<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PREFERRED PAYMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7322 36-3715258
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1230 EAST DIEHL ROAD
SUITE 300
NAPERVILLE, ILLINOIS 60563
(630) 245-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN E. NELSON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PREFERRED PAYMENT SYSTEMS, INC.
1230 EAST DIEHL ROAD
SUITE 300
NAPERVILLE, ILLINOIS 60563
(630) 245-0700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
BERNARD S. KRAMER, ESQUIRE ROBERT A. YOLLES, ESQUIRE
MCDERMOTT, WILL & EMERY JONES, DAY, REAVIS & POGUE
227 WEST MONROE STREET 77 WEST WACKER DRIVE
SUITE 4400 SUITE 3500
CHICAGO, ILLINOIS 60606-5096 CHICAGO, ILLINOIS 60601-1692
(312) 372-2000 (312) 269-4145
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE (1) FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock (par value $.01 per share).................. $69,000,000 $20,910
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICIATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 21, 1997
Shares
[PREFERRED PAYMENT SYSTEMS, INC. LOGO]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $ AND $ .
SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
-----------
APPLICATION HAS BEEN MADE TO LIST THE SHARES ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "PPSX."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- ----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total(3)................................... $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of additional Shares at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the Underwriters exercise such option in full, the
total price to public, underwriting discounts and commissions and
proceeds to Selling Stockholders will be $ , $ and $ ,
respectively. The Company will not receive any of the proceeds from the
sale of Shares of Common stock by the Selling Stockholders. See
"Underwriters" and "Principal and Selling Stockholders."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein, and subject to approval of certain legal matters
by Jones, Day, Reavis & Pogue, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1998, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
PIPER JAFFRAY INC.
, 1998
<PAGE>
[ARTWORK--SCHEMATIC DESCRIPTION OF HEALTHCARE BILL MANAGEMENT SYSTEM]
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
The Company............................................................... 14
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Unaudited Pro Forma Consolidated Statements of Income .................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Management................................................................ 37
Certain Transactions...................................................... 42
Principal and Selling Stockholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 51
Underwriters.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 55
Additional Information.................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated or the
context otherwise requires, all information in this Prospectus (a) gives effect
to a -for-1 stock split to occur immediately prior to consummation of the
Offering and the conversion of all outstanding Convertible Subordinated Notes
(as defined herein) into 968,316 shares of Common Stock upon consummation of
the Offering; and (b) assumes no exercise of the Underwriters' over-allotment
option. All references in this Prospectus to the "Company" or to "PPS" refer to
the Company and its subsidiary, collectively.
THE COMPANY
PPS is a leading nationwide provider of specialized cost containment and
outsourcing services for healthcare payors. Through its comprehensive portfolio
of services, the Company reduces for its clients costs ordinarily payable on
medical bills submitted by healthcare providers and the administrative expense
associated with reviewing and analyzing medical bills. These services include
professional negotiation services, line-item analysis and other specialized
audit and bill review processes ("Non-Network Services"), as well as access to
a nationwide PPO network (the "PPO Network"). PPS serves as a one-stop
outsourcing solution for cost containment with respect to medical bills that
are outside a healthcare payor's contracted network of providers. The Company's
net revenue is based primarily on the amount of price reductions realized by
the Company's clients as a result of its services. On a pro forma basis after
giving effect to the About Health Transaction (as defined herein), for the year
ended December 31, 1996, the Company analyzed approximately $1.1 billion in
bill volume, representing 154,134 medical bills, and for the nine months ended
September 30, 1997, the Company analyzed approximately $1.1 billion in bill
volume, representing 176,101 medical bills.
PPS analyzes each bill using its Healthcare Bill Management System ("HBMS"),
which incorporates proprietary software, Company-developed and licensed
databases and client-specific preference profiles. HBMS analyzes all medical
bills sent to the Company and automatically selects the appropriate PPS service
that will maximize savings for the client. HBMS then incorporates all cost-
savings information from the analysis into its databases in order to improve
future bill analysis. The Company, by incorporating all of its services into
HBMS, believes that it produces superior results when compared to single-
product cost containment companies.
The Company's clients include indemnity health insurers, health maintenance
organizations ("HMOs") and other managed care organizations, third-party
administrators, reinsurers, large self-insured employers, Blue Cross and Blue
Shield organizations and Taft-Hartley funds. The Company's clients include
leading healthcare payors such as CIGNA Healthcare, Inc. ("CIGNA"), Aetna Inc.
("Aetna"), Great-West Life Assurance Company ("Great-West Life"), The Guardian
Life Insurance Company of America ("The Guardian"), PacifiCare Health Systems
Inc. and Eli Lilly & Company.
All healthcare payors have out-of-network exposure due to healthcare claims
that are outside their coverage area or network either as a matter of choice on
the part of the insured or as a result of geographic circumstances where the
insured does not have local access to contracted providers. With the growth in
popularity of point of service ("POS") and open-access products, consumers have
greater freedom to choose healthcare providers that are outside a payor's
contracted network. Out-of-network healthcare claims expose payors to greater
incidence of over-utilization, cost shifting, omission of appropriate discounts
and possible billing errors. In the Company's experience, the potential savings
available to payors from cost containment efforts for out-of-network claims
have increased significantly in the past several years and range from several
hundred dollars to $100,000 or more per claim.
4
<PAGE>
While many payors have an internal cost containment department to review
claims, cost containment is not one of the core competencies of a typical
payor. Payors are increasingly outsourcing this function to independent cost
containment firms because of: (i) the growing regulatory complexity of
healthcare claims; (ii) an inability to replicate the breadth of data and
industry expertise of an independent vendor; (iii) a need for significant
investment in technology and systems to accomplish meaningful savings; (iv) a
desire on the part of the payors to focus on their core business; and (v) a
desire for larger and more meaningful cost savings on claims. The cost
containment industry is highly fragmented, with most participants operating on
a regional or local level. The Company believes that national, single-source
vendors, such as the Company, have the economies of scale and expertise to
deliver the requisite services at lower cost and similar or higher quality than
the payors could achieve for themselves or access through regional or local
vendors.
GROWTH STRATEGY
The Company's growth strategy is to increase net revenue and profitability by
enhancing its position as the single-source cost containment and administrative
outsourcing partner of choice for healthcare payors. In order to implement its
growth strategy, the Company focuses on the following business imperatives:
Access Greater Bill Volume from Existing Clients. The Company has a
significant opportunity to increase bill volume, and therefore net revenue,
from existing clients. The Company contracts with its clients to receive
medical bills with certain characteristics, including type of medical
service, size of bill and other factors. However, because most of its
clients have manual bill identification and transfer procedures, the
Company believes that it receives fewer than half of the bills that are
eligible for review. The Company believes that it can receive a greater
portion of its clients' bills by implementing automated bill selection
criteria coupled with electronic data interchange ("EDI") and utilizing on-
site PPS personnel. The Company also intends to increase its bill volume by
expanding the types of bills it reviews. With the About Health Transaction,
the Company has expanded the scope of its bill review services from
inpatient, outpatient and physician bills to include various types of
ancillary medical bills such as chemotherapy, home infusion and durable
medical equipment.
Maximize Savings Per Bill. The Company seeks to maximize its savings
performance for its clients, thereby increasing its net revenue, by
continuing to improve its technology, educating and deploying its employees
to build on best demonstrated practices and expanding the scope of its
services. The Company makes continuous improvements to HBMS, and
automatically incorporates all bill review results into its databases,
enabling its professionals to utilize these data to achieve greater savings
across all of the Company's services.
Provide Superior Customer Service. The Company believes that it can
strengthen its client relationships by continually upgrading its customer
service capabilities to help make its clients' administrative functions
more efficient. HBMS employs a customer preference profile to tailor its
services to meet each client's unique needs for administration and analysis
of medical bills.
Expand Client Base. The Company believes that it can expand its client
base to additional healthcare payors in certain of the sectors that it has
traditionally served, such as HMOs and other managed care organizations,
and to other types of risk-bearing entities with non-network exposure, such
as automobile liability insurers, workers' compensation insurers,
governmental entities and provider organizations that accept capitation.
The Company also plans to expand its client base through the introduction
of new services such as subrogation and credit recovery.
Pursue Strategic Acquisitions and Develop New Services. The Company
intends to enhance its position as a leading single-source vendor of cost
containment services by continuing to develop new services or by acquiring
assets or businesses that can expand its client base, improve its
technological and human resource capabilities, provide access to greater
bill volume or broaden its service lines.
5
<PAGE>
As part of its growth strategy, in August 1997, the Company combined its
operations with the operations of About Health, Inc. ("About Health") and
About Health merged into the Company effective as of October 31, 1997.
About Health, which was founded in 1992, is a leading professional medical
bill negotiation services company. About Health utilizes an internal staff
of senior-level medical professionals, including primary care physicians
and hospital administrators, to negotiate savings for its clients on
medical bills. During the year ended December 31, 1996, About Health
analyzed approximately $287.7 million in bill volume, representing 31,388
medical bills.
THE OFFERING
Common Stock offered by the shares
Company..........................
Common Stock to be outstanding
after the Offering(1)............
shares
Use of proceeds................... The estimated net proceeds to the Company
from the Offering will be used as follows:
(i) approximately $41.5 million to repay
the Company's outstanding indebtedness un-
der the 1997 Credit Facility, including
accrued and unpaid interest; (ii) approxi-
mately $7.8 million to repay and retire all
outstanding Subordinated Notes, including
accrued interest thereon, and to pay ac-
crued interest on the Convertible Subordi-
nated Notes; (iii) $5.0 million to redeem
all outstanding Redeemable Preferred Stock;
and (iv) the balance for working capital
and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market PPSX
Symbol...........................
- --------
(1) Excludes 190,040 shares of Common Stock issuable upon exercise of
outstanding stock options, 30,600 of which will be exercisable immediately
following the Offering. Assumes the over-allotment option granted to the
Underwriters will not be exercised. See "Shares Eligible for Future Sale"
and "Underwriters."
RISK FACTORS
Prior to making an investment in the Common Stock offered hereby, prospective
purchasers should carefully consider the specific matters set forth under the
caption "Risk Factors" as well as the other information and data in this
Prospectus.
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ --------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------- ------- ------- ------- ----------- ----------- ------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenue............. $5,948 $11,540 $16,702 $22,314 $22,996 $33,130 $17,356 $23,856 $32,755
Direct costs............ 2,156 4,394 5,943 7,769 6,336 9,244 4,893 6,195 8,254
------ ------- ------- ------- ------- --------- ------- ------- ---------
Gross profit............ 3,792 7,146 10,759 14,545 16,660 23,886 12,463 17,661 24,501
Selling, general and
administrative expense. 3,026 4,632 5,223 7,653 8,287 10,057 6,158 8,410 10,971
Depreciation and
amortization........... 36 60 122 187 387 1,523 246 513 1,373
------ ------- ------- ------- ------- --------- ------- ------- ---------
Income from operations.. 730 2,454 5,414 6,705 7,986 12,306 6,059 8,738 12,157
Interest expense
(income)............... 2 (7) (8) (47) 910 3,112 240 2,518 4,176
------ ------- ------- ------- ------- --------- ------- ------- ---------
Income before taxes..... 728 2,461 5,422 6,752 7,076 9,194 5,819 6,220 7,981
Provision for state
replacement taxes...... 58 152 274 138 171 171 126 160 164
------ ------- ------- ------- ------- --------- ------- ------- ---------
Net income.............. $ 670 $ 2,309 $ 5,148 $ 6,614 $ 6,905 $ 9,023 $ 5,693 $ 6,060 $ 7,817
====== ======= ======= ======= ======= ========= ======= ======= =========
Net income available to
common stockholders(2). $670 $2,309 $5,148 $6,614 $6,905 $9,023 $5,693 $4,834 $6,591
====== ======= ======= ======= ======= ========= ======= ======= =========
Supplemental Pro Forma
Information (3)(4):
Net income.............. $437 $1,477 $3,253 $4,051 $4,297 $5,387 $3,530 $3,847 $4,716
====== ======= ======= ======= ======= ========= ======= ======= =========
Net income per share.... $1.93 $1.63
========= =========
Weighted average common
shares outstanding..... 2,794,474 2,895,121
OTHER FINANCIAL DATA:
EBITDA(5)............... $766 $2,514 $5,536 $6,892 $8,373 $13,829 $6,305 $9,251 $13,530
Non-Network Services:
Net revenue............. $7,729 $11,026 $13,981 $24,145 $10,267 $17,887 $26,786
Percentage of net
revenue................ 46.3% 49.4% 60.8% 72.8% 59.2% 75.0% 81.8%
PPO Network Services:
Net revenue............. $8,973 $11,288 $9,015 $9,015 $7,089 $5,969 $5,969
Percentage of net
revenue................ 53.7% 50.6% 39.2% 27.2% 40.8% 25.0% 18.2%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)(7)
-------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ (1,327)
Total assets................... 39,148
Long-term debt, less current
maturities.................... 54,976
Stockholders' equity
(deficit).................... (26,763)
</TABLE>
(footnotes on next page)
7
<PAGE>
- --------
(1) Gives effect to the About Health Transaction and the Merger of About Health
into the Company as if such transactions had occurred as of January 1,
1996. See "The Company."
(2) Represents net income less the accretion to redemption value of the
securities underlying the Company's Convertible Subordinated Notes (the
"Convertible Subordinated Notes"). See "Certain Transactions--The 1996
Transaction").
(3) Prior to the Offering, the Company elected to be taxed as a Subchapter S
corporation for federal income taxes. Supplemental pro forma net income has
been computed as if the Company had been subject to all applicable federal
and state corporate income taxes for each period presented.
(4) Beginning with the year ended December 31, 1996, supplemental pro forma net
income is further adjusted for the elimination of the accretion to
redemption value of the securities underlying the Convertible Subordinated
Notes as a result of the cancellation of the put right relating to such
securities effective as of September 30, 1997 and the elimination of
interest expense due to the conversion of the Convertible Subordinated
Notes in connection with the Offering, net of income tax benefit. See
"Certain Transactions--The 1996 Transaction."
(5) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is provided because it is a financial indicator
commonly used in the industry. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not
be considered an alternative to net income as a measure of performance or
to cash flow as a measure of liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
(6) The pro forma as adjusted information gives effect to the Merger and the
sale by the Company of the shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom, as if such
transactions had occurred as of September 30, 1997.
(7) Retained earnings (deficit), a component of stockholders' equity (deficit),
includes a tax benefit of approximately $396,000 to occur upon the
conversion of the Company into a Subchapter C corporation, and an expense
of approximately $1.0 million associated with the estimated write off of
deferred financing costs, net of income tax benefit, which will occur upon
the repayment of all outstanding indebtedness with the proceeds of the
Offering.
8
<PAGE>
RISK FACTORS
Prospective investors in the Common Stock offered hereby should carefully
consider the following risk factors in addition to the other information
contained in this Prospectus.
DEPENDENCE ON LARGE CLIENTS
A significant portion of the Company's net revenue is derived from a limited
number of large healthcare clients. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, on a pro forma basis after giving
effect to the About Health Transaction, the Company's five largest clients
accounted, in the aggregate, for approximately 37.9% and 40.9%, respectively,
of the Company's net revenue. The Company has written agreements with certain
of its large clients. These contracts typically have a term of one to three
years, with automatic one-year renewals on the anniversary date. However, such
contracts may be terminated by either party at any time, generally upon 90 to
120 days' notice. There can be no assurance that any of the Company's
contracts with its large clients will remain in place until the end of their
stated terms or that such contracts will be renewed, and, if renewed, that
they will contain favorable terms. Additionally, existing clients may be lost
through acquisition by non-client payors or post-acquisition business or
management changes. The loss of a major client and the inability to replace
any such client with significant new clients could have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Business--Clients."
LENGTHY REVENUE CYCLE AND FLUCTUATION IN OPERATING RESULTS
The Company's operating results may fluctuate from time to time as a result
of a number of factors, including additions of new clients, loss of existing
clients, delays in transmission of claims data, changes in the levels of fees
charged to clients, timing of acquisitions, expenses associated with the
development of new services and technologies and with the implementation of
the Company's growth strategy without a corresponding increase in net revenue,
and customer acceptance of new services and technologies. Due to the nature of
its business, the Company expends substantial time, effort and funds
demonstrating to potential clients that cost containment services can result
in material savings and that PPS is in a position to provide such services
more efficiently and effectively than either in-house cost containment
departments or other providers of cost containment services.
The volume and timing of receipt of medical bills from clients, each of
which has a significant impact on the Company's operating results, are
difficult to forecast. The Company's clients continuously update and modify
their claims and medical encounter processing systems, and such changes often
create delays or errors in the transmission of medical bills. Furthermore, the
Company's operating expense levels are based in part on expectations of future
receipt of medical bills. The Company has been significantly increasing, and
intends to continue to increase, its operating expenditures and working
capital requirements as it implements its growth strategy. As the Company
expands its client base or the range of services provided to existing clients,
it will need to increase its operating capacity in advance of receipt of
revenues from such new clients or services. Each of the foregoing could have a
material adverse effect on the Company's business, financial condition or
results of operations and could cause operating results to fluctuate
significantly in any particular quarter, potentially resulting in volatility
in the price of the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent on the efforts of Steven E.
Nelson, Chairman, President
and Chief Executive Officer, Don P. Greenberg, Executive Vice President and
Chief Operating Officer,
James T. Doody, Executive Vice President-Sales, Byron W. Smith, Executive Vice
President and Chief Technology Officer, and other key management, technical
and marketing personnel. The Company's growth and future success will depend
in large part on its ability to retain and attract highly qualified personnel.
The
9
<PAGE>
Company has entered into employment agreements (the "Employment Agreements")
with its senior members of management. The Employment Agreements expire on
August 31, 1998 (or July 30, 1999 in the case of Dr. Greenberg) and are
renewable for successive one-year terms, unless terminated by either party at
the end of the original term or any extended term. Among other things, the
Employment Agreements provide that in the event of termination, the executives
will not compete with the business of the Company for a period of two years
following termination. The Company has obtained key man insurance in the
amount of $3.0 million on the life of Mr. Nelson, with the Company named as
the beneficiary. The loss of any of the Company's key personnel, particularly
any of its executive officers, or the inability to retain or hire qualified
personnel could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Management."
ABILITY TO MANAGE GROWTH
The Company recently has experienced significant growth in net revenue,
number of clients and number of employees. This growth has resulted in an
increase in the responsibilities placed upon the Company's management and has
placed added pressures on the Company's operating systems. As a result, the
Company is subject to certain growth-related risks, including the risk that it
will be unable to retain personnel or acquire other resources necessary to
manage and fund its growth adequately. A key element of the Company's strategy
is to continue to pursue internal growth. There can be no assurance that the
Company will successfully manage its expanding operations or implement its
growth strategy, and if the Company's management is unable to manage growth
effectively, the Company's business, financial condition or results of
operations could be adversely affected.
As strategic opportunities arise, the Company intends to pursue acquisitions
of companies offering complementary services, technologies or businesses.
There can be no assurance that any suitable opportunities for future strategic
acquisitions or relationships will arise or, if they do arise, that the
transactions contemplated thereby could be completed on acceptable terms.
There can be no assurance that the Company will be able to integrate
effectively the services, technologies or businesses that it has acquired or
those that it may acquire in the future. In addition, such transactions are
subject to various risks generally associated with the acquisition of
services, technologies or businesses, including the financial impact of
expenses associated with the integration of such services, technologies or
businesses and the diversion of management resources. There can be no
assurance that any recent or future acquisition or other strategic
relationship will not have a material adverse impact on the Company's
business, financial condition or results of operations. If suitable
acquisition opportunities were to arise in the future, the Company anticipates
that it would finance such transactions through internally generated funds or,
in certain instances, through additional debt or equity. There can be no
assurance, however, that debt or equity financing would be available to the
Company on acceptable terms when, and if, suitable opportunities arise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The healthcare industry is fragmented, highly competitive and continually
evolving. The traditional functions of payors and providers are beginning to
overlap in certain arenas and there is no consensus as to the ultimate
structure of the healthcare industry. Accordingly, it is difficult to predict
the nature of future competition in the cost containment industry.
The Company currently competes with companies that provide bill review,
utilization review, medical case review, case management and other network and
non-network cost containment services to healthcare payors on the basis of its
ability to maximize cost savings and through its superior, nationwide customer
service. Except for certain other national providers of healthcare cost
containment services, the industry is highly fragmented with most vendors
operating on a regional or local basis and offering a narrower range of
services than the Company. In addition, there are other participants in the
healthcare and insurance industries, including managed
10
<PAGE>
care organizations, that possess sufficient capital and managerial and
technical expertise to develop services that could compete with the Company's
services. Many of these companies have significantly greater financial,
technical and marketing resources than the Company.
DEPENDENCE ON PPO PARTNERS AND PARTICIPANTS IN PPO NETWORKS
The Company has agreements with several preferred provider organizations
("PPOs") to lease access to their PPO networks and market their PPOs to
payors. In return, these PPOs (each a "PPO Partner") are required to provide
the Company's clients with access to participating providers in the PPO
Partner's network at contracted rates. As a result, the Company is able to
offer to its clients access to PPO Network coverage in 48 states at contracted
rates. The success of the Company's PPO Network Services depends on its
relationships with its PPO Partners and the strength of the PPO Partners'
underlying provider networks. The Company's typical agreement with its PPO
Partners has a three-year term, and is renewable automatically for successive
one-year terms, unless either party gives written notice of termination at
least 120 days prior to the renewal date. The agreement can be terminated by
either party on the first or second anniversary of its effective date upon 120
days' prior written notice. Although such agreements preclude a PPO Partner
from granting any other party of comparable size to PPS a more favorable
network access fee, such agreements do not preclude the PPO Partner from
entering into agreements with competitors of the Company. The termination of
the Company's relationships with its PPO Partners, the inability to replace
such PPO Partners with similar PPO Partners, a significant decrease in the
number or quality of the healthcare providers comprising a PPO Partner's
underlying provider network and/or any significant deterioration of the
condition (financial or otherwise) of a PPO Partner could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business--PPO Network Services."
Selected interest groups within the healthcare industry, certain regulatory
agencies, as well as some provider-sponsored professional or trade
associations have expressed concern that certain PPOs and payors are accessing
discounts to which they may not be legally entitled. Although unclear, the
merits of their concerns and the basis for a potential legal challenge center
on the interpretation of certain language in a large number of contracts
between payors, providers and PPOs. The Company has taken a leadership
position in the industry to work with the Association of Managed Healthcare
Organizations, a PPO industry trade association, and other industry, payor,
PPO and provider groups to develop industry-wide PPO contracting protocols to
serve as the basis for appropriate access to provider discounts for payors and
PPOs. The Company believes that it is in compliance with the voluntary PPO
contracting standards and protocols in place today for the Company's PPO
Network business. However, there can be no assurance that a legal challenge
will not be made against payors, PPOs or their intermediaries, including the
Company. Any such challenge could have a material adverse effect on the
Company's business, financial condition or results of operations.
RELIANCE ON DATA PROCESSING AND PROPRIETARY SOFTWARE
Much of the Company's business is dependent upon its ability to process and
manage data and to maintain and upgrade its data processing capabilities.
Interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors, obsolescence or other computer
problems could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company's success also
depends, in part, upon its proprietary technology and software, including the
integrated software programs comprising HBMS. Although certain of the
Company's proprietary software programs are protected by federal copyright
law, such protection neither confers a monopoly on the use of similar software
nor prevents competitors from developing similar programs. Such software
programs may be subject to a variety of replication techniques (for example,
reverse engineering, logic trading, disassembly and decompilations) that would
produce a functionally similar software program not covered by the Company's
registered copyright. Therefore, there can be no assurance that the Company's
registered copyright on its proprietary software programs will preclude or
deter circumvention by current or future competitors, with the effect that the
Company might lose any advantage conferred by such software programs.
11
<PAGE>
Although the Company believes that its electronic data processing systems
are able to process year/date data beyond the year 1999, the Company is unable
to determine the extent to which its clients or healthcare providers have
systems that are able to process such year/date data. In light of the
Company's reliance on data processing capabilities, any inability of clients
or healthcare providers to process data or any interruption of data flow by
reason of the so-called "Year 2000" issue could have a material adverse effect
on the Company's business, financial condition or results of operations.
IMPACT OF POSSIBLE CHANGES IN GOVERNMENT HEALTHCARE REGULATION
During the past several years, the United States healthcare industry has
been subject to changing and increasing government regulation. A number of
proposals for healthcare reform have been made at the federal and state
levels, including proposals to provide greater government control of
healthcare spending, to broaden access to healthcare services and to change
the operating environment for healthcare providers and payors. The Company
cannot predict what impact, if any, these activities, which include efforts to
effect reform through legislation and changes in the administration or
interpretation of government healthcare programs, laws, regulations or
policies, might have on it. Accordingly, there can be no assurance that such
activities would not have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Government
Regulation."
CONTROL BY EXISTING STOCKHOLDERS
Upon consummation of the Offering, the executive officers and directors of
the Company and their affiliates will beneficially own approximately % of
the outstanding shares of Common Stock. Although these persons do not have any
arrangements or understandings among themselves with respect to the voting of
the shares of Common Stock beneficially owned by them after the Offering is
completed, such persons, if acting together, would be able to elect a majority
of the members of the Board of Directors and control the business, policies
and affairs of the Company. See "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect the market price for the Common Stock. The shares of Common
Stock outstanding prior to the Offering will be eligible for sale in the
public market at various times in the future. Upon consummation of the
Offering, the Company will have issued and outstanding shares of
Common Stock. The Company, all of the Company's executive officers and
directors, the Selling Stockholders and all other stockholders and
optionholders of the Company have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters and
subject to certain limited exceptions, they will not sell any shares of Common
Stock for a period of 180 days after the date of this Prospectus. See
"Underwriters." All of the shares to be outstanding upon consummation of the
Offering (other than the shares being offered hereby) are subject
to the lock-up agreements described above. Of the shares to be outstanding
upon consummation of the Offering, shares (the "Restricted Shares")
will be subject to certain restrictions on resale or transfer under the
Securities Act of 1933, as amended (the "Securities Act"). Upon expiration of
the lock-up period described above, approximately Restricted Shares
will be eligible for sale in the public market, subject to certain
restrictions under Rule 144 of the Securities Act. See "Shares Eligible for
Future Sale." In addition, all current stockholders and optionholders of the
Company have certain registration rights with respect to shares of Common
Stock beneficially owned by such stockholders and optionholders. See "Shares
Eligible for Future Sale--Registration Rights."
ABSENCE OF PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price will
12
<PAGE>
be determined by negotiations among the Company and the representatives of the
Underwriters and may not be indicative of prices which may prevail in the
trading market. There has been significant volatility in the market prices of
the stocks of healthcare and related companies that has often been unrelated
to the operating performance of such companies. In addition, the Company
believes that certain factors, including legislative and regulatory
developments, the response by the investment community and by competitors to
such developments, quarterly fluctuations in the actual or anticipated results
of operations of the Company, lower net revenue or earnings than those
anticipated by securities analysts, the overall economy and the financial
markets could cause the price of the Common Stock to fluctuate substantially.
See "Underwriters."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in the Offering will experience
an immediate and substantial dilution in net tangible book value of their
shares of Common Stock of approximately $ per share from an assumed public
offering price of $ per share. In the event that the Company issues
additional Common Stock in connection with future acquisitions, purchasers of
Common Stock in the Offering may experience further dilution in the net
tangible book value of the Common Stock. See "Dilution."
LACK OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's certificate of incorporation and bylaws contain a number of
provisions that could inhibit a change of control of the Company by means of a
tender offer, merger, proxy contest or otherwise, including advance notice
provisions, a classified board of directors and provisions that enable the
Company to issue "blank check" preferred stock. See "Description of Capital
Stock--Certain Anti-Takeover Effects."
13
<PAGE>
THE COMPANY
The Company is a Delaware corporation that was formed in August 1996 as the
successor to an Illinois corporation organized in July 1990. The Company's
headquarters are located at 1230 East Diehl Road, Suite 300, Naperville,
Illinois 60563, and its phone number is (630) 245-0700.
In August 1996, the Company completed a series of transactions involving
funds managed by TA Associates, Inc., a private equity firm based in Boston,
Massachusetts (collectively, the "TA Investors"), and senior officers of the
Company (the "1996 Transaction"). In connection with the 1996 Transaction, the
TA Investors invested $17.0 million to acquire $10.0 million in Convertible
Subordinated Notes pursuant to a Convertible Note Purchase Agreement (the
"Convertible Note Purchase Agreement") and $7.0 million of Subordinated Notes
of the Company (the "Subordinated Notes") pursuant to a Subordinated Loan
Agreement (the "Subordinated Loan Agreement"). The Convertible Subordinated
Notes are convertible at the option of the holder into the Company's
redeemable preferred stock, $0.01 par value per share (the "Redeemable
Preferred Stock") and the Company's redeemable convertible participating
preferred stock, $0.01 par value per share (the "Convertible Preferred
Stock"). The Convertible Preferred Stock is in turn convertible into Common
Stock. In connection with the 1996 Transaction, the Company also incurred
$20.5 million of indebtedness under a senior credit facility from a bank (the
"1996 Credit Facility"). The Company used the net proceeds from these
financing transactions to make distributions to its stockholders and to
purchase outstanding options. See "Certain Transactions."
Effective as of August 1, 1997, the Company and About Health formed a
limited liability company (the "Operating Company") to which they contributed
their respective operating assets for the purpose of combining their
businesses (the "About Health Transaction"). About Health is a leading
professional medical bill negotiation services company. About Health utilizes
an internal staff consisting of senior-level medical professionals, including
primary care physicians and hospital administrators, to negotiate savings for
its clients on medical bills. Effective October 31, 1997, About Health was
merged with and into the Company (the "Merger"). See "Certain Transactions."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale by it of the
shares of Common Stock offered hereby, based upon an assumed
initial public offering price of $ per share, are estimated to be $55.0
million. The net proceeds to the Company from the Offering will be used as
follows: (i) approximately $41.5 million will be used to repay all of the
Company's outstanding indebtedness under the 1997 Credit Facility (described
below), including accrued and unpaid interest; (ii) approximately $7.8 million
will be used to repay and retire all outstanding Subordinated Notes, including
accrued interest thereon, and to pay accrued interest on the Convertible
Subordinated Notes; (iii) $5.0 million will be used to redeem all outstanding
Redeemable Preferred Stock; and (iv) the balance will be used for working
capital and other general corporate purposes.
At the time of the About Health Transaction, the 1996 Credit Facility was
amended and restated (as so amended and restated, the "1997 Credit Facility")
to increase the amount available for borrowing under the term loan portion of
the facility to $44.0 million from $20.5 million. The line of credit portion
of the facility remained at $5.0 million. The 1997 Credit Facility is secured
by substantially all of the Company's assets and expires on September 30,
2001. Amounts outstanding under the 1997 Credit Facility bear interest at
variable rates which are based upon the Federal Funds Rate (as defined), the
Prime Rate (as defined) or LIBOR, plus in each case a margin which varies
according to the ratio of Total Debt (as defined) of the Company to EBITDA (as
defined) calculated for the four consecutive fiscal quarters ending on the
date of calculation. At September 30, 1997, the interest rate on the term loan
portion of the 1997 Credit Facility was 8% and the interest rate on the line
of credit portion of the 1997 Credit Facility was 9.25%. The Subordinated Loan
Agreement expires on August 31, 2003. Amounts outstanding under the
Subordinated Loan Agreement bear interest at 10% per annum. The
14
<PAGE>
Convertible Subordinated Notes bear interest at 5%, 2% being payable quarterly
and 3% being deferred and payable upon redemption or maturity as applicable.
See "Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." Funds
borrowed under the 1996 Credit Facility, the Subordinated Loan Agreement and
the Convertible Note Purchase Agreement were used to fund certain
distributions to stockholders of the Company and to purchase outstanding
options. See "Certain Transactions--The 1996 Transaction")." Funds borrowed
under the 1997 Credit Facility were used to finance the About Health
Transaction. See "Certain Transactions--The About Health Transaction."
