by their terms
solely to a date prior to date of this Amendment. Except as set forth on the disclosure schedule
attached hereto as
Exhibit A,
Borrower hereby ratifies and confirms all of its covenants
and agreements contained in the Credit Agreement and represents that it is not aware of any default
of any of the terms and provisions of the Credit Agreement.
5. Borrower further represents and warrants that this Amendment is its valid and binding
obligation, enforceable against it in accordance with its terms, except as may be affected by
bankruptcy and other similar laws of general application affecting the rights and remedies of
creditors.
6. Borrower shall promptly execute and deliver such further documents, instruments and agreements
and take such further action as Bank may reasonably request, in its sole discretion, to effect the
purposes of this Amendment and the Credit Agreement and other Loan Documents, including, but not
limited to the execution and delivery of all documents necessary or reasonably required by Bank to
ensure that Bank has perfected liens on all assets of Borrower to the extent originally provided
under the Credit Agreement and the other Loan Documents. Borrower hereby appoints any officer or
agent of Bank as Borrowers true and lawful attorney in fact, with power of substitution to endorse
the name of Borrower or any of their officers or agents in such regard, exercisable by Bank during
the continuance of an Event of Default.
7. Except as otherwise expressly provided in this Amendment, nothing in this Amendment shall extend
to or affect in any way any of the Obligations or any of the rights and remedies of Bank arising
under the Credit Agreement and other Loan Documents, and Bank shall not be deemed to have waived
any or all of such rights and remedies with respect to any Event of Default or event or condition
which, with notice or the lapse of time, would become an Event of a Default and which, upon
Borrowers execution and delivery of this Amendment, might otherwise exist or which might hereafter
occur.
8. By execution of this Amendment, Borrower acknowledges and confirms that it does not, as of the
date of this Amendment, have any offsets, defenses or claims against Bank or any of its officers,
agents, directors or employees whether asserted or unasserted to the Obligations.
9. To the extent possible and except for the specific changes to the Credit Agreement effected
hereby, this Amendment shall be construed to be consistent with the provisions of the Credit
Agreement. In the event of any inconsistency between the provisions of this Amendment and any other
document (including, without limitation, any Loan Document), instrument, or agreement entered into
by and between Bank and Borrower, the provisions of this Amendment shall govern and control. This
Amendment shall be binding upon Bank and Borrower, and their representatives, successors, and
assigns, and shall inure to the benefit of Bank and Borrower and
2
their respective successors and assigns. This Amendment and all documents, instruments, and
agreements executed in connection herewith incorporate all of the discussions and negotiations
between Borrower and Bank, either expressed or implied, concerning the matters included herein and
in such other documents, instruments and agreements, any statute, custom, or usage to the contrary
notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the
provisions hereof. No modification, amendment, or waiver of any provision of this Amendment, or any
provision of any other document, instrument, or agreement between any Borrower and Bank shall be
effective unless executed in writing by the party to be charged with such modification, amendment,
or waiver.
10. Borrower acknowledges and agrees that it shall promptly pay to Bank the full amount of all
reasonable out-of-pocket costs and expenses of Bank incurred by Bank in preparation and
documentation of this Amendment and all documents ancillary hereto or incurred by Bank after the
date of this Amendment in connection with administration of the Obligations or enforcement of any
rights of Bank under the Credit Agreement and other Loan Documents or otherwise in respect of any
of the Obligations.
11. If any clause or provision of this Amendment is determined to be illegal, invalid or
unenforceable under any present or future law by the final judgment of a court of competent
jurisdiction, the remainder of this Amendment will not be affected thereby. It is the intention of
the parties that if any such provision is held to be invalid, illegal or unenforceable, there will
be added in lieu thereof an enforceable provision as similar in terms to such provision as is
possible, and that such added provision will be legal, valid and enforceable.
12. This Amendment is delivered to Bank in The Commonwealth of Massachusetts and it is the desire
and intention of the parties that this Amendment and the Loan Documents be in all respects
interpreted according to the laws of The Commonwealth of Massachusetts. Borrower specifically and
irrevocably consents to the personal and subject matter, jurisdiction and venue of any court of The
Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex or in the District
Court of the United States for the District of Massachusetts with respect to all matters concerning
this Amendment or the Loan Documents or the enforcement of any of the foregoing.
13. This Amendment may be executed in one or more counterparts, each of which will be deemed an
original document, but all of which will constitute a single document. This Amendment will not be
binding on or constitute evidence of a contract between the parties until such time as a
counterpart of this document has been executed by each of the parties and delivered to Bank.
3
WITNESS our hands and seals effective as of December 31, 2007.
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WITNESS (to all)
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BORROWER:
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VIRTUSA CORPORATION
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/s/ [ILLEGIBLE]
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By: /s/ [ILLEGIBLE]
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[ILLEGIBLE]
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duly authorized VP & General Course
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[ILLEGIBLE]
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BANK:
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RBS CITIZENS, N.A.
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/s/ [ILLEGIBLE]
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By:
/s/ Victoria Lazzell
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Victoria Lazzell, Senior Vice President
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4
EXHIBIT A
Disclosure Schedule to Second Amendment to Amended and Restated Credit Agreement
5
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This Third Amendment (this Amendment) is made as of February 7, 2008 to that certain Amended
and Restated Credit Agreement dated September 29, 2006, as previously amended by First Amendment to
Amended and Restated Credit Agreement dated as of September 30, 2007 and Second Amendment to
Amended and Restated Credit Agreement dated as of December 31, 2007 (the Credit Agreement)
between CITIZENS BANK OF MASSACHUSETTS, now known as RBS CITIZENS, N.A. (Bank) and VIRTUSA
CORPORATION, a Delaware corporation with an address of 2000 West Park Drive, Westborough,
Massachusetts 01581 (Borrower). Capitalized terms used and not defined in this Amendment shall
have the meanings ascribed to them in the Credit Agreement.
RECITALS
Borrower has requested that Bank consent to the pledging by Borrower or Virtusa Securities
Corporation of up to $5,000,000.00 in cash and securities to J. P. Morgan Chase & Co. in connection
with certain foreign exchange accommodations for the benefit of Borrower and its affiliates.
Pursuant to Section 7.3 of the Credit Agreement, Borrower and Virtusa Securities Corporation may
not grant a security interest in their personal property without the consent of Bank.
Bank is willing to consent to such pledge, and has issued a consent letter regarding such
transaction dated January 28, 2008 in the form of
Exhibit A
, conditioned upon certain
amendments to the Credit Agreement as further set forth herein.
AGREEMENT
In consideration of the foregoing, of the undertakings of Borrower and Bank herein and for other
good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Sections 6.2(a) and 6.2(b) of the Credit Agreement are hereby deleted in their entirety and are
replaced with the following provisions:
(a) The Borrower and Virtusa Securities Corporation shall at all times maintain aggregate
unpledged and unrestricted cash and cash equivalents in United States-based accounts, or otherwise
on hand in the United States, of not less than $10,000,000.00, net of any outstanding Loans or
Reimbursement Obligations.
(b) The Borrower and its Subsidiaries shall at all times maintain aggregate unpledged and
unrestricted cash and cash equivalents, including both foreign-based accounts and United
States-based accounts of at least $15,000,000.00.
1
2. Except as set forth on the disclosure schedule attached hereto as
Exhibit B,
Borrower
represents and warrants that all of the representations and warranties made by Borrower in the
Credit Agreement and other Loan Documents are and continue to be true and correct on the date
hereof, except to the extent that any of such representations and warranties relate by their terms
solely to a date prior to date of this Amendment. Except as set forth on the disclosure schedule
attached hereto as
Exhibit B,
Borrower hereby ratifies and confirms all of its covenants
and agreements contained in the Credit Agreement and represents that it is not aware of any default
of any of the terms and provisions of the Credit Agreement.
3. Borrower further represents and warrants that this Amendment is its valid and binding
obligation, enforceable against it in accordance with its terms, except as may be affected by
bankruptcy and other similar laws of general application affecting the rights and remedies of
creditors.
4. Borrower shall promptly execute and deliver such further documents, instruments and agreements
and take such further action as Bank may reasonably request, in its sole discretion, to effect the
purposes of this Amendment and the Credit Agreement and other Loan Documents, including, but not
limited to the execution and delivery of all documents necessary or reasonably required by Bank to
ensure that Bank has perfected liens on all assets of Borrower to the extent originally provided
under the Credit Agreement and the other Loan Documents. Borrower hereby appoints any officer or
agent of Bank as Borrowers true and lawful attorney in fact, with power of substitution to endorse
the name of Borrower or any of their officers or agents in such regard, exercisable by Bank during
the continuance of an Event of Default.
5. Except as otherwise expressly provided in this Amendment, nothing in this Amendment shall extend
to or affect in any way any of the Obligations or any of the rights and remedies of Bank arising
under the Credit Agreement and other Loan Documents, and Bank shall not be deemed to have waived
any or all of such rights and remedies with respect to any Event of Default or event or condition
which, with notice or the lapse of time, would become an Event of a Default and which, upon
Borrowers execution and delivery of this Amendment, might otherwise exist or which might hereafter
occur.
6. By execution of this Amendment, Borrower acknowledges and confirms that it does not, as of the
date of this Amendment, have any offsets, defenses or claims against Bank or any of its officers,
agents, directors or employees whether asserted or unasserted to the Obligations.
7. To the extent possible and except for the specific changes to the Credit Agreement effected
hereby, this Amendment shall be construed to be consistent with the provisions of the Credit
Agreement. In the event of any inconsistency between the provisions of this Amendment and any other
document (including, without limitation, any Loan Document), instrument, or agreement entered into
by and between Bank and Borrower, the provisions of this Amendment shall govern and control. This
Amendment shall be binding upon Bank and Borrower, and their representatives, successors, and
assigns, and shall inure to the benefit of Bank and Borrower and their respective successors and
assigns. This Amendment and all documents, instruments, and agreements executed in connection
herewith incorporate all of the discussions and negotiations
2
between Borrower and Bank, either expressed or implied, concerning the matters included herein and
in such other documents, instruments and agreements, any statute, custom, or usage to the contrary
notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the
provisions hereof. No modification, amendment, or waiver of any provision of this Amendment, or any
provision of any other document, instrument, or agreement between any Borrower and Bank shall be
effective unless executed in writing by the party to be charged with such modification, amendment,
or waiver.
8. Borrower acknowledges and agrees that it shall promptly pay to Bank the full amount of all
reasonable out-of-pocket costs and expenses of Bank incurred by Bank in preparation and
documentation of this Amendment and all documents ancillary hereto or incurred by Bank after the
date of this Amendment in connection with administration of the Obligations or enforcement of any
rights of Bank under the Credit Agreement and other Loan Documents or otherwise in respect of any
of the Obligations.
9. If any clause or provision of this Amendment is determined to be illegal, invalid or
unenforceable under any present or future law by the final judgment of a court of competent
jurisdiction, the remainder of this Amendment will not be affected thereby. It is the intention of
the parties that if any such provision is held to be invalid, illegal or unenforceable, there will
be added in lieu thereof an enforceable provision as similar in terms to such provision as is
possible, and that such added provision will be legal, valid and enforceable.
10. This Amendment is delivered to Bank in The Commonwealth of Massachusetts and it is the desire
and intention of the parties that this Amendment and the Loan Documents be in all respects
interpreted according to the laws of The Commonwealth of Massachusetts. Borrower specifically and
irrevocably consents to the personal and subject matter, jurisdiction and venue of any court of The
Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex or in the District
Court of the United States for the District of Massachusetts with respect to all matters concerning
this Amendment or the Loan Documents or the enforcement of any of the foregoing.
11. This Amendment may be executed in one or more counterparts, each of which will be deemed an
original document, but all of which will constitute a single document. This Amendment will not be
binding on or constitute evidence of a contract between the parties until such time as a
counterpart of this document has been executed by each of the parties and delivered to Bank.
3
WITNESS our hands and seals effective as of January 28, 2008.
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WITNESS (to all)
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BORROWER:
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VIRTUSA CORPORATION
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(ILLEGIBLE)
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By:
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/s/ (ILLEGIBLE)
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(ILLEGIBLE)
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duly authorized
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BANK:
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RBS CITIZENS, N.A.
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(ILLEGIBLE)
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By
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/s/ (ILLEGIBLE)
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Victoria Lazzell, Senior Vice President
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4
EXHIBIT A
CONSENT LETTER
Attach copy of fully signed letter dated January 28, 2008
5
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Victoria P. Lazzell
Senior Vice President
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28 January 2008
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Technology Banking Division
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Citizens Bank of Massachusetts
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53 State Street. 8
th
Floor
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Paul D. Tutun, Esq.
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Boston, MA 02109
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Vice President and General Counsel
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Phone 617-994-7124 Fax 617-742-9548
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Virtusa Corporation
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Victoria lazzell@ citizens bank.com
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2000 West Park Drive
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Westborough, MA 01581
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Dear
Mr. Tutun,
Reference is made to the loans and all loan documents, as have been amended from time to
time, including the Amended and Restated Credit Agreement dated September 29, 2006 (Credit
Agreement), the First Amendment to Amended and Restated Credit Agreement dated September
30, 2007 and Second Amendment to Amended and Restated Credit Agreement dated December 31,
2007, by and between Virtusa Corporation (Borrower), a Delaware corporation with an
address of 2000 West Park Drive Westborough, MA 01581 and RBS Citizens, National
Association, (Bank).
Borrower has requested that Lender provide its consent to a proposed transaction
(Transaction) with JPMorgan Chase & Co. (JP Morgan} whereby Virtusa Corporation or
Virtusa Securities Corporation will pledge up to $5 million of its cash balances to
JPMorgan to facilitate various foreign exchange transactions for the benefit of Borrower
and its related entities. This transaction violates Section 7.3 of the Credit Agreement.
Please be advised that Lender hereby consents to the Transaction. Lender hereby gives this
consent solely for the Transaction described above and does not waive or consent to any
other violations of the Credit Agreement Additionally, Lenders consent is subject to
Borrowers agreement, as evidenced by its signature below, to execute an amendment within 5
business days to Section 6.2 (a) and 6.2 (b) of the Credit Agreement to exclude all cash
balances restricted by this Transaction from the calculation of its cash requirements.
All other terms of the Credit Agreement, as amended, remain in full force and effect.
Sincerely,
Agreed:
Virtusa Corporation
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By:
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(ILLEGIBLE)
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Name:
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(ILLEGIBLE)
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Date:
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Jan 28, 2008
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EXHIBIT B
Disclosure Schedule to Third Amendment to Amended and Restated Credit Agreement
6
FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This Fourth Amendment (this Amendment) is made as of March 31, 2008 to that certain Amended and
Restated Credit Agreement dated September 29, 2006, as previously amended by First Amendment to
Amended and Restated Credit Agreement dated as of September 30, 2007, Second Amendment to Amended
and Restated Credit Agreement dated as of December 30, 2007, and Third Amendment to Amended and
Restated Credit Agreement dated as of February 7, 2008 (the Credit Agreement) between RBS
CITIZENS, N.A., successor by merger to Citizens Bank of Massachusetts (Bank) and VIRTUS A
CORPORATION, a Delaware corporation with an address of 2000 West Park Drive, Westborough,
Massachusetts 01581 (Borrower). Capitalized terms used and not defined in this Amendment shall
have the meanings ascribed to them in the Credit Agreement.
RECITALS
Borrower has requested that Bank agree to extend the Revolving Credit Maturity Date through
September 30, 2008.
Bank is amenable to so extending the Revolving Credit Maturity Date, but only on the terms and
conditions set forth in the Credit Agreement as amended hereby.
AGREEMENT
In consideration of the foregoing, of the undertakings of Borrower and Bank herein and for other
good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Effective March 31, 2008, the definitions of the terms
FX Reserves
and
Revolving
Credit
Maturity Date
contained in Section 1.1 of the Credit Agreement are deleted and replaced
with
the following definitions:
FX Reseryes
means, at any time of determination of the Borrowing Base, an amount equal to
15.0% (or such other percentage as Lender may determine is appropriate for the respective
currencies of such contracts at such time) of the face amount (in US Dollars) of all foreign
exchange contracts entered into in connection with FX Transactions.
Revolving Credit Maturity Date.
September 30, 2008.
2. The following definition is hereby added to Section 1.1 of the Credit Agreement in
appropriate alphabetical order:
Hedging Contracts
means, interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements, or any other agreements or arrangements entered into between the
Borrower and the Bank and designed to protect the Borrower against fluctuations in interest
rates or currency exchange rates.
1
3. Section 2.7(b) of the Credit Agreement is hereby deleted in its entirety and is replaced with
the following text:
(b) If the Revolving Credit Commitment shall have been terminated or the Obligations shall
have been declared immediately due and payable pursuant to Section 8.2, all funds received from or
on behalf of the Borrower (including as proceeds of Collateral) by the Lender in respect of
Obligations, shall be applied by the Lender in the following manner and order: (i) first, to
reimburse the Lender for any amounts payable pursuant to Sections 10.2 and 11.3 hereof; (ii)
second, to the payment of Commitment Fees, Letter of Credit Fees and any other fees payable
hereunder; (iii) third, to the payment of interest due on the Loans and the Reimbursement
Obligations; (iv) fourth, to the payment of the outstanding principal balance of the Loans and the
Reimbursement Obligations, pro rata to the outstanding principal balance of each, and to pay any
breakage costs and fees associated with Hedging Contracts, and to provide the Lender with cash
collateral for any issued and outstanding Letters of Credit, Lenders exposure on Hedging Contracts
and Lenders exposure on FX Transactions in an amount determined by Lender to be necessary to
secure such Obligations; (v) fifth, to the payment of any other Obligations payable by the
Borrower, pro rata to the outstanding principal balance of each; and (vi) any remaining funds shall
be paid to whoever shall be entitled thereto or as a court of competent jurisdiction shall direct.
In the event that funds received are not adequate to provide the Lender with cash collateral for
all issued and outstanding Letters of Credit and Lenders exposure on FX Transactions, Borrower
shall immediately deposit with Lender cash collateral determined by Lender to be necessary to
secure such Obligations,.
4. Section 8.2(c) of the Credit Agreement is hereby deleted in its entirety and is replaced with
the following text:
(c) The Borrower shall immediately pledge to Lender cash collateral in an amount determined
by Lender to be sufficient to fully secure any Obligations of Borrower to Lender with respect to
(1) any issued Letters of Credit and (2) Lenders exposure on FX Transactions; and
5. All references to Bank or to Citizens Bank of Massachusetts in the Credit Agreement and any
of the documents, instruments and agreements shall be deemed to be mean and refer to RBS
CITIZENS, N.A.
6. Except as set forth on the disclosure schedule attached hereto as
Exhibit A,
Borrower
represents and warrants that all of the representations and warranties made by Borrower in the
Credit Agreement and other Loan Documents are and continue to be true and correct on the date
hereof, except to the extent that any of such representations and warranties relate by their terms
solely to a date prior to date of this Amendment. Except as set forth on the disclosure schedule
attached hereto as
Exhibit A,
Borrower hereby ratifies and confirms all of its covenants
and
agreements contained in the Credit Agreement and represents that it is not aware of any default of
any of the terms and provisions of the Credit Agreement.
2
7. Borrower further represents and warrants that this Amendment is its valid and binding
obligation, enforceable against it in accordance with its terms, except as may be affected by
bankruptcy and other similar laws of general application affecting the rights and remedies of
creditors.
8. Borrower shall promptly execute and deliver such further documents, instruments and
agreements and take such further action as Bank may reasonably request, in its sole discretion, to
effect the purposes of this Amendment and the Credit Agreement and other Loan Documents,
including, but not limited to the execution and delivery of all documents necessary or reasonably
required by Bank to ensure that Bank has perfected liens on all assets of Borrower to the extent
originally provided under the Credit Agreement and the other Loan Documents. Borrower hereby
appoints any officer or agent of Bank as Borrowers true and lawful attorney in fact, with power
of substitution to endorse the name of Borrower or any of their officers or agents in such regard,
exercisable by Bank during the continuance of an Event of Default.
9. Except as otherwise expressly provided in this Amendment, nothing in this Amendment shall
extend to or affect in any way any of the Obligations or any of the rights and remedies of Bank
arising under the Credit Agreement and other Loan Documents, and Bank shall not be deemed to
have waived any or all of such rights and remedies with respect to any Event of Default or event
or condition which, with notice or the lapse of time, would become an Event of a Default and
which, upon Borrowers execution and delivery of this Amendment, might otherwise exist or
which might hereafter occur.
10. By execution of this Amendment, Borrower acknowledges and confirms that it does not, as
of the date of this Amendment, have any offsets, defenses or claims against Bank or any of its
officers, agents, directors or employees whether asserted or unassorted to the Obligations.
11. To the extent possible and except for the specific changes to the Credit Agreement effected
hereby, this Amendment shall be construed to be consistent with the provisions of the Credit
Agreement. In the event of any inconsistency between the provisions of this Amendment and any
other document (including, without limitation, any Loan Document), instrument, or agreement
entered into by and between Bank and Borrower, the provisions of this Amendment shall govern
and control. This Amendment shall be binding upon Bank and Borrower, and their
representatives, successors, and assigns, and shall inure to the benefit of Bank and Borrower and
their respective successors and assigns. This Amendment and all documents, instruments, and
agreements executed in connection herewith incorporate all of the discussions and negotiations
between Borrower and Bank, either expressed or implied, concerning the matters included herein
and in such other documents, instruments and agreements, any statute, custom, or usage to the
contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise
affect the provisions hereof. No modification, amendment, or waiver of any provision of this
Amendment, or any provision of any other document, instrument, or agreement between any
Borrower and Bank shall be effective unless executed in writing by the party to be charged with
such modification, amendment, or waiver.
3
12. Borrower acknowledges and agrees that it shall promptly pay to Bank the full amount of all
reasonable out-of-pocket costs and expenses of Bank incurred by Bank in preparation and
documentation of this Amendment and all documents ancillary hereto or incurred by Bank after
the date of this Amendment in connection with administration of the Obligations or enforcement
of any rights of Bank under the Credit Agreement and other Loan Documents or otherwise in
respect of any of the Obligations.
13. If any clause or provision of this Amendment is determined to be illegal, invalid or
unenforceable under any present or future law by the final judgment of a court of competent
jurisdiction, the remainder of this Amendment will not be affected thereby. It is the intention of
the parties that if any such provision is held to be invalid, illegal or unenforceable, there will
be
added in lieu thereof an enforceable provision as similar in terms to such provision as is
possible,
and that such added provision will be legal, valid and enforceable.
14. This Amendment is delivered to Bank in The Commonwealth of Massachusetts and it is the
desire and intention of the parties that this Amendment and the Loan Documents be in all
respects interpreted according to the laws of The Commonwealth of Massachusetts. Borrower
specifically and irrevocably consents to the personal and subject matter, jurisdiction and venue of
any court of The Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex
or in the District Court of the United States for the District of Massachusetts with respect to
all
matters concerning this Amendment or the Loan Documents or the enforcement of any of the
foregoing.
15. This Amendment may be executed in one or more counterparts, each of which will be
deemed an original document, but all of which will constitute a single document. This
Amendment will not be binding on or constitute evidence of a contract between the parties until
such time as a counterpart of this document has been executed by each of the parties and
delivered to Bank.