DIVIDEND POLICY
From its inception in July 1990 until immediately prior to consummation of
the Offering, the Company was subject to taxation under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the net
income of the Company, for federal and certain state income tax purposes,
during that period was reported by and taxable directly to the Company's
stockholders rather than to the Company. In the past, the Company has made
Subchapter S distributions in the form of cash dividends to its stockholders
in amounts sufficient to enable the stockholders to pay income taxes on the
Company's taxable income allocated to them.
Following the Offering, the Company does not intend to pay cash dividends as
it intends to retain all earnings to support its planned growth. Any future
dividends will be at the discretion of the Board of Directors, subject to a
number of factors, including the Company's results of operations, general
business conditions, the Company's capital requirements, the general financial
condition of the Company and other factors deemed relevant by the Board of
Directors. The Company expects that any future credit facilities will restrict
the payment of dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
capitalization of the Company as of September 30, 1997 (i) on an actual basis
and (ii) on a pro forma as adjusted basis to give effect to the Merger, the
sale by the Company of the shares of Common Stock offered hereby at
an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom and the conversion of the
Company into a Subchapter C corporation. This table should be read in
conjunction with the Consolidated Financial Statements of the Company, the
About Health Financial Statements and the Unaudited Pro Forma Consolidated
Statements of Income, including, in each case, the notes thereto, appearing
elsewhere in this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.................. $7,000 $ --
======== =======
Long-term debt, less current portion:
1997 Credit Facility:
Line of credit................................. $ 500 $ --
Term loan...................................... 36,250 --
Convertible Subordinated Notes................... 10,000 --
Accretion to redemption value.................... 1,226 --
Subordinated Notes............................... 7,000 --
-------- -------
Total long-term debt......................... 54,976 --
-------- -------
Stockholders' equity (deficit)(2):
Preferred stock, $0.01 par value per share,
1,000,000 shares authorized, none issued and
outstanding..................................... -- --
Common stock, $0.01 par value per share,
10,000,000 shares authorized, 1,210,214 issued
and outstanding, actual; issued and
outstanding pro forma, as adjusted.............. 12
Additional paid-in-capital....................... 3,264
Retained earnings (deficit)...................... (30,039) (3)
-------- -------
Total stockholders' equity (deficit)......... (26,763)
-------- -------
Total capitalization....................... $ 28,213 $
======== =======
</TABLE>
- --------
(1) The pro forma as adjusted information gives effect to the conversion of
all outstanding Convertible Subordinated Notes into (i) Redeemable
Preferred Stock, which will be redeemed from proceeds of the Offering and
(ii) Convertible Preferred Stock, which will be converted into 968,316
shares of Common Stock upon consummation of the Offering. See "Certain
Transactions--The 1996 Transaction."
(2) Excludes 190,040 shares of Common Stock issuable upon the exercise of
outstanding stock options.
(3) Includes a tax benefit of approximately $396,000 to occur upon the
conversion of the Company into a Subchapter C corporation, and an expense
of approximately $1.0 million associated with the estimated write off of
deferred financing costs, net of income tax benefit, which will occur upon
the repayment of all outstanding indebtedness from net proceeds of the
Offering.
16
<PAGE>
DILUTION
The Company's deficit in net tangible book value as of September 30, 1997 was
$48.5 million, or $ per share of Common Stock, as adjusted as if the
Convertible Preferred Stock had been converted into 968,316 shares of Common
Stock and the Merger been consummated on that date. Net tangible book value per
share represents the amount of total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock outstanding.
Dilution per share represents the difference between the amount paid by
purchasers of Common Stock in the Offering and the net tangible book value per
share of Common Stock immediately after consummation of the Offering. After
giving effect to the sale by the Company of the shares of Common Stock offered
hereby, assuming an initial public offering price of $ per share and
the application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1997, as so adjusted,
would have been $ , or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $
per share to new investors at the assumed initial public offering price. The
following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Net tangible book value (deficit) per share as of September
30, 1997, as so adjusted....................................
Increase per share attributable to new investors(1)..........
-----
Net tangible book value (deficit) per share after the Offering.
-------
Dilution per share to new investors............................ $
=======
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses.
The following table summarizes, as of September 30, 1997, as adjusted as if
the Convertible Preferred Stock had been converted into 968,316 shares of
Common Stock and the Merger had been consummated on that date, the total
consideration paid and the average price per share paid by the existing
stockholders and new investors, after giving effect to the sale by the Company
of the shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ % $14,910,640 % $
New investors...........
--------- ----- ----------- -----
Total............... 100.0% $ 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Excludes 190,040 shares of Common Stock issuable upon the exercise of
outstanding options. The exercise of such options will be dilutive to new
investors. See "Management--1996 Incentive Stock Plan."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following Selected Consolidated Financial Data for the Company for each
fiscal year in the five-year period ended December 31, 1996, and as of and for
the nine-month period ended September 30, 1997, have been derived from the
Consolidated Financial Statements of the Company appearing elsewhere in this
Prospectus. The Selected Consolidated Financial Data for the nine-month period
ended September 30, 1996 have been derived from the unaudited Consolidated
Financial Statements of the Company. The Selected Consolidated Financial Data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus. The results of operations for the nine-month period ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year or in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ---------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net revenue............. $5,948 $11,540 $16,702 $22,314 $22,996 $17,356 $23,856
Direct costs............ 2,156 4,394 5,943 7,769 6,336 4,893 6,195
------ ------- ------- ------- ------- ------- -------
Gross profit............ 3,792 7,146 10,759 14,545 16,660 12,463 17,661
Selling, general and
administrative expense. 3,026 4,632 5,223 7,653 8,287 6,158 8,410
Depreciation and
amortization........... 36 60 122 187 387 246 513
------ ------- ------- ------- ------- ------- -------
Income from operations.. 730 2,454 5,414 6,705 7,986 6,059 8,738
Interest expense
(income)............... 2 (7) (8) (47) 910 240 2,518
------ ------- ------- ------- ------- ------- -------
Income before taxes..... 728 2,461 5,422 6,752 7,076 5,819 6,220
Provision for state
replacement taxes...... 58 152 274 138 171 126 160
------ ------- ------- ------- ------- ------- -------
Net income.............. $ 670 $ 2,309 $ 5,148 $ 6,614 $ 6,905 $ 5,693 $ 6,060
====== ======= ======= ======= ======= ======= =======
Net income available to
common stockholders(1). $670 $2,309 $5,148 $6,614 $6,905 $5,693 $4,834
====== ======= ======= ======= ======= ======= =======
Supplemental Pro Forma
Information(2)(3):
Net income.............. $437 $1,477 $3,253 $4,051 $4,297 $3,530 $3,847
====== ======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA(4)............... $766 $2,514 $5,536 $6,892 $8,373 $6,305 $9,251
Non-Network Services:
Net revenue............. $7,729 $11,026 $13,981 $10,267 $17,887
Percentage of net
revenue................ 46.3% 49.4% 60.8% 59.2% 75.0%
PPO Network Services:
Net revenue............. $8,973 $11,288 $9,015 $7,089 $5,969
Percentage of net
revenue................ 53.7% 50.6% 39.2% 40.8% 25.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1997
-------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital........... $ (1,327)
Total assets.............. 39,148
Long-term debt, less
current maturities....... 54,976
Stockholders' equity
(deficit)................ (26,763)
</TABLE>
- -------
(1) Represents net income less the accretion to redemption value of the
securities underlying the Convertible Subordinated Notes.
(2) Prior to the Offering, the Company elected to be taxed as a Subchapter S
corporation for federal income taxes. Supplemental pro forma net income
has been computed as if the Company had been subject to all applicable
federal and state corporate income taxes for each period presented. For
this purpose, the income tax rate assumed is 40%.
(3) Beginning with the year ended December 31, 1996, supplemental pro forma
net income is further adjusted for the elimination of the accretion to
redemption value of the securities underlying the Convertible Subordinated
Notes as a result of the cancellation of the put right relating to such
securities effective as of September 30, 1997 and the elimination of
interest expense due to the conversion of the Convertible Subordinated
Notes in connection with the Offering, net of income tax benefit.
(4) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is provided because it is a financial indicator
commonly used in the industry. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not
be considered an alternative to net income as a measure of performance or
to cash flow as a measure of liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Unaudited Pro Forma Consolidated Statements of Income for the
year ended December 31, 1996 and for the nine months ended September 30, 1997
are based on the Company's Consolidated Financial Statements and the About
Health Financial Statements, including in each case, the notes thereto. The
Unaudited Pro Forma Consolidated Statements of Income, which combine the
Company's Consolidated Financial Statements with the About Health Financial
Statements using the purchase method of accounting, are adjusted to give
effect to the About Health Transaction and the Merger as if the transactions
had occurred as of January 1, 1996. The Unaudited Pro Forma As Adjusted
Consolidated Statements of Income further give effect to the sale by the
Company of the Common Stock offered hereby and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds" as if
such sale of Common Stock had also occurred as of January 1, 1996. The pro
forma operating results are not necessarily indicative of the operating
results that would have been achieved had the transactions actually occurred
as of January 1, 1996, nor do they purport to indicate the results of future
operations. The pro forma adjustments are based on available information and
certain adjustments that the Company believes are reasonable. In the opinion
of the Company, all adjustments have been made that are necessary to fairly
present the pro forma data.
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- PRO FORMA OFFERING AS
PPS ABOUT HEALTH ADJUSTMENTS PRO FORMA ADJUSTMENTS(1) ADJUSTED
------- ------------ ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $22,996 $10,134 $33,130 $33,130
Direct costs............ 6,336 2,908 9,244 9,244
------- ------- ------- -------
Gross profit............ 16,660 7,226 23,886 23,886
Selling, general and
administrative expense. 8,287 1,770 10,057 10,057
Depreciation and 387 22 1,523 1,523
amortization........... ------- ------- $1,114(2) ------- -------
Income from operations.. 7,986 5,434 12,306 12,306
Interest expense 910 (50) 3,112 (50)
(income)............... ------- ------- 2,252(3) ------- $(3,162) -------
Income before taxes..... 7,076 5,484 9,194 12,356
Provision for taxes..... 171 -- 3,636(4) 3,807 1,265 5,072
------- ------- ------- -------
Net income available to $ 6,905 $ 5,484 $ 5,387 $ 7,284
common stockholders.... ======= ======= ======= =======
Net income per share.... $1.93 $
======= =======
Weighted average number
of shares outstanding.. 2,794,474(7)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<CAPTION>
HISTORICAL
--------------------
SEVEN MONTHS
ENDED
JULY 31,
1997 PRO FORMA
------------ PRO FORMA OFFERING AS
PPS ABOUT HEALTH ADJUSTMENTS PRO FORMA ADJUSTMENTS(1) ADJUSTED
------- ------------ ----------- --------- -------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $23,856 $8,899 $32,755 $32,755
Direct costs............ 6,195 2,059 8,254 8,254
------- ------ ------- -------
Gross profit............ 17,661 6,840 24,501 24,501
Selling, general and
administrative expense. 8,410 6,228 $(3,667)(5) 10,971 10,971
Depreciation and 513 24 1,373 1,373
amortization........... ------- ------ 836 (2) ------- -------
Income from operations.. 8,738 588 12,157 12,157
Interest expense 2,518 (31) 4,176 (31)
(income)............... ------- ------ 1,689 (3) ------- $(4,207) -------
Income before taxes..... 6,220 619 7,981 12,188
Provision for taxes..... 160 -- 3,105 (4) 3,265 1,695 4,960
Accretion to redemption 1,226 -- -- --
value.................. ------- ------ (1,226)(6) ------- -------
Net income available to $ 4,834 $ 619 $ 4,716 $ 7,228
common stockholders.... ======= ====== ======= =======
Net income per share.... $1.63 $
======= =======
Weighted average number
of shares outstanding.. 2,895,121(7)
</TABLE>
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(1) Represents the impact of the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $ per
share and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." Interest expense is reduced as a result
of applying the net proceeds of the Offering to repay all outstanding
indebtedness. The pro forma provision for taxes is increased due to the
reduction in interest expense.
(2) Represents an increase in amortization expense associated with the
goodwill recorded in connection with the About Health Transaction and the
Merger and reflects the amortization of goodwill on a straight-line basis
over thirty years. Both transactions are assumed to have occurred as of
January 1, 1996.
(3) Represents the additional interest expense and the amortization of
deferred financing costs associated with the debt incurred to finance the
About Health Transaction, assuming such transaction occurred on January 1,
1996. The weighted average annual interest rate assumed is 8.0%.
(4) Prior to the Offering, the Company elected to be taxed as a Subchapter S
corporation for federal income taxes. The pro forma adjustment reflects
the impact on income taxes as if the Company had been subject to all
applicable federal and state corporate income taxes.
(5) Represents the elimination of a non-recurring bonus paid to certain
employees of About Health in connection with the About Health Transaction.
(6) Represents the elimination of accretion to redemption value associated
with the cancellation of the put right on the securities underlying the
Convertible Subordinated Notes effective September 30, 1997.
(7) Gives effect to the issuance of shares pursuant to the Merger.
At the time the Company's outstanding indebtedness is repaid from proceeds
of the Offering, the Company will record an expense of approximately $1.0
million, representing the write off of the deferred financing fees associated
with such indebtedness, net of the estimated tax benefit. In addition, upon
converting to a Subchapter C corporation, the Company will record a tax
benefit of approximately $396,000 to reflect deferred income taxes. These
anticipated changes are not reflected in the Unaudited Pro Forma Consolidated
Statements of Income.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Selected Consolidated Financial Data, the Unaudited Pro Forma
Consolidated Statements of Income, the Consolidated Financial Statements of
the Company and the About Health Financial Statements, including, in each
case, the notes thereto, appearing elsewhere in this Prospectus.
OVERVIEW
The Company is a leading nationwide provider of specialized cost containment
and outsourcing services for healthcare payors. Through its comprehensive
portfolio of services, the Company reduces for its clients costs ordinarily
payable on medical bills submitted by healthcare providers and the
administrative expense associated with reviewing and processing medical bills.
These Non-Network Services include professional negotiation services, line-
item analysis and other specialized audit and bill review processes, as well
as access to a nationwide PPO Network. PPS serves as a one-stop outsourcing
solution for cost containment with respect to medical bills that are outside a
healthcare payor's contracted network of providers.
The Company's net revenue is primarily a function of three variables: (i)
the volume and size of medical bills submitted by clients; (ii) the amount of
price concessions or bill reductions the Company obtains for its clients; and
(iii) the fee arrangements negotiated by the Company with its clients, which
are based principally on the dollar amount of price reductions realized by the
Company's clients. The Company recognizes net revenue upon completion of its
services. In some cases, the initial repricing may become subject to further
negotiation with the healthcare provider, or it may be updated due to
additional information being provided. Net revenue is adjusted through the
issuance of credit memos should the final disposition of the bill differ from
the initial analysis. The Company provides for its estimate of any future
adjustments when the revenue is initially recorded. The Company's strategy is
to enhance its ability to generate net revenue by focusing on: (i) accessing
greater bill volume from existing clients; (ii) maximizing savings per bill;
(iii) providing superior customer service; (iv) expanding its client base; and
(v) pursuing strategic acquisitions and developing new services.
The following table sets forth for each of the periods indicated, on an
actual basis and on a pro forma basis after giving effect to the About Health
Transaction, the Company's net revenue (and percentage of net revenue)
generated from its Non-Network Services and PPO Network Services (dollars in
thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ---------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------ ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Network Services:
Net revenue........... $7,729 $11,026 $13,981 $24,145 $10,267 $17,887 $26,786
Percentage of net
revenue.............. 46.3% 49.4% 60.8% 72.8% 59.2% 75.0% 81.8%
PPO Network Services:
Net revenue........... $8,973 $11,288 $ 9,015 $9,015 $ 7,089 $ 5,969 $ 5,969
Percentage of net
revenue.............. 53.7% 50.6% 39.2% 27.2% 40.8% 25.0% 18.2%
</TABLE>
Since 1994, due to the growing client acceptance of HBMS and the addition of
new services, the Company has experienced significant growth in Non-Network
Services on an absolute basis and as a percentage of net revenue. Beginning in
the fourth quarter of 1995, net revenue from PPO Network Services has
declined, both on an absolute basis and as a percentage of net revenue due to
the Company's decision to discontinue its PPO relationship with certain
clients who could not comply with PPO Network access requirements and the
Company's decision to concentrate its resources on Non-Network Services. With
the About Health Transaction, the Company anticipates that Non-Network
Services will continue to increase as a percentage of net revenue.
The Company's operating expenses consist of direct costs, selling, general
and administrative ("SG&A") expenses and depreciation and amortization. Direct
costs are costs directly associated with the provision of Non-Network Services
and PPO Network Services, such as compensation of professional negotiators,
support staff, data entry personnel and contracted labor for hospital bill
audit services and commissions paid to the Company's PPO Partners.
21
<PAGE>
Effective as of August 1, 1997, the Company and About Health formed the
Operating Company for the purpose of combining their businesses. About Health
contributed substantially all of its operating assets to the Operating Company
in exchange for equity in the Operating Company and $25.8 million in cash. The
cash distribution to About Health and fees associated with the About Health
Transaction were funded through the 1997 Credit Facility. Effective October
31, 1997, About Health was merged with and into the Company. In connection
with the Merger, the Company issued an aggregate of 593,517 shares of Common
Stock to the stockholders of About Health. The Company is in the process of
combining its operations with those of About Health, including incorporating
About Health's services into HBMS. The Company has identified certain
infrastructure and other improvements needed in order to combine operations
most effectively, including hiring additional professional negotiation staff.
It is expected that expenses related to these improvements will be incurred
through the first half of 1998 prior to realizing the full revenue impact of
the improvements and, accordingly, operating results for 1998 may be affected.
See "Certain Transactions--The About Health Transaction."
The About Health Transaction and the Merger have been accounted for using
the purchase method of accounting. In connection with the About Health
Transaction and the Merger, the Company recorded $33.5 million of costs in
excess of net assets acquired, which is being amortized on a straight line
basis over thirty years. The significant increase in amortization expense
beginning in the third quarter of 1997 is principally attributable to goodwill
associated with the About Health Transaction and the Merger.
The Company has incurred substantial interest expense in recent periods as a
result of the 1996 Transaction and the About Health Transaction. Because the
proceeds of the Offering will be used to repay all of the Company's
indebtedness, interest expense attributable to existing indebtedness will be
eliminated upon consummation of the Offering. See "Use of Proceeds." After the
Offering, the Company intends to negotiate a new credit facility to provide
ongoing liquidity.
Since its inception, the Company has operated as a Subchapter S corporation
under the Code. As a result, the Company has not incurred federal income
taxes. Federal income taxes attributable to the Company's income have been
incurred and paid directly by the Company's stockholders. Following the
Offering, the Company will be a Subchapter C corporation under the Code. As a
Subchapter C corporation, the Company will be fully subject to federal and
state income taxation. For the purposes of the following discussion, net
income refers to pro forma net income assuming that the Company had been
subject to all applicable federal and state corporate income taxes.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of net sales for each of the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs................. 35.6 34.8 27.6 28.2 26.0
------- ------- ------- -------- --------
Gross profit................. 64.4 65.2 72.4 71.8 74.0
Selling, general and
administrative expense...... 31.3 34.3 36.0 35.5 35.2
Depreciation and
amortization................ 0.7 0.8 1.7 1.4 2.2
------- ------- ------- -------- --------
Income from operations....... 32.4 30.1 34.7 34.9 36.6
Interest expense (income).... 0.0 (0.2) 4.0 1.4 10.5
------- ------- ------- -------- --------
Income before taxes.......... 32.4 30.3 30.7 33.5 26.1
Provision for taxes (pro
forma)...................... 12.9 12.1 12.0 13.2 10.0
------- ------- ------- -------- --------
Net income (pro forma)....... 19.5% 18.2% 18.7% 20.3% 16.1%
======= ======= ======= ======== ========
</TABLE>
22
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Since August 1, 1997, the effective date of the About Health Transaction,
the Company's financial statements have been reported on a consolidated basis,
including the operations of About Health.
Net revenue increased $6.5 million, or 37.5%, to $23.9 million for the nine
months ended September 30, 1997 from $17.4 million for the nine months ended
September 30, 1996. Net revenue from Non-Network Services increased $7.6
million, or 74.2%, to $17.9 million for the nine months ended September 30,
1997 from $10.3 million for the nine months ended September 30, 1996. This
increase was primarily due to a significant increase in the number of bills
from existing clients for Non-Network Services, and from the addition of new
clients attributable to the Company's marketing efforts and the About Health
Transaction. Net revenue from PPO Network Services decreased $1.1 million, or
15.8%, to $6.0 million for the nine months ended September 30, 1997 from $7.1
million for the nine months ended September 30, 1996. This decrease was due to
a reduction in PPO Network usage and conversion to certain alternative fee
arrangements in anticipation of increased bill volume.
Direct costs increased $1.3 million, or 26.6%, to $6.2 million for the nine
months ended September 30, 1997 from $4.9 million for the nine months ended
September 30, 1996 to support a higher level of net revenue and an increase in
the number of bills analyzed. However, as a percentage of net revenue, direct
costs decreased to 26.0% in the 1997 period from 28.2% in the 1996 period due
to (i) a decrease in net revenue attributable to PPO Network Services, which
have a lower margin than Non-Network Services, and (ii) a lower commission
rate payable to the Company's largest PPO Partner effective September 1996.
SG&A expense increased $2.2 million, or 36.6%, to $8.4 million for the nine
months ended September 30, 1997 from $6.2 million for the nine months ended
September 30, 1996. Growth in SG&A expense was consistent with (i) growth in
net revenue between the periods and (ii) the Company's investment in new
technology and other infrastructure necessary to support such growth and the
integration of About Health. As a percentage of net revenue, SG&A expense
decreased slightly to 35.4% in the 1997 period from 35.5% in the 1996 period.
Depreciation and amortization expense increased $267,000, or 108.9%, to
$513,000 for the nine months ended September 30, 1997 from $246,000 for the
nine months ended September 30, 1996, primarily as a result of the
amortization of goodwill attributable to the About Health Transaction.
Interest expense increased $2.3 million to $2.5 million for the nine months
ended September 30, 1997 from $240,000 for the nine months ended September 30,
1996 primarily as a result of the 1996 Transaction, which was effective as of
August 30, 1996, and the About Health Transaction, which was effective as of
August 1, 1997. See "Certain Transactions."
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenue increased $682,000, or 3.1%, to $23.0 million for the year ended
December 31, 1996 from $22.3 million for the year ended December 31, 1995. Net
revenue from Non-Network Services increased $3.0 million, or 26.8%, to $14.0
million for the year ended December 31, 1996 from $11.0 million for the year
ended December 31, 1995. This increase was primarily the result of the
addition of in-house hospital bill audit service capabilities in the first
quarter of 1995 and substantial improvements in savings performance in the
Company's professional negotiation services. Net revenue from PPO Network
Services decreased $2.3 million, or 20.1%, to $9.0 million for the year ended
December 31, 1996 from $11.3 million for the year ended December 31, 1995.
This decrease was primarily due to the Company's decision during the fourth
quarter of 1995 to discontinue its PPO relationships with certain clients who
could not comply with PPO Network access requirements.
Direct costs decreased $1.5 million, or 18.4%, to $6.3 million for the year
ended December 31, 1996 from $7.8 million for the year ended December 31,
1995. As a percentage of net revenue, direct costs decreased to 27.6% in 1996
from 34.8% in 1995. Both decreases resulted from a decrease in net revenue
attributable to PPO Network Services, which have a lower margin than Non-
Network Services, and a lower commission rate payable to the Company's largest
PPO Partner effective September 1996.
23
<PAGE>
SG&A expense increased $634,000, or 8.3%, to $8.3 million for the year ended
December 31, 1996 from $7.7 million for the year ended December 31, 1995
primarily due to general cost increases and the Company's investment in new
technology and other infrastructure necessary to support forecasted growth. As
a result, as a percentage of net revenue, SG&A expense increased to 36.0% in
1996 from 34.3% in 1995.
Depreciation and amortization expense increased $200,000, or 107.0%, to
387,000 for the year ended December 31, 1996 from $187,000 for the year ended
December 31, 1995 primarily as a result of the purchase of additional computer
equipment and other fixed assets.
Interest expense of $910,000 for the year ended December 31, 1996 was
attributable to the 1996 Transaction, which was effective as of August 30,
1996. See "Certain Transactions--The 1996 Transaction."
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenue increased $5.6 million, or 33.6%, to $22.3 million for the year
ended December 31, 1995 from $16.7 million for the year ended December 31,
1994. Net revenue from Non-Network Services increased $3.3 million, or 42.7%,
to $11.0 million for the year ended December 31, 1995 from $7.7 million for
the year ended December 31, 1994. This increase was primarily due to
significant increases in the number and dollar volume of bills analyzed and
greater client acceptance of HBMS, which was introduced in mid-1994. Net
revenue from PPO Network Services increased $2.3 million, or 25.8%, to $11.3
million for the year ended December 31, 1995 from $9.0 million for the year
ended December 31, 1994. This increase was primarily due to increases in the
number and dollar volume of bills analyzed through the PPO Network.
Direct costs increased $1.9 million, or 30.7% to $7.8 million for the year
ended December 31, 1995 from $5.9 million for the year ended December 31,
1994, consistent with the increase in net revenue. As a percentage of net
revenue, direct costs decreased to 34.8% in 1995 from 35.6% in 1994 primarily
due to lower PPO access rates with PPO Partners.
SG&A expense increased $2.5 million, or 46.5%, to $7.7 million for the year
ended December 31, 1995 from $5.2 million for the year ended December 31, 1994
primarily due to the need to provide sufficient resources to support growth in
net revenue and the number of bills analyzed. Approximately $1.0 million of
the increase was due to costs associated with a computer conversion. As a
percentage of net revenue, SG&A expense increased to 34.3% in 1995 from 31.3%
in 1994 primarily due to an increase in bad debt expense related to the
computer conversion.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain of the Company's unaudited quarterly
financial data. The Company's business is seasonal and operating results have
varied from quarter to quarter due to industry cyclicality, particularly
during the fourth quarter of each fiscal year as business is affected by the
November and December holiday seasons.
<TABLE>
<CAPTION>
QUARTERS ENDING
-------------------------------------------------------------------
1995 1996 1997
------- ---------------------------------- ------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- ------- ------- -------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $5,506 $5,975 $5,503 $5,878 $5,640 $6,270 $6,933 $10,653
Direct costs............ 1,595 1,610 1,474 1,809 1,443 1,625 1,759 2,811
------ ------ ------ ------ ------ ------ ------ -------
Gross profit............ 3,911 4,365 4,029 4,069 4,197 4,645 5,174 7,842
Selling, general, and
administrative expense. 2,134 1,843 1,902 2,430 2,112 2,207 2,525 3,678
Depreciation and
amortization........... 72 77 72 97 141 147 149 217
------ ------ ------ ------ ------ ------ ------ -------
Income from operations.. 1,705 2,445 2,055 1,542 1,944 2,291 2,500 3,947
Interest expense
(income)............... 5 (39) (5) 285 669 662 680 1,176
------ ------ ------ ------ ------ ------ ------ -------
Income before taxes..... 1,700 2,484 2,060 1,257 1,275 1,629 1,820 2,771
Net income (pro forma).. $1,020 $1,490 $1,236 $ 754 $ 765 $ 977 $1,092 $ 1,663
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the 1996 Transaction, the Company's principal cash requirements
were to fund working capital needed to support growth and to fund dividends
necessitated by the Company's Subchapter S corporation status. The Company
funded such working capital and dividend requirements principally with cash
generated from operations. Cash flows provided by operating activities were
$6.1 million, $8.1 million and $5.5 million for fiscal years 1995 and 1996 and
the nine months ended September 30, 1997, respectively.
On August 1, 1996, the Company completed the 1996 Transaction. In connection
with the 1996 Transaction: (i) the Company incurred $20.5 million of senior
secured indebtedness under the 1996 Credit Facility; (ii) the TA Investors
invested $17.0 million to acquire the Convertible Subordinated Notes and the
Subordinated Notes; (iii) the Company made a special distribution to
stockholders and acquired options for an aggregate amount of $36.0 million;
(iv) the Company entered into employment agreements with certain members of
its senior management; and (v) the Company, its stockholders and the TA
Investors entered into a Shareholders' Agreement and a Registration Rights
Agreement. See "Certain Transactions." The Subordinated Notes mature on August
31, 2003 and accrue interest at a rate of 10% per annum. The Convertible
Subordinated Notes are convertible at any time into an aggregate of 10,000
shares of Redeemable Preferred Stock and 10,000 shares of Convertible
Preferred Stock. Each share of Convertible Preferred Stock is convertible into
shares of the Company's Common Stock at a conversion price of $5.1636 per
share of Common Stock. The Convertible Subordinated Notes bear interest at 5%
per annum, 2% being payable quarterly and 3% being deferred and payable upon
redemption or maturity, as applicable. The 1996 Transaction resulted in a
significant increase in the Company's interest expense beginning in the third
quarter of 1996. See "Certain Transactions--The 1996 Transaction."
Following the 1996 Transaction, the Company's principal cash requirements
have been to continue to fund dividends in amounts sufficient to enable its
stockholders to pay income taxes on account of the Company's taxable income
allocated to them, as well as to fund working capital to support growth, debt
service and the About Health Transaction in 1997. The Company has funded these
requirements with cash generated from operations and with borrowings under its
bank credit facilities.
In connection with the About Health Transaction, which became effective on
August 1, 1997, the Company contributed substantially all of its operating
assets to the Operating Company in exchange for equity interests in the
Operating Company and the assumption by the Operating Company of substantially
all of the liabilities of the Company other than the Convertible Subordinated
Notes. About Health contributed substantially all of its assets to the
Operating Company in exchange for equity interests in the Operating Company
and $25.8 million in cash and the assumption by the Operating Company of
substantially all of the liabilities of About Health. Prior to the Merger, the
Company was the managing member of the Operating Company and was allocated 80%
of its profits and losses. As a result of the Merger, which became effective
as of October 31, 1997, the Company is the sole member of the Operating
Company and is allocated 100% of its profits and losses. The cash
distributions to About Health and expenses associated with the About Health
Transaction were funded through bank debt under the 1997 Credit Facility. The
About Health Transaction resulted in a further increase in the Company's
interest expense beginning in the third quarter of 1997. See "Certain
Transactions--The About Health Transaction."
The 1997 Credit Facility consists of a $5.0 million revolving credit
facility and a $44.0 million term loan and is secured by substantially all of
the Company's assets. As of September 30, 1997, borrowing capacity of $4.5
million existed under the revolving line of credit. Interest rates on
borrowings under the 1997 Credit Facility are based upon either the Federal
Funds Rate (as defined), the Prime Rate (as defined), or LIBOR, plus in each
case a margin which varies according to the ratio of Total Debt (as defined)
of the Company to EBITDA (as defined) calculated for the four consecutive
fiscal quarters ending on the date of calculation. As of September 30, 1997,
the interest rate on the term loan portion of the 1997 Credit Facility was 8%
and the interest rate on the line of credit portion of the 1997 Credit
Facility was 9.25%. The revolver portion of the 1997 Credit Facility expires
in September 2001. The term portion requires quarterly payments of principal
and interest and matures
25
<PAGE>
in September 2001. In compliance with requirements under the 1997 Credit
Facility, the Company has an interest rate swap agreement with the lending
banks with an aggregate notional principal amount equal to 50% of the
outstanding credit balance under the term loan. The swap agreement is
maintained exclusively as a hedge against exposure to variable interest rates
applicable to borrowings under the 1997 Credit Facility.
Prior to consummation of the Offering, the Convertible Subordinated Notes
will be converted, at the option of the holders, into Redeemable Preferred
Stock and Convertible Preferred Stock. Upon consummation of the Offering, the
Convertible Preferred Stock will automatically convert into 968,316 shares of
Common Stock and the Redeemable Preferred Stock will be immediately redeemed
for $5.0 million with proceeds from the Offering. The Company intends to use a
portion of the remaining proceeds from the Offering to repay the 1997 Credit
Facility and the Subordinated Notes, including accrued interest thereon, and to
pay accrued interest on the Convertible Subordinated Notes. As a result, after
giving effect to the Offering and the application of the estimated net proceeds
therefrom, the Company will have no indebtedness, other than amounts which the
Company may borrow under an amended credit facility in order to fund working
capital and future acquisitions. See "Use of Proceeds."