4
EXHIBIT A
Disclosure Schedule to Fourth Amendment to Amended and Restated Credit Agreement
The Companys Subsidiaries are the following:
Virtusa Securities Corporation
Virtusa UK Limited
Virtusa (India) Private Limited
Virtusa (Sri Lanka) Private Limited
Virtusa International, B.V (Dutch company)
Virtusa Consulting Services Private Limited (Hyderabad, India)
Virtusa Software Services Private Limited (Chennai, India)
5
WITNESS our hands and seals effective as of March 31, 2008.
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WITNESS (to all)
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BORROWER:
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VIRTUSA CORPORATION
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By:
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/s/ [ILLEGIBLE]
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duly authorized
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BANK:
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RBS CITIZENS, N.A.
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By:
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/s/ [ILLEGIBLE]
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Victoria Lazzell, Senior Vice President
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6
EXHIBIT 10.15
VIRTUSA CORPORATION
2007 STOCK OPTION AND INCENTIVE PLAN
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SECTION 1.
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GENERAL PURPOSE OF THE PLAN; DEFINITIONS
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The name of the plan is the Virtusa Corporation 2007 Stock Option and Incentive Plan (the
Plan). The purpose of the Plan is to encourage and enable the officers, employees, Non-Employee
Directors and other key persons (including consultants and prospective employees) of Virtusa
Corporation (the Company) and its Subsidiaries upon whose judgment, initiative and efforts the
Company largely depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a direct stake in the
Companys welfare will assure a closer identification of their interests with those of the Company
and its stockholders, thereby stimulating their efforts on the Companys behalf and strengthening
their desire to remain with the Company.
The following terms shall be defined as set forth below:
Act
means the Securities Act of 1933, as amended, and the rules and regulations thereunder.
Administrator
means either the Board or the compensation committee of the Board or a similar
committee performing the functions of the compensation committee and which is comprised of not less
than two Non-Employee Directors who are independent.
Award
or
Awards,
except where referring to a particular category of grant under the Plan,
shall include Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Deferred Stock Awards, Restricted Stock Awards, Unrestricted Stock Awards, Cash-based Awards and
Dividend Equivalent Rights.
Award Agreement
means a written or electronic agreement setting forth the terms and
provisions applicable to an Award granted under the Plan. Each Award Agreement is subject to the
terms and conditions of the Plan.
Board
means the Board of Directors of the Company.
Cash-based Award
means an Award entitling the recipient to receive a cash-denominated
payment.
Code
means the Internal Revenue Code of 1986, as amended, and any successor Code, and
related rules, regulations and interpretations.
Covered Employee
means an employee who is a Covered Employee within the meaning of Section
162(m) of the Code.
Deferred Stock Award
means an Award of phantom stock units to a grantee.
1
Dividend Equivalent Right
means an Award entitling the grantee to receive credits based on
cash dividends that would have been paid on the shares of Stock specified in the Dividend
Equivalent Right (or other award to which it relates) if such shares had been issued to and held by
the grantee.
Effective Date
means the date on which the Plan is approved by stockholders as set forth in
Section 19.
Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.
Fair Market Value
of the Stock on any given date means the fair market value of the Stock
determined in good faith by the Administrator; provided, however, that if the Stock is admitted to
quotation on the National Association of Securities Dealers Automated Quotation System (NASDAQ),
NASDAQ Global Market or another national securities exchange, the determination shall be made by
reference to market quotations. If there are no market quotations for such date, the determination
shall be made by reference to the last date preceding such date for which there are market
quotations, provided further, however, that if the date for which Fair Market Value is determined
is the first day when trading prices for the Stock are reported on a national securities exchange,
the Fair Market Value shall be the Price to the Public (or equivalent) set forth on the cover
page for the final prospectus relating to the Companys Initial Public Offering.
Incentive Stock Option
means any Stock Option designated and qualified as an incentive
stock option as defined in Section 422 of the Code.
Initial Public Offering
means the consummation of the first fully underwritten, firm
commitment public offering pursuant to an effective registration statement under the Act covering
the offer and sale by the Company of its equity securities, or such other event as a result of or
following which the Stock shall be publicly held.
Non-Employee Director
means a member of the Board who is not also an employee of the Company
or any Subsidiary.
Non-Qualified Stock Option
means any Stock Option that is not an Incentive Stock Option.
Option
or
Stock Option
means any option to purchase shares of Stock granted pursuant to
Section 5.
Restricted Stock Award
means an Award entitling the recipient to acquire, at such purchase
price (which may be zero) as determined by the Administrator, shares of Stock subject to such
restrictions and conditions as the Administrator may determine at the time of grant.
Sale Event
shall mean (i) the sale of all or substantially all of the assets of the
Company on a consolidated basis to an unrelated person or entity, (ii) a merger, reorganization or
consolidation in which the outstanding shares of Stock are converted into or exchanged for
securities of the successor entity and the holders of the Companys outstanding voting power
2
immediately prior to such transaction do not own a majority of the outstanding voting power of the
successor entity immediately upon completion of such transaction, or (iii) the sale of all of the
Stock of the Company to an unrelated person or entity.
"
Sale Price
means the value as determined by the Administrator of the consideration payable,
or otherwise to be received by stockholders, per share of Stock pursuant to a Sale Event.
Section 409A
means Section 409A of the Code and the regulations and other guidance
promulgated thereunder.
Stock
means the Common Stock, par value $0.01 per share, of the Company, subject to
adjustments pursuant to Section 3.
Stock Appreciation Right
means an Award entitling the recipient to receive shares of Stock
having a value equal to the excess of the Fair Market Value of the Stock on the date of exercise
over the exercise price of the Stock Appreciation Right multiplied by the number of shares of Stock
with respect to which the Stock Appreciation Right shall have been exercised.
Subsidiary
means any corporation or other entity (other than the Company) in which the
Company has at least a 50 percent interest, either directly or indirectly.
Ten Percent Owner
means an employee who owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than 10 percent of the combined voting power
of all classes of stock of the Company or any parent or subsidiary corporation.
Unrestricted Stock Award
means an Award of shares of Stock free of any restrictions.
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SECTION 2.
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ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES AND DETERMINE AWARDS
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(a)
Administration of Plan
. The Plan shall be administered by the Administrator.
(b)
Powers of Administrator
. The Administrator shall have the power and authority to
grant Awards consistent with the terms of the Plan, including the power and authority:
(i) to select the individuals to whom Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Deferred
Stock Awards, Unrestricted Stock Awards, Cash-based Awards and Dividend Equivalent Rights, or any
combination of the foregoing, granted to any one or more grantees;
(iii) to determine the number of shares of Stock to be covered by any Award;
(iv) to determine and modify from time to time the terms and conditions, including
restrictions, not inconsistent with the terms of the Plan, of any Award, which terms and
3
conditions may differ among individual Awards and grantees, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of all or any portion of any
Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend at any time the period in which
Stock Options may be exercised; and
(vii) at any time to adopt, alter and repeal such rules, guidelines and practices for
administration of the Plan and for its own acts and proceedings as it shall deem advisable; to
interpret the terms and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the administration of the Plan; to
decide all disputes arising in connection with the Plan; and to otherwise supervise the
administration of the Plan.
All decisions and interpretations of the Administrator shall be binding on all persons,
including the Company and Plan grantees.
(c)
Delegation of Authority to Grant Options
. Intentionally Deleted.
(d)
Award Agreement
. Awards under the Plan shall be evidenced by Award Agreements that
set forth the terms, conditions and limitations for each Award which may include, without
limitation, the term of an Award, the provisions applicable in the event employment or service
terminates, and the Companys authority to unilaterally or bilaterally amend, modify, suspend,
cancel or rescind an Award.
(e)
Indemnification
. Neither the Board nor the Administrator, nor any member of either
or any delegate thereof, shall be liable for any act, omission, interpretation, construction or
determination made in good faith in connection with the Plan, and the members of the Board and the
Administrator (and any delegate thereof) shall be entitled in all cases to indemnification and
reimbursement by the Company in respect of any claim, loss, damage or expense (including, without
limitation, reasonable attorneys fees) arising or resulting therefrom to the fullest extent
permitted by law and/or under the Companys articles or bylaws or any directors and officers
liability insurance coverage which may be in effect from time to time and/or any indemnification
agreement between such individual and the Company.
(f)
Foreign Award Recipients
. Notwithstanding any provision of the Plan to the
contrary, in order to comply with the laws in other countries in which the Company and its
Subsidiaries operate or have employees or other individuals eligible for Awards, the Administrator,
in its sole discretion, shall have the power and authority to: (i) determine which Subsidiaries
shall be covered by the Plan; (ii) determine which individuals outside the United States are
eligible to participate in the Plan; (iii) modify the terms and conditions of any Award granted to
individuals outside the United States to comply with applicable foreign laws; (iv) establish
subplans and modify exercise procedures and other terms and procedures, to the extent the
Administrator determines such actions to be necessary or advisable (and such subplans and/or
modifications shall be attached to this Plan as appendices); provided, however, that no such
subplans and/or modifications shall increase the share limitations contained in Section 3(a)
4
hereof; and (v) take any action, before or after an Award is made, that the Administrator
determines to be necessary or advisable to obtain approval or comply with any local governmental
regulatory exemptions or approvals. Notwithstanding the foregoing, the Administrator may not take
any actions hereunder, and no Awards shall be granted, that would violate the Exchange Act or any
other applicable United States securities law, the Code, or any other applicable United States
governing statute or law.
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SECTION 3.
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STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
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(a)
Stock Issuable
. The maximum number of shares of Stock reserved and available for
issuance under the Plan shall be the sum of (i) 2,600,000 shares, (ii) the number of Shares under
the Companys Amended and Restated 2000 Stock Option Plan and 2005 Stock Appreciation Rights Plan
(together, the Prior Plans) which are not needed to fulfill the Companys obligations for awards
issued under the Prior Plans as a result of forfeiture, expiration, cancellation, termination or
net issuances of awards thereunder, and (iii) on April 1, 2008 and on each April 1 thereafter, an
additional number of shares equal to the lower of (A) two and nine tenths percent (2.9%) of the
outstanding number of shares of Stock on the immediately preceding March 31, or (B) such lower
number of shares of Stock as may be determined by the Board of Directors, in each case subject to
adjustment as provided in Section 3(b). For purposes of this limitation, the shares of Stock
underlying any Awards that are forfeited, canceled, held back upon exercise of an Option or
settlement of an Award to cover the exercise price or tax withholding, reacquired by the Company
prior to vesting, satisfied without the issuance of Stock or otherwise terminated (other than by
exercise) (including any such Awards under the Prior Plans) shall be added back to the shares of
Stock available for issuance under the Plan. Subject to such overall limitations, shares of Stock
may be issued up to such maximum number pursuant to any type or types of Award; provided, however,
that (i) Incentive Stock Options may be granted with respect to no more than 2,600,000 shares, plus
on each April 1, starting April 1, 2008, an additional number of shares equal to the lesser of (A)
two and nine tenths percent (2.9%) of the outstanding number of shares of Stock on the immediately
preceding March 31 and (B) 2,600,000 shares of Stock and (ii) Stock Options or Stock Appreciation
Rights with respect to no more than 3,000,000 shares of Stock may be granted to any one individual
grantee during any one calendar year period. The shares available for issuance under the Plan may
be authorized but unissued shares of Stock or shares of Stock reacquired by the Company.
(b)
Changes in Stock
. Subject to Section 3(c) hereof, if, as a result of any
reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar change in the Companys capital stock, the outstanding shares of Stock are
increased or decreased or are exchanged for a different number or kind of shares or other
securities of the Company, or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to such shares of Stock or other
securities, or, if, as a result of any merger or consolidation, sale of all or substantially all of
the assets of the Company, the outstanding shares of Stock are converted into or exchanged for
securities of the Company or any successor entity (or a parent or subsidiary thereof), the
Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of
shares reserved for issuance under the Plan, (ii) the number of Stock Options or Stock Appreciation
Rights that can be granted to any one individual grantee, (iii) the number and kind of shares or
other securities subject to any then outstanding Awards under the Plan, (iv) the
5
repurchase price, if any, per share subject to each outstanding Restricted Stock Award and (v) the
price for each share subject to any then outstanding Stock Options and Stock Appreciation Rights
under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied
by the number of Stock Options and Stock Appreciation Rights) as to which such Stock Options and
Stock Appreciation Rights remain exercisable. The Administrator shall also make equitable or
proportionate adjustments in the number of shares subject to outstanding Awards and the exercise
price and the terms of outstanding Awards to take into consideration cash dividends paid other than
in the ordinary course or any other extraordinary corporate event. The adjustment by the
Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued
under the Plan resulting from any such adjustment, but the Administrator in its discretion may make
a cash payment in lieu of fractional shares.
(c)
Mergers and Other Transactions
. Except as the Administrator may otherwise specify
with respect to particular Awards in the relevant Award documentation, in the case of and subject
to the consummation of a Sale Event, all Options and Stock Appreciation Rights that are not
exercisable immediately prior to the effective time of the Sale Event shall become fully
exercisable as of the effective time of the Sale Event, all other Awards with time-based vesting,
conditions or restrictions shall become fully vested and nonforfeitable as of the effective time of
the Sale Event and all Awards with conditions and restrictions relating to the attainment of
performance goals may become vested and nonforfeitable in connection with a Sale Event in the
Administrators discretion, unless, in any case, the parties to the Sale Event agree that Awards
will be assumed or continued by the successor entity. Upon the effective time of the Sale Event,
the Plan and all outstanding Awards granted hereunder shall terminate, unless provision is made in
connection with the Sale Event in the sole discretion of the parties thereto for the assumption or
continuation of Awards theretofore granted by the successor entity, or the substitution of such
Awards with new Awards of the successor entity or parent thereof, with appropriate adjustment as to
the number and kind of shares and, if appropriate, the per share exercise prices, as such parties
shall agree (after taking into account any acceleration hereunder). In the event of such
termination, (i) the Company shall have the option (in its sole discretion) to make or provide for
a cash payment to the grantees holding Options and Stock Appreciation Rights, in exchange for the
cancellation thereof, in an amount equal to the difference between (A) the Sale Price multiplied by
the number of shares of Stock subject to outstanding Options and Stock Appreciation Rights (to the
extent then exercisable (after taking into account any acceleration hereunder) at prices not in
excess of the Sale Price) and (B) the aggregate exercise price of all such outstanding Options and
Stock Appreciation Rights; or (ii) each grantee shall be permitted, within a specified period of
time prior to the consummation of the Sale Event as determined by the Administrator, to exercise
all outstanding Options and Stock Appreciation Rights held by such grantee.
(d)
Substitute Awards
. The Administrator may grant Awards under the Plan in
substitution for stock and stock based awards held by employees, directors or other key persons of
another corporation in connection with the merger or consolidation of the employing corporation
with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Administrator may direct that the substitute awards be
granted on such terms and conditions as the Administrator considers appropriate in the
circumstances. Any substitute Awards granted under the Plan shall not count against the share
limitation set forth in Section 3(a).
6
SECTION 4.
ELIGIBILITY
Grantees under the Plan will be such full or part-time officers and other employees,
Non-Employee Directors and key persons (including consultants and prospective employees) of the
Company and its Subsidiaries as are selected from time to time by the Administrator in its sole
discretion.
SECTION 5.
STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the Administrator may from
time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified
Stock Options. Incentive Stock Options may be granted only to employees of the Company or any
Subsidiary that is a subsidiary corporation within the meaning of Section 424(f) of the Code. To
the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a
Non-Qualified Stock Option.
(a)
Stock Options Granted to Employees and Key Persons
. The Administrator in its
discretion may grant Stock Options to eligible employees and key persons of the Company or any
Subsidiary. Stock Options granted pursuant to this Section 5(a) shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so
determines, Stock Options may be granted in lieu of cash compensation at the optionees election,
subject to such terms and conditions as the Administrator may establish.
(i)
Exercise Price
. The exercise price per share for the Stock covered by a Stock
Option granted pursuant to this Section 5(a) shall be determined by the Administrator at the time
of grant but shall not be less than 100 percent of the Fair Market Value on the date of grant. In
the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of
such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the
grant date.
(ii)
Option Term
. The term of each Stock Option shall be fixed by the Administrator,
but no Stock Option shall be exercisable more than ten years after the date the Stock Option is
granted. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the term
of such Stock Option shall be no more than five years from the date of grant.
(iii)
Exercisability; Rights of a Stockholder
. Stock Options shall become exercisable
at such time or times, whether or not in installments, as shall be determined by the Administrator
at or after the grant date. The Administrator may at any time accelerate the exercisability of all
or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to
shares acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.
(iv)
Method of Exercise
. Stock Options may be exercised in whole or in part, by giving
written notice of exercise to the Company, specifying the number of shares to be
7
purchased. Payment of the purchase price may be made by one or more of the following methods to
the extent provided in the Option Award Agreement:
(A) In cash, by certified or bank check or other instrument acceptable to the
Administrator;
(B) Through the delivery (or attestation to the ownership) of shares of Stock that have
been purchased by the optionee on the open market or that are beneficially owned by the
optionee and are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date. To the extent required to
avoid variable accounting treatment under FAS 123R or other applicable accounting rules, such
surrendered shares shall have been owned by the optionee for at least six months; or
(C) By the optionee delivering to the Company a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the Company cash or
a check payable and acceptable to the Company for the purchase price; provided that in the
event the optionee chooses to pay the purchase price as so provided, the optionee and the
broker shall comply with such procedures and enter into such agreements of indemnity and
other agreements as the Administrator shall prescribe as a condition of such payment
procedure.
Payment instruments will be received subject to collection. The transfer to the optionee on the
records of the Company or of the transfer agent of the shares of Stock to be purchased pursuant to
the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser
acting in his stead in accordance with the provisions of the Stock Option) by the Company of the
full purchase price for such shares and the fulfillment of any other requirements contained in the
Option Award Agreement or applicable provisions of laws (including the satisfaction of any
withholding taxes that the Company is obligated to withhold with respect to the optionee). In the
event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the
attestation method, the number of shares of Stock transferred to the optionee upon the exercise of
the Stock Option shall be net of the number of shares attested to. In the event that the Company
establishes, for itself or using the services of a third party, an automated system for the
exercise of Stock Options, such as a system using an internet website or interactive voice
response, then the paperless exercise of Stock Options may be permitted through the use of such an
automated system.
(v)
Annual Limit on Incentive Stock Options
. To the extent required for incentive
stock option treatment under Section 422 of the Code, the aggregate Fair Market Value (determined
as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options
granted under this Plan and any other plan of the Company or its parent and subsidiary corporations
become exercisable for the first time by an optionee during any calendar year shall not exceed
$100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a
Non-Qualified Stock Option.
(b)
Stock Options Granted to Non-Employee Directors
. The Administrator in its
discretion may grant Non-Qualified Stock Options to Non-Employee Directors. Any such grant
8
may vary among individual Non-Employee Directors. Non-Qualified Stock Options granted pursuant to
this Section 5(b) shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator
shall deem desirable. If the Administrator so determines, Non-Qualified Stock Options may be
granted in lieu of cash compensation at the optionees election, subject to such terms and
conditions as the Administrator may establish.
(i)
Exercise Price
. The exercise price per share for the Stock covered by a Stock
Option granted under this Section 5(b) shall be equal to the Fair Market Value of the Stock on the
date the Stock Option is granted.
(ii)
Exercise; Termination
.
(A) Options shall become exercisable at such time or times, whether or not in
installments, as shall be determined by the Administrator at or after the grant date. The
Administrator may at any time accelerate the exercisability of all or any portion of any
Stock Option. An Option issued under this Section 5(b) shall not be exercisable after the
expiration of ten years from the date of grant.
(B) Options granted under this Section 5(b) may be exercised only by written notice to
the Company specifying the number of shares to be purchased. Payment of the full purchase
price of the shares to be purchased may be made by one or more of the methods specified in
Section 5(a)(iv). An optionee shall have the rights of a stockholder only as to shares
acquired upon the exercise of a Stock Option and not as to unexercised Stock Options.
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SECTION 6.
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STOCK APPRECIATION RIGHTS
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(a)
Exercise Price of Stock Appreciation Rights
. The exercise price of a Stock
Appreciation Right shall not be less than 100 percent of the Fair Market Value of the Stock on the
date of grant (or more than the Stock Option exercise price per share, if the Stock Appreciation
Right was granted in tandem with a Stock Option).
(b)
Grant and Exercise of Stock Appreciation Rights
. Stock Appreciation Rights may be
granted by the Administrator in tandem with, or independently of, any Stock Option granted pursuant
to Section 5 of the Plan. In the case of a Stock Appreciation Right granted in tandem with a
Non-Qualified Stock Option, such Stock Appreciation Right may be granted either at or after the
time of the grant of such Option. In the case of a Stock Appreciation Right granted in tandem with
an Incentive Stock Option, such Stock Appreciation Right may be granted only at the time of the
grant of the Option.
A Stock Appreciation Right or applicable portion thereof granted in tandem with a Stock Option
shall terminate and no longer be exercisable upon the termination or exercise of the related
Option.
(c)
Terms and Conditions of Stock Appreciation Rights
. Stock Appreciation Rights shall
be subject to such terms and conditions as shall be determined from time to time by the
Administrator, subject to the following:
9
(i) Stock Appreciation Rights granted in tandem with Options shall be exercisable at such time
or times and to the extent that the related Stock Options shall be exercisable.
(ii) Upon exercise of a Stock Appreciation Right, the applicable portion of any related Option
shall be surrendered.
(iii) Stock Appreciation Rights may have a term of no more than ten years.
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SECTION 7.
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RESTRICTED STOCK AWARDS
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(a)
Nature of Restricted Stock Awards
. The Administrator shall determine the
restrictions and conditions applicable to each Restricted Stock Award at the time of grant.
Conditions may be based on continuing employment (or other service relationship) and/or achievement
of pre-established performance goals and objectives. The grant of a Restricted Stock Award is
contingent on the grantee executing the Restricted Stock Award Agreement. The terms and conditions
of each such Award Agreement shall be determined by the Administrator, and such terms and
conditions may differ among individual Awards and grantees.
(b)
Rights as a Stockholder
. Upon execution of the Restricted Stock Award Agreement
and payment of any applicable purchase price, a grantee shall have the rights of a stockholder with
respect to the voting of the Restricted Stock, subject to such conditions contained in the
Restricted Stock Award Agreement. Unless the Administrator shall otherwise determine, (i)
uncertificated Restricted Stock shall be accompanied by a notation on the records of the Company or
the transfer agent to the effect that they are subject to forfeiture until such Restricted Stock
are vested as provided in Section 7(d) below, and (ii) certificated Restricted Stock shall remain
in the possession of the Company until such Restricted Stock is vested as provided in Section 7(d)
below, and the grantee shall be required, as a condition of the grant, to deliver to the Company
such instruments of transfer as the Administrator may prescribe.