Prior to the Offering, the Company was treated as a Subchapter S corporation
for federal income tax purposes. Similar elections were made in states
providing for conforming laws. As a result, the Company currently pays no
federal income tax and minimal state income tax, and the earnings of the
Company are subject to taxation directly at the stockholder level. Effective
upon consummation of the Offering, the Company's Subchapter S corporation
status will be terminated, and the Company will become subject to corporate
income taxation as a Subchapter C corporation. Upon consummation of the
Offering, current deferred tax assets of approximately $551,000 and noncurrent
deferred tax liabilities of approximately $155,000 (each estimated as of
September 30, 1997) will be recorded with an offsetting benefit to net income.
This one-time net benefit of $396,000 is expected to increase net income for
the first quarter of 1998. No additional tax consequences to the Company are
expected to result from termination of its Subchapter S corporation status.
The Company made capital expenditures (excluding the About Health
Transaction) totaling approximately $347,000, $821,000 and $282,000 during
1995, 1996 and the nine months ended September 30, 1997, respectively. The
Company expects to make total capital expenditures of approximately $530,000 in
1997 and approximately $800,000 in 1998, primarily to expand its information
systems capabilities. Such amounts may be increased due to acquisitions and
other expenditures required to expand the Company's operations.
Following the Offering, the Company's long-term liquidity needs will consist
of working capital, ordinary capital expenditures and capital required to fund
future acquisitions. The Company intends to enter into a new credit facility
upon consummation of the Offering. The Company expects that the new facility
and cash provided by operations will be sufficient to fund ongoing operations
and possible acquisitions through 1998. In the event the Company requires
additional funds, it intends to raise such funds through future equity or debt
financings.
The Company does not believe inflation has had a material adverse effect on
its financial statements for the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations, as basic earnings per share (currently primary)
and diluted earnings per share (currently fully diluted). The weighted average
number of common shares for the basic earnings per common share calculation
includes (i) all Common Stock outstanding during each period presented, (ii)
all Common Stock options and warrants issued within one year prior to the
initial filing of the Registration Statement with a price below the estimated
initial public offering price, reduced by the number of shares which could be
purchased with proceeds from the exercise of the options and warrants, and
(iii) the Common Stock that will be issued upon the conversion of the
Convertible Preferred Stock. The weighted average number of
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shares of Common Stock for the Company's diluted earnings per common share
calculation is based on similar assumptions and is adjusted for all other
common stock equivalents that were outstanding during each period presented.
SFAS No. 128 is effective for reporting periods ending after December 15, 1997.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, had the Company calculated earnings per share using SFAS No. 128, the
basic earnings per share would have been $1.60 and $1.42, respectively, and the
diluted earnings per share would have been $1.59 and $1.37, respectively. The
basic and diluted earnings per share include a pro forma income tax provision
as if the Company had been a Subchapter C corporation. The Company will adopt
SFAS No. 128 on December 31, 1997.
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BUSINESS
GENERAL
PPS is a leading nationwide provider of specialized cost containment and
outsourcing services for healthcare payors. Through its comprehensive
portfolio of services, the Company reduces for its clients costs ordinarily
payable on medical bills submitted by healthcare providers and the
administrative expense associated with reviewing and analyzing medical bills.
These services include professional negotiation services, line-item analysis
and other specialized audit and bill review processes, as well as access to a
nationwide PPO Network. PPS serves as a one-stop outsourcing solution for cost
containment with respect to medical bills that are outside a healthcare
payor's contracted network of providers. The Company's net revenue is based
primarily on the amount of price reductions realized by the Company's clients
as a result of its services. On a pro forma basis after giving effect to the
About Health Transaction, for the year ended December 31, 1996, the Company
analyzed approximately $1.1 billion in bill volume, representing 154,134
medical bills, and for the nine months ended September 30, 1997, the Company
analyzed approximately $1.1 billion in bill volume, representing 176,101
medical bills.
All healthcare payors have out-of-network exposure due to healthcare claims
that are outside their coverage area or network either as a matter of choice
on the part of the insured or as a result of geographic circumstances where
the insured does not have local access to contracted providers. With the
growth in popularity of POS and open-access products, consumers have greater
freedom to choose healthcare providers that are outside a payor's contracted
network. Out-of-network healthcare claims expose payors to greater incidence
of over-utilization, cost shifting, omission of appropriate discounts and
possible billing errors. In the Company's experience, the potential savings
available to payors from cost containment efforts for out-of-network claims
have increased significantly in the past several years and range from several
hundred dollars to $100,000 or more per claim.
PPS produces savings for its clients by analyzing each bill using its HBMS,
which incorporates proprietary software, Company-developed and licensed
databases and client-specific preference profiles. HBMS analyzes all medical
bills sent to the Company and automatically selects the appropriate PPS
service that will maximize savings for the client. HBMS then incorporates all
cost-savings information from the analysis into its database in order to
improve future bill analysis. The Company, by incorporating all of its
services into HBMS, believes that it produces superior results when compared
to single-product cost containment companies.
The Company's clients include indemnity health insurers, HMOs and other
managed care organizations, third-party administrators, reinsurers, large
self-insured employers, Blue Cross and Blue Shield organizations and Taft-
Hartley funds. The Company's clients include leading healthcare payors such as
CIGNA, Aetna, Great-West Life, The Guardian, PacifiCare Health Systems Inc.
and Eli Lilly & Company.
INDUSTRY OVERVIEW
Historically, health insurers offering traditional indemnity (fee-for-
service) products were the principal payors of healthcare benefits for
employers and individuals. The indemnity plans offered by these insurers
generally were not designed to control increasing healthcare costs. In
response to continuing increases in healthcare costs, purchasers of healthcare
services have sought means that control the amounts payable to healthcare
providers. The largest purchasers of healthcare services, the federal and
state governments, have established specific reimbursements for given
diagnoses, which are often substantially below market rates. In the private
sector, HMO, PPO and other managed healthcare plans have been developed.
Typically, HMO and PPO plans employ networks of contracted healthcare
providers who agree to deliver healthcare at favorable rates. These plans also
incorporate healthcare utilization management and other cost control measures
within their network. A number of HMOs offer POS and open-access products that
allow out-of-network usage, often at substantially higher out-of-pocket costs
to the insured. Services performed within the out-of-network portion of
managed care plans, as well as within the plans of traditional indemnity
carriers and other non-contracted payors,
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are billed at retail rates. Both the rising costs of providing healthcare
services and the increasingly common practice on the part of providers known
as cost shifting (providers compensating for the effect of lower contracted
rates by charging more to non-contracted payors) have increased providers'
retail rates. This has put severe pressure on the ability of indemnity and
managed care organizations that offer POS and open-access products to control
out-of-network costs.
Recently, employers and patients are increasingly demanding more flexible
products (such as POS and open access products), an ability to deliver
benefits across wider geographies and lower costs. The result has been a
series of product innovations that have combined the benefits of HMO products
with traditional indemnity products. This exposes managed care organizations
to increased out-of-network exposure, the potential for provider cost shifting
and higher claims costs. In addition, the increased competition in the payor
industry has led to a prolonged stagnant premium rate environment, forcing
payors to try to improve earnings through better management of claims costs.
As a result of a larger volume of claims, a proliferation of plans and fee
scales and reduced back office capacity, payors are finding it increasingly
difficult to detect billing errors, omissions of appropriate discounts and
instances of cost shifting. While many payors have an internal cost
containment department to review claims prior to sending them to third-party
outsource vendors, cost containment is not one of the core competencies of a
typical payor. Payors are increasingly outsourcing these functions to
independent cost containment firms because of: (i) the growing regulatory
complexity of healthcare claims; (ii) an inability to replicate the breadth of
data and industry expertise of an independent vendor; (iii) a need for
significant investment in technology and systems to accomplish meaningful
savings; (iv) a desire on the part of the payors to focus on their core
competencies; and (v) a desire for larger and more meaningful cost savings on
claims.
The cost containment industry is highly fragmented, with most participants
operating on a regional or local level. The Company believes that national,
single-source vendors, such as the Company, have the economies of scale and
expertise to deliver the requisite services at lower cost and similar or
higher quality than the payors could achieve for themselves or access through
regional or local vendors.
GROWTH STRATEGY
The Company's growth strategy is to increase net revenue and profitability
by enhancing its position as the single-source cost containment and
administrative outsourcing partner of choice for healthcare payors. In order
to implement its growth strategy, the Company focuses on the following
business imperatives:
Access Greater Bill Volume from Existing Clients. The Company has a
significant opportunity to increase bill volume, and therefore net revenue,
from existing clients. The Company contracts with its clients to receive
medical bills with certain characteristics, including type of medical
service, size of bill and other factors. However, because most of its
clients have manual bill identification and transfer procedures, the
Company believes that it receives fewer than half of the bills that are
eligible for review. The Company believes that it can receive a greater
proportion of its clients' bills by implementing automated bill selection
criteria coupled with EDI and utilizing on-site PPS personnel. The Company
also intends to increase its bill volume by expanding the types of medical
bills it reviews. With the About Health Transaction, the Company has
expanded the scope of its bill review services from inpatient, outpatient
and physician bills to include various types of ancillary medical bills
such as chemotherapy, home infusion and durable medical equipment.
Maximize Savings Per Bill. The Company seeks to maximize its savings
performance for its clients, thereby increasing net revenue, by continuing
to improve its technology, educating and deploying its employees to build
on best demonstrated practices and expanding the scope of its services. The
Company makes continuous improvements to HBMS, and automatically
incorporates all bill review results into its databases, enabling its
professionals to utilize these data to achieve greater savings across all
of the Company's services.
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Provide Superior Customer Service. The Company believes that it can
strengthen its client relationships by continually upgrading its customer
service capabilities to help make its clients' administrative functions
more efficient. The Company believes that healthcare payors increasingly
are seeking a single-source approach to meeting all of their cost
containment and administrative outsourcing needs, which include savings,
processing time, flexibility, customization, capacity and provider
resolution. HBMS employs a customer preference profile to tailor its
services to meet each client's unique needs for administration and analysis
of medical bills. PPS also offers customized reporting that allows clients
to monitor the success and accuracy of the Company's services. Through
HBMS, the Company is able to consolidate services and provide a one-stop
outsourcing solution.
Expand Client Base. The Company believes that it can expand its client
base to additional healthcare payors in certain of the sectors that it has
traditionally served, such as HMOs and other managed care organizations,
and to other types of risk-bearing entities with non-network exposure, such
as automobile liability insurers, workers' compensation insurers, and
governmental entities and provider organizations that accept capitation.
The Company also plans to expand its client base through the introduction
of new services such as subrogation and credit recovery. The About Health
Transaction has broadened the Company's client base, providing significant
cross-selling opportunities for its existing services. The Company will
seek to further expand its client base by working with system vendors to
incorporate electronic bill identification criteria and EDI capabilities to
interface with the Company's services. The Company plans to utilize the
internal sales forces of the Company's third-party administrator clients to
market the Company's services as value-added services to the insurance
products sold by the Company's clients.
Pursue Strategic Acquisitions and Develop New Services. The Company
intends to enhance its position as a leading single-source vendor of cost
containment services by continuing to develop new services or by acquiring
assets or businesses that can expand its client base, improve its
technological and human resource capabilities, provide access to greater
bill volume or broaden its service lines. PPS believes that the cost
containment industry is highly fragmented, with a large number of single-
service or regional vendors that are at a competitive disadvantage to
single-source national vendors such as PPS. Through the About Health
Transaction, the Company acquired what it believes to be the industry-
leading methodology for professional negotiation services, which is being
incorporated into HBMS. Also, as a result of the About Health Transaction,
the Company now offers a service that prospectively identifies and analyzes
medical bills that are expected to occur over a period of time due to
medical conditions that require ongoing treatment. This enables the Company
to anticipate, capture and monitor the ongoing billing for recurring
treatments. Through its Customer Advisory Board, comprised of
representatives of some of its largest clients, the Company gains real-time
access to information on client preferences and industry trends, and
insights for use in planning strategy, possible acquisition candidates and
developing new service offerings.
HEALTHCARE BILL MANAGEMENT SYSTEM
PPS differentiates itself from its competitors by analyzing each bill using
a proprietary, technology-based system called HBMS. The following diagram
illustrates how HBMS operates:
[Diagram--schematic description of operation of HBMS]
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Bills are accessed and entered into HBMS in a variety of ways. The client
may choose electronic bill identification within the client's claim
adjudication system with subsequent EDI transfer to PPS. Alternatively,
because of internal systems or resource constraints, the client may elect to
enter appropriate bills into a PPS-supplied Data Access Point ("DAP") system
customized for claims data entry, customer reporting and provider
identification. With certain clients, PPS may supply an on-site employee to
enter bills into the DAP system and manage workflow. In other cases, the
client may choose to use overnight mail or facsimile to send appropriate bills
to a PPS service center. These access strategies are designed to increase the
number of appropriate bills that PPS receives, while minimizing the
administrative cost to the client. To assist with the implementation of these
strategies, the Company offers to its clients a consultative Claims Assessment
and Savings Evaluation service ("CASE") that evaluates the effectiveness of
the client's cost containment processes and recommends a series of steps with
the goals of accessing greater bill volume while reducing administrative cost.
Once a bill is electronically or manually entered into HBMS, the bill is
evaluated against the Company's licensed and proprietary databases that are
designed to identify instances of cost shifting, improper coding and
utilization and pricing issues. The databases contain information on a variety
of healthcare cost data such as mean length of stay, hospital demographics,
hospital cost report data and the Company's historical results with particular
providers. This database analysis assigns a score to each of the Company's
potential review services to measure the probability of success in achieving
cost savings as a result of such service and the likely magnitude of the
savings. Following analysis of the bill, the bill passes through the Company's
client preference profile that is created at the time of PPS's initial
engagement with the client. HBMS then evaluates the compatibility of the
service with the greatest expected savings with the service requirements of
the client. Based on the total bill score and the client's preset client
preference profile factors, the bill is then electronically sent to one of the
Company's Non-Network Services or is repriced as a result of its eligibility
for inclusion in the Company's PPO Network.
Non-Network Services
The Company offers a portfolio of services that lower the costs of
healthcare claims that are (i) outside a payor's coverage area or network,
either as a matter of choice on the part of the insured or as a result of
geographic circumstances where insureds do not have local access to contracted
providers and (ii) outside of, or not eligible for, the Company's PPO Network.
The Company uses proprietary software for each of its Non-Network Services to
maximize savings performance and administer the Company's services according
to the client's requirements. These Non-Network Services include Professional
Negotiation Services, Inpatient Line Item Analysis ("LIA"), Outpatient
Facility Bill Repricing ("OPR"), Hospital Bill Audit Services ("HBA"),
Diagnostic Related Group Validation Services ("DRG"), Special Investigative
Review Services ("SIR") and Hospital Relative Charge Analysis ("HRCA").
Professional Negotiation Services. The Company's professional negotiation
services are applied to a variety of bills, such as inpatient, outpatient,
physician and ancillary service bills. Each bill is analyzed and negotiated by
an internal staff, which includes senior-level medical professionals such as
physicians and former hospital administrators, to determine the clinical and
financial appropriateness for each confinement or procedure and reach a
negotiated settlement with the healthcare provider on behalf of the payor and
the patient. As part of the Company's professional negotiation services,
negotiated settlements include written agreements with the provider to the
adjusted bill amount and an agreement by the provider not to bill the patient
separately for the difference between the initial bill and the adjusted bill.
Inpatient Line Item Analysis. The Company's LIA services involve the
examination of hospital charges at the individual line item charge level in
order to determine reasonable and appropriate fees for submitted line item
charges on the detailed bill. Through LIA, the Company assesses the value of
the goods and services provided and performs an evaluation based upon several
different licensed and proprietary databases and screening criteria. LIA
compares charges for diagnostic and therapeutic services, segmented
geographically, and uses benchmarks for provider acquisition costs as a basis
for supply, pharmaceutical and capital equipment
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allowances. With LIA, the Company also looks for improper coding practices and
reviews invoices for clinical incompatibility and potential billing errors.
Hospital Bill Audit Services. The Company's HBA services are performed on-
site by independent, contracted, licensed and registered nurses to verify
whether hospital bill charges were provided as billed and as ordered by a
physician. The audit includes analysis and reporting of potential over-
utilization issues. Coordination of benefits is also verified. In the case of
workers' compensation audits, an analysis of unrelated services and charges is
also performed.
Outpatient Facility Bill Repricing. The Company's OPR service utilizes
reasonable charge allowances for most surgical and certain radiological
procedures performed on an outpatient basis in order to reprice these types of
bills. PPS has produced a usual, customary and reasonable charge database for
nearly 2,000 procedures that provides percentile level data for outpatient
facility charges by procedure and geographic area.
Diagnostic Related Group Validation Services. The Company's DRG-based
validation services generate savings for clients by identifying and correcting
code manipulations as well as coding errors. The Company has expanded its DRG-
based validation services to include Medicare-DRG review and validation
services for the Medicare-risk market where there is potential for DRG
upcoding.
Special Investigative Review Services. The Company's SIR services are used
to review foreign and domestic inpatient, outpatient and physician bills that
require special investigative and fraud analysis. The process consists of
provider validations, patient interviews, clinical reviews, reporting and
documentation and appeals review. PPS has access to a panel of over 200 board-
certified specialists and non-physicians who provide input as required during
an SIR audit.
Hospital Relative Charge Analysis. The Company's HRCA service is an
inpatient charge-profiling analysis used to establish median charges for most
inpatient services. This analysis is effective in contract negotiation and for
enabling payors to evaluate provider pricing practices within local markets
throughout the United States.
If a bill is routed to one of the Company's Non-Network services and that
service is unsuccessful in achieving savings, the bill is rerouted through
HBMS to determine if there is another appropriate service path. When the
process is complete, the results are returned to the client, either manually,
by facsimile or through EDI.
PPO Network Services
The Company has contractual agreements with several large PPO Partners to
lease access to their PPO networks and market their PPOs to payors. In return,
each PPO Partner is contractually required to provide those PPS clients who
meet certain established requirements ("Qualifying PPO Clients") with access
to participating providers in the PPO Partner's network at contracted rates.
As a result, the Company contractually offers its clients access to a PPO
Network that covers 48 states and consists of approximately 3,300 hospitals,
260,000 physicians and 14,000 ancillary providers.
The PPO Network is used by clients either as a primary PPO network or as an
out-of-area network where the client does not have coverage under its
traditional arrangements. The Company works with its Qualifying PPO Clients to
ensure that the client meets the criteria necessary to obtain contracted
discounts on an ongoing basis. Under HBMS, bills that are generated by
Qualifying PPO Clients and identified as eligible for PPO Network coverage are
automatically repriced.
Client Reporting and Data Capture
HBMS integrates all client savings information into a single report that is
tailored to the client's specifications, allowing the client to monitor the
success and accuracy of the Company's services. The Company
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warehouses all of the healthcare provider charge and other cost encounter data
that it gathers with a view to using such data in future bill review services
and repackaging the data for application in new market opportunities.
SALES, MARKETING AND CLIENT SERVICE
The Company markets its services primarily to executives of existing and
prospective clients. The Company also uses referrals from existing accounts,
presentations at industry conventions, trade shows and telemarketing. The
decision to engage an outsourcing firm for cost containment purposes involves
a period of familiarization and evaluation by a prospective client. The sales
process may be lengthy and involves demonstrating to the potential client that
cost containment services can result in material savings and that PPS is in a
position to provide such services more efficiently and effectively than either
in-house cost containment departments or other providers of cost containment
services. Frequently, new client relationships are established through pilot
evaluation programs, which typically range from 30 to 180 days. Once the
Company successfully completes a pilot program, it generally is able to
establish a long-term relationship with the client.
The Company's sales, marketing and client service department, which consists
of 31 full-time employees, is organized into a corporate sales group and a
regional sales group. The corporate sales group consists of members of the
Company's senior management, four account managers and six customer service
representatives. The corporate sales group primarily focuses on cultivating
relationships with existing large national accounts. The regional sales group
consists of a member of the Company's senior management, five regional sales
directors, three account executives, three account managers and six customer
service representatives who are vertically organized in five geographic
regions across the country. The regional sales group primarily focuses on
expanding the Company's client base, but also assists in cultivating and
expanding existing client relationships. All members of the corporate and
regional sales groups receive regular training on the Company's systems,
services and markets. Members of the Company's sales groups are compensated
based on existing account sales activity, territorial sales activity and
individual quota objectives on a monthly, quarterly and annual basis.
The Company has recently begun to focus its marketing efforts on corporate-
level management instead of mid-level managers in order to better communicate
the message that the Company's services can result in material cost savings
(either through the lowering of claim costs or the reduction of administrative
costs) that can directly improve a client's earnings. The Company also uses
its Customer Advisory Board to help plan strategy and update service
offerings. The Customer Advisory Board gives the Company access to senior
management of large payors and strengthens the strategic relationships between
PPS and its clients.
CLIENTS
The Company currently serves approximately 375 clients including indemnity
health insurers, HMOs and other managed care organizations, third-party
administrators, reinsurers, large self-insured employers, Blue Cross and Blue
Shield organizations and Taft-Hartley funds. The Company's clients include
leading healthcare payors such as CIGNA, Aetna, Great-West Life, The Guardian,
PacifiCare Health Services Inc. and Eli Lilly & Company. The Company focuses
on large, national payor groups that have greater claim volume and similar
adjudication requirements that can be effectively managed through the
Company's portfolio of services. However, the Company also markets its
services to medium and smaller claim volume payors if the business potential
exists.
During 1996 two clients, CIGNA and The Guardian, accounted for 15.9% and
12.5%, respectively, of the Company's net revenue. For the nine months ended
September 30, 1997, CIGNA and Great-West Life accounted for 13.7% and 10.8%,
respectively, of net revenue. On a pro forma basis, after giving effect to the
About Health Transaction, CIGNA and the Guardian, accounted for 11.0% and
8.6%, respectively, of the Company's net revenue for 1996, and Great-West Life
and CIGNA accounted for 14.5% and 10.0%, respectively, of the Company's net
revenue for the nine months ended September 30, 1997.
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The Company has contracts with the majority of its larger clients. The
duration of these contracts typically is one to three years with automatic
one-year renewals on the anniversary date. However, such contracts may be
terminated by either party at any time, generally upon 90 to 120 days' notice.
The contracts do not require the client to send claims to the Company and do
not restrict the client from forwarding claims to other cost containment
companies.
INFORMATION SYSTEMS CAPABILITIES
The Company uses extensive information and technology systems that permit
centralized data management while allowing for decentralized bill input,
resolution and invoicing. The Company's information systems consist of
multiple local area networks and Intel-architecture servers connected via a
wide area network ("WAN") between the Company's corporate headquarters and
operations in East Stroudsburg, Pennsylvania and Rockville, Maryland. The WAN
connects every night with approximately fifty customer locations to access and
report results electronically. The WAN also connects daily to the Internet to
exchange electronic data with clients. Historically, the Company has
experienced negligible computer down time and minimizes the risk of loss of
data by backing up its systems daily on magnetic tape. The Company believes it
has sufficient existing systems capacity, or will be able to acquire
sufficient additional capacity, to incorporate additional operating centers
and claims review services and meet future growth requirements.
The Company has designed and implemented IBM compatible mainframe software
to interface with its clients' claims processing systems. The software
identifies bills that meet PPS referral criteria, performs on-line repricing
of bills that are eligible to participate in the PPO Network and
electronically communicates all appropriate bills to PPS for analysis. PPS
generally provides the software to customers on a no-cost license basis in
exchange for an on-going service relationship.
COMPETITION
The Company competes with companies that provide bill review, utilization
review, medical case review, case management and other network and non-network
cost containment services to healthcare payors on the basis of its ability to
maximize cost savings and through its superior, nationwide customer service.
Except for certain other national providers of healthcare cost containment
services, the cost containment industry is highly fragmented, with most
vendors operating on a regional or local basis and offering a narrower range
of services than the Company. In addition, there are other participants in the
healthcare and insurance industries, including managed care organizations,
that possess sufficient capital and managerial and technical expertise to
develop services that could compete with the Company's services. Many of these
companies have significantly greater financial, technical and marketing
resources than the Company.
GOVERNMENT REGULATION
General
As an entity conducting business within the healthcare industry, the
Company's operations are potentially subject to extensive and increasing
regulation by a number of governmental entities at the federal, state and
local levels. The Company is also subject to laws and regulations relating to
business corporations in general. The Company believes its operations are in
material compliance with applicable laws as currently interpreted.
Nevertheless, certain aspects of the Company's current or anticipated business
operations could fall within the regulatory oversight of federal or state
authorities, and there can be no assurance that a review of the Company's
business by courts or regulatory authorities will not result in a
determination that could have a material adverse effect on the Company's
business, financial condition or results of operations. There also can be no
assurance that the regulatory environment in which the Company operates will
not change significantly in the future, which change could restrict the
Company's existing operations, expansion, financial condition or opportunities
for success. See "--Healthcare Bill Management System--PPO Network Services,"
"--Industry Overview" and "--Clients."
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Healthcare Reform
The agencies and legislative bodies of the federal government and state
governments have focused significant attention on reforming the healthcare
system in the United States. A broad range of healthcare reform measures have
been introduced in Congress and in certain state legislatures. Additional
healthcare reform measures have been brought before the public in state voter
initiatives. These initiatives range from those that would tend to encourage
managed care, such as allowing physician and hospital groups to accept risk,
to those that would impede managed care, such as mandating that any willing
provider could participate in any health plan. Among the proposals that have
been considered are cost controls on hospitals, requirements that all
businesses offer health insurance coverage to their employees and the creation
of a single government health insurance plan at the state or federal level
that would cover all citizens. Legislative interest has focused on the effect
of managed care reimbursement mechanisms on healthcare service utilization and
quality of service. It is not clear at this time what proposals, if any, will
be adopted or, if adopted what effect, if any, such proposals would have on
the Company. Certain proposals, such as containment of healthcare costs that
could include a freeze on prices charged by physicians, hospitals or other
healthcare providers, could adversely affect the Company. There can be no
assurance that currently proposed or future healthcare legislation or policies
or other changes in the administration or interpretation of governmental
healthcare programs, laws, regulations or policies will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
State Licensure
The Company believes that it is in material compliance with state licensure
requirements in all states where it is required to be licensed. It is possible
that, in the future, regulatory authorities might conclude that some of the
Company's activities subject it to licensure as a PPO or otherwise. In some
states, such licensure may be conditioned on the licensed entity engaging in
practices, such as quality assurance or utilization review, that are beyond
the scope of the Company's current or anticipated operations. Although the
Company believes that, in general, it would be able to modify its operations
to obtain any licenses that were deemed to be required, there can be no
assurance that the Company would be able to modify its operations, or
otherwise to obtain or maintain any such licenses.
ERISA Regulation
It is possible that in the usual course of its business the Company could be
deemed to provide services to employee benefit plans regulated under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including self-insured health benefit plans. The U.S. Department of Labor
("DOL"), the federal agency that administers ERISA, has been auditing certain
insurance companies in connection with their practices involving medical
provider discounts and the transfer of those discounts to self-insured ERISA
plans. In connection with these audits, DOL has indicated that the negotiation
and administration of provider discount arrangements by these insurance
companies for the benefit of ERISA plans could constitute the activities of an
ERISA fiduciary. The Company is not engaged in the business of insurance under
state law nor does it provide administrative services to ERISA-regulated
benefit plans. Although the Company believes that its practices relating to
provider discount arrangements are beyond the scope of ERISA regulation, there
can be no assurance that DOL or some other person would not assert that the
Company acts as an ERISA fiduciary with respect to its limited activities for
self-insured ERISA plans. In the unlikely event that the Company were deemed
to be an ERISA fiduciary, the Company believes that it would be viewed as
being in compliance with applicable ERISA rules.
Anti-Remuneration Laws
Medicare and Medicaid law provides civil and criminal penalties for paying
or receiving any remuneration to induce the referral of Medicare or Medicaid
patients, or to induce the purchase or the arranging for or recommending of
the purchase of items or services for which payment may be made under
Medicare, Medicaid and other federally-funded healthcare programs. Various
exceptions and "safe harbors," including those
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applicable to certain properly reported discounts, may be available in
appropriate circumstances. Several states also have similar laws which are not
limited to services for which Medicare or Medicaid payment may be made. State
laws vary and have been infrequently interpreted by courts or regulatory
agencies. It is possible that enforcement officials could seek to review the
fees paid to or by the Company to determine whether such fees should be deemed
to be unlawful remuneration given indirectly by providers in exchange for
arranging for the referral of patients from its clients. While there can be no
assurance that the Company's position would be upheld if challenged, the
Company believes that its fee arrangements represent reasonable compensation
for legitimate services actually provided to or by the Company and should not
be deemed to be unlawful remuneration under these anti-remuneration laws.
LEGAL PROCEEDINGS
From time to time, the Company is a party to various claims, lawsuits and
administrative proceedings arising in the ordinary course of business.
Although the outcome of these claims, lawsuits and proceedings cannot be
predicted with certainty, the Company does not expect such matters to have a
material adverse effect on the Company's business, financial condition or
results of operations.
EMPLOYEES
As of September 30, 1997, the Company employed 284 people on a full-time
basis. The Company's employees are not covered by collective bargaining
agreements and the Company believes that its relations with its employees are
good.
PROPERTIES
The Company subleases approximately 40,000 square feet of office space at
1230 East Diehl Road, Naperville, Illinois. This space is provided under the
terms of a sublease that expires on May 31, 2000. The Company also leases
approximately 12,000 square feet of office space in Rockville, Maryland and
6,000 square feet of office space in East Stroudsburg, Pennsylvania. The
Company's current aggregate monthly rental cost for office space is
approximately $56,000, with periodic escalators. The Company believes that its
current facilities are adequate for its existing needs and that suitable space
will be available as required.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company. The directors named below have been
elected to serve until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Executive officers of the Company
serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven E. Nelson(1)(2).. 42 Chairman, President, Chief Executive Officer and Director
Don P. Greenberg, M.D. . 41 Executive Vice President, Chief Operating Officer and Director
James T. Doody(2)....... 43 Executive Vice President--Sales and Director
Byron W. Smith,
D.P.M.(1).............. 44 Executive Vice President, Chief Technology Officer and Director
Robert C. Trumpy........ 45 Executive Vice President, Chief Financial Officer and Secretary
Jonathan M.
Goldstein(1)(2)........ 36 Director
Richard D. Tadler....... 41 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Within 60 days following consummation of the Offering, the Company's Board
of Directors intends to appoint two persons who are not currently affiliated
with the Company as additional directors. Each of these directors will serve
on the Audit Committee and the Compensation Committee.
Steven E. Nelson, Chairman, President, Chief Executive Officer and Director,
is a co-founder of the Company and has served the Company in his current
capacity since its inception in 1990. Prior to joining the Company, Mr. Nelson
held a number of positions with healthcare cost management companies. From
1990 to 1992, he served as President of Medical Bill Review, Inc., a medical
logic software systems company. From 1983 to 1989, he was Senior Vice
President of Republic-RSB Companies, Inc. (acquired by and doing business as
HCX, Inc.).
Don P. Greenberg, M.D., Executive Vice President, Chief Operating Officer
and Director, has served as Executive Vice President of the Company since July
1997 and Chief Operating Officer of the Company since October 1997. Dr.
Greenberg founded About Health and served as its President and Chief Executive
Officer from About Health's inception in April 1992 until the consummation of
the About Health Transaction. Dr. Greenberg has completed numerous consulting
projects for the Department of Health and Human Services, state health
agencies, and the private sector on issues such as health policy, cost
containment and health economics.
James T. Doody, Executive Vice President--Sales and Director, is a co-
founder of the Company and has served the Company in his current capacity
since its inception in 1990. He is responsible for all sales activity
throughout the Company. Prior to joining the Company, Mr. Doody was a Vice
President of Managed Care Sales for Republic-RSB Companies, Inc.
Byron W. Smith, D.P.M, Executive Vice President, Chief Technology Officer
and Director, is a co-founder of the Company. He has served as Executive Vice
President of the Company since January 1993 and Chief Technology Officer of
the Company since November 1996. From April 1995 to November 1996, Dr. Smith
also served as Chief Operating Officer of the Company. Prior to joining the
Company, Dr. Smith was President and co-founder of Medical Data Research and
Vice President and Chairman of Medical Bill Review, Inc.
Robert C. Trumpy, Executive Vice President, Chief Financial Officer and
Secretary, has served the Company in his current capacity since October 1997.
From February 1997 to October 1997, Mr. Trumpy was Chief Financial Officer of
Blue Cross and Blue Shield of North Carolina. From March 1992 to February
1997, Mr. Trumpy served as Chief Financial Officer of Healthsource Provident,
Inc., a managed care organization.
37
<PAGE>
Jonathan M. Goldstein, Director, has served as a director of the Company
since August 1996. He has been associated with TA Associates, Inc. since 1986,
serving as a Vice President from 1990 to 1996 and as a Principal since January
1997. He is currently a director of Olympus Healthcare Group, Inc. and Unique
Instruments, Inc.
Richard D. Tadler, Director, has served as a director of the Company since
August 1996. Mr. Tadler is a Managing Director of TA Associates, Inc. He has
been associated with TA Associates, Inc. since 1987, specializing in medical
and specialty service businesses. He is currently a director of AmeriChoice
Corporation, Auto Palace, Inc., Bachtel Cellular Liquidity, L.P., Galaxy
Telecom L.P., Olympus Healthcare Group, Inc. and TechForce Corporation.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at six. Following
the Offering, the Company's Board of Directors will be increased to eight
members and will be divided into three classes, with the members of each class
of directors serving for staggered three-year terms.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews the scope and results of the audit
with the independent public accountants, reviews with management and the
independent accountants the Company's annual operating results, considers the
adequacy of the internal accounting procedures and considers the effect of
such procedures on the accountants' independence.
The Compensation Committee reviews and recommends the compensation
arrangements for officers and other senior-level employees, reviews general
compensation levels for other employees as a group, determines the options or
stock to be granted to eligible persons under the Company's 1996 Incentive
Stock Plan and takes such other action as may be required in connection with
the Company's compensation and incentive plans.
The directors of the Company do not currently receive any compensation in
connection with their services as directors of the Company. All directors of
the Company are reimbursed for expenses incurred in attending meetings of the
Board of Directors and committees thereof.
38
<PAGE>
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table and accompanying footnotes provide certain summary
information concerning the compensation paid by the Company to its Chief
Executive Officer and the four other most highly compensated executive
officers of the Company (the "Named Executive Officers"), in each case for
services rendered in all capacities to the Company for the year ended December
31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- ------------------
COMMON STOCK ALL OTHER
SALARY BONUS UNDERLYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION(1) ($) ($) (# OF SHARES) ($)(2)
------------------------------ -------- ----- ------------------ ------------
<S> <C> <C> <C> <C>
Steven E. Nelson
Chairman of the Board,
President and Chief Executive
Officer........................ $170,769 -- 12,500 $4,854
James T. Doody
Executive Vice President--
Sales.......................... 170,769 -- 12,500 4,613
Byron W. Smith
Executive Vice President and
Chief Technology Officer....... 170,769 -- 12,500 4,315
Craig W. Cunningham
Executive Vice President--
Operations..................... 170,769 -- 17,500 2,816
Brent R. Anderson
Chief Financial Officer........ 121,846 -- 12,500 3,697
</TABLE>
- --------
(1) The principal position for each officer is as of December 31, 1996.
(2) Consists of premiums paid on behalf of the Named Executive Officers for
life, health and disability insurance and contributions made by the
Company to its 401(k) Retirement Savings Plan on behalf of the Named
Executive Officers.
Option Grants
The following table sets forth information concerning individual grants of
options to purchase Common Stock to the Named Executive Officers during 1996.
No stock appreciation rights ("SARs") have been granted.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION
FOR OPTION
INDIVIDUAL GRANTS TERM(2)
------------------------------------------------------- ---------------
COMMON STOCK PERCENT OF TOTAL EXERCISE
UNDERLYING OPTIONS GRANTED OR
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME (# OF SHARES)(1) IN 1996 PER SHARE DATE 5% ($) 10% ($)
---- ---------------- ---------------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Steven E. Nelson........ 12,500 7.8% $2.84 8/31/01 $ 5,660 $16,439
James T. Doody.......... 12,500 7.8 2.84 8/31/01 5,660 16,439
Byron W. Smith.......... 12,500 7.8 2.84 8/31/01 5,660 16,439
Craig W. Cunningham..... 17,500 10.9 2.58 8/31/06 28,395 71,957
Brent R. Anderson....... 12,500 7.8 2.58 8/31/06 20,282 51,398
</TABLE>
- --------
(1) Each of the Named Executive Officers received options granted under the
Company's 1996 Incentive Stock Plan (the "Incentive Stock Plan") on August
30, 1996. These options vest in increments of 20% per year beginning on
the date of grant (August 30, 1996). All options terminate on the
expiration date set forth
39
<PAGE>
above, subject to earlier termination in accordance with the Incentive
Stock Plan and the applicable option agreement. See "--1996 Incentive Stock
Plan."
(2) Assumed annual rates of stock price appreciation are for illustrative
purposes only as required by the rules of the Securities and Exchange
Commission. The actual price of Common Stock will vary from time to time
based upon market factors and the Company's financial performance. No
assurance can be given that such rates will be achieved.
Option Holdings
The following table sets forth information with respect to options exercised
by the Named Executive Officers during 1996 and the aggregate number and value
of shares underlying unexercised options held by each Named Executive Officer
as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
COMMON STOCK UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
EXERCISE VALUE END (# OF SHARES) FISCAL YEAR-END($)
NAME (# OF SHARES) REALIZED($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(2)
---- ------------- -------------- --------------------------- ------------------------------
<S> <C> <C> <C> <C>
Steven E. Nelson........ 2,500 $5,800 --/10,000
James T. Doody.......... 2,500 5,800 --/10,000
Byron W. Smith.......... 2,500 5,800 --/10,000
Craig W. Cunningham..... 3,500 9,030 --/14,000
Brent R. Anderson....... 2,500 6,450 --/10,000
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at the time of
these exercises, which occurred in October and November 1996. Accordingly,
these values have been calculated on the basis of an assumed market value
of $5.20 per share of Common Stock, which was the fair market value of the
Common Stock on August 30, 1996, the date on which the 1996 Transaction
was consummated.
(2) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $ per share, less the
applicable exercise price payable for such shares.
1996 INCENTIVE STOCK PLAN
The Incentive Stock Plan was initially adopted by the Board of Directors in
August 1996 and was subsequently approved by the Company's stockholders. The
Incentive Stock Plan permits the grant of incentive stock options and non-
qualified stock options. These grants may be made to officers, key employees,
directors, independent consultants and other key persons of the Company and
its subsidiaries. A total of 325,000 shares are reserved for issuance under
the Incentive Stock Plan, of which 171,540 shares were subject to outstanding
options with a weighted average exercise price of $3.77 per share, as of
October 15, 1997.
The Incentive Stock Plan is administered by the Compensation Committee.
Subject to the provisions of the Incentive Stock Plan, the Compensation
Committee has full power to determine to whom grants will be made from among
those persons who are eligible for grants under the Incentive Stock Plan, the
combination of grants to participants and the specific terms of each grant,
including vesting. Incentive stock options may be granted only to officers or
other full-time employees of the Company or its subsidiaries, including
members of the Board of Directors who are also full-time employees of the
Company or its subsidiaries.
The exercise price of options granted under the Incentive Stock Plan is
determined by the Compensation Committee and may not be less than 100% of the
fair market value of the underlying shares on the date of grant. If any plan
participant owns (or is deemed to own) at the date of grant shares of stock
representing in excess of
40
<PAGE>
10% of the combined issued and outstanding shares of Common Stock of the
Company or any parent or subsidiary (a "Ten Percent Holder"), the exercise
price for incentive stock options granted to such participant may not be less
than 110% of the fair market value of the underlying shares on the date of
grant. Options typically are subject to vesting schedules, terminate (i)
fifteen years from the date of grant in the case of non-qualified stock
options, (ii) ten years from the date of the grant in the case of incentive
stock options, and (iii) five years from the date of the grant in the case of
incentive stock options granted to Ten Percent Holders, and may be exercised
for specified periods, as determined by the Compensation Committee, subsequent
to the termination of the optionholder's employment or other business
relationship with the Company. Upon the exercise of options, the exercise
price must be paid by certified check or, in the sole discretion of the
Compensation Committee, by delivery of shares of Common Stock already owned by
the optionholder. At the discretion of the Compensation Committee, payment may
also be made by delivering a properly executed exercise notice to the Company,
together with a copy of the irrevocable instructions to a broker to deliver
promptly to the Company the amount of the sale or loan proceeds to pay the
exercise price.
The Compensation Committee may, in its sole discretion, accelerate or extend
the date or dates on which all or any particular award or awards granted under
the Incentive Stock Plan may be exercised or vest. To the extent not
exercised, all options granted under the Incentive Stock Plan terminate upon
the dissolution, liquidation or sale of the Company unless assumed by a
successor entity, except as the Compensation Committee otherwise determines.
In the event that the Company becomes the subject of an acquisition, a
participant has the right to receive consideration upon such acquisition as if
the participant had held the number of shares of Common Stock which might have
been obtained upon exercise immediately prior to such acquisition.
THE 1996 REPLACEMENT STOCK OPTION PLAN
The 1996 Replacement Stock Option Plan (the "Replacement Plan") was adopted
by the Board of Directors in August 1996 and was subsequently approved by the
Company's stockholders. The Replacement Plan was created in order to grant
replacement options to employees who had outstanding options under the
Company's 1993 Amended and Restated Stock Option Plan (the "Old Plan"). The
Old Plan was terminated and the Replacement Plan was adopted as a condition to
the 1996 Transaction. A total of 27,833 shares are reserved for issuance under
the Replacement Plan, all of which were subject to outstanding options with a
weighted average exercise price of $0.91 per share as of October 31, 1997. The
terms of the Replacement Plan are substantially similar to the terms of the
Incentive Stock Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into the Employment Agreements with each of the
Named Executive Officers. The Employment Agreements were executed as a
condition to the 1996 Transaction and are intended to maintain a stable and
competent management base. The continued success of the Company depends to a
significant degree on the skills and competence of these Named Executive
Officers, among others. See "Risk Factors-- Dependence on Key Personnel."
The Employment Agreements, which are substantially similar for each of the
Named Executive Officers, provide for two-year initial terms with automatic
one-year renewals, unless the Employment Agreement is terminated by the
Company or the employee at least 30 days prior to expiration. Effective
September 1, 1997, the Employment Agreements provide for a base salary for
each of Messrs. Nelson, Smith, Doody and Cunningham of $180,000 per annum and
a base salary for Mr. Anderson of $128,000 per annum. The Named Executive
Officers also are entitled to participate in any bonus plan as may be
established in the sole discretion of the Compensation Committee. The
Employment Agreements further provide that the Named Executive Officers are
entitled to participate in all employee benefit plans of the Company that are
generally made available to executive personnel.
Upon a Named Executive Officer's termination for cause, as defined in the
employment agreements, or upon a Named Executive Officer's voluntary
resignation, the Named Executive Officer is entitled only to such
41
<PAGE>
compensation and benefits as shall have accrued through the date of the Named
Executive Officer's termination or resignation, as the case may be. In the
event that the Company terminates the Named Executive Officer's employment for
any reason other than for cause, or the Named Executive Officer terminates his
employment because of a reduction in base salary, a material reduction in
benefits not generally applicable to all employees, or a relocation of the
Named Executive Officer's office to more than fifty miles away from its
present site, the Named Executive Officer will be entitled to receive as
severance pay an amount equal to one week's worth of his base salary
multiplied by the number of years, or portions thereof rounded to the nearest
whole number, that the Named Executive Officer has been employed by the
Company. Upon a Named Executive Officer's resignation or termination during
the term of the agreement, each employment agreement provides that, for a
period of two years from the date of termination, the Named Executive Officer
will neither compete directly or indirectly with the business of the Company
nor solicit or contract with any entity that is a client of the Company.
CERTAIN TRANSACTIONS
THE 1996 TRANSACTION
In August 1996, the Company completed a series of transactions involving the
TA Investors. In connection with the 1996 Transaction: (i) the Company, then
an Illinois company, was merged into Preferred Payment Systems, Inc., a
Delaware corporation; (ii) the Company incurred $20.5 million of senior
secured indebtedness under the 1996 Credit Facility; (iii) the TA Investors
invested $17.0 million to acquire $10.0 million in Convertible Subordinated
Notes pursuant to the Convertible Note Purchase Agreement and $7.0 million of
Subordinated Notes pursuant to the Subordinated Loan Agreement; (iv) the
Company entered into the Employment Agreements with each of Messrs. Nelson,
Doody, Smith, Cunningham and Anderson; and (v) the Company, its stockholders
and the TA Investors entered into the Shareholders' Agreement and the 1996
Registration Rights Agreement.
Each $1,000 principal amount of Convertible Subordinated Notes is
convertible into one share of the Company's Redeemable Preferred Stock and one
share of the Company's Convertible Preferred Stock. Each share of Convertible
Preferred Stock is automatically convertible upon consummation of an initial
public offering by the Company into shares of the Company's Common Stock at a
conversion price of $5.1636 per share of Common Stock. Immediately prior to
consummation of the Offering, all outstanding Convertible Subordinated Notes
will be converted into Redeemable Preferred Stock and Convertible Preferred
Stock. Upon consummation of the Offering, the Convertible Preferred Stock will
automatically convert into 968,316 shares of Common Stock and the Redeemable
Preferred Stock will be immediately redeemed for $5.0 million using a portion
of the net proceeds from the Offering. The Subordinated Notes will also be
repaid and retired with proceeds from the Offering. See "Use of Proceeds."
THE ABOUT HEALTH TRANSACTION
In July 1997, the Company and About Health formed the Operating Company for
the purpose of combining their businesses. Dr. Greenberg, currently a director
of the Company, was the President, a director and, together with trusts for
the benefit of members of his family, the principal stockholder of About
Health. In connection with the About Health Transaction, the Company
contributed substantially all of its assets to the Operating Company in
exchange for 10,000 preferred units and 1,405,754 common units and the
assumption by the Operating Company of substantially all of the liabilities of
the Company other than the Convertible Subordinated Notes. About Health
contributed substantially all of its assets to the Operating Company in
exchange for $25.8 million in cash, 593,517 common units and the assumption by
the Operating Company of substantially all of the liabilities of About Health.
The Operating Company assumed the Subordinated Notes and the bank indebtedness
under the 1997 Credit Facility. The cash distribution to About Health and
expenses associated with the transaction were funded through bank debt under
the 1997 Credit Facility. Upon consummation of the About Health Transaction,
the Company became the managing member of the Operating Company and profits
and losses of the Operating Company became generally allocated 80% to the
Company and 20% to About Health, subject to the right of the Company to
receive a $500,000 allocation of income and cash distributions on its
preferred units.
42
<PAGE>
Effective as of October 31, 1997 About Health was merged with and into the
Company and the stockholders of About Health received, in the aggregate,
593,517 shares of Common Stock. As a result of the Merger, all of the
ownership interests in the Operating Company are held directly by the Company,
and the Operating Company is a wholly-owned subsidiary of the Company.
In connection with the About Health Transaction, the Company entered into an
employment agreement with Dr. Greenberg that is substantially similar to the
employment agreements between the Company and the Named Executive Officers and
provides for a base salary of $180,000 per annum. See "Management--Executive
Compensation--Employment Agreements." The Company also granted to Dr.
Greenberg options to purchase 10,000 shares of Common Stock at an exercise
price of $5.20 per share. The options vest in increments of 20% per annum
beginning on July 31, 1998. The Company and the former stockholders of About
Health also agreed to indemnify each other against certain liabilities.
SHAREHOLDERS' AGREEMENT
In connection with the 1996 Transaction and the About Health Transaction,
the Company, its stockholders and optionholders and the TA Investors entered
into a shareholders' agreement (as amended and restated in connection with the
About Health Transaction, the "Shareholders' Agreement") that provides for
certain rights and restrictions with respect to transfers of Common Stock.
Pursuant to the Shareholders' Agreement, (i) each stockholder of the Company
(a "Stockholder" and collectively, the "Stockholders") granted to the other
Stockholders, the Company and the TA Investors a right of first refusal (the
"Right of First Refusal") on resales of Common Stock by such Stockholder; (ii)
each Stockholder granted to the TA Investors a right (the "Co-Sale Right") to
participate on a pro rata basis in certain resales of Common Stock; (iii) each
Stockholder agreed to include his or her shares of Common Stock in any sale or
series of sales of all of the Common Stock owned by Mr. Nelson, Dr. Greenberg
and one of Mr. Doody or Dr. Smith to an unrelated and unaffiliated person (the
"Bring-Along Right"); (iv) the Stockholders and the TA Investors were granted
pro rata participation rights (the "Participation Rights") with respect to
certain future sales or issuances of securities by the Company; (v) the TA
Investors and the Stockholders agreed to certain lock-up arrangements in the
event of an underwritten public offering; (vi) each party agreed to elect and
continue in office (a) prior to conversion of the Convertible Subordinated
Notes, three individuals designated by Mr. Nelson and one of Mr. Doody or Dr.
Smith (the "Founders Group"), one individual designated by Dr. Greenberg and
two independent directors selected by the Founders Group, and (b) upon
conversion of any of the Convertible Subordinated Notes, three individuals
designated by the Founders Group, one individual designated by Dr. Greenberg
and two individuals designated by the TA Investors, one independent director
selected by the Founders Group and one independent director selected and
approved by the Founders Group and a majority-in-interest of the TA Investors;
and (vii) each party agreed to use its best efforts to cause the Board of
Directors to (a) permit a representative of the TA Investors to attend the
meetings of the Company's Audit Committee and Compensation Committee and to
have a right of veto power over actions taken by these Committees during the
period any Convertible Subordinate Notes are outstanding, and (b) to appoint a
representative of the TA Investors to the Company's Audit Committee and
Compensation Committee upon conversion of any of the Convertible Subordinated
Notes. Upon consummation of the Offering, the provisions of the Shareholders'
Agreement relating to the Rights of First Refusal, the Co-Sale Right, the
Bring-Along Right, the Participation Rights and designation of members of the
Company's Board of Directors and committees thereof will expire in accordance
with their terms.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to a Registration Rights Agreement entered into in connection with
the 1996 Transaction (the "1996 Registration Rights Agreement"), the TA
Investors received certain demand and "piggyback" registration rights and the
stockholders and optionholders of the Company received certain piggyback
registration rights. In addition, pursuant to the About Health Transaction,
the Company and the current and prospective stockholders of About Health
(collectively, the "About Health Stockholders") entered into a Registration
Rights Agreement (the "About Health Registration Rights Agreement") pursuant
to which the About Health
43
<PAGE>
Stockholders received a demand registration right that will be exercisable at
any time 180 days after consummation of the Offering, subject to certain
limitations, and certain piggyback registration rights. See "Shares Eligible
for Future Sale--Registration Rights."
DISTRIBUTIONS TO STOCKHOLDERS
The Company has been treated as a Subchapter S corporation for federal income
tax purposes and thus the taxable income of the Company has been subject to
taxation at the stockholder level. Accordingly, the Company has made periodic
distributions to its stockholders in amounts sufficient to enable the
stockholders to pay income taxes on account of the Company's taxable income
allocated to them. Effective upon consummation of the Offering, the Company's
Subchapter S corporation status will be terminated and the Company will be
subject to corporate income taxation. Immediately prior to the consummation of
the Offering the Company will declare a dividend equal to the Company's taxable
income for the period from January 1, 1997 through the consummation of the
Offering, multiplied by the stockholders' average effective federal and state
tax rate less all dividends in respect of the 1997 and 1998 fiscal years
previously distributed. The Company anticipates making this distribution after
completion of the Company's tax returns for fiscal year 1997 and the taxable
year ending simultaneously with the consummation of the Offering.
The Company may also make a distribution to its existing stockholders
following the Offering in the event that Subchapter S corporation taxable
income is thereafter increased due to any Internal Revenue Service audit. The
Company expects to enter into an indemnification agreement with existing
stockholders with respect to any income tax attributable to periods prior to
the termination of the Company's Subchapter S corporation status. Purchasers of
shares of Common Stock in the Offering will not participate in any future
distributions in respect of tax years ending on or prior to the consummation of
the Offering.
During 1996, the Company made certain Subchapter S distributions in the form
of cash dividends to its stockholders, pursuant to which Messrs. Nelson, Doody,
Smith, Cunningham and Anderson received an aggregate of $17.3 million, $7.8
million, $7.8 million, $2.3 million and $1.7 million, respectively.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby for (i) each Selling
Stockholder, (ii) each person who is known by the Company to beneficially own
more than five percent of the Company's Common Stock, (iii) each of the
Company's directors and Named Executive Officers and (iv) all executive
officers and directors as a group. The table assumes the conversion of the
Convertible Preferred Stock into shares of Common Stock upon consummation of
the Offering and the sale by the Company of shares of Common Stock
pursuant to the Offering. The address of the TA Investors is c/o TA
Associates, Inc. High Street Tower, Suite 2500, 125 High Street, Boston,
Massachusetts 02110-2720. The address of Messrs. Goldstein and Tadler is c/o
TA Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston,
Massachusetts 02110-2720. The address of all other listed stockholders is c/o
Preferred Payment Systems, Inc., 1230 East Diehl Road, Suite 300, Naperville,
Illinois 60563. Unless otherwise indicated, each person has sole voting and
dispositive power with respect to the shares attributable to such person.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR NUMBER OF SHARES OWNERSHIP
TO OFFERING TO BE SOLD IF AFTER OFFERING
----------------- OVER-ALLOTMENT -----------------
NAME OF BENEFICIAL NUMBER OF OPTION IS NUMBER
OWNER(1) SHARES PERCENT EXERCISED(2) OF SHARES PERCENT
------------------ --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
TA Investors(3)......... 968,316 34.9%
Steven E. Nelson........ 505,000 27.9
Don P. Greenberg(4)..... 523,260 28.9
James T. Doody.......... 230,000 12.7
Byron W. Smith.......... 230,000 12.7
Craig W. Cunningham..... 74,432 4.1
Brent R. Anderson....... 55,000 3.0
Jonathan M.
Goldstein(5)........... 1,244 *
Richard D. Tadler(6).... 1,229 *
All executive officers
and directors as a
group (8 persons)...... 2,586,008 93.1
</TABLE>
- --------
*Less than 1%.
(1) Beneficial Ownership has been determined as of October 31, 1997 in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares of
Common Stock that such person has the right to acquire within 60 days
after October 31, 1997. For purposes of computing the percentage of
outstanding shares of Common Stock held by each person or group of persons
named above, any security that such person or group has the right to
acquire within 60 days after October 31, 1997 is deemed to be outstanding,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. The number of shares of Common
Stock set forth herein includes shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock upon consummation of the
Offering.
(2) If the Underwriters' over-allotment option is exercised in part, the TA
Investors will be entitled to first sell a number of shares with an
aggregate price to the public of $5.0 million and any remaining shares in
the over-allotment option will be sold by the other Selling Stockholders
on a pro rata basis.
(3) Includes (i) 569,564 shares of Common Stock owned by Advent VII L.P.; (ii)
329,808 shares of Common Stock owned by Advent Atlantic and Pacific III
L.P.; (iii) 56,937 shares of Common Stock owned by Advent New York L.P.;
and (iv) 12,007 shares of Common Stock owned by TA Venture Investors
Limited Partnership. Advent VII L.P., Advent Atlantic and Pacific III,
L.P., Advent New York L.P. and TA Venture Investors Limited Partnership
are part of an affiliated group of investment partnerships referred to,
collectively, as the "TA Investors". The general partner of Advent VII
L.P. is TA Associates VII L.P. The general partner of Advent Atlantic and
Pacific III L.P. is TA Associates AAP III Partners L.P. The general
45
<PAGE>
partner of Advent New York L.P. is TA Associates VI L.P. The general
partner of each of TA Associates VI L.P., TA Associates VII L.P. and TA
Associates AAP III Partners L.P. is TA Associates, Inc. In such capacity,
TA Associates, Inc. exercises sole voting and investment power with respect
to all of the shares held of record by the named investment partnerships,
with the exception of those shares held by TA Venture Investors Limited
Partnership; individually, no stockholder, director or officer of TA
Associates, Inc. is deemed to have or share such voting or investment
power. Principals and employees of TA Associates, Inc. (including Mr.
Goldstein and Mr. Tadler, directors of the Company) comprise the general
partners of TA Venture Investors Limited Partnership. In such capacity, Mr.
Goldstein and Mr. Tadler may each be deemed to share voting and investment
power with respect to the 12,007 shares held of record by TA Venture
Investors Limited Partnership. Mr. Goldstein and Mr. Tadler each disclaim
beneficial ownership of all shares, except as to 1,244 shares and 1,229
shares, respectively, held by TA Venture Investors Limited Partnership, as
to which each holds a pecuniary interest. See footnotes (5) and (6) below.
(4) Of these shares, 20,654 shares are held by a trust established for the
benefit of Dr. Greenberg's mother and 12,909 shares are held by a trust
established for the benefit of each of Dr. Greenberg's four children. Dr.
Greenberg disclaims beneficial ownership as to the shares held by these
trusts.
(5) Includes 1,244 shares of Common Stock beneficially owned by Mr. Goldstein
through TA Venture Investors Limited Partnership, all of which shares are
included in the 968,316 shares described in footnote (3) above. Does not
include any shares beneficially owned by Advent VII L.P., Advent Atlantic
and Pacific III L.P., or Advent New York L.P. of which Mr. Goldstein
disclaims beneficial ownership.
(6) Includes 1,229 shares of Common Stock beneficially owned by Mr. Tadler
through TA Venture Investors Limited Partnership, all of which shares are
included in the 968,316 shares described in footnote (3) above. Does not
include any shares beneficially owned by Advent VII L.P., Advent Atlantic
and Pacific III L.P., or Advent New York L.P. of which Mr. Tadler
disclaims beneficial ownership.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Certificate of Incorporation will provide that the Company may
issue up to 100,000,000 shares of common stock, par value $.01 per share (the
"Common Stock") and 2,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock"). As of October 31, 1997, there were 1,809,231
shares of Common Stock issued and outstanding which were held by 28
stockholders of record, and there were no shares of Preferred Stock
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders and do not
have preemptive rights. The Company's Certificate of Incorporation will not
provide for cumulative voting for the election of directors. Subject to
preferences that may be applicable to any outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors of the
Company out of funds legally available therefor. All outstanding shares of
Common Stock are, and the Common Stock to be sold in the Offering, when issued
and paid for, will be, fully paid and nonassessable. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders
of Common Stock will be entitled to share ratably in the assets of the Company
remaining after payment or provision for payment of all of the Company's debts
and obligations and liquidation payments to holders of outstanding shares of
Preferred Stock. See "--Certain Anti-Takeover Effects" and "Dividend Policy."
PREFERRED STOCK
Shares of Preferred Stock may be issued by the Company in series with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights,
which could dilute the voting strength of the holders of the Common Stock and
may assist management in impeding an unfriendly takeover or attempted change
in control. In connection with the 1996 Transaction, the Board of Directors
created a series of Convertible Preferred Stock and a series of Redeemable
Preferred Stock. Pursuant to the terms of the Convertible Note Purchase
Agreement entered into between the Company and TA Investors, each $1,000
principal amount of Convertible Subordinated Notes is convertible into one
share of Redeemable Preferred Stock and one share of Convertible Preferred
Stock. Each share of Convertible Preferred Stock is automatically convertible
upon consummation of an initial public offering of the Company into shares of
Common Stock at a conversion price of $5.1636 per share of Common Stock.
Immediately prior to consummation of the Offering, all outstanding Convertible
Subordinated Notes will be converted into Redeemable Preferred Stock and
Convertible Preferred Stock. Upon consummation of the Offering, the
Convertible Preferred Stock will automatically convert into 968,316 shares of
Common Stock and the Redeemable Preferred Stock will be redeemed for $5.0
million using a portion of the net proceeds of the Offering. As a result,
subsequent to the Offering there will be no shares of Preferred Stock
outstanding.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
summarized in the following paragraphs may be deemed to have anti-takeover
effects. These provisions may have the effect of discouraging a future
takeover attempt that is not approved by the Board of Directors but that
individual Company stockholders may deem to be in their best interests or by
which stockholders may receive a substantial premium for their shares over
then-current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Certificate of Incorporation and Bylaws of the
Company is necessarily general and reference
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should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Classified Board of Directors
Upon consummation of the Offering, the Certificate of Incorporation and
Bylaws of the Company will provide that the Board of Directors be divided into
three classes of directors, as nearly equal in number as is reasonably
possible, serving staggered terms, so that directors' initial terms will
expire either at the 1999, 2000 or 2001 annual meeting of the stockholders.
Starting with the 1999 annual meeting of the stockholders, one class of
directors will be elected each year for a three-year term. See "Management--
Board of Directors."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the
Company's business strategies and policies as determined by the Board of
Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this
experience, in turn, will permit the Board of Directors to more effectively
represent the interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
the majority of the Board of Directors. As a result, classification of the
Board of Directors may discourage proxy contests for the election of directors
or purchases of a substantial block of the Common Stock because such
classification could operate to prevent obtaining control of the Board of
Directors in a relatively short period of time. The classification could also
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company. Under the Delaware General Corporation Law (the
"DGCL"), unless a Company's certificate of incorporation otherwise provides, a
director on a classified board may be removed by the stockholders of the
corporation only for cause.
Authorized Shares
The Certificate of Incorporation will authorize the issuance of 100,000,000
shares of Common Stock and 2,000,000 shares of Preferred Stock. Following the
consummation of the Offering, the Board of Directors will have the authority
to authorize issuance of any authorized and unissued shares of Common Stock
and Preferred Stock. The Board of Directors has sole authority to determine
the terms of any one or more series of Preferred Stock, including voting
rights, conversion rates and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred Stock, the Board has
the power, consistent with its fiduciary duty, to issue a series of Preferred
Stock to persons friendly to management in order to attempt to block a post-
tender offer merger or other transaction by which a third party seeks control,
and thereby assist management in retaining its position. The Company's Board
of Directors currently has no plans for the issuance of additional shares of
Preferred Stock or Common Stock.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors
The Bylaws will establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the Board or a committee
thereof, of candidates for election as directors (the "Nomination Procedure")
and with regard to other matters to be brought by stockholders before an
annual meeting of stockholders of the Company (the "Business Procedure"). The
Nomination Procedure will require that a stockholder give 90 days' advance
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Bylaws. If the Chairman of the
Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election
as a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give 90 days' advance written
notice, in proper form, to the Secretary of the Company. The requirements as
to the form and timing of that notice will be specified in the Bylaws. If the
Chairman of the Board of Directors determines that the other business was not
properly brought before such meeting in accordance with the Business
Procedure, such business will not be conducted at such meeting.
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Although the Bylaws will not give the Board of Directors any power to
approve or disapprove stockholder nominations for the election of directors or
of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or
(ii) may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such
attempt might be beneficial to the Company and its stockholders.
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any interested stockholder, as defined
below, for a period of three years following the time that such stockholder
became an interested stockholder, unless: (i) prior to such time, the Board of
Directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) at or after such time, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. For
purposes of Section 203 of the DGCL, an "interested stockholder" is defined as
any person that is (a) the owner of 15% or more of the outstanding voting
stock of the corporation or (b) an affiliate or associate of the corporation
who was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an
interested stockholder. This provision may have the effect of delaying,
deterring, or preventing a change in control of the Company without further
action by the Company's stockholders.