(c)
Restrictions
. Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of except as specifically provided herein or in the Restricted
Stock Award Agreement. Except as may otherwise be provided by the Administrator either in the Award
Agreement or, subject to Section 16 below, in writing after the Award Agreement is issued, if any,
if a grantees employment (or other service relationship) with the Company and its Subsidiaries
terminates for any reason, any Restricted Stock that has not vested at the time of termination
shall automatically and without any requirement of notice to such grantee from or other action by
or on behalf of, the Company be deemed to have been reacquired by the Company at its original
purchase price (if any) from such grantee or such grantees legal representative simultaneously
with such termination of employment (or other service relationship), and thereafter shall cease to
represent any ownership of the Company by the grantee or rights of the grantee as a stockholder.
Following such deemed reacquisition of unvested Restricted Stock that are represented by physical
certificates, a grantee shall surrender such certificates to the Company upon request without
consideration.
(d)
Vesting of Restricted Stock
. The Administrator at the time of grant shall specify
the date or dates and/or the attainment of pre-established performance goals, objectives and other
10
conditions on which the non-transferability of the Restricted Stock and the Companys right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of
such pre-established performance goals, objectives and other conditions, the shares on which all
restrictions have lapsed shall no longer be Restricted Stock and shall be deemed vested. Except
as may otherwise be provided by the Administrator either in the Award Agreement or, subject to
Section 16 below, in writing after the Award Agreement is issued, a grantees rights in any shares
of Restricted Stock that have not vested shall automatically terminate upon the grantees
termination of employment (or other service relationship) with the Company and its Subsidiaries and
such shares shall be subject to the provisions of Section 7(c) above.
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SECTION 8.
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DEFERRED STOCK AWARDS
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(a)
Nature of Deferred Stock Awards
. The Administrator shall determine the
restrictions and conditions applicable to each Deferred Stock Award at the time of grant.
Conditions may be based on continuing employment (or other service relationship) and/or achievement
of pre-established performance goals and objectives. The grant of a Deferred Stock Award is
contingent on the grantee executing the Deferred Stock Award Agreement. The terms and conditions of
each such Award Agreement shall be determined by the Administrator, and such terms and conditions
may differ among individual Awards and grantees. At the end of the deferral period, the Deferred
Stock Award, to the extent vested, shall be settled in the form of shares of Stock.
(b)
Election to Receive Deferred Stock Awards in Lieu of Compensation
. The
Administrator may, in its sole discretion, permit a grantee to elect to receive a portion of future
cash compensation otherwise due to such grantee in the form of a Deferred Stock Award. Any such
election shall be made in writing and shall be delivered to the Company no later than the date
specified by the Administrator and in accordance with Section 409A and such other rules and
procedures established by the Administrator. Any such future cash compensation that the grantee
elects to defer shall be converted to a fixed number of phantom stock units based on the Fair
Market Value of Stock on the date the compensation would otherwise have been paid to the grantee if
such payment had not been deferred as provided herein. The Administrator shall have the sole right
to determine whether and under what circumstances to permit such elections and to impose such
limitations and other terms and conditions thereon as the Administrator deems appropriate.
(c)
Rights as a Stockholder
. A grantee shall have the rights as a stockholder only as
to shares of Stock acquired by the grantee upon settlement of a Deferred Stock Award; provided,
however, that the grantee may be credited with Dividend Equivalent Rights with respect to the
phantom stock units underlying his Deferred Stock Award, subject to such terms and conditions as
the Administrator may determine.
(d)
Termination
. Except as may otherwise be provided by the Administrator either in
the Award Agreement or, subject to Section 16 below, in writing after the Award Agreement is
issued, a grantees right in all Deferred Stock Awards that have not vested shall automatically
terminate upon the grantees termination of employment (or cessation of service relationship) with
the Company and its Subsidiaries for any reason.
11
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SECTION 9.
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UNRESTRICTED STOCK AWARDS
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Grant or Sale of Unrestricted Stock. The Administrator may, in its sole discretion, grant (or
sell at par value or such higher purchase price determined by the Administrator) an Unrestricted
Stock Award under the Plan. Unrestricted Stock Awards may be granted in respect of past services or
other valid consideration, or in lieu of cash compensation due to such grantee.
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SECTION 10.
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CASH-BASED AWARDS
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(a) Grant of Cash-based Awards. The Administrator may, in its sole discretion, grant
Cash-based Awards to any grantee in such number or amount and upon such terms, and subject to such
conditions, as the Administrator shall determine at the time of grant. The Administrator shall
determine the maximum duration of the Cash-based Award, the amount of cash to which the Cash-based
Award pertains, the conditions upon which the Cash-based Award shall become vested or payable, and
such other provisions as the Administrator shall determine. Each Cash-based Award shall specify a
cash-denominated payment amount, formula or payment ranges as determined by the Administrator.
Payment, if any, with respect to a Cash-based Award shall be made in accordance with the terms of
the Award and may be made in cash or in shares of Stock, as the Administrator determines.
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SECTION 11.
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DIVIDEND EQUIVALENT RIGHTS
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(a)
Dividend Equivalent Rights
. A Dividend Equivalent Right may be granted hereunder
to any grantee as a component of another Award or as a freestanding award. The terms and conditions
of Dividend Equivalent Rights shall be specified in the Award Agreement. Dividend equivalents
credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any
such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as
may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend
Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single
installment or installments. A Dividend Equivalent Right granted as a component of another Award
may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or
payment of, or lapse of restrictions on, such other Award, and that such Dividend Equivalent Right
shall expire or be forfeited or annulled under the same conditions as such other Award. A Dividend
Equivalent Right granted as a component of another Award may also contain terms and conditions
different from such other Award.
(b)
Interest Equivalents
. Any Award under this Plan that is settled in whole or in
part in cash on a deferred basis may provide in the grant for interest equivalents to be credited
with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon
such terms and conditions as may be specified by the grant.
(c)
Termination
. Except as may otherwise be provided by the Administrator either in
the Award Agreement or, subject to Section 16 below, in writing after the Award Agreement is
issued, a grantees rights in all Dividend Equivalent Rights or interest equivalents granted as a
component of another Award that has not vested shall automatically terminate upon the grantees
12
termination of employment (or cessation of service relationship) with the Company and its
Subsidiaries for any reason.
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SECTION 12.
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TRANSFERABILITY OF AWARDS
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(a)
Transferability
. Except as provided in Section 12(b) below, during a grantees
lifetime, his or her Awards shall be exercisable only by the grantee, or by the grantees legal
representative or guardian in the event of the grantees incapacity. No Awards shall be sold,
assigned, transferred or otherwise encumbered or disposed of by a grantee other than by will or by
the laws of descent and distribution. No Awards shall be subject, in whole or in part, to
attachment, execution, or levy of any kind, and any purported transfer in violation hereof shall be
null and void.
(b)
Administrator Action
. Notwithstanding Section 12(a), the Administrator, in its
discretion, may provide either in the Award Agreement regarding a given Award or by subsequent
written approval that the grantee (who is an employee or director) may transfer his or her Awards
(other than any Incentive Stock Options) to his or her immediate family members, to trusts for the
benefit of such family members, or to partnerships in which such family members are the only
partners, provided that the transferee agrees in writing with the Company to be bound by all of the
terms and conditions of this Plan and the applicable Award.
(c)
Family Member
. For purposes of Section 12(b), family member shall mean a
grantees child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse,
sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law,
or sister-in-law, including adoptive relationships, any person sharing the grantees household
(other than a tenant of the grantee), a trust in which these persons (or the grantee) have more
than 50 percent of the beneficial interest, a foundation in which these persons (or the grantee)
control the management of assets, and any other entity in which these persons (or the grantee) own
more than 50 percent of the voting interests.
(d)
Designation of Beneficiary
. Each grantee to whom an Award has been made under the
Plan may designate a beneficiary or beneficiaries to exercise any Award or receive any payment
under any Award payable on or after the grantees death. Any such designation shall be on a form
provided for that purpose by the Administrator and shall not be effective until received by the
Administrator. If no beneficiary has been designated by a deceased grantee, or if the designated
beneficiaries have predeceased the grantee, the beneficiary shall be the grantees estate.
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SECTION 13.
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TAX WITHHOLDING
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(a)
Payment by Grantee
. Each grantee shall, no later than the date as of which the
value of an Award or of any Stock or other amounts received thereunder first becomes includable in
the gross income of the grantee for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local
taxes of any kind required by law to be withheld by the Company with respect to such income. The
Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the
13
grantee. The Companys obligation to deliver evidence of book entry (or stock certificates) to any
grantee is subject to and conditioned on tax withholding obligations being satisfied by the
grantee.
(b)
Payment in Stock
. Subject to approval by the Administrator, a grantee may elect to
have the Companys minimum required tax withholding obligation satisfied, in whole or in part, by
authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a
number of shares with an aggregate Fair Market Value (as of the date the withholding is effected)
that would satisfy the withholding amount due.
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SECTION 14.
ADDITIONAL CONDITIONS APPLICABLE TO NONQUALIFIED DEFERRED COMPENSATION UNDER SECTION 409A
.
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In the event any Stock Option or Stock Appreciation Right under the Plan is materially
modified and deemed a new grant at a time when the Fair Market Value exceeds the exercise price, or
any other Award is otherwise determined to constitute nonqualified deferred compensation within
the meaning of Section 409A (a 409A Award), the following additional conditions shall apply and
shall supersede any contrary provisions of this Plan or the terms of any agreement relating to such
409A Award.
(a)
Exercise and Distribution
. Except as provided in Section 14(b) hereof, no 409A
Award shall be exercisable or distributable earlier than upon one of the following:
(i)
Specified Time
. A specified time or a fixed schedule set forth in the written
instrument evidencing the 409A Award.
(ii)
Separation from Service
. Separation from service (within the meaning of Section
409A) by the 409A Award grantee; provided, however, that if the 409A Award grantee is a key
employee (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof) and
any of the Companys Stock is publicly traded on an established securities market or otherwise,
exercise or distribution under this Section 14(a)(ii) may not be made before the date that is six
months after the date of separation from service.
(iii)
Death
. The date of death of the 409A Award grantee.
(iv)
Disability
. The date the 409A Award grantee becomes disabled (within the meaning
of Section 14(c)(ii) hereof).
(v)
Unforeseeable Emergency
. The occurrence of an unforeseeable emergency (within the
meaning of Section 14(c)(iii) hereof), but only if the net value (after payment of the exercise
price) of the number of shares of Stock that become issuable does not exceed the amounts necessary
to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of
the exercise, after taking into account the extent to which the emergency is or may be relieved
through reimbursement or compensation by insurance or otherwise or by liquidation of the grantees
other assets (to the extent such liquidation would not itself cause severe financial hardship).
14
(vi)
Change in Control Event
. The occurrence of a Change in Control Event (within the
meaning of Section 14(c)(i) hereof), including the Companys discretionary exercise of the right to
accelerate vesting of such grant upon a Change in Control Event or to terminate the Plan or any
409A Award granted hereunder within 12 months of the Change in Control Event.
(b)
No Acceleration
. A 409A Award may not be accelerated or exercised prior to the
time specified in Section 14(a) hereof, except in the case of one of the following events:
(i)
Domestic Relations Order
. The 409A Award may permit the acceleration of the
exercise or distribution time or schedule to an individual other than the grantee as may be
necessary to comply with the terms of a domestic relations order (as defined in Section
414(p)(1)(B) of the Code).
(ii)
Conflicts of Interest
. The 409A Award may permit the acceleration of the exercise
or distribution time or schedule as may be necessary to comply with the terms of a certificate of
divestiture (as defined in Section 1043(b)(2) of the Code).
(iii)
Change in Control Event
. The Administrator may exercise the discretionary right
to accelerate the vesting of such 409A Award upon a Change in Control Event or to terminate the
Plan or any 409A Award granted thereunder within 12 months of the Change in Control Event and
cancel the 409A Award for compensation.