Limitations on Liability and Indemnification of Directors and Officers
Limitations on Liability
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for
monetary damages arising from acts or omissions in the director's capacity as
a director. The provision does not, however, eliminate the personal liability
of a director (i) for any breach of such director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
under the Delaware statutory provision making directors personally liable,
under a negligence standard, for unlawful dividends or unlawful stock
purchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve
on the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care, except as indicated
above. As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for
a breach of his duty of care is limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission (the "Commission") has taken the position that the
provision will have no effect on claims arising under the federal securities
laws.
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Indemnification
The Company's Bylaws provide for mandatory indemnification rights to the
maximum extent permitted by applicable law, subject to limited exceptions, to
any director or officer of the Company who, by reason of the fact that he or
she is a director or officer of the Company, is involved in a legal proceeding
of any nature. Such indemnification rights include reimbursement for expenses
incurred by such director or officer in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL. The
Company may from time to time agree to provide similar indemnifications to
certain employees and other agents.
The Company also maintains directors' and officers' liability insurance in
the amount of $5.0 million.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Illinois Stock
Transfer Company, Chicago, Illinois.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon consummation of the Offering, the Company will have issued and
outstanding shares of Common Stock. The shares of Common Stock sold
in the Offering will be freely tradeable by persons other than "affiliates" of
the Company without restriction under the Securities Act. Substantially all of
the shares to be outstanding upon consummation of the Offering (other than the
shares being offered hereby) are subject to the lock-up agreements
described below. The shares of Common Stock that were outstanding immediately
prior to the consummation of the Offering (the "Restricted Shares") are
"restricted securities" within the meaning of Rule 144 promulgated under the
Securities Act ("Rule 144") and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including exemptions contained in Rule 144. As described below under "--
Registration Rights," the Company has granted registration rights covering all
such Restricted Shares.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the
Company or any affiliate of the Company, a person (or persons whose shares are
aggregated) would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of (i) 1% of the number of then
outstanding shares of Common Stock ( shares immediately after
consummation of the Offering) or (ii) the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sales provisions, notice requirements and the
availability of current public information about the Company. If two years
have elapsed since the date of acquisition of Restricted Shares from the
Company or any affiliate of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an affiliate of the Company at any time
during the 90 days preceding a sale, such person (or persons whose shares are
aggregated) would be entitled to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, notice requirements and the availability of current public
information requirements. An "affiliate" of an entity is a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with such entity and may include
officers and directors, principal stockholders and certain stockholders with
special relationships. Upon the expiration of the lock-up period described
below, approximately Restricted Shares will be eligible for sale in the
public market subject to certain restrictions under Rule 144.
As of October 15, 1997, a total of 352,833 shares were reserved for issuance
under the Company's stock option plans, 190,040 of which were subject to
outstanding options as of such date. The Company intends to register under the
Securities Act within 90 days after consummation of the Offering all shares
reserved for issuance upon exercise of options outstanding under such plans.
Other than shares and options to purchase shares subject to the lock-up
agreements, shares registered under the Securities Act will be freely
transferable upon issuance unless acquired by affiliates of the Company.
Subject to certain exceptions, the Company, all of the Company's executive
officers and directors, the Selling Stockholders and all other stockholders
and optionholders of the Company have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters,
they will not, during the period ending 180 days after the date of this
Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer, lend or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangements that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or other securities, in cash or otherwise.
See "Underwriters."
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Prior to the Offering, there was no public market for the Common Stock, and
no prediction can be made as to the effect, if any, that future sales of Common
Stock or the availability of shares of Common Stock for future sale will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock following the Offering, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Common Stock and could impair the Company's ability to raise capital
through an Offering of its equity securities.
REGISTRATION RIGHTS
Pursuant to the 1996 Registration Rights Agreement, the TA Investors and the
stockholders and optionholders of the Company received (i) certain demand
registration rights that will be exercisable upon consummation of the Offering,
subject to certain limitations; (ii) certain demand registration rights that
can be exercised at any time once the Company becomes eligible to register
securities on Form S-3 under the Securities Act, subject to certain
limitations; and (iii) certain piggyback registration rights with respect to
all of the shares covered by the Shareholders' agreement. The parties to the
1996 Registration Rights Agreement agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act. In
addition, pursuant to the About Health Transaction, the About Health
Stockholders entered into the About Health Registration Rights Agreement,
pursuant to which the About Health Stockholders received a demand registration
right covering the 593,517 shares of Common Stock issued to the About Health
Stockholders pursuant to the Merger and that will be exercisable at any time
180 days after consummation of the Offering, subject to certain limitations,
and certain piggyback registration rights. Upon consummation of the About
Health Transaction, the 1996 Registration Rights Agreement was amended to
provide that in the event of an underwriter's decision pursuant to a public
offering to exclude shares of the Company's registrable securities from sale,
the About Health Stockholders would be subject to exclusion from such sales on
the same terms as the stockholders and optionholders of the Company and other
holders of the Company's registrable securities.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Smith
Barney Inc. and Piper Jaffray Inc. are acting as Representatives (the
"Representatives") have severally agreed to purchase, and the Company has
agreed to sell to them, severally, the respective number of shares of Common
Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
---- --------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
Smith Barney Inc................................................
Piper Jaffray Inc...............................................
--------
Total.......................................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of additional shares of Common Stock at the public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, made in connection with the offering of
the shares of Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock set
forth next to the names of all Underwriters in the preceding table. See
"Principal and Selling Stockholders."
At the request of the Company, the Underwriters have reserved for sale, at
the initial offering price, up to shares offered hereby for
directors, officers, employees, business associates, and related persons of
the Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares that are not so purchased will be offered
by the Underwriters to the general public on the same basis as the other
shares offered hereby.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
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The Company has submitted an application for approval of its Common Stock
for quotation on the Nasdaq National Market under the symbol "PPSX."
The Company and the Company's directors and executive officers, and all
other stockholders and optionholders of the Company have agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of
the Underwriters, they will not, during the period ending 180 days after the
date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of shares of
Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities,
in cash or otherwise. The restrictions described in this paragraph do not
apply to (x) the sale of shares to the Underwriters pursuant to the
Underwriting Agreement, (y) the issuance by the Company of shares of Common
Stock upon the exercise of an option or a warrant or the conversion of a
security outstanding on the date of this Prospectus of which the Underwriters
have been advised in writing or (z) transactions by any person other than the
Company relating to shares of Common Stock or other securities acquired in
open market transactions after the consummation of the Offering.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot in connection with
the Offering, creating a short position in the Common Stock for their own
account. In addition, to cover over-allotments or to stabilize the price of
the Common Stock, the Underwriters may bid for, and purchase, shares of Common
Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions,
in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Representatives. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, net revenue, earnings and certain
other financial operating information of the Company in recent periods, and
the price-earnings ratios, price-revenues ratios, market prices of securities
and certain financial and operating information of companies engaged in
activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary
Prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Chicago, Illinois. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Jones,
Day, Reavis & Pogue, Chicago, Illinois and for the Selling Stockholders by
McDermott, Will & Emery, Chicago, Illinois.
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EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996
and as of and for the nine months ended September 30, 1997, included in this
Prospectus and elsewhere in the Registration Statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of About Health as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 included
in this Registration Statement, have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement," which term encompasses all amendments,
exhibits and schedules thereto) under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is hereby made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material, when filed, may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site (address http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission in accordance with
the Commission's rules. Such reports and other information concerning the
Company may be inspected and copied at the public reference facilities and
regional offices of the Commission referred to above.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion therein expressed by
independent accountants, and with quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PREFERRED PAYMENTS SYSTEMS, INC. AND SUBSIDIARY
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997..................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and
1996 and for the Nine Months Ended September 30, 1996 (unaudited) and
1997................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994,
1995 and 1996 and for the Nine Months Ended September 30, 1997......... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and
1996, and for the Nine Months Ended September 30, 1996 (unaudited) and
1997................................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
ABOUT HEALTH, INC.
Report of Independent Accountants....................................... F-19
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)............................................................ F-20
Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996 and for the Six Months Ended June 30, 1996 (unaudited) and 1997
(unaudited)............................................................ F-21
Statements of Stockholders' Equity for the Years Ended December 31,
1994, 1995 and 1996 and for the Six Months Ended June 30, 1997
(unaudited)............................................................ F-22
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Six Months Ended June 30, 1996 (unaudited) and 1997
(unaudited)............................................................ F-23
Notes to Financial Statements........................................... F-24
</TABLE>
F-1
<PAGE>
After the stock split and the increase in authorized shares discussed in
Note 11 to the PREFERRED PAYMENT SYSTEMS, INC. and Subsidiary Consolidated
Financial Statements are effective, we expect to be in a position to render
the following report.
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Preferred Payments Systems, Inc.:
We have audited the accompanying consolidated balance sheets of PREFERRED
PAYMENT SYSTEMS, INC. (a Delaware corporation) and Subsidiary as of December
31, 1995 and 1996 and September 30, 1997, and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1996 and for the nine
months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Preferred Payment Systems,
Inc. and Subsidiary as of December 31, 1995 and 1996 and September 30, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting
principles.
November 21, 1997
Chicago, Illinois
F-2
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------- SEPTEMBER 30,
ASSETS 1995 1996 1997
------ ---------- ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 634,537 $2,164,528 $1,260,730
Accounts receivable, less allowance
for doubtful accounts of $100,000,
$50,000 and $283,129 for 1995, 1996
and 1997, respectively............... 4,067,064 3,597,958 8,021,639
---------- ------------ ------------
Total current assets................ 4,701,601 5,762,486 9,282,369
---------- ------------ ------------
Property and equipment, net............. 792,363 1,290,650 1,398,985
---------- ------------ ------------
Other assets:
Deferred financing costs, net......... -- 1,167,995 1,672,149
Goodwill, net......................... 78,884 72,836 26,750,843
Other................................. 32,034 2,935 43,925
---------- ------------ ------------
Total other assets.................. 110,918 1,243,766 28,466,917
---------- ------------ ------------
Total assets........................ $5,604,882 $8,296,902 $39,148,271
========== ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt.. $ -- $ 3,125,000 $ 7,000,000
Accounts payable...................... 319,518 547,039 642,707
Accrued expenses...................... 576,460 628,103 967,207
Commissions payable................... 1,571,780 970,515 1,792,104
Interest payable...................... -- 524,067 207,168
---------- ------------ ------------
Total current liabilities........... 2,467,758 5,794,724 10,609,186
---------- ------------ ------------
Long-term interest payable.............. -- 100,273 325,476
---------- ------------ ------------
Long-term debt:
Line of credit........................ -- 500,000 500,000
Term loan............................. -- 15,875,000 36,250,000
Convertible Subordinated Notes........ -- 10,000,000 10,000,000
Accretion to redemption value......... -- -- 1,226,219
Subordinated notes.................... -- 7,000,000 7,000,000
---------- ------------ ------------
Total long term debt................ -- 33,375,000 54,976,219
---------- ------------ ------------
Total liabilities................... 2,467,758 39,269,997 65,910,881
---------- ------------ ------------
Commitments and contingencies...........
Stockholders' equity (deficit)
Preferred stock, 1,000,000 shares
authorized; 0 shares issued and
outstanding during the years......... -- -- --
Common stock, $.01 par value, voting,
10,000,000 shares authorized;
1,186,631 and 1,210,214 shares issued
and outstanding in 1996 and 1997,
respectively......................... -- 11,866 12,102
Common stock, class A, no par value,
9,500,000 shares authorized in 1995;
1,146,000 shares issued and
outstanding in 1995.................. 1,146 -- --
Common stock, class B, no par value,
500,000 shares authorized in 1995;
24,531 shares issued and outstanding
in 1995.............................. 95,200 -- --
Additional paid-in capital............ -- 127,968 3,263,765
Retained earnings (deficit)........... 3,040,778 (31,112,929) (30,038,477)
---------- ------------ ------------
Total stockholders' equity
(deficit).......................... 3,137,124 (30,973,095) (26,762,610)
---------- ------------ ------------
Total liabilities and stockholders'
equity (deficit)................... $5,604,882 $ 8,296,902 $ 39,148,271
========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $16,702,284 $22,313,762 $22,995,806 $17,355,873 $23,855,798
Direct costs............ 5,943,180 7,768,670 6,335,990 4,893,170 6,194,665
----------- ----------- ----------- ----------- -----------
Gross profit.......... 10,759,104 14,545,092 16,659,816 12,462,703 17,661,133
Selling, general and
administrative expense. 5,222,878 7,652,559 8,287,138 6,157,806 8,409,615
Depreciation and
amortization........... 122,114 187,205 386,710 245,736 513,438
----------- ----------- ----------- ----------- -----------
Income from
operations........... 5,414,112 6,705,328 7,985,968 6,059,161 8,738,080
Interest (income)
expense................ (7,810) (46,895) 909,515 239,645 2,517,267
----------- ----------- ----------- ----------- -----------
Income before taxes... 5,421,922 6,752,223 7,076,453 5,819,516 6,220,813
Provision for state
replacement taxes...... 274,000 138,020 171,463 125,728 160,193
----------- ----------- ----------- ----------- -----------
Net income.............. $ 5,147,922 $ 6,614,203 $ 6,904,990 $ 5,693,788 $ 6,060,620
=========== =========== =========== =========== ===========
Accretion to redemption
value.................. (1,226,219)
-----------
Net income available to
common stockholders.... $4,834,401
===========
Supplemental pro forma
information
(unaudited):
Net income (Note 3)... $4,296,705 $3,529,835 $3,846,862
=========== =========== ===========
Net income per share
(Note 3)............. $1.59 $1.31 $1.37
=========== =========== ===========
Weighted average
number of shares
outstanding ......... 2,699,511 2,696,624 2,800,158
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ISSUED
(NUMBER OF SHARES) AMOUNT($) TOTAL
----------------------------- ------------------------- ADDITIONAL RETAINED STOCKHOLDERS'
COMMON COMMON PAID-IN EARNINGS EQUITY
STOCK CLASS A CLASS B STOCK CLASS A CLASS B CAPITAL (DEFICIT) (DEFICIT)
--------- ---------- ------- ------- ------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................. -- 1,126,000 22,864 $ -- $ 1,126 $ 88,712 $ -- $ 1,131,778 $ 1,221,616
Net income............ -- -- -- -- -- -- -- 5,147,922 5,147,922
Distributions to
stockholders......... -- -- -- -- -- -- -- (3,715,299) (3,715,299)
--------- ---------- ------- ------- ------- -------- ---------- ------------ ------------
Balance at December 31,
1994.................. -- 1,126,000 22,864 -- 1,126 88,712 -- 2,564,401 2,654,239
Issuance of common
stock................ -- 20,000 1,667 -- 20 6,488 -- 6,508
Net income............ -- -- -- -- -- -- -- 6,614,203 6,614,203
Distributions to
stockholders......... -- -- -- -- -- -- -- (6,137,826) (6,137,826)
--------- ---------- ------- ------- ------- -------- ---------- ------------ ------------
Balance at December 31,
1995.................. -- 1,146,000 24,531 -- 1,146 95,200 -- 3,040,778 3,137,124
1996 Transaction...... 1,170,531 (1,146,000) (24,531) 11,705 (1,146) (95,200) 84,641 -- --
Issuance of common
stock................ 16,100 -- -- 161 -- -- 43,327 -- 43,488
Net income............ -- -- -- -- -- -- -- 6,904,990 6,904,990
Distributions to
stockholders......... -- -- -- -- -- -- -- (41,058,697) (41,058,697)
--------- ---------- ------- ------- ------- -------- ---------- ------------ ------------
Balance at December 31,
1996.................. 1,186,631 -- -- 11,866 -- -- 127,968 (31,112,929) (30,973,095)
Issuance of common
stock................ 23,583 -- -- 236 -- -- 49,509 -- 49,745
Issuance of equity.... -- -- -- -- -- -- 3,086,288 -- 3,086,288
Accretion to
redemption value..... -- -- -- -- -- -- -- (1,226,219) (1,226,219)
Net income............ -- -- -- -- -- -- -- 6,060,620 6,060,620
Distributions to
stockholders......... -- -- -- -- -- -- -- (3,759,949) (3,759,949)
--------- ---------- ------- ------- ------- -------- ---------- ------------ ------------
Balance at September
30, 1997.............. 1,210,214 -- -- $12,102 $ -- $ -- $3,263,765 $(30,038,477) $(26,762,610)
========= ========== ======= ======= ======= ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PREFERRED PAYMENTS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 5,147,922 $ 6,614,203 $ 6,904,990 $ 5,693,788 $ 6,060,620
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 122,114 187,205 386,710 245,736 513,438
Loss recorded on
property and
equipment........... -- -- -- -- 164,856
Changes in assets and
liabilities:
Accounts
receivable........ (2,399,299) (130,133) 469,106 134,615 (2,366,471)
Accounts payable... 118,693 120,159 227,521 554,483 256,406
Accrued expenses... 214,942 (256,485) 51,643 (174,600) (205,731)
Commissions
payable........... 1,151,113 (418,711) (601,265) (458,730) 824,538
Interest payable... -- -- 624,340 -- 225,203
----------- ----------- ------------ ------------ ------------
Net cash provided
by operating
activities....... 4,355,485 6,116,238 8,063,045 5,995,292 5,472,859
Cash flows from
investing activities:
Purchase of property
and equipment......... (365,539) (347,312) (820,973) (480,074) (282,156)
Cash paid in About
Health Transaction,
net................... -- -- -- -- (26,000,412)
Change in other assets. -- (24,287) 28,900 (36,352) (37,635)
----------- ----------- ------------ ------------ ------------
Net cash used in
investing
activities....... (365,539) (371,599) (792,073) (516,426) (26,320,203)
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt..... (500,000) -- 37,500,000 37,500,000 26,489,243
Payments on long-term
debt.................. -- -- (1,000,000) -- (2,239,243)
Distributions to
stockholders.......... (3,715,299) (6,137,826) (41,058,697) (40,458,978) (3,759,949)
Issuance of common
stock................. -- 6,508 43,488 1,032 49,745
Deferred financing
costs................. -- -- (1,225,772) (1,270,607) (596,250)
----------- ----------- ------------ ------------ ------------
Net cash (used in)
provided by
financing
activities....... (4,215,299) (6,131,318) (5,740,981) (4,228,553) 19,943,546
Net (decrease) increase
in cash and cash
equivalents............ (225,353) (386,679) 1,529,991 1,250,313 (903,798)
Cash and cash
equivalents at
beginning of the
period................. 1,246,569 1,021,216 634,537 634,537 2,164,528
----------- ----------- ------------ ------------ ------------
Cash and cash
equivalents at end of
the period............. $ 1,021,216 $ 634,537 $ 2,164,528 $ 1,884,850 $ 1,260,730
=========== =========== ============ ============ ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period:
Interest............. $ 451 $ 22,734 $301,044 $ -- $2,482,645
Taxes................ 13,253 225,445 120,296 161,866 257,513
Supplemental disclosure
of non-cash
transactions:
Issuance of equity in
connection with About
Health Transaction.... 3,086,288
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Preferred Payment Systems, Inc. and Subsidiary ("the Company" or "PPS") was
incorporated in August 1996 as the successor to an Illinois corporation
organized in July 1990. PPS is a leading nationwide provider of specialized
cost containment and outsourcing services for healthcare payors. Through its
comprehensive portfolio of services, the Company reduces for its clients costs
ordinarily payable on medical bills submitted by healthcare providers and the
administrative expense associated with reviewing and processing medical bills.
The Company's clients include indemnity health insurers, HMOs and other
managed care organizations, third-party administrators, reinsurers, large
self-insured employers, Blue Cross and Blue Shield organizations and Taft-
Hartley funds.
2. CERTAIN TRANSACTIONS
1996 Transaction
On August 31, 1996, the Company completed a series of transactions involving
funds managed by TA Associates, Inc., a private equity firm based in Boston,
Massachusetts (collectively, the "TA Investors"), and senior officers of the
Company (the "1996 Transaction"). In connection with the 1996 Transaction, TA
Investors invested $17.0 million to acquire $10.0 million in Convertible
Subordinated Notes of the Company (the "Convertible Subordinated Notes")
pursuant to a Convertible Note Purchase Agreement (the "Convertible Note
Purchase Agreement") and $7.0 million of Subordinated Notes of the Company
(the "Subordinated Notes") pursuant to a Subordinated Loan Agreement (the
"Subordinated Loan Agreement"). Each $1,000 principal amount of Convertible
Subordinated Notes is convertible into one share of the Company's Redeemable
Preferred Stock and one share of the Company's Convertible Preferred Stock. In
connection with the 1996 Transaction, the Company also incurred $20.5 million
of indebtedness under a senior credit facility from a bank (the "1996 Credit
Facility"). The specific terms of these loans are described more fully in Note
5. The Company in turn used the net proceeds from these financing transactions
to make distributions to its stockholders in an aggregate amount of
approximately $36.0 million and to purchase outstanding options for
approximately $430,000.
About Health Transaction
On July 31, 1997, the Company and About Health, Inc. ("About Health") formed
Preferred Payment Systems, LLC (the "Operating Company") for the purpose of
combining their businesses (the "About Health Transaction"). In connection
with the About Health Transaction, the Company contributed all of its assets
to the Operating Company in exchange for 10,000 Class A Preferred Units and
1,405,754 common units in the Operating Company and the assumption by the
Operating Company of substantially all the liabilities of the Company other
than the Convertible Subordinated Notes. About Health contributed
substantially all of its assets to the Operating Company in exchange for $25.8
million in cash, 593,517 common units (valued at $5.20 per share) in the
Operating Company and the assumption by the Operating Company of substantially
all of the liabilities of About Health. In connection with the About Health
Transaction, the Company amended and restated the 1996 Credit Facility (as so
amended and restated, the "1997 Credit Facility") to increase the amount
available for borrowing by approximately $26.5 million. The additional funds
borrowed under the 1997 Credit Facility were used to finance the $25.8 million
cash payment to the About Health shareholders and the fees associated with the
About Health Transaction and the amendment of the 1996 Credit Facility. On a
fully diluted basis, the Company owned 80% of the Operating Company plus a
security redeemable for $5 million. Profits, losses, and cash distributions of
the Operating Company were generally allocated 80% to the Company and 20% to
About Health.
F-7
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective October 31, 1997, About Health was merged into the Company (the
"Merger") and all shares of About Health held by the stockholders were
exchanged for an aggregate of 593,517 shares of Common Stock of the Company.
As a result of the Merger, all of the ownership interests in the Operating
Company are held directly by the Company and the Operating Company is a
wholly-owned subsidiary of the Company. The transaction was treated as a
purchase and the shares of Common Stock issued were valued at $11.20 per
share.
The About Health Transaction has been accounted for using the purchase
method. The purchase price of $29.1 million was allocated to the fair value of
the tangible assets acquired as follows:
<TABLE>
<S> <C>
Accounts receivable........................................... $2,416,511
Other assets.................................................. 3,228
Property, plant and equipment................................. 189,946
Accounts payable and accrued expenses......................... (423,274)
----------
$2,186,411
==========
</TABLE>
The excess of the purchase price over the net assets acquired of $26.9
million has been recorded as goodwill and is being amortized on a straight-
line basis over thirty years. Subsequent to September 30, 1997, additional
goodwill of approximately $6.6 million was recorded in connection with the
Merger (see Note 11).
The following unaudited pro forma results of operations data for fiscal 1995
and 1996, and the nine months ended September 30, 1997, assumes that the About
Health Transaction and the Merger of About Health into PPS occurred as of
January 1, 1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------- SEPTEMBER 30,
1995 1996 1997
------- ------- ------------- ---
<S> <C> <C> <C> <C>
Net revenue............................ $25,394 $33,130 $32,755
Net income before accretion............ $ 2,783 $ 5,387 $ 4,716
======= ======= =======
Net income per common share before
accretion............................. $1.63 $1.93 $1.63
======= ======= =======
</TABLE>
The pro forma results assume that the Company was treated as a Subchapter C
corporation as of the beginning of 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements consolidate the accounts of PPS and the 80%-owned
Operating Company. Because the Operating Company has a net deficit at
September 30, 1997, no minority interest is reflected on the Company's balance
sheet or statement of income. All intercompany items and transactions have
been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and overnight securities.
F-8
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trade Receivables
The following summarizes trade receivables allowance activity for the years
ended 1995 and 1996, and for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
December 31, 1994............................................ $ 546,000
Increase to operating expense.............................. 1,029,373
Charge to allowance........................................ (1,475,373)
-----------
December 31, 1995............................................ 100,000
Increase to operating expense.............................. 275,000
Charge to allowance........................................ (325,000)
-----------
December 31, 1996............................................ 50,000
Increase to operating expense.............................. 475,000
Charge to allowance........................................ (241,871)
-----------
September 30, 1997........................................... $ 283,129
===========
</TABLE>
Revenue Recognition
The majority of the Company's revenues are based on a percentage of the
price reductions realized by its clients as a result of its services. The
Company recognizes revenue upon completion of its services. In some cases, the
initial repricing may become subject to further negotiation with the
healthcare provider, or it may be updated due to additional information being
provided. Revenue is adjusted through the issuance of credit memos should the
final disposition of the bill differ from the initial analysis. The Company
provides for its estimate of any future adjustments when the revenue is
initially recorded.
Supplemental Pro Forma Information (unaudited)
The accompanying unaudited supplemental pro forma information presented on
the Consolidated Statements of Income reflects the following pro forma
adjustments for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997: (i) the elimination of interest expense resulting
from the conversion of the Convertible Preferred Stock into Common Stock,
which will occur upon consummation of the Offering, and (ii) a provision for
federal and state income taxes as if the Company had been a Subchapter C
corporation.
For the nine months ended September 30, 1997, an additional pro forma
adjustment is reflected to eliminate the accretion to redemption value, as a
result of the cancellation of the put right effective as of September 30,
1997.
The following unaudited table reconciles net income available to common
stockholders with supplemental pro forma income:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ ------------------------
1996 1996 1997
------------ ----------- ----------------
<S> <C> <C> <C> <C>
Net income available to
common stockholders........ $ 6,904,990 $ 5,693,788 $ 4,834,401
Elimination of interest
expense.................... 84,722 63,542 190,625
Elimination of accretion.... -- -- 1,226,219
Income tax provision........ (2,693,007) (2,227,495) (2,404,383)
----------- ----------- -----------
Supplemental pro forma net
income..................... $ 4,296,705 $ 3,529,835 $ 3,846,862
=========== =========== ===========
</TABLE>
F-9
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment have been recorded at their cost. For both financial
and tax reporting purposes, depreciation is computed using the straight-line
and declining balance methods. At December 31, 1995, December 31, 1996, and
September 30, 1997 property and equipment along with the corresponding useful
lives consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
ASSET DESCRIPTION 1995 1996 1997 LIFE
----------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Computer equipment...... $ 818,695 $1,294,980 $1,505,445 5 years
Office equipment........ 160,481 296,195 334,873 5 to 7 years
Furniture and fixtures.. 197,972 255,166 339,784 7 years
Length of the
Leasehold improvements.. 24,111 175,891 211,592 Lease
---------- ---------- ----------
Total property and
equipment.............. 1,201,259 2,022,232 2,391,694
Less accumulated
depreciation........... 408,896 731,582 992,709
---------- ---------- ----------
Total property and
equipment, net......... $ 792,363 $1,290,650 $1,398,985
========== ========== ==========
</TABLE>
Deferred Financing Costs
As a result of the financing that was obtained in connection with the 1996
Transaction and the About Health Transaction, the Company incurred financing
fees of $1,225,772 and $596,250, respectively, which are being amortized over
the terms of the related loans. For the year ended December 31, 1996 and for
the nine months ended September 30, 1997, amortization totaled approximately
$58,000 and $150,000, respectively.
Goodwill
The cost of acquired businesses in excess of the fair value of identifiable
net assets acquired has been recorded as goodwill and is being amortized over
thirty years on a straight-line basis.
The Company reviews goodwill for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. To
date, no such events or changes in circumstances have occurred. If such events
or changes in circumstances occur, the Company will recognize an impairment
loss if the undiscounted future cash flows expected to be generated by the
acquired business are less than the carrying value of the related goodwill.
The impairment loss in such instances would adjust the goodwill to its fair
value.
Concentration of Credit Risk/Significant Clients
Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial condition of certain major clients, including
insurance companies and large corporations. The Company does not require
collateral or other security to support clients' receivables. The Company
conducts periodic reviews of its clients' financial condition and vendor
payment practices to minimize collection risks on trade accounts receivables.
F-10
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As shown in the following table, the Company had two clients which each
accounted for more than 10 percent of the Company's net revenue for the years
ended 1994, 1995 and 1996, and the nine months ended September 30, 1996 and
one customer which accounted for more than 10 percent of the Company's net
revenue for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR NINE MONTHS
ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------- --------------
1994 1995 1996 1996 1997
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Customer A.............................. 16.4% 23.9% 15.9% 16.8% 13.7%
Customer B.............................. 10.9 14.3 12.5 13.0 10.8
---- ---- ---- ------ ------
27.3% 38.2% 28.4% 29.8% 24.5%
==== ==== ==== ====== ======
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of cash, receivables, accounts payable and accrued
expenses approximate fair value because of the short-term nature of the items.
The carrying values of the line of credit and the term loan approximate their
fair value primarily due to the floating interest rates associated with the
debt instruments. Although the interest rate on the Subordinated Notes is
fixed, the carrying value reasonably approximates the fair value at both
December 31, 1996 and September 30, 1997. The conversion, redemption and put
rights associated with the Convertible Subordinated Notes are features that
affect the fair value of the debt instrument. However, at December 31, 1996,
mainly because only a short time had elapsed since the Company had issued the
Convertible Subordinated Notes, the carrying value reasonably approximated the
fair value. At September 30, 1997, the approximate fair value of the
Convertible Subordinated Notes is $15.7 million.
Accretion to Redemption Value of the Convertible Preferred Stock
As more fully discussed in Note 5, the holders of the Convertible
Subordinated Notes have the right to convert into Redeemable Preferred Stock
and Convertible Preferred Stock. The Convertible Preferred Stock is
convertible into an aggregate of 968,316 shares of Common Stock of the
Company. The holders have a put right associated with these shares, which can
be exercised in 2003 and 2004. Accretion to redemption value represents
straight-line accretion to the redemption dates from the date of the 1996
Transaction through September 30, 1997. This put right was cancelled effective
September 30, 1997.
Supplemental Pro Forma Net Income Per Share
Supplemental pro forma net income per share is computed based upon the
weighted average number of common and common equivalent shares outstanding.
Any common stock options issued during the one year preceding the initial
public offering filing with an exercise price below the estimated initial
public offering price have been included as outstanding shares for all periods
presented reduced by the number of shares which could be purchased with
proceeds from the exercise of the options.
In order to reflect the application of the net proceeds of the Offering to
reduce outstanding indebtedness, supplemental pro forma as adjusted net income
per share for the year ended December 31, 1996 and for the nine months ended
September 30, 1997 would be $ and $ respectively, computed based
upon (i) supplemental pro forma income adjusted for the reduction in interest
expense (net of tax benefit) resulting from such application of net proceeds
and (ii) the supplemental pro forma weighted average number of shares of
Common Stock outstanding adjusted to reflect the sale by the Company of
approximately shares of Common Stock in the Offering resulting in net
proceeds sufficient to pay such indebtedness.
F-11
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited Interim Financial Data
In management's opinion, the unaudited financial statements for the nine
months ended September 30, 1996 are presented on a basis consistent with the
audited financial statements, and all adjustments, consisting only of normal
recurring adjustments, which are necessary to present fairly the operating
results have been reflected. The results of operations for interim periods are
not necessarily indicative of operations for the full fiscal year.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during the
reporting period. These estimates include certain allowances, reserves and
accruals, as well as estimates of the useful lives of property and equipment
and goodwill, among others. Actual results could differ from those estimates.
4. NEW ACCOUNTING PRONOUNCEMENTS
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128 ("SFAS No. 128"), addressing earnings per share.