(c)
Definitions
. Solely for purposes of this Section 14 and not for other purposes of
the Plan, the following terms shall be defined as set forth below:
(i) Change in Control Event means the occurrence of a change in the ownership of the
Company, a change in effective control of the Company, or a change in the ownership of a
substantial portion of the assets of the Company (as defined in Section 1.409A-3(g) of the proposed
regulations promulgated under Section 409A by the Department of the Treasury on September 29, 2005
or any subsequent guidance).
(ii) Disabled means a grantee who (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment that can be expected
to result in death or can be expected to last for a continuous period of not less than 12 months,
or (ii) is, by reason of any medically determinable physical or mental impairment that can be
expected to result in death or can be expected to last for a continuous period of not less than 12
months, receiving income replacement benefits for a period of not less than three months under an
accident and health plan covering employees of the Company or its Subsidiaries.
(iii) Unforeseeable Emergency means a severe financial hardship to the grantee resulting
from an illness or accident of the grantee, the grantees spouse, or a dependent (as defined in
Section 152(a) of the Code) of the grantee, loss of the grantees property due to casualty, or
similar extraordinary and unforeseeable circumstances arising as a result of events beyond the
control of the grantee.
15
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SECTION 15.
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TRANSFER, LEAVE OF ABSENCE, ETC
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For purposes of the Plan, the following events shall not be deemed a termination of
employment:
(a) a transfer to the employment of the Company from a Subsidiary or from the Company to a
Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for any other purpose
approved by the Company, if the employees right to re-employment is guaranteed either by a statute
or by contract or under the policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
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SECTION 16.
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AMENDMENTS AND TERMINATION
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The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any
time, amend or cancel any outstanding Award for the purpose of satisfying changes in law or for any
other lawful purpose, but no such action shall adversely affect rights under any outstanding Award
without the holders consent unless otherwise required by, or necessary to comply with, applicable
law. Except as provided in Section 3(b) or 3(c), in no event may the Administrator exercise its
discretion to reduce the exercise price of outstanding Stock Options or Stock Appreciation Rights
or effect repricing through cancellation and re-grants. Any material Plan amendments (other than
amendments that curtail the scope of the Plan), including any Plan amendments that (i) increase the
number of shares reserved for issuance under the Plan, (ii) expand the type of Awards available
under, materially expand the eligibility to participate in, or materially extend the term of, the
Plan, or (iii) materially change the method of determining Fair Market Value, shall be subject to
approval by the Company stockholders entitled to vote at a meeting of stockholders. In addition, to
the extent determined by the Administrator to be required by the Code to ensure that Incentive
Stock Options granted under the Plan are qualified under Section 422 of the Code or to ensure that
compensation earned under Awards qualifies as performance-based compensation under Section 162(m)
of the Code, Plan amendments shall be subject to approval by the Company stockholders entitled to
vote at a meeting of stockholders. Nothing in this Section 16 shall limit the Administrators
authority to take any action permitted pursuant to Section 3(c).
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SECTION 17.
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STATUS OF PLAN
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With respect to the portion of any Award that has not been exercised and any payments in cash,
Stock or other consideration not received by a grantee, a grantee shall have no rights greater than
those of a general creditor of the Company unless the Administrator shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the Administrator may
authorize the creation of trusts or other arrangements to meet the Companys obligations to deliver
Stock or make payments with respect to Awards hereunder, provided that the existence of such trusts
or other arrangements is consistent with the foregoing sentence.
16
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SECTION 18.
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GENERAL PROVISIONS
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(a)
No Distribution
. The Administrator may require each person acquiring Stock
pursuant to an Award to represent to and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof.
(b)
Delivery of Stock Certificates
. Stock certificates to grantees under this Plan
shall be deemed delivered for all purposes when the Company or a stock transfer agent of the
Company shall have mailed such certificates in the United States mail, addressed to the grantee, at
the grantees last known address on file with the Company. Uncertificated Stock shall be deemed
delivered for all purposes when the Company or a Stock transfer agent of the Company shall have
given to the grantee by electronic mail (with proof of receipt) or by United States mail, addressed
to the grantee, at the grantees last known address on file with the Company, notice of issuance
and recorded the issuance in its records (which may include electronic book entry records).
Notwithstanding anything herein to the contrary, the Company shall not be required to issue or
deliver any certificates evidencing shares of Stock pursuant to the exercise of any Award, unless
and until the Board has determined, with advice of counsel (to the extent the Board deems such
advice necessary or advisable), that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authorities and, if applicable,
the requirements of any exchange on which the shares of Stock are listed, quoted or traded. All
Stock certificates delivered pursuant to the Plan shall be subject to any stop-transfer orders and
other restrictions as the Administrator deems necessary or advisable to comply with federal, state
or foreign jurisdiction, securities or other laws, rules and quotation system on which the Stock is
listed, quoted or traded. The Administrator may place legends on any Stock certificate to reference
restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the
Board may require that an individual make such reasonable covenants, agreements, and
representations as the Board, in its discretion, deems necessary or advisable in order to comply
with any such laws, regulations, or requirements. The Administrator shall have the right to require
any individual to comply with any timing or other
restrictions with respect to the settlement or exercise of any Award, including a window-period
limitation, as may be imposed in the discretion of the Administrator.
(c)
Stockholder Rights
. Until Stock is deemed delivered in accordance with Section
18(b), no right to vote or receive dividends or any other rights of a stockholder will exist with
respect to shares of Stock to be issued in connection with an Award, notwithstanding the exercise
of a Stock Option or any other action by the grantee with respect to an Award.
(d)
Other Compensation Arrangements; No Employment Rights
. Nothing contained in this
Plan shall prevent the Board from adopting other or additional compensation arrangements, including
trusts, and such arrangements may be either generally applicable or applicable only in specific
cases. The adoption of this Plan and the grant of Awards do not confer upon any employee any right
to continued employment with the Company or any Subsidiary.
(e)
Trading Policy Restrictions
. Option exercises and other Awards under the Plan
shall be subject to such Companys insider trading policy and procedures, as in effect from time to
time.
17
(f)
Forfeiture of Awards under Sarbanes-Oxley Act
. If the Company is required to
prepare an accounting restatement due to the material noncompliance of the Company, as a result of
misconduct, with any financial reporting requirement under the securities laws, then any grantee
who is one of the individuals subject to automatic forfeiture under Section 304 of the
Sarbanes-Oxley Act of 2002 shall reimburse the Company for the amount of any Award received by such
individual under the Plan during the 12-month period following the first public issuance or filing
with the United States Securities and Exchange Commission, as the case may be, of the financial
document embodying such financial reporting requirement.
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SECTION 19.
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EFFECTIVE DATE OF PLAN
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This Plan shall become effective upon approval by the holders of a majority of the votes cast
at a meeting of stockholders at which a quorum is present or pursuant to written consent. No grants
of Stock Options and other Awards may be made hereunder after the tenth anniversary of the
Effective Date and no grants of Incentive Stock Options may be made hereunder after the tenth
anniversary of the date the Plan is approved by the Board.
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SECTION 20.
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GOVERNING LAW
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This Plan and all Awards and actions taken thereunder shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts, applied without regard to conflict
of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: May 14, 2007
DATE APPROVED BY STOCKHOLDERS: May 22, 2007
18
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE VIRTUSA CORPORATION
2007 STOCK OPTION AND INCENTIVE PLAN
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Name of Optionee:
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No. of Option Shares:
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Option Exercise Price per Share: $
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[FMV on Grant Date (110% of FMV if a 10% owner)]
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Grant Date:
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Expiration Date:
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[up to 10 years (5 if a 10% owner)]
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Pursuant to the Virtusa Corporation 2007 Stock Option and Incentive Plan as amended through
the date hereof (the Plan), Virtusa Corporation (the Company) hereby grants to the Optionee
named above an option (the Stock Option) to purchase on or prior to the Expiration Date specified
above all or part of the number of shares of Common Stock, par value $0.01 per share (the Stock),
of the Company specified above at the Option Exercise Price per Share specified above subject to
the terms and conditions set forth herein and in the Plan.
1.
Exercisability Schedule
. No portion of this Stock Option may be exercised until
such portion shall have become exercisable. Except as set forth below, and subject to the
discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the
exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the
following number of Option Shares on the dates indicated:
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Incremental Number of
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Option Shares Exercisable*
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Exercisability Date
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(___%)
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(___%)
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(___%)
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(___%)
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*
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Max. of $100,000 per yr.
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Once exercisable, this Stock Option shall continue to be exercisable at any time or times
prior to the close of business on the Expiration Date, subject to the provisions hereof and of the
Plan.
2.
Manner of Exercise
.
(a) The Optionee may exercise this Stock Option only in the following
manner: from time to time on or prior to the Expiration Date of this Stock Option, the
Optionee may give written notice to the Administrator of his or her election to purchase some or all of
the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased.
Payment of the purchase price for the Option Shares may be made by one or more of the
following methods: (i) in cash, by certified or bank check or other instrument acceptable to the
Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that
have been purchased by the Optionee on the open market or that are beneficially owned by the
Optionee and are not then subject to any restrictions under any Company plan and that otherwise
satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee
delivering to the Company a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the option purchase price, provided that in the event the Optionee chooses to
pay the option purchase price as so provided, the Optionee and the broker shall comply with such
procedures and enter into such agreements of indemnity and other agreements as the Administrator
shall prescribe as a condition of such payment procedure; or (iv) a combination of (i), (ii) and
(iii) above. Payment instruments will be received subject to collection.
The transfer to the Optionee on the records of the Company or of the transfer agent of the
Option Shares will be contingent upon (i) the Companys receipt from the Optionee of the full
purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other
requirements contained herein or in the Plan or in any other agreement or provision of laws, and
(iii) the receipt by the Company of any agreement, statement or other evidence that the Company may
require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of
Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance
with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price
by previously-owned shares of Stock through the attestation method, the number of shares of Stock
transferred to the Optionee upon the exercise of the Stock Option shall be net of the shares
attested to.
(b) The shares of Stock purchased upon exercise of this Stock Option shall be
transferred to the Optionee on the records of the Company or of the transfer agent upon
compliance to the satisfaction of the Administrator with all requirements under applicable
laws or regulations in connection with such issuance and with the requirements hereof and of the
Plan. The determination of the Administrator as to such compliance shall be final and binding on the
Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights
of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this
Stock Option shall have been exercised pursuant to the terms hereof, the Company or the
transfer agent shall have transferred the shares to the Optionee, and the Optionees name shall have
been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee
shall have full voting, dividend and other ownership rights with respect to such shares of
Stock.
2
(c) The minimum number of shares with respect to which this Stock Option may be exercised at
any one time shall be 100 shares, unless the number of shares with respect to which this Stock
Option is being exercised is the total number of shares subject to exercise under this Stock Option
at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock
Option shall be exercisable after the Expiration Date hereof.
3.
Termination of Employment
. If the Optionees employment by the Company or a
Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the
Stock Option may be subject to earlier termination as set forth below.
(a)
Termination Due to Death
. If the Optionees employment terminates by reason of the
Optionees death, any portion of this Stock Option outstanding on such date may thereafter be
exercised by the Optionees legal representative or legatee for a period of 12 months from the date
of death or until the Expiration Date, if earlier.
(b)
Termination Due to Disability
. If the Optionees employment terminates by reason
of the Optionees disability (as determined by the Administrator), any portion of this Stock Option
outstanding on such date may thereafter be exercised by the Optionee for a period of 12 months from
the date of termination or until the Expiration Date, if earlier.
(c)
Termination for Cause
. If the Optionees employment terminates for Cause, any
portion of this Stock Option outstanding on such date shall terminate immediately and be of no
further force and effect. For purposes hereof, Cause shall mean, unless otherwise provided in an
employment agreement between the Company and the Optionee, a determination by the Administrator
that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any
agreement between the Optionee and the Company; (ii) the conviction of, indictment for or plea of
nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any
material misconduct or willful and deliberate non-performance (other than by reason of disability)
by the Optionee of the Optionees duties to the Company.