SFAS No. 128 changed the methodology of calculating earnings per share and
renamed the two calculations, basic earnings per share (currently primary) and
diluted earnings per share (currently fully diluted). The weighted average
number of common shares for the basic earnings per common share calculation
includes (i) all Common Stock outstanding during each period presented, (ii)
all Common Stock options and warrants issued within one year prior to the
initial public filing with a price below the estimated initial public offering
price, reduced by the number of shares which could be purchased with proceeds
from the exercise of the options and warrants, and (iii) the Common Stock that
will be issued upon the preferred stock conversion. The weighted average
number of common stock shares for the diluted earnings per common share
calculation is based on similar assumptions and is adjusted for all other
common stock equivalents that were outstanding during each period presented.
SFAS No. 128 is effective for reporting periods ending after December 15,
1997. For the year ended December 31, 1996 and the nine months ended September
30, 1997, had the Company calculated supplemental pro forma earnings per share
using SFAS No. 128, the basic earnings per share would have been $1.60 and
$1.42, respectively, and the diluted earnings per share would have been $1.59
and $1.37, respectively. The Company will adopt SFAS No. 128 on December 31,
1997.
Capital Structure
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"),
which requires all companies to disclose all relevant information regarding
their structure. SFAS No. 129 presentation is required for reporting periods
ending after December 15, 1997. Based on the capital structure disclosures
presented in the accompanying consolidated financial statements and notes
thereto, the Company does not believe that any additional disclosures will be
required as a result of adopting this pronouncement.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130.
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for reporting of comprehensive income. This
F-12
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
pronouncement requires that all items recognized under accounting standards as
components of comprehensive income as defined in the pronouncement, be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. The financial statement presentation required under
SFAS No. 130 is effective for all fiscal years beginning after December 15,
1997. The Company will adopt SFAS No. 130 in 1998. As of September 30, 1997,
the impact of adopting this pronouncement has not been determined.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable segments. Operating
segments, as defined in the pronouncement are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The disclosures required by
SFAS No. 131 are effective for all fiscal years beginning after December 15,
1997. The Company will adopt SFAS No. 131 in 1998. As of September 30, 1997,
the impact of this pronouncement has not been determined.
5. DEBT
In August 1996, the Company entered into the 1996 Credit Facility with a
syndicate of two banks, which provided for $25 million of senior debt, $20
million of which was in the form of a term loan and $5 million of which was
available pursuant to a line of credit. In connection with the About Health
Transaction (see Note 2), the Company entered into an amended and restated
credit facility (as so amended and restated, the 1997 Credit Facility) to
increase the term loan portion by $26.5 million. The Company is obligated to
make quarterly principal and interest payments on the term loan (bearing
interest of 7.8% and 8.0% at December 31, 1996 and September 30, 1997,
respectively) and quarterly interest payments on the line of credit (bearing
interest at 9.0% and 9.25% at December 31, 1996 and September 30, 1997,
respectively). The 1997 Credit Facility expires in September 2001. The 1997
Credit Facility also provides for mandatory principal prepayments from the
proceeds of certain sales of assets or equity or in the event the Company
exceeds specified levels of cash flow. The Company can elect to have interest
on its borrowings based either on the prime rate, the federal funds rate, or
LIBOR, plus in each case a margin which varies according to the ratio of total
debt to EBITDA, as defined. The Company is also obligated to enter into
interest rate swaps with an aggregate notional principal amount equal to at
least 50% of the outstanding term loan and with a maturity of at least three
years to reduce the impact of interest rate fluctuations.
The Subordinated Notes mature on August 31, 2003 and bear interest at 10%
per annum, payable quarterly. Beginning February 2002, the Company is required
to make semiannual principal payments on the Subordinated Notes of $1.7
million. Under the Subordinated Loan Agreement, the Company is required to
prepay the Subordinated Notes in whole upon a qualifying public offering, sale
of the Company, or other change in control, as defined.
The Convertible Subordinated Notes are convertible at any time by the holder
into 10,000 shares of Redeemable Preferred Stock and 10,000 shares of
Convertible Preferred Stock. The Convertible Subordinated Notes mature in
August 2006, subject to the right of the holders to accelerate the maturity of
the Convertible Subordinated Notes upon a public equity offering, a qualifying
sale of the Company, or a merger resulting in a change in majority ownership
of the Company and subject to the right of the holders to require the Company
to redeem 50% of the outstanding principal amount of the Convertible
Subordinated Notes on or after August 2003
F-13
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and 100% of the outstanding principal amount of the Convertible Subordinated
Notes on or after August 2004. The Convertible Subordinated Notes bear
interest at 5%, 2% being payable quarterly and 3% being deferred and payable
upon redemption or maturity. The Redeemable Preferred Stock is redeemable for
$5 million. The 10,000 shares of Convertible Preferred Stock issuable upon
conversion of the Convertible Subordinated Notes are convertible into an
aggregate of 968,316 shares of Common Stock. The Convertible Preferred Stock
provides for a put right, exercisable no earlier than 2003. This put right was
cancelled effective September 30, 1997.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1996 1997
----------- -----------
<S> <C> <C>
Line of credit................................... $ 500,000 $ 500,000
Term loan........................................ 19,000,000 43,250,000
Convertible Subordinated Notes................... 10,000,000 10,000,000
Accretion to redemption value.................... -- 1,226,219
Subordinated Notes............................... 7,000,000 7,000,000
----------- -----------
36,500,000 61,976,219
Less: current maturities......................... 3,125,000 7,000,000
----------- -----------
Total long-term debt......................... $33,375,000 $54,976,219
=========== ===========
</TABLE>
The scheduled maturity of long-term debt outstanding at September 30, 1997
is as follows:
<TABLE>
<S> <C>
Three months ended
December 31, 1997............................................ $ 1,750,000
1998.......................................................... 7,000,000
1999.......................................................... 10,500,000
2000.......................................................... 12,000,000
2001.......................................................... 12,000,000
Thereafter.................................................... 18,726,219
-----------
$54,976,219
===========
</TABLE>
6. INCOME TAXES
The Company elected to include its income and expenses with those of its
stockholders for federal income tax purposes (Subchapter S corporation tax
status). Accordingly, the accompanying consolidated statements of income do
not include a provision for federal income taxes. The Subchapter S corporation
election will terminate immediately prior to the consummation of the Offering.
The Company continues to pay state taxes in certain states in which it
conducts business based on its taxable income .
Upon consummation of the Offering and the effective termination of the
Subchapter S corporation election, deferred income taxes will be recorded,
resulting in an income tax benefit in the accompanying consolidated statements
of income. If the effective date of the Offering had been September 30, 1997,
a deferred income tax asset of approximately $551,000 and a deferred income
tax liability of approximately $155,000 would have been recorded. Deferred
income taxes will be recorded under the asset and liability method of
accounting for income taxes which requires the recognition of deferred income
taxes based upon the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities.
F-14
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The aggregate rental expenses under noncancellable leases was $358,700,
$292,095 and $340,619 for the fiscal years ended 1994, 1995 and 1996,
respectively, and $255,464 and $412,000, respectively, for the nine months
ended September 30, 1996 and September 30, 1997. At September 30, 1997,
aggregate future minimum rental commitments (excluding escalation payments and
capitalized lease obligations) for all noncancellable leases are $2,604,466,
payable as follows:
<TABLE>
<S> <C>
Remainder 1997................ $ 204,294
1998.......................... 1,044,836
1999.......................... 1,027,675
2000.......................... 318,404
2001 and thereafter........... 9,257
----------
$2,604,466
==========
</TABLE>
Preferred Provider Agreements
The Company has agreements with certain preferred provider organizations
("PPOs") to market their PPO networks to its customers. As part of the
arrangement, the Company provides analysis of the PPO's healthcare provider
bills and pays a commission to the applicable PPO on each case analyzed.
Commissions payable to the PPOs are recorded as commission expense and
included as a direct cost in the accompanying consolidated statements of
income at the time that revenue is recorded.
Employment Agreements
The Company has employment agreements with certain key members of
management. These agreements provide for annual base salaries of $1.0 million
in the aggregate. The agreements expire either on August 31, 1998 or July 31,
1999 and are renewable for successive one-year terms, unless terminated by
either party.
Legal Proceedings
The Company is not involved in any material legal proceedings.
8. EMPLOYEE BENEFIT PLAN
On January 1, 1993, the Company established a savings plan under the
provisions of Section 401(k) of the Internal Revenue Code for eligible
employees. Employee contributions may be supplemented by matching Company
contributions on a discretionary basis. No Company contributions are required.
Beginning in 1995, the Company matched 25% of employee contributions, limited
to 7% of gross earnings per employee. The Company's 401(k) contributions were
approximately $34,000, $43,000 and $55,000 for fiscal years ended December 31,
1994, 1995 and 1996, respectively, and for the nine months ended September 30,
1996 and September 30, 1997, accrued contributions were $62,837 and $107,518,
respectively.
F-15
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CAPITAL STOCK AGREEMENTS
The Company, its existing shareholders, the TA Investors and the
stockholders of About Health are parties to a Shareholders' Agreement which
provides for certain rights of first refusal and co-sale rights in the event
that a stockholder receives a bona fide offer to sell his shares. The
agreement also provides for pro rata rights to participate in certain sales of
additional securities by the Company. The agreement further provides for
"bring-along rights" whereby, if specified stockholders determine to sell
their shares, the other stockholders are also required to sell their shares.
Upon consummation of the Offering, the provisions of the Shareholders'
Agreement relating to rights of first refusal, the co-sale rights, the bring-
along rights and the participation rights will expire in accordance with their
terms. Separate Registration Rights Agreements were entered into in connection
with the 1996 Transaction and the About Health Transaction that provide
certain stockholders with registration rights with respect to their shares of
Common Stock.
10. STOCK OPTION PLANS
In connection with the 1996 Transaction, the Company canceled all
outstanding stock options and terminated all existing stock option plans. In
return for the cancellation of outstanding options, the Company made a cash
payment to the holders of these options of approximately $430,000, which
resulted in a compensation charge of approximately $484,000. Upon the
cancellation of the options, the Company adopted the 1996 Replacement Stock
Option Plan. The Company reserved 27,833 shares of common stock for grant
under this plan. On August 30, 1996, the Company granted options to purchase
27,833 shares to the individuals that held options in the prior plan ("1993
Stock Option Plan") with grant prices ranging between $.30 and $2.58 per
share. These options vest between the date of grant and two years.
As of August 30, 1996, the Company adopted a 1996 Incentive Stock Option
Plan for its key employees. The Plan is administered by a committee of the
Board of Directors. The plan provides for the issuance of up to 250,000 shares
of Common Stock. The exercise price for the incentive stock options may not be
less than the fair market value of the underlying Common Stock on the date of
grant. The exercise price of incentive stock options granted to a participant
that holds more than 10% of the issued and outstanding shares of Common Stock
("Ten Percent Holders") may not be less than 110% of the fair market value of
the underlying Common Stock on the date of grant. Nonqualified stock options
are not exercisable more than fifteen years after the date of grant. Incentive
stock options granted to Ten Percent Holders are not exercisable more than
five years after the date of grant. During 1996, the Company granted incentive
stock options to purchase 135,500 shares of Common Stock at per share exercise
prices ranging from $2.58 to $2.84 per share. Of these options granted, 25,300
options vested immediately on the date of grant and the remaining vest over a
four-year period.
In connection with the About Health Transaction, the Company amended and
restated its 1996 Incentive Stock Option Plan to increase the number of shares
reserved for issuance to 325,000 shares. During the nine months ended
September 30, 1997, the Company granted 76,190 options with a grant price of
$5.20 per share, which was fair market value at the date of grant. These
options vest ratably over a five-year period.
F-16
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity for the Company's stock option plans for the year
ended December 31, 1996, and for the nine months ended September 30, 1997, is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
PRICE PER EXERCISE PRICE
SHARES SHARE PER SHARE
------- ----------- --------------
<S> <C> <C> <C>
1996 Incentive Stock Option Plan:
Year Ended December 31, 1996
Granted........................... 135,500 $2.58-$2.84 $2.65
Exercised......................... 14,600 2.58-2.84 2.71
Canceled.......................... -- -- --
------- ----------- -----
Outstanding as of December 31,
1996............................. 120,900 $2.58-$2.84 $2.64
======= =========== =====
Nine Months Ended September 30, 1997
Granted........................... 76,190 $ 5.20 $5.20
Exercised......................... 15,750 2.58-2.84 2.66
Canceled.......................... 3,800 2.58 2.58
------- ----------- -----
Outstanding as of
September 30, 1997............... 177,540 $2.58-$5.20 $3.74
======= =========== =====
Options exercisable:
At December 31, 1996.............. 10,700 $2.58-$2.84 $2.58
======= =========== =====
At September 30, 1997............. 19,400 $2.58-$2.84 $2.73
======= =========== =====
1996 Replacement Stock Option Plan:
Year Ended December 31, 1996
Granted........................... 27,833 $0.30-$2.58 $1.03
Exercised......................... 1,500 2.58 2.58
Canceled.......................... -- -- --
------- ----------- -----
Outstanding as of December 31,
1996............................. 26,333 $0.30-$2.58 $1.23
======= =========== =====
Nine Months Ended September 30, 1997
Granted........................... -- -- --
Exercised......................... 7,833 $0.30-$2.58 $1.00
Canceled.......................... 500 1.30 1.30
------- ----------- -----
Outstanding as of
September 30, 1997............... 18,000 $0.30-$2.58 $0.92
======= =========== =====
Options exercisable:
At December 31, 1996.............. 11,667 $0.30-$2.58 $0.30
======= =========== =====
At September 30, 1997............. 11,750 $0.30-$2.58 $0.56
======= =========== =====
</TABLE>
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option-pricing model, assuming, among other things, no dividend
yield, a risk free rate of 7.09%, a volatility factor of 60% and an expected
life of ten years. The weighted average fair value of options granted under
the Company's stock option plans for the fiscal year ended December 31, 1996
and for the nine months ended September 30, 1997 was $1.41 and $2.21 per
share, respectively. Each option expires ten years after the date of grant.
The weighted average remaining term of all outstanding options was 9.4 years
as of September 30, 1997.
F-17
<PAGE>
PREFERRED PAYMENT SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The Company has adopted the disclosure-only provision of Statements of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation expense has been
recognized for the stock option plans. Consistent with the provisions of SFAS
No. 123, had compensation expense for the Company's stock plans been
determined based upon the fair value at the grant date, the Company's pro
forma net income and pro forma net income per share would have been
approximately $4.3 million and $1.58, respectively, for the fiscal year ended
December 31, 1996 and $3.8 million and $1.36, respectively, and for the nine
months ended September 30, 1997.
11. SUBSEQUENT EVENTS
Merger of About Health into PPS
Effective October 31, 1997, About Health merged into the Company, by
exchanging all of its outstanding common shares for an aggregate of 593,517
shares of Common Stock of the Company. The transaction will be accounted for
using the purchase method of accounting. The total purchase price associated
with the Merger was approximately $6.6 million, which will be recorded as
goodwill and amortized on a straight-line basis over thirty years. In
connection with the Merger, the Operating Company became a wholly-owned
subsidiary of the Company.
Proposed Initial Public Offering
On , the Company filed a Registration Statement with regard to the
Offering, pursuant to which the Company intends to sell to the public
shares of Common Stock. The Company proposes to use substantially all of the
net proceeds to repay amounts outstanding under the 1997 Credit Facility, to
repay borrowings obtained from the TA Investors as part of the 1996
Transaction and to redeem the Redeemable Preferred Stock issued in connection
with the 1996 Transaction.
Immediately prior to consummation of the Offering, all outstanding
Convertible Subordinated Notes will be converted into Redeemable Preferred
Stock and Convertible Preferred Stock. Upon consummation of the Offering, the
Convertible Preferred Stock will automatically convert into 968,316 shares of
Common Stock and the Redeemable Preferred Stock will be redeemed for $5.0
million using a portion of the net proceeds from the sale of Common Stock.
Stock Split
On , the Company effected a -for-one stock split of Common Stock
and increased the number of authorized shares of Common Stock to
shares. The accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of About Health, Inc.
We have audited the accompanying balance sheets of About Health, Inc. (the
"About Health") as of December 31, 1995 and 1996, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the About Health's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurances 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.
As indicated in Note 9 to the financial statements, About Health contributed
substantially all of its assets to Preferred Payment Systems, LLC (the
"Operating Company") in exchange for cash, common units of the Operating
Company and other consideration.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of About Health, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Rockville, Maryland
June 26, 1997, except for Note 9, for which the date is July 31, 1997
F-19
<PAGE>
ABOUT HEALTH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- JUNE 30,
ASSETS 1995 1996 1997
------ -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $185,278 $ 609,573 $1,144,314
Trade accounts receivable, net............... 725,957 2,264,388 2,231,511
Other current assets......................... 1,522 11,037 11,147
-------- ---------- ----------
Total current assets....................... 912,757 2,884,998 3,386,972
Property and equipment, net.................. 41,753 180,487 193,370
-------- ---------- ----------
Total assets............................... $954,510 $3,065,485 $3,580,342
======== ========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................. $ 32,751 $ 44,370 $ 64,746
Accrued compensation and benefits............ 51,799 467,822 661,222
-------- ---------- ----------
Total liabilities.......................... 84,550 512,192 725,968
-------- ---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 1,000 shares
authorized; 100 shares issued and
outstanding................................. 100 100 100
Additional paid-in capital................... 1,890 1,890 1,890
Retained earnings............................ 867,970 2,551,303 2,852,384
-------- ---------- ----------
Total stockholders' equity................. 869,960 2,553,293 2,854,374
-------- ---------- ----------
Total liabilities and stockholders' equity. $954,510 $3,065,485 $3,580,342
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
ABOUT HEALTH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................. $1,522,564 $3,079,799 $10,133,664 $3,703,392 $7,277,758
Operating expenses:
Direct contract
expense.............. 722,389 930,973 2,908,348 1,114,518 1,763,988
Selling, general and
administrative....... 181,453 967,458 1,769,737 609,276 2,005,838
Depreciation and
amortization......... 5,459 8,062 21,776 7,504 20,572
---------- ---------- ----------- ---------- ----------
Total operating
expenses........... 909,301 1,906,493 4,699,861 1,731,298 3,790,398
---------- ---------- ----------- ---------- ----------
Income from operations.. 613,263 1,173,306 5,433,803 1,972,094 3,487,360
---------- ---------- ----------- ---------- ----------
Other income:
Interest income....... 2,826 4,695 29,638 11,635 21,521
Other income.......... 4,405 3,094 19,892 12,174 --
---------- ---------- ----------- ---------- ----------
Total other income.. 7,231 7,789 49,530 23,809 21,521
---------- ---------- ----------- ---------- ----------
Net income.............. $ 620,494 $1,181,095 $ 5,483,333 $1,995,903 $3,508,881
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
ABOUT HEALTH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$1 PAR VALUE ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993
(unaudited)................ 100 $100 $1,890 $ 271,381 $ 273,371
Net income................ -- -- -- 620,494 620,494
Distributions to owners... -- -- -- (505,000) (505,000)
--- ---- ------ ----------- -----------
Balance, December 31, 1994.. 100 100 1,890 386,875 388,865
Net income................ -- -- -- 1,181,095 1,181,095
Distributions to owners... -- -- -- (700,000) (700,000)
--- ---- ------ ----------- -----------
Balance, December 31, 1995.. 100 100 1,890 867,970 869,960
Net income................ -- -- -- 5,483,333 5,483,333
Distributions to owners... -- -- -- (3,800,000) (3,800,000)
--- ---- ------ ----------- -----------
Balance, December 31, 1996.. 100 100 1,890 2,551,303 2,553,293
Net income (unaudited).... -- -- -- 3,508,881 3,508,881
Distributions to owners
(unaudited).............. -- -- -- (3,207,800) (3,207,800)
--- ---- ------ ----------- -----------
Balance, June 30, 1997
(unaudited)................ 100 $100 $1,890 $ 2,852,384 $ 2,854,374
=== ==== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ABOUT HEALTH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income............ $ 620,494 $1,181,095 $ 5,483,333 $ 1,995,903 $ 3,508,881
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization....... 5,459 8,062 21,776 7,504 20,572
Provision for bad
debt............... 30,451 61,596 304,010 111,110 344,358
Changes in assets
and liabilities
resulting in
increase
(decreases)
in cash:
Accounts
receivable....... (236,720) (465,850) (1,842,441) (499,688) (311,481)
Other current
assets........... -- (1,522) (9,515) (364) (135)
Accounts payable.. 3,362 24,218 11,619 33,397 20,376
Accrued expenses.. (20,728) (9,725) 416,023 347,008 193,400
--------- ---------- ----------- ----------- -----------
Net cash
provided by
operating
activities..... 402,318 797,874 4,384,805 1,994,870 3,775,971
--------- ---------- ----------- ----------- -----------
Investing activities:
Purchase of fixed
assets............... (12,330) (17,423) (160,510) (58,064) (33,430)
--------- ---------- ----------- ----------- -----------
Net cash used in
investing
activities..... (12,330) (17,423) (160,510) (58,064) (33,430)
--------- ---------- ----------- ----------- -----------
Financing activities:
Distributions to
stockholders......... (505,000) (700,000) (3,800,000) (1,200,000) (3,207,800)
--------- ---------- ----------- ----------- -----------
Net cash used in
financing
activities..... (505,000) (700,000) (3,800,000) (1,200,000) (3,207,800)
--------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (115,012) 80,451 424,295 736,806 534,741
Cash and cash
equivalents at
beginning of period.... 219,839 104,827 185,278 185,278 609,573
--------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 104,827 $ 185,278 $ 609,573 $ 922,084 $ 1,144,314
========= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ABOUT HEALTH, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
About Health, Inc. ("About Health") specializes in cost containment in the
healthcare industry. About Health uses its proprietary database and
professional negotiators to analyze healthcare-related insurance claims on
behalf of health insurance companies, third party administrators, health
maintenance organizations and reinsurance companies. About Health is able to
reduce clients' expenses by negotiating substantial discounts directly with
healthcare providers. About Health receives revenue equal to a percentage of
the total discount negotiated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
About Health considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization, and are depreciated on a straight-line basis over an estimated
useful economic life of three to seven years.
Maintenance and repairs are charged to operations and major improvements
that extend the useful life are capitalized. Upon retirement, sale or other
disposition of property and equipment, the cost and accumulated depreciation
are eliminated from the accounts and any gain or loss is included in
operations.
Common Stock
About Health has the authority to issue 1,000 shares of $1 par value common
stock, of which 750 are designated "Voting Common Stock" and 250 are
designated "Non-Voting Common Stock." The 100 shares issued and outstanding as
of December 31, 1995 and 1996 are Voting Common Stock.
Revenue Recognition
About Health recognizes revenue based on the contracted percentage of the
amount of cost savings realized by About Health's clients as a result of the
discounts negotiated by About Health. Revenue is recorded in the period in
which the negotiation of the cost saving is initially completed.
Adjustments to receivables and revenues are recorded in the period that
renegotiations of the discounts or About Health's percentage of cost savings
are concluded. About Health provides allowances for adjustments and amounts it
does not expect to collect based on an evaluation of its accounts receivable
portfolio and prior experience.
Income Taxes
About Health, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the shareholders of a Subchapter S corporation are taxed on their
proportionate share of About Health's taxable income. Therefore, no provision
or liability for federal or state income taxes has been included in the
financial statements.
Concentration of Credit Risk
Financial instruments that potentially subject About Health to
concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. About Health maintains its cash and cash equivalents in
bank deposit accounts which, at times, may exceed federally insured amounts.
About Health has not experienced any
F-24
<PAGE>
losses in these accounts and About Health believes it is not exposed to any
significant credit risk. About Health's accounts receivable are concentrated
with customers in the insurance industry. About Health does not require
collateral from its customers.
Fair Value of Financial Instruments
At December 31, 1995 and 1996, financial instruments held consist of cash,
accounts receivable, accounts payable and accrued expenses for which carrying
value approximates fair value due to the short-term nature of these items.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liability at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The unaudited balance sheet as of June 30, 1997 and the unaudited statements
of income and cash flows for the six-month periods ended June 30, 1997 and
1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- ----------
<S> <C> <C>
Trade accounts receivable........................... $748,720 $2,448,074
Allowance........................................... (22,763) (183,686)
-------- ----------
Trade accounts receivable, net...................... $725,957 $2,264,388
======== ==========
</TABLE>
The provisions included in selling, general and administrative expense
for trade accounts receivable allowance was $30,451, $61,596 and $304,010
for the years ended December 31, 1994, 1995 and 1996, respectively. Amounts
charged against the trade accounts receivable allowance totaled $21,506,
$47,778 and $143,087 for the years ended December 31, 1994, 1995 and 1996,
respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- --------
<S> <C> <C>
Machinery and equipment................................. $37,515 $122,914
Furniture and fixtures.................................. 20,707 69,125
Leasehold improvements.................................. -- 26,693
------- --------
Less accumulated depreciation and amortization.......... 16,469 38,245
------- --------
Total............................................... $41,753 $180,487
======= ========
</TABLE>
F-25
<PAGE>
5. LEASES
About Health leases office space and telephone equipment under operating
leases which contain certain rent escalations. Future minimum payments under
these noncancellable lease agreements for office space and telephone equipment
consisted of the following as of December 31, 1996:
<TABLE>
<S> <C>
1997............................ $185,241
1998............................ 194,598
1999............................ 183,688
--------
$563,527
========
</TABLE>
Rental expense under operating leases was $32,783, $39,330 and $103,158 for
the years ended December 31, 1994, 1995 and 1996, respectively.
6. RETIREMENT PLAN
About Health has a defined contribution profit sharing plan entitled the
"About Health, Inc. 401(k) Plan" which was started in 1996 and covers
substantially all eligible employees. Under the provisions of the plan,
eligible employees may defer up to 20% of their compensation. The Plan
provides that About Health may make a discretionary matching contribution to
be determined annually. About Health contributions and other expenses
associated with the plan were approximately $25,800 for the year ended
December 31, 1996.
7. STOCK APPRECIATION RIGHT PAYMENTS
Certain key executives of About Health are entitled to receive stock
appreciation right payments ("SARP") equal to up to 13% of the net proceeds
received in any transaction involving the disposition of About Health's
assets, as defined in the SARP agreements, other than in the ordinary course
of business, to the extent that such amount is distributed to the stockholders
of About Health. The SARPs terminate upon a specified number of days following
the termination of the employee's employment with About Health.
8. MAJOR CUSTOMERS
For the year ended December 31, 1996 there were two customers that
individually accounted for approximately 18% and 13%, respectively, of
revenue. For the year ended December 31, 1995 there were no customers that
accounted for over 10% of revenue and for the year ended December 31, 1994
there was one customer that accounted for approximately 13% of revenue.
9. TRANSACTION WITH PREFERRED PAYMENT SYSTEMS, LLC
On July 31, 1997, About Health contributed substantially all of its assets
to Preferred Payment Systems, LLC (the "Operating Company") in exchange for
cash, common units of the Operating Company and other consideration.
F-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC registration fee............................................. $20,910
NASD filing fee.................................................. 7,400
NASDAQ National Market listing fee............................... *
Printing, engraving, postage and mailing......................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Transfer agent fees and expenses................................. *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
*To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation, subject to the applicable
indemnification provisions of the General Corporation Law of the State of
Delaware (the "DGCL"). Section 145 of the DGCL empowers a Delaware corporation
to indemnify, subject to the standards therein prescribed, any person in
connection with any action, suit or proceeding brought or threatened because
such person is or was a director, officer, employee or agent of the
corporation or was serving as such with respect to another corporation or
other entity at the request of such corporation.
In accordance with Section 102(b)(7) of the DGCL, Article VIII of the
Company's Amended and Restated Certificate of Incorporation provides that "[a]
director of the corporation shall not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, as
the same exists or hereafter may be amended, or (iv) for any transaction from
which the director derived an improper personal benefit. If the Delaware
General Corporation law is amended to authorize the further elimination or
limitation of liability of directors, then the liability of directors shall be
eliminated or limited to the full extent authorized by the General Corporation
Law of the State of Delaware, as so amended. Any repeal or modification of
this Article shall not adversely affect any right or protection of a director
of the corporation existing at the time of such repeal or modification."
The Company's Certificate of Incorporation and Bylaws contain provisions
that require the Company to indemnify its directors and officers to the
fullest extent permitted by Delaware law. The Company also maintains
directors' and officers' liability insurance in the amount of $5.0 million.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the Company and its directors and executive officers in
the Offering of the Common Stock registered hereby, and each person, if any,
who controls the Company, for certain liabilities, including liabilities
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued or
sold within the past three years.
II-1
<PAGE>
(a) Pursuant to an Agreement of Merger dated August 29, 1996, the
stockholders of Preferred Payment Systems, Inc., an Illinois corporation,
merged with and into its wholly-owned subsidiary Preferred Delaware, Inc., a
Delaware corporation. The surviving Delaware corporation subsequently amended
its certificate of incorporation to change its name to Preferred Payment
Systems, Inc. In connection with this merger, each issued and outstanding
share of common stock of the Illinois corporation was, on August 29, 1996,
exchanged for one share of Common Stock of the Company. The persons who
received shares of the Company pursuant to this share exchange are set forth
below.
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDER SHARES ISSUED
----------- -------------
<S> <C>
Steven E. Nelson............................................ 500,000
James T. Doody.............................................. 225,000
Byron W. Smith.............................................. 225,000
Craig W. Cunningham......................................... 67,432
Brent R. Anderson........................................... 50,000
Rosemary Weiner............................................. 90,000
Daniel Kenney............................................... 11,432
Daniel J. Marion............................................ 1,667
---------
Total................................................... 1,170,531
=========
</TABLE>
(b) In connection with the 1996 Transaction, the TA Investors invested $17.0
million to acquire (i) $10.0 million dollars in Convertible Subordinated Notes
and (ii) $7.0 million of Subordinated Notes. See "Certain Transactions."
(c) As of October 31, 1997, (i) persons who had received options pursuant to
the Incentive Stock Plan had exercised options pursuant to such plan to
acquire 35,850 shares of the Company's Common Stock, and (ii) persons who had
received options pursuant to the Replacement Plan had exercised options
pursuant to such plan to acquire 9,333 shares of the Company's Common Stock.
See "Management--1996 Incentive Stock Plan" and "Management--1996 Replacement
Stock Option Plan."
(d) In connection with the Merger, About Health merged with and into the
Company and each share of common stock of About Health exchanged for one share
of Common Stock of the Company. The persons who received shares of the Company
pursuant to this share exchange are set forth below:
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDER SHARES ISSUED
----------- -------------
<S> <C>
Don P. Greenberg............................................ 450,970
Timothy Smith............................................... 47,481
Sonny Bloom................................................. 22,776
Trust for Miriam Greenberg.................................. 20,654
Trust for David Greenberg................................... 12,909
Trust for Robert Greenberg.................................. 12,909
Trust for Daniel Greenberg.................................. 12,909
Trust for Amy Greenberg..................................... 12,909
-------
Total................................................... 593,517
=======
</TABLE>
No underwriters were engaged in connection with the foregoing sales of
securities. The foregoing sales, other than the issuance of shares upon the
exercise of options, were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act for transactions
not involving a public offering. The issuance of the shares upon the exercise
of options was made in reliance on the exemption from registration provided
under Rule 701 of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) LIST OF EXHIBITS (filed herewith unless otherwise noted)
<TABLE>
<CAPTION>
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Company and Mor-
gan Stanley & Co. Incorporated, Smith Barney Inc. and
Piper Jaffray Inc.*
3.1 Form of Amended and Restated Certificate of Incorporation
of Preferred Payment Systems, Inc.*
3.2 Form of Bylaws of Preferred Payment Systems, Inc.*
4.1 Specimen Stock Certificate of Preferred Payment Systems,
Inc.*
4.2 1996 Registration Rights Agreement
4.3 Amendment to the 1996 Registration Rights Agreement
4.4 1997 Registration Rights Agreement
5.1 Opinion of McDermott, Will & Emery*
10.1 Employment Agreement between Preferred Payment Systems,
Inc. and Steven E. Nelson
10.2 Employment Agreement between Preferred Payment Systems,
Inc. and James T. Doody
10.3 Employment Agreement between Preferred Payment Systems,
Inc. and Byron W. Smith
10.4 Employment Agreement between Preferred Payment Systems,
Inc. and Craig W.
Cunningham
10.5 Employment Agreement between Preferred Payment Systems,
Inc. and Brent R. Anderson
10.6 Employment Agreement between Preferred Payment Systems,
Inc. and Robert C. Trumpy*
10.7 Employment Agreement between Preferred Payment Systems,
Inc. and Donald P.
Greenberg*
10.8 Amended and Restated 1996 Incentive Stock Plan
10.9 1996 Replacement Stock Option Plan
10.10 Preferred Payment Systems, Inc. Lease in Naperville, Illi-
nois
11.1 Statement Regarding Computation of Earnings Per Share*
21.1 Subsidiaries of Preferred Payment Systems, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers and Lybrand, L.L.P.
27.1 Financial Data Schedule
99.1 Consent of McDermott, Will & Emery (included with Exhibit
5.1)*
</TABLE>
- --------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Representative
of the Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Representative of the Underwriters to permit prompt delivery to each
purchaser.
II-3
<PAGE>
The Registrant hereby undertakes further that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Naperville, State of
Illinois on November 20, 1997.
Preferred Payment Systems, Inc.
/s/ Steven E. Nelson
By: _________________________________
Steven E. Nelson
President, Chief Executive
Officer, and Chairman of the
Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven E. Nelson and Robert C. Trumpy and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Preferred Payment Systems, Inc.) to sign any or all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Steven E. Nelson President, Chief Executive November 20, 1997
____________________________________ Officer, and Chairman of
Steven E. Nelson the Board
/s/ Don P. Greenberg Executive Vice President, November 20, 1997
____________________________________ Chief Operating Officer and
Don P. Greenberg Director
/s/ James T. Doody Executive Vice President-- November 20, 1997
____________________________________ Sales and Director
James T. Doody
/s/ Byron W. Smith Executive Vice President, November 20, 1997
____________________________________ Chief Information Officer
Byron W. Smith and Director
/s/ Robert C. Trumpy Executive Vice President, November 20, 1997
____________________________________ Chief Financial Officer,
Robert C. Trumpy and Secretary
(Chief Financial and
Accounting Officer)
/s/ Jonathan M. Goldstein Director November 20, 1997
____________________________________
Jonathan M. Goldstein
/s/ Richard D. Tadler Director November 20, 1997
____________________________________
Richard D. Tadler
</TABLE>
II-5
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of August 30,
1996 by and among Preferred Payment Systems, Inc., a Delaware corporation
(including its successors by merger, acquisition, reorganization or otherwise,
the "Company"), the investors named on Schedule A attached hereto (the
"Investors") and the current shareholders and optionholders of the Company named
on Schedule B attached hereto (the "Shareholder").
WHEREAS, the Investors propose to purchase certain convertible subordinated
notes in the aggregate principal amount of $10,000,000 (the "Convertible Notes")
pursuant to a Convertible Note Purchase Agreement dated as of the date hereof
(the "Purchase Agreement") by ad among the Company, the Investors and certain of
the Shareholders.
WHEREAS, the Convertible Notes are convertible into shares of Convertible
Redeemable Preferred Stock of the Company (the "Convertible Preferred Stock")
and shares of Redeemable Preferred Stock of the Company.
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the transactions contemplated by the Purchase Agreement.
NOW, THEREFORE, in consideration of the premises, as an inducement to the
Investors to consummate the transactions contemplated by the Purchase Agreement,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company hereby covenants and agrees with each
Investor as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the United States Securities and Exchange
Commission, or any other federal agency at the time administering the Securities
Act.
"Common Stock" shall mean (i) the Company's common stock, par value
$.01 per share, as authorized on the date of this Agreement, (ii) any other
capital stock of any class or classes (however designated) of the Company,
authorized on or after the date hereof, the holders of which shall have the
right, without limitation as to amount per share, either to all or to a share of
the balance of current dividends and liquidating distributions after the payment
of dividends and distributions on any shares entitled to preference in the
payment thereof, and the holders of which shall ordinarily, in the absence of
contingencies, be entitled to vote for the election of directors of the Company
(even though the right so to vote has been suspended by the happening of such a
contingency), and (iii) any other securities into which or for which any of the
securities described in (i) or (ii) above may be converted or exchanged pursuant
to a plan of recapitalization, reorganization, merger, sale of assets or
otherwise.
<PAGE>
"Conversion Shares" shall mean shares of the Company's Common Stock
issued and issuable upon conversion of the Convertible Preferred Stock.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the time.
"Person" shall mean an individual, a corporation, a partnership, a
joint venture, a trust, an unincorporated organization, a limited liability
company or partnership, a government and any agency or political subdivision
thereof.
"Registrable Securities" shall mean (i) the Conversion Shares or
shares of any other securities issued and issuable upon conversion of the
Convertible Preferred Stock, and (ii) any other securities issued and issuable
with respect to any such shares described in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization (it being
understood that for purposes of this Agreement, a Person will be deemed to be a
holder of Registrable Securities whenever such Person has the right to then
acquire or obtain form the Company any Registrable Securities, whether or not
such acquisition has actually been effected.)
"Registration Expenses" shall mean the expenses so described in
Section 6.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
2. Demand Registration.
(a) At any time after the earlier to occur of (i) August 30, 1998 or
(ii) the date on which the Company becomes subject to Section 13 or Section
15(d) of the Exchange Act, the holders of at least twenty percent (20%) of the
Registrable Securities may request the Company register under the Securities Act
the Registrable Securities held by such requesting holders (such amount to be at
least 20% of the Registrable Securities or a lesser percentage, if the
reasonably anticipated aggregate offering price to the public of such public
offering (net of reasonably anticipated underwriting discounts and commissions)
would exceed $3,000,000) in the manner specified in such request. Upon receipt
of such request, the Company shall promptly deliver notice of such request to
all Persons holding Registrable Securities who shall then have thirty (30) days
to notify the Company in writing of their desire to be included in such
registration. If the request for registration contemplates an underwritten
public offering, the Company shall state such in written notice and in such
event the right of any Person to participate in such registration shall be
conditioned upon their participation in such underwritten public offering and
the inclusion of their Registrable Securities in the underwritten public
offering to the extent provided herein. The Company will use its best efforts
to expeditiously effect the
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registration of all Registrable Securities whose holders request participation
in such registration under the Securities Act, but only to the extent provided
for in the following provisions of this Agreement; provided, however, that the
Company shall not be required to effect registration pursuant to a request under
this Section 2 more than two (2) times for the holders of Registrable Securities
as a group. Notwithstanding anything to the contrary contained herein, no
request may be made under this Section 2 within 180 days after the effective
date of a registration statement filed by the Company covering a firm commitment
underwritten public offering in which the holders of Registrable Securities
shall have been entitled to join pursuant to Section 4 and in which there shall
have been effectively registered all Registrable Securities as to which
registration shall have been requested.
(b) If a request for registration pursuant to this section 2 is made
and the Company has not previously effected an initial underwritten public
offering of its securities, the Company may include in such requested
registration any authorized but unissued shares of Common Stock (or authorized
treasury shares) for sale by the Company to effect an initial public offering;
and if the managing underwriter of such initial public offering determines in
good faith that the total number of securities sought to be included in such
offering should be limited due to the necessity of including in such
underwriting or registration securities to be sold for the account of the
Company, the number of shares of Common Stock sought to be included on behalf of
the Company shall not be reduced until all other shares of securities sought to
be included in such initial public offering (including Registrable Securities)
are first reduced in accordance with the priorities set forth in Section 4
hereof. Notwithstanding anything herein to the contrary, in the event (x) the
number of shares of Common Stock so included by the Company pursuant to this
clause (b) exceeds the number of Registrable Securities requested to be included
by the holders who originally requested such registration or (y) if the number
of Registrable Securities requested to be included by any holders is reduced by
operation of the preceding sentence of this clause (b), then such registration
shall be deemed to be a registration in accordance with and pursuant to Section
4 and the holders of Registrable Securities shall not be deemed to have
exercised one of their rights to request registration under Section 2.
(c) With respect to a request for registration pursuant to this
Section 2 other than a request as described in clause (b) above, the Company may
include in each such requested registration any authorized but unissued shares
of Common Stock (or authorized treasury shares) for sale by the Company and the
Shareholders may include in each such requested registration shares of Common
Stock held by such Shareholders; provided, however, that any such shares of
Common Stock shall not be included to the extent that the managing underwriter
of the offering (if the offering is underwritten) or the holders of a majority
of the shares of the Registrable Securities who requested the registration (if
the offering is not underwritten), determine(s) in good faith that the inclusion
of such shares will interfere with the successful marketing of the shares of the
Registrable Securities to be included in the registration. If a requested
registration involves an underwritten public offering and the managing
underwriter of such offering determines in good faith that the number of
securities sought to be offered should be limited due to market conditions, then
the number of securities to be included in such underwritten public
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<PAGE>
offering shall be reduced to a number deemed satisfactory by such managing
underwriter, provided that the shares to be excluded shall be determined in the
following order of priority: (i) securities held by any other Persons (other
than the Shareholders and holders of Registrable Securities) having a
contractual, incidental "piggy back" right to include such securities in the
registration statement, (ii) securities held by the Shareholders, (iii)
securities offered on behalf of the Company, (iv) Registrable Securities of
holders who did not make the original request for registration and, if
necessary, (v) Registrable Securities of holders who requested such registration
pursuant to Section 2. If there is a reduction of the number of Registrable
Securities pursuant to clauses (iv) and (v), such reduction shall be made on a
pro rata basis (based upon the aggregate number of Registrable Securities held
by such holders).
(d) Whenever a requested registration pursuant to Section 2(a) is for
an underwritten public offering, the Company shall have the right to approve the
managing underwriter chosen by the holders of a majority of the Registrable
Securities to be sold in such offering (which approval will not be unreasonably
withheld or delayed). The Company may not cause any other registration of
securities for sale for its own account (other than a registration effected
solely to implement an employee benefit plan or a transaction to which Rule 145
of the Commission is applicable) to become effective within 90 days following
the effective date of any registration required pursuant to this Section 2.
(e) If, at the time of any request to register Registrable Securities
pursuant to Section 2(a), the Company is preparing a registration statement for
a public offering (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 of the Commission is
applicable) which in fact is filed and becomes effective within ninety (90) days
after the request, or is engaged in any activity (including a concurrent or
proposed security issuance or acquisition) which, in the good faith
determination of the Company's board of directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may at is option direct that such request be delayed for a period (the
"Black-Out Period") not in excess of 120 days from the effective date of such
offering or the date of commencement of such other activity, as the case may be.
The aggregate amount of Black-Out Periods in any consecutive twelve month period
shall not exceed 120 days. Nothing in this Section 2(e) shall prelude a holder
of Registrable Securities from enjoying registration rights which it might
otherwise possess under Section 4 hereof.
3. Form-3.
(a) After the first public offering of its securities registered
under the Securities Act, the Company shall use its best efforts to qualify and
remain qualified to register securities on Form S-3 (or any successor form)
under the Securities Act. The holders of at least twenty (20%) of the
Registrable Securities shall have the right to request any number of
registrations on Form S-3 (or any successor form) for the Registrable Securities
held by such requesting holders, including registrations for the sale of such
Registrable Securities on a delayed or continuous basis pursuant to Rule 415
under the
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<PAGE>
Securities Act. Such requests shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended method of
disposition of such shares by such holder or holders. The Company shall give
notice to all other holders of the Registrable Securities of the receipt of a
request for registration pursuant to this Section 3 and such holders of
Registrable Securities shall then have thirty (30) days to notify the Company in
writing of their desire to participate in the registration.
(b) If, at the time of any request to register Registrable Securities
pursuant to this Section 3, the Company is preparing a registration statement
for a public offering (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 of the Commission is
applicable) which in fact is filed and becomes effective within ninety (90) days
after the request, or is engaged in any activity (including a concurrent or
proposed security issuance or acquisition) which, in the good faith
determination of the Company's board of directors, would be adversely affected
by the requested registration to the material detriment of the Company, then the
Company may request a Black-Out Period in accordance with, and subject to,
Section 2(e) hereof. Subject to the foregoing, the Company will use its best
efforts, in each case, to effect promptly the registration of the Registrable
Securities to the extent requested by the holder or holders thereof on Form S-3
and to keep such registration effective until the Registrable Securities
registered thereunder are sold.
(c) In the case of a registration for the sale of Registrable
Securities on a delayed or continuous basis pursuant to Rule 415 of the
Securities Act (a "Shelf Registration Statement"), upon receipt of any notice (a
"Suspension Notice") from the Company of the happening of any event which makes
any statement made in the Shelf Registration Statement or related prospectus
untrue or which requires the making of any changes in such Shelf Registration
Statement or prospectus so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made not misleading, each holder of Registrable Securities
registered under such Shelf Registration Statement shall forthwith discontinue
disposition of such Registrable Securities pursuant to such Shelf Registration
Statement until such holder's receipt of the copies of the supplemented or
amended prospectus or until it is advised in writing (the "Advice") by the
Company that the use of the prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference in
the prospectus; provided, however, that the Company shall not give a Suspension
Notice until after the Shelf Registration Statement has been declared effective
and shall not give more than one Suspension Notice during any period of twelve
consecutive months and in no event shall the period from the date on which any
holder receives a Suspension Notice to the date on which any holder receives
either the Advice or copies of the supplemented or amended prospectus (the
"Suspension Period') exceed 60 days. In the event that the Company shall give
any Suspension Notice, the Company shall use its best efforts and take such
actions as are reasonably necessary to render the Advice and end the Suspension
Period as promptly as practicable.
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<PAGE>
4. Piggyback Registration. If the Company at any time proposes to
register any of its securities under the Securities Act (including, without
limitation, pursuant to a demand of any stockholder of the Company exercising
registration rights) for sale to the public (except with respect to registration
statements on Forms S-4, S-8 or another form not available for registering the
Registrable Securities for sale to the public), each such time it will give
written notice at the applicable address of record to each holder of Registrable
Securities and to each Shareholder of its intention to do so. Upon the written
request of any of such holders of the Registrable Securities and/or any such
Shareholders, given within twenty (20) days after receipt by such Person of such
notice, the Company will, subject to the limits contained in this Section 4, use
its best efforts to cause all such Registrable Securities of said requesting
holders and all such Common Stock of said requesting Shareholders to be
registered under the Securities Act and qualified for sale under any state blue
sky law, all to the extent required to permit such sale or other disposition of
said Registrable Securities and Common Stock so registered; provided, however,
that if the Company is advised in writing in good faith by any managing
underwriter of the Company's securities being offered in a public offering
pursuant to such registration statement that the amount to be sold by persons
other than the Company (collectively, "Selling Stockholders") is greater than
the amount which can be offered without adversely affecting the offering, the
Company may reduce the amount offered for the accounts of Selling Stockholders
(including such holders of shares of Registrable Securities) to a number deemed
satisfactory by such managing underwriter; provided that the shares to be
excluded shall be determined in the following order of priority: (i) securities
held by any Persons not having any such contractual, incidental registration
rights, (ii) securities held by any Persons having contractual, incidental
registration rights pursuant to an agreement which is not this Agreement, (iii)
securities held by the Shareholders, and (iv) the Registrable Securities sought
to be included by the holders as determined on a pro rata basis (based upon the
aggregate number of Registrable Securities held by such holders); provided
further however, that in the event the holders Registrable Securities shall have
received in the aggregate net proceeds of at least $30 million from the previous
sale of Registrable Securities, then the securities sought to be included by the
Shareholders and the Registrable Securities sought to be included by the holders
shall be reduced on a pro rata basis notwithstanding clauses (iii) and (iv)
above.
5. Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect the
registration of any of its securities under the Securities Act, the Company
will, as expeditiously as possible:
(i) use its best efforts diligently to prepare and file with the
Commission a registration statement on the appropriate form under the Securities
Act with respect to such securities, which form shall comply as to form in all
material respects with the requirements of the applicable form and include all
financial statements required by the Commission to be filed therewith, and use
its best efforts to cause such registration statement to become and remain
effective until completion of the proposed offering;
(ii) prepare and file with the Commission such amendments and
supplements
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<PAGE>
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the seller or sellers of such securities shall desire to sell or otherwise
dispose of the same, but only to the extent provided in this Agreement;
(iii) furnish to each selling holder and the underwriters, if any,
such number of copies of such Registration Statement, any amendments thereto,
any documents incorporated by reference therein, the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such selling holder may reasonably request in
order to facilitate the public sale or other disposition of the securities owned
by such selling holder;
(iv) use every reasonable effort to register or qualify the
securities covered by such registration statement under such other securities or
state blue sky laws of such jurisdictions as each selling holder shall
reasonably request, and do any and all other acts and things which may be
necessary under such securities or blue sky laws to enable such selling holder
to consummate the public sale or other disposition in such jurisdictions of the
securities owned by such selling holder, except that the Company shall not for
any such purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified;
(v) within a reasonable time before each filing of the registration
statement or prospectus or amendments or supplements thereto with the
Commission, furnish to counsel selected by the holders of Registrable Securities
copies of such documents proposed to be filed, which documents shall be subject
to the reasonable approval of such counsel;
(vi) promptly notify each selling holder of Registrable Securities,
such selling holders' counsel and any underwriter and (if requested by any such
Person) confirm such notice in writing, of the happening of any event which
makes any statement made in the registration statement or related prospectus
untrue or which requires the making of any changes in such registration
statement or prospectus so that they will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made not misleading; and, as promptly as practicable thereafter,
prepare and file with the Commission and furnish a supplement or amendment to
such prospectus so that, as thereafter deliverable to the purchasers of such
Registrable Securities, such prospectus will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(vii) use its best efforts to prevent the issuance of any order
suspending the effectiveness of a registration statement, and if one is issued
use its best efforts to obtain the withdrawal of any order suspending the
effectiveness of a registration statement at the earliest possible moment;
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<PAGE>
(viii) if requested by the managing underwriter or underwriters (if
any), any selling holder, or such selling holder's counsel, promptly incorporate
in a prospectus supplement or post-effective amendment such information as such
Person requests to be included therein, including, without limitation, with
respect to the securities being sold by such selling holder to such underwriter
or underwriters, the purchase price being paid therefor by such underwriter or
underwriters and with respect to any other terms of an underwritten offering of
the securities to be sold in such offering, and promptly make all required
filings of such prospectus supplement or post-effective amendment;
(ix) make available to each selling holder, any underwriter
participating in any disposition pursuant to a registration statement, and any
attorney, accountant or other agent or representative retained by any such
selling holder or underwriter (collectively, the "Inspectors"), all financial
and other records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to enable them
to exercise their due diligence responsibility, and cause the Company's
officers, directors and employees to supply all information requested by any
such Inspector in connection with such registration statement;
(x) enter into any reasonable underwriting agreement required by the
proposed underwriter(s) for the selling holders, if any, and use its best
efforts to facilitate the public offering of the securities;
(xi) furnish to each prospective selling holder a signed counterpart,
addressed to the prospective selling holder, of (A) an opinion of counsel for
the Company, dated the effective date of the registration statement, and (B) a
"comfort" letter signed by the independent public accountants who have certified
the Company's financial statements included in the registration statement,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants' letter) with respect to events subsequent to the date of the
financial statements, as are customarily covered (at the time of such
registration) in opinions of the Company's counsel and in accountants' letters
delivered to the underwriters in underwritten public offerings of securities;
(xii) use its best efforts to cause the securities covered by such
registration statement to be listed on the securities exchange or quoted on the
quotation system on which the Common Stock of the Company is then listed or
quoted (or if the Common Stock is not yet listed or quoted, then on such
exchange or quotation system as the selling holders and the Company shall
determine);
(xiii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make generally available to its
security holders, in each case as soon as practicable, but not later than 45
days after the close of the period covered thereby (90) days in case the period
covered corresponds to a fiscal year of the Company), an earnings statement of
the Company which will satisfy the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder (or any comparable successor provisions); and
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<PAGE>
(xiv) otherwise cooperate with the underwriters), the Commission and
other regulatory agencies and take all actions and execute and deliver or cause
to be executed and delivered all documents necessary to effect the registration
of any securities under this Agreement.
6. Expenses. All expenses incurred in effecting the registrations
provided for in Sections 2, 3 and 4, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and fees of one counsel for the selling holders of
Registrable Securities (which counsel shall be selected by the holders of not
less than a majority of the Registrable Securities to be included in any such
registration), underwriting expenses (other than fees, commissions or
discounts), expenses of any audits incident to or required by any such
registration and expenses of complying with the securities or blue sky laws of
any jurisdictions pursuant to Section 5(iv) hereof (all of such expenses
referred to as "Registration Expenses"), shall be paid by the Company.
7. Indemnification. (a) The Company shall indemnify and hold harmless
the selling holder of such securities, each underwriter (as defined in the
Securities Act), and each other Person who participates in the offering of such
securities and each other Person, if any, who controls (within the meaning of
the Securities Act) such seller, underwriter or participating Person
(individually and collectively the "Indemnified Person") against any losses,
claims, damages or liabilities (collectively the "liability"), joint or several,
to which such Indemnified Person may become subject under the Securities Act or
any other statute or at common law, insofar as such liability (or action in
respect thereof) arises out of or is based upon (i) any untrue statement or
alleged untrue statement of any material fact contained, on the effective date
thereof, in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or (ii)
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading.
Except as otherwise provided in Section 7(d), the Company shall reimburse each
such Indemnified Person in connection with investigating or defending any such
liability; provided, however, that.the Company shall not be liable to any
Indemnified Person in any such case to the extent that any such liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, preliminary or
final prospectus, or amendment or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by such Person
specifically for use therein, or upon such statement or omission therein based
on the authority of an expert within the meaning of that term as defined in the
Securities Act (but only if the Company had no reasonable ground to believe, and
did not believe, that the statements made on the authority of an expert were
untrue or that there was an omission to state a material fact); and provided
further, that the Company shall not be required to indemnify any Person against
any liability arising from any untrue or misleading statement or omission
contained in any preliminary prospectus if such deficiency is corrected in the
final prospectus or for any liability which arises out of the failure of any
Person to deliver a prospectus as required by the Securities Act regardless of
any investigation made by or on behalf of such Indemnified
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Person and shall survive transfer of such securities by such seller.
(b) Each selling holder of any securities included in such
registration being effected, indemnify and hold harmless each other selling
holder of any securities, the Company, its directors and officers, each
underwriter and each other Person, if any, who controls the Company or such
underwriter (individually and collectively also the "Indemnified Person"),
against any liability, joint or several, to which any such Indemnified Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such liability (or actions in respect thereof) arises out of or
is based upon (i) any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which securities were registered under the Securities Act at the
request of such selling holder, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or (ii) any omission
or alleged omission by such selling holder to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in the case of (i) and (ii) to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in such registration statement, preliminary or final
prospectus, amendment or supplement thereto in reliance upon and in conformity
with information furnished in writing to the Company by such selling holder
specifically for use therein, and then only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission by the
selling holder was not based on the authority of an expert as to which the
selling holder had no reasonable ground to believe, and did not believe, that
the statement made on the authority of such expert was untrue or that there was
an omission to state a material fact. Such selling holder shall reimburse any
Indemnified Person for any legal fees incurred in investigating or defending any
such liability; provided, however, that such selling holder's obligations
hereunder shall be limited to an amount equal to the proceeds to such selling
holder of the securities sold in any such registration; and provided, further,
however, that no selling holder shall be required to indemnify any Person
against any liability arising from any untrue or misleading statement or
omission contained in any preliminary prospectus if such deficiency is corrected
in the final prospectus or for any liability which arises out of the failure of
any Person to deliver a prospectus as required by the Securities Act.
(c) Indemnification similar to that specified in Sections 7(a) and
(b) shall be given by the Company and each selling holder (with such
modifications as may be appropriate) with respect to any required registration
or other qualification of their securities under any federal or state law or
regulation of governmental authority other than the Securities Act.
(d) In the event the Company, any selling holder or other Person
receives a complaint, claim or other notice of any liability or action, giving
rise to a claim for indemnification under Sections 7(a), (b) or (c), the Person
claiming indemnification under such paragraphs shall promptly notify the Person
against whom indemnification is sought of such complaint, notice, claim or
action, and such indemnifying Person shall have the right to investigate and
defend any such loss, claim, damage, liability or action. The Person
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<PAGE>
claiming indemnification shall have the right to employ separate counsel in any
such action and to participate in the defense thereof but the fees and expenses
of such counsel shall not be at the expense of the Person against whom
indemnification is sought (unless the indemnifying party fails to promptly
defend, in which case the fees and expenses of such separate counsel shall be
home by the Person against whom indemnification is sought). In no event shall a
Person against whom indemnification is sought be obligated to indemnify any
Person for any settlement of any claim or action effected without the
indemnifying Person's prior written consent.
8. Compliance with Rule 144. In the event that the Company (i) registers
a class of securities under Section 12 of the Exchange Act or (ii) shall
commence to file reports under Section 13 or 15(d) of the Exchange Act,
thereafter, the Company will use its best efforts thereafter to file with the
Commission such information as is required under the Exchange Act for so long as
there are holders of Registrable Securities; and in such event, the Company
shall use its best efforts to take all action as may be required as a condition
to the availability of Rule 144 under the Securities Act (or any comparable
successor rules). The Company shall furnish to any holder of Registrable
Securities upon request a written statement executed by the Company as to the
steps it has taken to comply with the current public information requirement of
Rule 144 (or such comparable successor rules). After the occurrence of the
first underwritten public offering of Common Stock of the Company pursuant to an
offering registered under the Securities Act on Form S-1 or Form SB-1 (or any
comparable successor forms), subject to the limitations on transfers imposed by
this Agreement, the Company shall use its best efforts to facilitate and
expedite transfers of Registrable Securities pursuant to Rule 144 under the
Securities Act, which efforts shall include timely notice to its transfer agent
to expedite such transfers of Registrable Securities.
9. "Market Stand-off" Agreement. In connection with the Company's initial
underwritten public offering, the holders of Registrable Securities and the
Shareholders, if requested in good faith by the Company and the managing
underwriter of the Company's securities, shall agree not to sell or otherwise
transfer or dispose of any securities of the Company held by them (except for
any securities sold pursuant to such registration statement) for a period
following the effective date of the applicable registration statement as agreed
to by such parties, provided, however that in no event shall such period exceed
180 days. In connection with any other underwritten public offering by the
Company, to the extent holders of not less than a majority of the Registrable
Securities have agreed with the managing underwriter(s) not to sell or otherwise
transfer or dispose of any of the Registrable Securities held by each them for a
period of time after the effective date of any such registration statement in
order to effect an orderly public distribution thereof, then each holder of
Registrable Securities and each Shareholder, if requested in good faith by the
Company and the managing underwriter, shall enter into and execute such an
agreement with such managing underwriter(s) and the Company pertaining to a
restriction on the transfer of any securities of the Company then held by them
(and not included in such registration) during such same time period and on the
same terms and conditions as the agreement made by said holders of a majority of
the Registrable Securities.
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10. Amendments. The provisions of this Agreement may be amended, and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of at least sixty-seven percent (67%) of the Registrable
Securities.
11. Transferability of Registration Rights. The registration rights set
forth in this Agreement are transferable to each transferee of Registrable
Securities, other than a transferee whose activities, products or services are
competitive with the activities, products or services of the Company as of the
date of such transfer. Each subsequent holder of Registrable Securities must
consent in writing to be bound by the terms and conditions of this Agreement in
order to acquire the rights granted pursuant to this Agreement.
12. Rights Which May Be Granted to Subsequent Investors. Other than
permitted transferees of Registrable Securities under Section 11 hereof, the
Company shall not, without the prior written consent of holders of at least
fifty one percent (51%) of the Registrable Securities, (a) allow purchasers of
the Company's securities or transferees of securities held by the Shareholders
to become a party to this Agreement or (b) grant any other registration rights
to any third parties.
13. Damages. The Company recognizes and agrees that each holder of
Registrable Securities will not have an adequate remedy if the Company fails to
comply with the terms and provisions of this Agreement and that damages will not
be readily ascertainable, and the Company expressly agrees that, in the event of
such failure, it shall not oppose an application by any holder of Registrable
Securities or any other Person entitled to the benefits of this Agreement
requiring specific performance of any and all provisions hereof or enjoining the
Company from continuing to commit any such breach of this Agreement.
14. Miscellaneous.
(a) All notices, requests, demands and other communications provided
for hereunder shall be in writing and mailed (by first class registered or
certified mail, postage prepaid), telegraphed, sent by express overnight courier
service or electronic facsimile transmission (with a copy by mail), or delivered
to the applicable party at the addresses indicated below:
If to the Company:
Preferred Payment Systems, Inc.
1230 East Diehl Road,
Suite 300
Naperville, IL 60563
Attention: Steven E. Nelson
Telecopy No.: (708) 245-0740
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With a copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606-5096
Attention: Bernard S. Kramer, Esq.
Telecopy No.: (312) 984-3669
If to the Investors:
TA Associates, Inc.
High Street Tower, Suite 2500
125 High Street
Boston, MA 02110
Attention: Jonathan M. Goldstein
Telecopy No.: (617) 574-6728
With a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
53 State Street
Boston, MA 02109
Attention: Kevin M. Dennis, Esq.
Telecopy No.: (617) 570-8150
If to any other holder of Registrable Securities or the Shareholders:
At such Person's address for notice as set forth in the books and
records of the Company
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to other parties complying as to delivery with
the terms of this subsection (a). All such notices, requests, demands and other
communications shall, when mailed, telegraphed or sent, respectively, be
effective (i) two days after being deposited in the mails or (ii) one day after
being delivered to the telegraph company, deposited with the express overnight
courier service or sent by electronic facsimile transmission, respectively,
addressed as aforesaid.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
(c) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-13-
<PAGE>
(d) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed as of the date first set forth above.
PREFERRED PAYMENT SYSTEMS, INC.
By:________________________________
Name:
Title:
SHAREHOLDERS:
___________________________________
Steven E. Nelson
___________________________________
James T. Doody
___________________________________
Byron W. Smith
___________________________________
Craig Cunningham
___________________________________
Brent R. Anderson
___________________________________
Rosemary Weiner
___________________________________
Daniel Kenney
___________________________________
Thomas D. Bartlett
-15-
<PAGE>
____________________________________
Daniel J. Marion
___________________________________
Donna J. Ambrosino
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed as of the date first set forth above.
PREFERRED PAYMENT SYSTEMS, INC.
By:________________________________
Name:
Title:
SHAREHOLDERS:
___________________________________
Steven E. Nelson
___________________________________
James T. Doody
___________________________________
Byron W. Smith
___________________________________
Craig Cunningham
___________________________________
Brent R. Anderson
___________________________________
Rosemary Weiner
___________________________________
Daniel Kenney
___________________________________
Thomas D. Bartlett
-17-
<PAGE>
___________________________________
Daniel J. Marion
___________________________________
Donna J. Ambrosino
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
-18-
<PAGE>
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
___________________________________
Brian Master
___________________________________
Debra Skinner
-19-
<PAGE>
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
-20-
<PAGE>
___________________________________
Brian Master
___________________________________
Debra Skinner
-21-
<PAGE>
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
-22-
<PAGE>
___________________________________
Brian Master
___________________________________
Debra Skinner
-23-
<PAGE>
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
-24-
<PAGE>
___________________________________
Brian Master
___________________________________
Debra Skinner
-25-
<PAGE>
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
-26-
<PAGE>
___________________________________
Brian Master
___________________________________
Debra Skinner
-27-
<PAGE>
___________________________________
Joan C. Bottigliero
___________________________________
Donald A. Gieser
___________________________________
Zan W. Larsen
___________________________________
Patricia A. Loid
___________________________________
Kimberly S. Pritchett
___________________________________
Chad J. Charles
___________________________________
Keith I. Smith
___________________________________
Janet Rancati
___________________________________
Clare Cortez
___________________________________
Tom Nolte
___________________________________
Mary Jane LaBelle
-28-
<PAGE>
___________________________________
Brian Master
___________________________________
Debra Skinner
-29-
<PAGE>
INVESTORS:
ADVENT NEW YORK L.P.