(d)
Other Termination
. If the Optionees employment terminates for any reason other
than the Optionees death, the Optionees disability, or Cause, and unless otherwise determined by
the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to
the extent exercisable on the date of termination, for a period of three months from the date of
termination or until the Expiration Date, if earlier. Any portion of this Stock Option that is not
exercisable on the date of termination shall terminate immediately and be of no further force or
effect.
The Administrators determination of the reason for termination of the Optionees employment
shall be conclusive and binding on the Optionee and his or her representatives or legatees.
4.
Incorporation of Plan
. Notwithstanding anything herein to the contrary, this Stock Option
shall be subject to and governed by all the terms and conditions of the Plan,
including the powers of the Administrator set forth in Section 2(b) of the Plan and the powers of the
Administrator under Section 16 of the Plan to amend or cancel this Stock Option if
required
3
by, or necessary to comply with, applicable law. Capitalized terms in this Agreement shall have the
meaning specified in the Plan, unless a different meaning is specified herein.
5.
Transferability
. This Agreement is personal to the Optionee, is non-assignable and
is not transferable in any manner, by operation of law or otherwise, other than by will or the laws
of descent and distribution. This Stock Option is exercisable, during the Optionees lifetime, only
by the Optionee, and thereafter, only by the Optionees legal representative or legatee.
6.
Status of the Stock Option
. This Stock Option is intended to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the
Code), but the Company does not represent or warrant that this Stock Option qualifies as such.
The Optionee should consult with his or her own tax advisors regarding the tax effects of this
Stock Option and the requirements necessary to obtain favorable income tax treatment under Section
422 of the Code, including, but not limited to, holding period requirements. To the extent any
portion of this Stock Option does not so qualify as an incentive stock option, such portion shall
be deemed to be a non-qualified stock option. If the Optionee intends to dispose or does dispose
(whether by sale, gift, transfer or otherwise) of any Option Shares within the one-year period
beginning on the date after the transfer of such shares to him or her, or within the two-year
period beginning on the day after the grant of this Stock Option, he or she will so notify the
Company within 30 days after such disposition.
7.
Tax Withholding
. The Optionee shall, not later than the date as of which the
exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the
Company or make arrangements satisfactory to the Administrator for payment of any Federal, state,
and local taxes required by law to be withheld on account of such taxable event. The Optionee may
elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by
authorizing the Company to withhold from shares of Stock to be issued a number of shares of Stock
with an aggregate Fair Market Value that would satisfy the withholding amount due.
8.
No Obligation to Continue Employment
. Neither the Company nor any Subsidiary is
obligated by or as a result of the Plan or this Agreement to continue the Optionee in employment
and neither the Plan nor this Agreement shall interfere in any way with the right of the Company or
any Subsidiary to terminate the employment of the Optionee at any time.
4
9.
Notices
. Notices hereunder shall be mailed or delivered to the Company at
its principal place of business and shall be mailed or delivered to the Optionee at the address on
file with the Company or, in either case, at such other address as one party may subsequently
furnish to the other party in writing.
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VIRTUSA CORPORATION
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By:
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Title:
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The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by
the undersigned.
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Dated:
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Optionees Signature
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Optionees name and address:
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5
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR COMPANY EMPLOYEES
UNDER THE VIRTUSA CORPORATION
2007 STOCK OPTION AND INCENTIVE PLAN
Pursuant to the Virtusa Corporation 2007 Stock Option and Incentive Plan as amended through
the date hereof (the
Plan
), Virtusa Corporation, a Delaware corporation (together with
its successors, the
Company
) hereby grants to the person named (the
Optionee
or
(
Grantee
) in the Notice of Grant of Stock Option (the
Notice
) which is either
attached hereto or provided electronically to the Optionee, a non-qualified stock option (the
Stock Option
) to purchase on or prior to the Expiration Date (as defined in the Notice)
all or part of the number of shares of Common Stock, par value $0.01 per share (the
Option
Shares
) of the Company specified in the Notice (under Number of Option Shares) at the Exercise
Price per Share specified in the Notice, subject to the terms and conditions set forth herein, the
Notice and in the Plan, including the adjustment provision thereof. All capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Notice and the
Plan (as applicable). This Stock Option is not intended to be an incentive stock option under
Section 422 of the Internal Revenue Code of 1986, as amended.
1.
Exercisability Schedule
. No portion of this Stock Option may be exercised until
such portion shall have become exercisable. Except as set forth herein, and subject to the
discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the
exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the
number of Option Shares and on the dates as set forth in the Notice. Once exercisable, this Stock
Option shall continue to be exercisable at any time or times prior to the close of business on the
Expiration Date, subject to the provisions hereof, the Notice (including vesting provisions) and of
the Plan.
2.
Manner of Exercise
.
(a) The Optionee may exercise this Stock Option only in the following manner: from time to
time on or prior to the Expiration Date of this Stock Option, the Optionee may give written notice
to the Administrator of his or her election to purchase some or all of the Option Shares
purchasable at the time of such notice. This notice shall specify the number of Option Shares to be
purchased.
Payment of the purchase price for the Option Shares may be made by one or more of the
following methods: (i) in cash, by certified or bank check or other instrument acceptable to the
Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that
have been purchased by the Optionee on the open market or that are beneficially owned by the
Optionee and are not then subject to any restrictions under any Company plan and that otherwise
satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee
delivering to the Company a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the option purchase price, provided that in the event the Optionee chooses to
pay the option purchase price as so provided, the Optionee and the broker shall comply with such
procedures and enter into such agreements of indemnity and other
agreements as the Administrator shall prescribe as a condition of such payment procedure; or (iv) a
combination of (i), (ii) and (iii) above. Payment instruments will be received subject to
collection.
The transfer to the Optionee on the records of the Company or of the transfer agent of the
Option Shares will be contingent upon (i) the Companys receipt from the Optionee of the full
purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other
requirements contained herein or in the Plan or in any other agreement or provision of laws, and
(iii) the receipt by the Company of any agreement, statement or other evidence that the Company may
require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of
Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance
with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price
by previously-owned shares of Stock through the attestation method, the number of shares of Stock
transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares
attested to.
(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to
the Optionee on the records of the Company or of the transfer agent upon compliance to the
satisfaction of the Administrator with all requirements under applicable laws or regulations in
connection with such issuance and with the requirements hereof and of the Plan. The determination
of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee
shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to,
any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been
exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred
the shares to the Optionee, and the Optionees name shall have been entered as the stockholder of
record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such shares of Stock.
(c) The minimum number of shares with respect to which this Stock Option may be exercised at
any one time shall be 100 shares, unless the number of shares with respect to which this Stock
Option is being exercised is the total number of shares subject to exercise under this Stock Option
at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option
shall be exercisable after the Expiration Date hereof.
3.
Termination of Employment
. If the Optionees employment by the Company or
a Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the Stock
Option may be subject to earlier termination as set forth below.
(a)
Termination Due to Death
. If the Optionees employment terminates by reason of the
Optionees death, any portion of this Stock Option outstanding on such date may thereafter be
exercised by the Optionees legal representative or legatee for a period of 12 months from the date
of death or until the Expiration Date, if earlier.
(b)
Termination Due to Disability
. If the Optionees employment terminates by reason
of the Optionees disability (as determined by the Administrator), any portion of this Stock Option
outstanding on such date may thereafter be exercised by the Optionee for a period of 12 months from
the date of termination or until the Expiration Date, if earlier.
2
(c)
Termination for Cause
. If the Optionees employment terminates for Cause, any
portion of this Stock Option outstanding on such date shall terminate immediately and be of no
further force and effect. For purposes hereof, Cause shall mean, unless otherwise provided in an
employment agreement between the Company and the Optionee, a determination by the Administrator
that the Optionee shall be dismissed as a result of (i) any material breach by the Optionee of any
agreement between the Optionee and the Company; (ii) the conviction of, indictment for or plea of
nolo contendere by the Optionee to a felony or a crime involving moral turpitude; or (iii) any
material misconduct or willful and deliberate non-performance (other than by reason of disability)
by the Optionee of the Optionees duties to the Company.
(d)
Other Termination
. If the Optionees employment terminates for any reason other
than the Optionees death, the Optionees disability or Cause, and unless otherwise determined by
the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to
the extent exercisable on the date of termination, for a period of three months from the date of
termination or until the Expiration Date, if earlier. Any portion of this Stock Option that is not
exercisable on the date of termination shall terminate immediately and be of no further force or
effect.
The Administrators determination of the reason for termination of the Optionees employment
shall be conclusive and binding on the Optionee and his or her representatives or legatees.
4.
Incorporation of Plan
. Notwithstanding anything herein to the contrary,
this Stock Option shall be subject to and governed by all the terms and conditions of the Plan,
including the powers of the Administrator set forth in Section 2(b) of the Plan and the powers of
the Administrator under Section 16 of the Plan to amend or cancel this Stock Option if required by,
or necessary to comply with, applicable law. Capitalized terms in this Agreement shall have the
meaning specified in the Plan, unless a different meaning is specified herein. The Board may, at
any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any
outstanding Award for the purpose of satisfying changes in law or for any other lawful purpose, but
no such action shall adversely affect rights under any outstanding Award without the holders
consent.
5.
Transferability
. This Agreement is personal to the Optionee, is non-assignable and
is not transferable in any manner, by operation of law or otherwise, other than by will or the laws
of descent and distribution. This Stock Option is exercisable, during the Optionees lifetime, only
by the Optionee, and thereafter, only by the Optionees legal representative or legatee.
6.
Tax Withholding
. The Optionee shall, not later than the date as of which the
exercise of this Stock Option becomes a taxable event for Federal income tax purposes, pay to the
Company or make arrangements satisfactory to the Administrator for payment of any Federal, state,
and local taxes required by law to be withheld on account of such taxable event. The Optionee may
elect to have the minimum required tax withholding obligation satisfied, in whole or in part, by
authorizing the Company to withhold from shares of Stock to be issued a number of shares of Stock
with an aggregate Fair Market Value that would satisfy the withholding amount due.
3
7.
No Obligation to Continue Employment
. Neither the Company nor any
Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Optionee in
employment and neither the Plan nor this Agreement shall interfere in any way with the right of the
Company or any Subsidiary to terminate the employment of the Optionee at any time.
8.
Notices
. Notices hereunder shall be mailed or delivered to the Company at its
principal place of business and shall be mailed or delivered to the Optionee at the address on file
with the Company or, in either case, at such other address as one party may subsequently furnish to
the other party in writing.
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VIRTUSA CORPORATION
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By:
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/s/ Thomas R Holler
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THOMAS R. HOLLER
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EVP, Finance & CFO
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4
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR NON-EMPLOYEE DIRECTORS
UNDER THE VIRTUSA CORPORATION
2007 STOCK OPTION AND INCENTIVE PLAN
Pursuant to the Virtusa Corporation 2007 Stock Option and Incentive Plan as amended through
the date hereof (the
Plan
), Virtusa Corporation, a Delaware corporation (together with
its successors, the
Company
) hereby grants to the person named (the
Optionee
or
(
Grantee
) in the Notice of Grant of Stock Option (the
Notice
) which is either
attached hereto or provided electronically to the Optionee, a non-qualified stock option (the
Stock Option
) to purchase on or prior to the Expiration Date (as defined in the Notice)
all or part of the number of shares of Common Stock, par value $0.01 per share (the
Option
Shares
) of the Company specified in the Notice (under Number of Option Shares) at the Exercise
Price per Share specified in the Notice, subject to the terms and conditions set forth herein, the
Notice and in the Plan, including the adjustment provision thereof. All capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Notice and the
Plan (as applicable). This Stock Option is not intended to be an incentive stock option under
Section 422 of the Internal Revenue Code of 1986, as amended.
1.
Exercisability Schedule
. No portion of this Stock Option may be exercised until
such portion shall have become exercisable. Except as set forth herein, and subject to the
discretion of the Administrator (as defined in Section 2 of the Plan) to accelerate the
exercisability schedule hereunder, this Stock Option shall be exercisable with respect to the
number of Option Shares and on the dates as set forth in the Notice.
In the case of and subject to the consummation of a Sale Event, the Optionee shall be entitled
to a twelve (12) month acceleration of all unvested Option Shares so that the shares that would
have vested in the one-year period following such Sale Event become immediately vested and the
remaining unvested Option Shares would continue to vest quarterly but on a schedule that would be
twelve (12) months earlier than had the Sale Event not transpired. Once exercisable, this Stock
Option shall continue to be exercisable at any time or times prior to the close of business on the
Expiration Date, subject to the provisions hereof and of the Plan.
2.
Manner of Exercise
.
(a) The Optionee may exercise this Stock Option only in the following manner: from time
to time on or prior to the Expiration Date of this Stock Option, the Optionee may give written
notice to the Administrator of his or her election to purchase some or all of the Option Shares
purchasable at the time of such notice. This notice shall specify the number of Option Shares to be
purchased.
Payment of the purchase price for the Option Shares may be made by one or more of the
following methods: (i) in cash, by certified or bank check or other instrument acceptable to the
Administrator; (ii) through the delivery (or attestation to the ownership) of shares of Stock that
have been purchased by the Optionee on the open market or that are beneficially owned by the
Optionee and are not then subject to any restrictions under any Company plan and that otherwise
satisfy any holding periods as may be required by the Administrator; (iii) by the Optionee
delivering to the Company a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the option purchase price, provided that in the event the Optionee chooses to
pay the option purchase price as so provided, the Optionee and the broker shall comply with such
procedures and enter into such agreements of indemnity and other agreements as the Administrator
shall prescribe as a condition of such payment procedure; or (iv) a combination of (i), (ii) and
(iii) above. Payment instruments will be received subject to collection.
The transfer to the Optionee on the records of the Company or of the transfer agent of the
Option Shares will be contingent upon (i) the Companys receipt from the Optionee of the full
purchase price for the Option Shares, as set forth above, (ii) the fulfillment of any other
requirements contained herein or in the Plan or in any other agreement or provision of laws, and
(iii) the receipt by the Company of any agreement, statement or other evidence that the Company may
require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of
Stock Options under the Plan and any subsequent resale of the shares of Stock will be in compliance
with applicable laws and regulations. In the event the Optionee chooses to pay the purchase price
by previously-owned shares of Stock through the attestation method, the number of shares of Stock
transferred to the Optionee upon the exercise of the Stock Option shall be net of the Shares
attested to.
(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to
the Optionee on the records of the Company or of the transfer agent upon compliance to the
satisfaction of the Administrator with all requirements under applicable laws or regulations in
connection with such transfer and with the requirements hereof and of the Plan. The determination
of the Administrator as to such compliance shall be final and binding on the Optionee. The Optionee
shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to,
any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been
exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred
the shares to the Optionee, and the Optionees name shall have been entered as the stockholder of
record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such shares of Stock.
(c) The minimum number of shares with respect to which this Stock Option may be exercised at
any one time shall be 100 shares, unless the number of shares with respect to which this Stock
Option is being exercised is the total number of shares subject to exercise under this Stock Option
at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option
shall be exercisable after the Expiration Date hereof.
3.
Termination as Director
. If the Optionee ceases to be a Director of the Company,
the period within which to exercise the Stock Option may be subject to earlier termination as set
forth below.
2
(a)
Termination by Reason of Death
. If the Optionee ceases to be a Director by reason
of the Optionees death, any portion of this Stock Option outstanding on such date may be exercised
by his or her legal representative or legatee for a period of 12 months from the date of death or
until the Expiration Date, if earlier.
(b)
Other Termination
. If the Optionee ceases to be a Director for any reason other
than the Optionees death, any portion of this Stock Option outstanding on such date may be
exercised for a period of six months from the date of termination or until the Expiration Date, if
earlier.
4.
Incorporation of Plan
. Notwithstanding anything herein to the contrary, this Stock
Option shall be subject to and governed by all the terms and conditions of the Plan, including the
powers of the Administrator set forth in Section 2(b) of the Plan and the powers of the
Administrator under Section 16 of the Plan to amend or cancel this Stock Option if required by, or
necessary to comply with, applicable law. Capitalized terms in this Agreement shall have the
meaning specified in the Plan, unless a different meaning is specified herein.
5.
Transferability
. This Agreement is personal to the Optionee, is non-assignable and
is not transferable in any manner, by operation of law or otherwise, other than by will or the laws
of descent and distribution. This Stock Option is exercisable, during the Optionees lifetime, only
by the Optionee, and thereafter, only by the Optionees legal representative or legatee.
6.
No Obligation to Continue as a Director
. Neither the Plan nor this Stock Option
confers upon the Optionee any rights with respect to continuance as a Director.
7.
Notices
. Notices hereunder shall be mailed or delivered to the Company at its
principal place of business and shall be mailed or delivered to the Optionee at the address on file
with the Company or, in either case, at such other address as one party may subsequently furnish to
the other party in writing.
8.
Amendment
. Pursuant to Section 18 of the Plan, the Administrator may at any time
amend or cancel any outstanding portion of this Stock Option, but no such action may be taken that
adversely affects the Optionees rights under this Agreement without the Optionees consent.
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VIRTUSA CORPORATION
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By:
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/s/ Thomas R Holler
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THOMAS R. HOLLER
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EVP Finance & CFO
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3
RESTRICTED STOCK AWARD AGREEMENT
UNDER THE VIRTUSA CORPORATION
2007 STOCK OPTION AND INCENTIVE PLAN
Pursuant to the Virtusa Corporation 2007 Stock Option and Incentive Plan as amended through the
date hereof (the
Plan
), Virtusa Corporation, a Delaware corporation (together with its
successors, the
Company
) hereby grants to the person named (the
Grantee
) in the Notice of Grant
of Restricted Stock Award (the
Notice
) which is either attached hereto or provided electronically
to the Grantee, a Restricted Stock Award (a
Restricted Stock Award
). The Grantee shall receive
the number of shares of Common Stock, par value $0.01 per share (the
Stock
) of the Company
specified in the Notice, subject to the restrictions and conditions set forth herein, the Notice
and in the Plan including the adjustment provision thereof. The Company acknowledges the receipt
from the Grantee of an amount equal to the aggregate par value for the Stock in the form of cash,
services or other appropriate consideration. All capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Notice and the Plan (as applicable).
1.
Acceptance of Award
. The Grantee shall accept this Restricted Stock Award
by
(i) signing and delivering to the Company a copy of the Notice (or otherwise accepting by
electronic approval in compliance with the Companys electronic acceptance process), and (ii)
delivering to the Company a stock power endorsed in blank. The shares of Restricted Stock granted
hereunder shall be issued and held by the Companys transfer agent in book entry form, and the
Grantees name shall be entered as the stockholder of record on the books of the Company. The
Grantee shall have all the rights of a stockholder with respect to such shares, including voting
and dividend rights, subject, however, to the restrictions and conditions specified in Paragraph 2
below, the Plan and the Notice. .
2.
Restrictions and Conditions
.
(a) Any book entries for the shares of Restricted Stock granted herein shall bear an
appropriate legend, as determined by the Administrator in its sole discretion, to the effect that
such shares are subject to restrictions as set forth herein and in the Plan.
(b) Shares of Restricted Stock granted herein may not be sold, assigned, transferred, pledged
or otherwise encumbered or disposed of by the Grantee prior to vesting.
(c) If the Grantees employment with the Company and its Subsidiaries is voluntarily or
involuntarily terminated for any reason (including death) and Grantees service relationship with
the Company and its Subsidiaries is terminated, prior to vesting of shares of Restricted Stock
granted herein, all shares of Restricted Stock not vested as of such date shall immediately and
automatically be forfeited and returned to the Company.
3.
Vesting of Restricted Stock
. The restrictions and conditions in Paragraph
2 of this
Agreement shall lapse on the Vesting Date or Dates specified in the Notice so long as the Grantee
remains an employee of the Company or a Subsidiary on such Dates or otherwise
maintains a service relationship with the Company or its Subsidiaries. If a series of Vesting Dates
is specified, then the restrictions and conditions in Paragraph 2 shall lapse only with respect to
the number of shares of Restricted Stock specified as vested on such date. Subsequent to such
Vesting Date or Dates, the shares of Stock on which all restrictions and conditions have lapsed
shall no longer be deemed Restricted Stock. The Administrator may at any time accelerate the
vesting schedule specified in this Paragraph 3.
4.
Dividends
. Dividends on shares of Restricted Stock shall be paid
currently to the Grantee.
5.
Incorporation of Plan
. Notwithstanding anything herein to the contrary,
this Agreement shall be subject to and governed by all the terms and conditions of the Plan, including
the powers of the Administrator set forth in Section 2(b) of the Plan and the powers of the
Administrator under Section 16 of the Plan to amend or cancel this Restricted Stock Award if
required by, or necessary to comply with, applicable law. Capitalized terms in this Agreement shall
have the meaning specified in the Plan, unless a different meaning is specified herein.
6.
Transferability
. This Agreement is personal to the Grantee, is non-assignable and
is not transferable in any manner, by operation of law or otherwise, other than by will or the laws
of descent and distribution.
7.
Tax Withholding
. The Grantee shall, not later than the date as of which the receipt
of this Restricted Stock Award becomes a taxable event for Federal income tax purposes, pay to the
Company or make arrangements satisfactory to the Administrator for payment of any Federal, state,
and local taxes required by law to be withheld on account of such taxable event. Except in the case
where an election is made pursuant to Paragraph 8 below, unless the Grantee makes arrangements
satisfactory to the Administrator for the payment of the applicable Federal, state, and local taxes
required by law to be withheld on account of such taxable event by the date of the taxable event,
the Grantee shall and hereby does authorize the full settlement and satisfaction of the minimum tax
withholding obligation in whole or, to the extent not settled and satisfied in full prior to or on
such taxable event, in part, by authorizing the Company to withhold from shares of Stock to be
issued or released by the transfer agent a number of shares of Stock with an aggregate Fair Market
Value that would satisfy the withholding amount due; provided such arrangement is satisfactory to
the Administrator.
8.
Election Under Section 83(b)
. The Grantee and the Company hereby agree that the
Grantee may, within 30 days following the acceptance of this Restricted Stock Award as provided in
Paragraph 1 hereof, file with the Internal Revenue Service and the Company an election under
Section 83(b) of the Internal Revenue Code. In the event the Grantee makes such an election, he or
she agrees to provide a copy of the election to the Company.
9.
No Obligation to Continue Employment
. Neither the Company nor any
Subsidiary is obligated by or as a result of the Plan or this Agreement to continue the Grantee in
employment and neither the Plan nor this Agreement shall interfere in any way with the right of the
Company or any Subsidiary to terminate the employment of the Grantee at any time.
2
10.
Notices
. Notices hereunder shall be mailed or delivered to the Company at its
principal place of business and shall be mailed or delivered to the Grantee at the address on file
with the Company or, in either case, at such other address as one party may subsequently furnish to
the other party in writing.
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VIRTUSA CORPORATION
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By:
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/s/ Thomas R Holler
|
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THOMAS R. HOLLER
|
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EVP, Finance & CFO
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3