By: TA Associates VI L.P., its General Partner
By: TA Associates Inc., its General Partner
By: _______________________________________
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
TA VENTURE INVESTORS LIMITED
PARTNERSHIP
By: _______________________________________
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
ADVENT VII L.P.
By: TA Associates VII L.P., its General Partner
By: TA Associates Inc., its General Partner
By: _______________________________________
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
ADVENT ATLANTIC AND PACIFIC III, L.P.
By: TA Associates AAP III Partners, its General Partner
By: TA Associates, Inc.
By: _______________________________________
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
-30-
<PAGE>
SCHEDULE A
----------
to
Registration Rights Agreement
List of Investors
-----------------
Advent New York L.P.
TA Venture Investors Limited Partnership
Advent VII L.P.
Advent Atlantic and Pacific III, L.P.
-31-
<PAGE>
EXHIBIT 4.3
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
This AMENDMENT TO REGISTRATION RIGHTS AGREEMENT (this "Amendment") is made
and entered into as of the 31st day of July, 1997 by and among Preferred Payment
Systems, Inc., a Delaware corporation (including its successors by merger,
acquisition, reorganization or otherwise, the "Company"), the investors named on
Schedule A attached hereto (the "Investors") and the current shareholders and
optionholders of the Company named on Schedule B attached hereto (the
"Shareholders").
WHEREAS, About Health, Inc., a Maryland corporation ("AHI"), Preferred
Payment Systems, L.L.C., a Delaware limited liability company, Preferred Payment
Systems, Inc., a Delaware corporation and the shareholders of AHI (the "AHI
Shareholders") have entered into that certain Contribution Agreement, dated July
31, 1997; and
WHEREAS, the Company, the Investors and the Shareholders desire to amend
the Registration Rights Agreement, dated as of August 30, 1996 by and among the
Company, the Investors and the Shareholders (the "Agreement"), as provided in
the Contribution Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, the parties
hereby agree to amend the Agreement as follows:
A. Section 2(c) of the Agreement is hereby modified by deleting it in its
entirety and by adding the following in its place:
" (c) With respect to a request for registration pursuant to
this Section 2 other than a request as described in clause (b) above,
the Company may include in each such requested registration any
authorized but unissued shares of Common Stock (or authorized treasury
shares) for sale by the Company and the Shareholders may include in
each such requested registration shares of Common Stock held by such
Shareholders; provided, however, that any such shares of Common Stock
shall not be included to the extent that the managing underwriter of
the offering (if the offering is underwritten) or the holders of a
majority of the shares of Registrable Securities who requested the
registration (if the offering is not underwritten), determine(s) in
good faith that the inclusion of such shares will interfere with the
successful marketing of the shares of Registrable Securities to be
included in the registration. If a requested registration involves an
underwritten public offering and the managing underwriter of such
offering determines in good faith that the number of securities sought
to be offered should be limited due to market conditions, then the
<PAGE>
number of securities to be included in such underwritten public
offering shall be reduced to a number deemed satisfactory by such
managing underwriter, provided that the shares to be excluded shall be
determined in the following order of priority: (i) securities held by
any other Persons (other than the Shareholders, the AHI Shareholders
and holders of Registrable Securities) having a contractual,
incidental "piggy back" right to include such securities in the
registration statement, (ii) securities held by the Shareholders and
the AHI Shareholders on a pro rata basis (based upon the aggregate
number of Registrable Securities held by such holders), (iii)
securities offered on behalf of the Company, (iv) Registrable
Securities of holders who did not make the original request for
registration and, if necessary, and (v) Registrable Securities of
holders who requested such registration pursuant to Section 2. If
there is a reduction of the number of Registrable Securities pursuant
to clauses (iv) or (v), such reduction shall be made on a pro rata
basis (based upon the aggregate number of Registrable Securities held
by such holders)."
B. Section 4 of the Agreement is hereby modified by deleting it in its
entirety and by adding the following in its place:
" 4. Piggyback Registration. If the Company at any time proposes
to register any of its securities under the Securities Act (including,
without limitation, pursuant to a demand of any stockholder of the
Company exercising registration rights) for sale to the public (except
with respect to registration statements on Forms S-4, S-8 or another
form not available for registering the Registrable Securities for sale
to the public), each such time it will give written notice at the
applicable address of record to each holder of Registrable Securities
and to each Shareholder of its intention to do so. Upon the written
request of any of such holders of the Registrable Securities and/or
any such Shareholders, given within twenty (20) days after receipt by
such Person of such notice, the Company will, subject to the limits
contained in this Section 4, use its best efforts to cause all such
Registrable Securities of said requesting holders and all such Common
Stock of said requesting Shareholders to be registered under the
Securities Act and qualified for sale under any state blue sky law,
all to the extent required to permit such sale or other disposition of
said Registrable
<PAGE>
Securities and Common Stock so registered; provided, however, that if
the Company is advised in writing in good faith by any managing
underwriter of the Company's securities being offered in a public
offering pursuant to such registration statement that the amount to be
sold by persons other than the Company (collectively, "Selling
Stockholders") is greater than the amount which can be offered without
adversely affecting the offering, the Company may reduce the amount
offered for the accounts of Selling Stockholders (including such
holders of shares of Registrable Securities) to a number deemed
satisfactory by such managing underwriter; provided that the shares to
be excluded shall be determined in the following order of priority:
(i) securities held by any Persons not having any such contractual,
incidental registration rights, (ii) securities held by any Persons
not having contractual, incidental registration rights pursuant to an
agreement which is not this Agreement or the Registration Rights
Agreement dated as of July 31, 1997 by and among the Company and the
AHI Shareholders, (iii) securities held by the Shareholders and the
AHI Shareholders on a pro rata basis (based upon the aggregate number
of Registrable Securities held by such holders), and (iv) the
Registrable Securities sought to be included by the holders as
determined on a pro rata basis (based upon the aggregate number of
Registrable Securities held by such holders); provided further
however, that in the event the holders Registrable Securities shall
have received in the aggregate net proceeds of at least $30 million
from the previous sale of Registrable Securities, then the securities
sought to be included by the Shareholders and the Registrable
Securities sought to be included by the holders shall be reduced on a
pro rata basis notwithstanding clauses (iii) and (iv) above."
* * *
-3-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by the Company,
the Investors and the Shareholders on the day and year first above written.
COMPANY:
-------
PREFERRED PAYMENT SYSTEMS, INC.
By: ---------------------------------
Name: Steven E. Nelson
Title: President
<PAGE>
INVESTORS:
---------
ADVENT NEW YORK L.P.
By: TA Associates VI L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: -------------------------------------------
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
TA VENTURE INVESTORS LIMITED PARTNERSHIP
By: -------------------------------------------
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
ADVENT VII L.P.
By: TA Associates VII L.P., its General Partner
By: TA Associates, Inc., its General Partner
By: -------------------------------------------
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
ADVENT ATLANTIC AND PACIFIC III, L.P.
By: TA Associates AAP III Partners, its General
Partner
By: TA Associates, Inc.
By: -------------------------------------------
Name: Jonathan M. Goldstein
Title: Attorney-in-Fact
<PAGE>
SHAREHOLDERS:
------------
_______________________________
Steven E. Nelson
_______________________________
James T. Doody
_______________________________
Byron W. Smith
_______________________________
Craig Cunningham
_______________________________
Brent R. Anderson
_______________________________
Rosemary Weiner
_______________________________
Daniel Kenney
_______________________________
Thomas D. Bartlett
_______________________________
Daniel J. Marion
_______________________________
Donna J. Ambrosino
_______________________________
Joan C. Bottigliero
_______________________________
Donald A. Gieser
_______________________________
Zan W. Larsen
<PAGE>
_______________________________
Patricia A. Loid
_______________________________
Kimberly S. Pritchett
_______________________________
Chad J. Charles
_______________________________
William Zaun
_______________________________
Janet Rancati
_______________________________
Claire Cortez
_______________________________
Tom Nolte
_______________________________
Mary Jane LaBelle
_______________________________
Brian Master
_______________________________
Debra Skinner
<PAGE>
SCHEDULE A
to
Amendment to Registration Rights Agreement
NAME ADDRESS
---- -------
INVESTORS:
Advent New York L.P. c/o TA Associates, Inc.
Advent VII L.P. High Street Tower
Advent Atlantic and Pacific 125 High Street
III, L.P. Boston, MA 02110
TA Venture Investors Limited Attn: Jonathan M. Goldstein
Partnership
========================================================================
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B
to
Amendment to Registration Rights Agreement
SHAREHOLDERS: ADDRESS:
<S> <C>
Steven E. Nelson 27 Lakeside Lane
Fox Lake, IL 60020
James Doody 3308 Scottsdale
Naperville, IL 60584
Byron Smith 3579 Apple Mill Cove
Salt Lake City, UT 64109
Craig Cunningham 612 Steamboat
Naperville, IL 60566
Brent Anderson 11761 Brookmill Lane
Sandy, UT 84092
Rosemary Weiner 4 Slabtown Creek Road
Blairstown, NJ 07825
Daniel Kenney 427 Le Provence Circle
Naperville, IL 60540
Daniel Marion 1704 Frost Lane
Naperville, IL 60564
Thomas Bartlett 200 5th Avenue
Naperville, IL 60540
Donna Ambrosino 24 W 504 Bluff Court
Naperville, IL 60540
Joan Bottigliero 838 Mandrake
Batavia, IL 60510
Donald Gieser 435 Newport Drive
Naperville, IL 60566
Zan Larsen 775 West 1100 South
Woods Cross, UT 84087
Pat Loid 24WO45 Cliff Court
Naperville, IL 60566
Kim Pritchett 2707 Gleneagles Court
Naperville, IL 60566
Chad Charles 989 Springdale Circle
N. Salt Lake City, UT 84054
William Zaun 261 Cameron Drive
Ft. Lauderdale, FL 33326
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Janet Rancati 1728 Hemlock Farms
Hawley, PA 18428
Claire Cortez 1071 Georgian Place
Bartlett, IL 60103
Tom Nolte 1155 S. Fairview
Lombard, IL 60148
Mary Jane LaBelle 3015 Benvenue Ave.
Berkeley, CA 94705
Brian Master ONO 25 Page Street
Winfield, IL 60190
Debra Skinner 2113 Prentis Dr. #K204
Downers Grove, IL 60516
=========================================================================
OPTIONHOLDERS: ADDRESS:
<S> <C>
Sonny Bloom 2412 Henslowe Drive
Potomac, MD 20854
Don Greenberg 21 Hollyberry Court
Rockville, MD 20852
Timothy Smith 2720 Jordan Road
Orefield, PA 18069
Michelle Zernan P.O. Box 562
Olney, MD 20830
Marianne Chiccone 8706 Yellow Bird Court
Laurel, MD 20723
Timothy Cahill 2092 Yorkshire Road
Birmingham, MI 48009
Lisa Brown 3634 Bel Pre Road
Silver Spring, MD 20906
David Fantozzi 14148 Forest Ridge Drive
North Potomac, MD 20878
Toni Grimsley 11906 Callow Terrace
Laurel, MD 20708
Barbara Husar 13708 Modrad Way, #24
Silver Spring, MD 20904
Lloyd Lachow 7A Deer Cross Court
Reisterstown, MD 21136
Ronald McDonald Jr. 2938 Sycamore Street
Alexandria, VA 22305
</TABLE>
<PAGE>
Susan Feldman 104 Stauffer Road
Severna Park, MD 21146
Gary Fields 10136 Sterling Terrace
Rockville, MD 20850
Gregory Honshul 303 Rangers Way
Leesburg, VA 22075
Frances Brannigan 1206 Broadwood Drive
Rockville, MD 20851
Leslie Craig 12491 Hayes Court, #202
Fairfax, VA 22033
James Hill 20013 Sweetgum Circle
Germantown, MD 20874
Marcia McComb 28801 Greenberry Drive
Laytonsville, MD 20882
Patricia Tarabocchia 5834 Wyndham Circle, #202
Columbia, MD 21044
Carol Walters 9316 Sombersby Court
Laurel, MD 20723
<PAGE>
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of July 31, 1997
by and among Preferred Payment Systems, Inc., a Delaware corporation (including
its successors by merger, acquisition, reorganization or otherwise, the
"Company") and the current and prospective shareholders of About Health, Inc.
("AHI") named on Schedule A attached hereto (the "Shareholders").
WHEREAS, the Shareholders, the Company, AHI and Preferred Payment Systems,
L.L.C. (the "LLC") entered into a Contribution Agreement dated as of July 31,
1997 pursuant to which AHI and the Company contributed all of their respective
assets to the LLC.
WHEREAS, under the terms of the Amended and Restated Limited Liability
Company Operating Agreement dated as of July 31, 1997 by and among the
shareholders of the Company and AHI, the Shareholders have the right, and under
certain circumstances shall have the obligation, to exchange their shares of AHI
Common Stock for shares of Company Common Stock.
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the transactions contemplated by the Contribution Agreement.
NOW, THEREFORE, in consideration of the premises, as an inducement to the
Shareholders to consummate the transactions contemplated by the Contribution
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company hereby covenants and
agrees with each Investor as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the United States Securities and Exchange
Commission, or any other federal agency at the time administering the Securities
Act.
"Common Stock" shall mean (i) the Company's common stock, par value $.01
per share, as authorized on the date of this Agreement, (ii) any other capital
stock of any class or classes (however designated) of the Company, authorized on
or after the date hereof, the holders of which shall have the right, without
limitation as to amount per share, either to all or to a share of the balance of
current dividends and liquidating distributions after the payment of dividends
and distributions on any shares entitled to preference in the payment thereof,
and the holders of which shall ordinarily, in the absence of contingencies, be
entitled to vote for the election of directors of the Company (even though the
right so to vote has been suspended by the happening of such a contingency), and
(iii) any other securities
<PAGE>
into which or for which any of the securities described in (i) or (ii) above may
be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Person" shall mean an individual, a corporation, a partnership, a joint
venture, a trust, an unincorporated organization, a limited liability company or
partnership, a government and any agency or political subdivision thereof.
"Registrable Securities" shall mean (i) all securities issued or issuable
upon a merger involving AHI and the Company, (ii) any securities of the Company
issued in exchange for securities of AHI, (iii) any securities of the Company
held by the Shareholders or their assigns, and (iv) any other securities issued
and issuable with respect to any such shares described in clauses (i) through
(iii) above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization (it being understood that for purposes of this Agreement, a
Person will be deemed to be a holder of Registrable Securities whenever such
Person has the right to then acquire or obtain from the Company any Registrable
Securities, whether or not such acquisition has actually been effected).
"Registration Expenses" shall mean the expenses so described in Section 5.
"1996 Registration Rights Agreement" shall mean the Registration Rights
Agreement dated as of August 30, 1996, as amended as of July 31, 1997, by and
among the Company, the holders of convertible subordinated notes of the Company
and all of the then holders of Common Stock and options to acquire Common Stock.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
2. Demand Registration.
(a) At any time after 180 days after the date on which the Company
becomes subject to Section 13 or Section 15(d) of the Exchange Act, the holders
of at least fifty percent (50%) of the
- 2 -
<PAGE>
Registrable Securities may request the Company register under the Securities Act
the Registrable Securities held by such requesting holders in a firm commitment
underwritten public offering or any other method of distribution (including
offerings involving a delayed or continuous offering pursuant to Rule 415 under
the Securities Act); provided, however, that the holders of Registrable
Securities shall be entitled under this Section 2 to no more than the number of
shares of Common Stock sufficient to yield net proceeds equal to the aggregate
number of Registrable Securities multiplied by the per share initial public
offering price multiplied by 0.33 ("Minimum Demand Proceeds"); provided further
however, that if the underwritten public offer (or other method of distribution)
does not yield the Minimum Demand Proceeds, the holders of Registrable
Securities shall be entitled to request additional registrations until the
holders of Registrable Securities shall have yielded the Minimum Demand
Proceeds. Upon receipt of such request, the Company shall promptly deliver
notice of such request to all Persons holding Registrable Securities who shall
then have thirty (30) days to notify the Company in writing of their desire to
be included in such registration. The right of any Person to participate in
such registration shall be conditioned upon their participation in such
underwritten public offering (or such other method of distribution) and the
inclusion of their Registrable Securities in the underwritten public offering
(or such other method of distribution) to the extent provided herein. The
Company will use its best efforts to expeditiously effect the registration of
all Registrable Securities whose holders request participation in such
registration under the Securities Act and shall keep such registration effective
until the Registrable Securities thereunder shall have been sold, but only to
the extent provided for in the following provisions of this Agreement; provided,
however, that the Company shall not be required to effect registration pursuant
to a request under this Section 2 more than one (1) time for the holders of the
Registrable Securities as a group; provided further however, that if a
registration statement does not include the number of Registrable Securities
requested by the holders thereof to be included in such registration statement,
it shall not be counted as a registration statement initiated pursuant to this
Section 2. Notwithstanding anything to the contrary contained herein, no
request may be made under this Section 2 within 180 days after the effective
date of a registration statement filed by the Company covering a firm commitment
underwritten public offering in which the holders of Registrable Securities
shall have been entitled to join pursuant to Section 3 and in which there shall
have been effectively registered all Registrable Securities as to which
registration shall have been requested.
(b) With respect to a request for registration pursuant to this
Section 2 involving an underwritten public
- 3 -
<PAGE>
offering, the Company may include in each such requested registration any
authorized but unissued shares of Common Stock (or authorized treasury shares)
for sale by the Company and the Shareholders may include in each such requested
registration shares of Common Stock held by such Shareholders; provided,
however, that any such shares of Common Stock shall not be included to the
extent that the managing underwriter of the offering (if the offering is
underwritten) or the holders of a majority of the shares of Registrable
Securities who requested the registration (if the offering is not underwritten),
determine(s) in good faith that the inclusion of such shares will interfere with
the successful marketing of the shares of Registrable Securities to be included
in the registration. If the managing underwriter of such offering determines in
good faith that the number of securities sought to be offered should be limited
due to market conditions, then the number of securities to be included in such
underwritten public offering shall be reduced to a number deemed satisfactory by
such managing underwriter, provided that the shares to be excluded shall be
determined in the following order of priority: (i) securities held by any other
Persons (other than the holders of Registrable Securities) having a contractual,
incidental "piggy back" right to include such securities in the registration
statement, (ii) securities offered on behalf of the Company, (iii) Registrable
Securities of holders who did not make the original request for registration
and, if necessary, and (iv) Registrable Securities of holders who requested such
registration pursuant to Section 2. If there is a reduction of the number of
Registrable Securities pursuant to clauses (iii) or (iv), such reduction shall
be made on a pro rata basis (based upon the aggregate number of Registrable
Securities held by such holders).
(c) The Company shall have the right to approve the managing
underwriter chosen by the holders of a majority of the Registrable Securities to
be sold in such offering (which approval will not be unreasonably withheld or
delayed). The Company may not cause any other registration of securities for
sale for its own account (other than a registration effected solely to implement
an employee benefit plan or a transaction to which Rule 145 of the Commission is
applicable) to become effective within 90 days following the effective date of
any registration required pursuant to this Section 2.
(d) If, at the time of any request to register Registrable Securities
pursuant to Section 2(a), the Company is preparing a registration statement for
a public offering (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 of the Commission is
applicable) which in fact is filed and becomes effective within ninety (90) days
after the request, or is engaged in any activity (including a concurrent or
proposed security issuance or
- 4 -
<PAGE>
acquisition) which, in the good faith determination of the Company's board of
directors, would be adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period (the "Black-Out Period") not in excess
of 120 days from the effective date of such offering or the date of commencement
of such other activity, as the case may be. The aggregate amount of Black-Out
Periods in any consecutive twelve month period shall not exceed 120 days.
Nothing in this Section 2(d) shall preclude a holder of Registrable Securities
from enjoying registration rights which it might otherwise possess under Section
3 hereof.
3. Piggyback Registration. If the Company at any time proposes to
register any securities under the Securities Act (including, without limitation,
pursuant to a demand of any stockholder of the Company exercising registration
rights) for sale to the public (except with respect to registration statements
on Forms S-4, S-8 or another form not available for registering the Registrable
Securities for sale to the public), each such time it will give written notice
at the applicable address of record to each holder of Registrable Securities of
its intention to do so. Upon the written request of any of such holders of the
Registrable Securities given within twenty (20) days after receipt by such
Person of such notice, the Company will, subject to the limits contained in this
Section 3, use its best efforts to cause all such Registrable Securities of said
requesting holders to be registered under the Securities Act and qualified for
sale under any state blue sky law, all to the extent required to permit such
sale or other disposition of said Registrable Securities and Common Stock so
registered; provided, however, that if the Company is advised in writing in good
faith by any managing underwriter of the securities being offered in a public
offering pursuant to such registration statement that the amount to be sold is
greater than the amount which can be offered without adversely affecting the
offering, the Company may reduce the amount offered to a number deemed
satisfactory by such managing underwriter; provided that the shares to be
excluded shall be determined in the following order of priority: (i) securities
held by any Persons not having any such contractual, incidental registration
rights, (ii) securities held by any Persons having contractual, incidental
registration rights pursuant to an agreement which is neither this Agreement nor
the 1996 Registration Rights Agreement, (iii) securities held by the holders of
Registrable Securities (as such term is defined hereunder) and the persons
defined as "Shareholders" under the 1996 Registration Rights Agreement on a pro
rata basis (based upon the aggregate number of securities held by such holders),
and (iv) the securities sought to be included by the persons defined as
"Investors" under the 1996 Registration Rights Agreement as determined on a pro
rata basis (based upon the
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<PAGE>
aggregate number of securities held by such holders); provided further however,
that in the event the persons defined as the "Investors" under the 1996
Registration Rights Agreement shall have received in the aggregate net proceeds
of at least $30 million from previous sales of securities, then the securities
sought to be included by the Shareholders and the persons defined as the
"Shareholders" and "Investors" under the 1996 Registration Rights Agreement the
holders shall be reduced on a pro rata basis notwithstanding clauses (iii) and
(iv) above.
4. Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect the
registration of any of its securities under the Securities Act, the Company
will, as expeditiously as possible:
(i) use its best efforts diligently to prepare and file with the
Commission a registration statement on the appropriate form under the
Securities Act with respect to such securities, which form shall comply as
to form in all material respects with the requirements of the applicable
form and include all financial statements required by the Commission to be
filed therewith, and use its best efforts to cause such registration
statement to become and remain effective until completion of the proposed
offering;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by
such registration statement whenever the seller or sellers of such
securities shall desire to sell or otherwise dispose of the same, but only
to the extent provided in this Agreement;
(iii) furnish to each selling holder and the underwriters, if any,
such number of copies of such Registration Statement, any amendments
thereto, any documents incorporated by reference therein, the prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Securities Act, and such other documents as such selling holder may
reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such selling holder;
- 6 -
<PAGE>
(iv) use every reasonable effort to register or qualify the
securities covered by such registration statement under such other
securities or state blue sky laws of such jurisdictions as each selling
holder shall reasonably request, and do any and all other acts and things
which may be necessary under such securities or blue sky laws to enable
such selling holder to consummate the public sale or other disposition in
such jurisdictions of the securities owned by such selling holder, except
that the Company shall not for any such purpose be required to qualify to
do business as a foreign corporation in any jurisdiction wherein it is not
so qualified;
(v) within a reasonable time before each filing of the registration
statement or prospectus or amendments or supplements thereto with the
Commission (or any materials to be provided to the staff of the
Commission), furnish to counsel selected by the holders of Registrable
Securities copies of such documents proposed to be filed (or provided to
the staff of the Commission), which documents shall be subject to the
reasonable approval of such counsel;
(vi) promptly notify each selling holder of Registrable Securities,
such selling holders' counsel and any underwriter and (if requested by any
such Person) confirm such notice in writing, of the happening of any event
which makes any statement made in the registration statement or related
prospectus untrue or which requires the making of any changes in such
registration statement or prospectus so that they will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made not misleading;
and, as promptly as practicable thereafter, prepare and file with the
Commission and furnish a supplement or amendment to such prospectus so
that, as thereafter deliverable to the purchasers of such securities
covered by such prospectus, such prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading;
(vii) use its best efforts to prevent the issuance of any order
suspending the effectiveness of a registration statement, and if one is
issued use its best efforts to obtain the withdrawal of any order
- 7 -
<PAGE>
suspending the effectiveness of a registration statement at the earliest
possible moment;
(viii) if requested by the managing underwriter or underwriters (if
any), any selling holder, or such selling holder's counsel, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as such Person requests to be included therein, including,
without limitation, with respect to the securities being sold by such
selling holder to such underwriter or underwriters, the purchase price
being paid therefor by such underwriter or underwriters and with respect to
any other terms of an underwritten offering of the securities to be sold in
such offering, and promptly make all required filings of such prospectus
supplement or post-effective amendment;
(ix) make available to each selling holder, any underwriter
participating in any disposition pursuant to a registration statement, and
any attorney, accountant or other agent or representative retained by any
such selling holder or underwriter (collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents and properties
of the Company (collectively, the "Records"), as shall be reasonably
necessary to enable them to exercise their due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information requested by any such Inspector in connection with such
registration statement;
(x) enter into any reasonable underwriting agreement required by the
proposed underwriter(s) for the selling holders, if any, and use its best
efforts to facilitate the public offering of the securities;
(xi) furnish to each prospective selling holder a signed counterpart,
addressed to the prospective selling holder, of (A) an opinion of counsel
for the Company, dated the effective date of the registration statement,
and (B) a "comfort" letter signed by the independent public accountants who
have certified the Company's financial statements included in the
registration statement, covering substantially the same matters with
respect to the registration statement (and the prospectus included therein)
and (in the case of the accountants' letter) with respect to events
subsequent to the date of the financial statements, as are customarily
covered (at the time of such registration) in opinions of the Company's
counsel and
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<PAGE>
in accountants' letters delivered to the underwriters in underwritten
public offerings of securities;
(xii) use its best efforts to cause the securities covered by such
registration statement to be listed on the securities exchange or quoted on
the quotation system on which the Common Stock of the Company is then
listed or quoted (or if the Common Stock is not yet listed or quoted, then
on such exchange or quotation system as the selling holders and the Company
shall determine);
(xiii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make generally available to its
security holders, in each case as soon as practicable, but not later than
45 days after the close of the period covered thereby (90 days in case the
period covered corresponds to a fiscal year of the Company), an earnings
statement of the Company which will satisfy the provisions of Section 11(a)
of the Securities Act and Rule 158 thereunder (or any comparable successor
provisions); and
(xiv) otherwise cooperate with the underwriters), the Commission and
other regulatory agencies and take all actions and execute and deliver or
cause to be executed and delivered all documents necessary to effect the
registration of any securities under this Agreement.
5. Expenses. All of the expenses incurred in effecting the registration
provided for in Section 2 if a request for registration pursuant to Section 2 is
made at least 365 days after the date on which the Company becomes subject to
Section 13 or Section 15(d) of the Exchange Act and all of the expenses incurred
in effecting the registration provided for in Section 3, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company and fees of one counsel for the selling
holders of Registrable Securities (which counsel shall be selected by the
holders of not less than a majority of the Registrable Securities to be included
in any such registration), underwriting expenses (other than fees, commissions
or discounts), expenses of any audits incident to or required by any such
registration and expenses of complying with the securities or blue sky laws of
any jurisdictions pursuant to Section 4(iv) hereof (all of such expenses
referred to as "Registration Expenses"), shall be paid by the Company. The
Company and the Shareholders shall each pay 50% of the Registration Expenses
incurred in effecting the registration provided for in Sections 2 if the
registration is
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<PAGE>
effective pursuant to Section 2 between 180 and 270 days after the date on which
the Company becomes subject to Section 13 or Section 15(d) of the Exchange Act;
provided, however, that if the percentage of Registrable Securities included in
the registration provided for in Section 2 is less than 50% of the total number
of shares of Common Stock included in such registration then the Shareholders
shall pay that lesser percentage of the Registration Expenses incurred in
effecting such registration; and provided further, however, that the
Shareholders shall not be required to pay in excess of $75,000 of Registration
Expenses in connection with such request. If a request for registration
pursuant to Section 2 is effective between 270 and 365 days after the date on
which the Company becomes subject to Section 13 or Section 15(d) of the Exchange
Act, the Company and the Shareholders will share the Registration Expenses 75%
and 25%, respectively; provided, however, that the Shareholders shall not be
required to pay in excess of $37,500 of Registration Expenses in connection with
such request.
6. Indemnification. (a) The Company shall indemnify and hold harmless
the selling holder of such securities, each underwriter (as defined in the
Securities Act), and each other Person who participates in the offering of such
securities and each other Person, if any, who controls (within the meaning of
the Securities Act) such seller, underwriter or participating Person
(individually and collectively, the "Indemnified Person") against any losses,
claims, damages or liabilities (collectively the "liability"), joint or several,
to which such Indemnified Person may become subject under the Securities Act or
any other statute or at common law, insofar as such liability (or action in
respect thereof) arises out of or is based upon (i) any untrue statement or
alleged untrue statement of any material fact contained, on the effective date
thereof, in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or (ii)
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading.
Except as otherwise provided in Section 6(d), the Company shall reimburse each
such Indemnified Person in connection with investigating or defending any such
liability; provided, however, that the Company shall not be liable to any
Indemnified Person in any such case to the extent that any such liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, preliminary or
final prospectus, or amendment or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by such Person
specifically for use therein, or upon such statement or omission therein based
on the authority of an expert within the meaning of that term as defined
- 10 -
<PAGE>
in the Securities Act (but only if the Company had no reasonable ground to
believe, and did not believe, that the statements made on the authority of an
expert were untrue or that there was an omission to state a material fact); and
provided further, that the Company shall not be required to indemnify any Person
against any liability arising from any untrue or misleading statement or
omission contained in any preliminary prospectus if such deficiency is corrected
in the final prospectus or for any liability which arises out of the failure of
any Person to deliver a prospectus as required by the Securities Act regardless
of any investigation made by or on behalf of such Indemnified Person and shall
survive transfer of such securities by such seller.
(b) Each selling holder of any securities included in such
registration being effected, shall indemnify and hold harmless each other
selling holder of any securities, the Company, its directors and officers, each
underwriter and each other Person, if any, who controls the Company or such
underwriter (individually and collectively also the "Indemnified Person"),
against any liability, joint or several, to which any such Indemnified Person
may become subject under the Securities Act or any other statute or at common
law, insofar as such liability (or actions in respect thereof) arises out of or
is based upon (i) any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which securities were registered under the Securities Act at the
request of such selling holder, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or (ii) any omission
or alleged omission by such selling holder to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in the case of (i) and (ii) to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in such registration statement, preliminary or final
prospectus, amendment or supplement thereto in reliance upon and in conformity
with information furnished in writing to the Company by such selling holder
specifically for use therein, and then only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission by the
selling holder was not based on the authority of an expert as to which the
selling holder had no reasonable ground to believe, and did not believe, that
the statement made on the authority of such expert was untrue or that there was
an omission to state a material fact. Such selling holder shall reimburse any
Indemnified Person for any legal fees incurred in investigating or defending any
such liability; provided, however, that such selling holder's obligations
hereunder shall be limited to an amount equal to the proceeds to such selling
holder of the securities sold in any such registration; and provided further,
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<PAGE>
however, that no selling holder shall be required to indemnify any Person
against any liability arising from any untrue or misleading statement or
omission contained in any preliminary prospectus if such deficiency is corrected
in the final prospectus or for any liability which arises out of the failure of
any Person to deliver a prospectus as required by the Securities Act.
(c) Indemnification similar to that specified in Sections 6(a) and
(b) shall be given by the Company and each selling holder (with such
modifications as may be appropriate) with respect to any required registration
or other qualification of their securities under any federal or state law or
regulation of governmental authority other than the Securities Act.
(d) In the event the Company, any selling holder or other Person
receives a complaint, claim or other notice of any liability or action, giving
rise to a claim for indemnification under Sections 6(a), (b) or (c), the Person
claiming indemnification under such paragraphs shall promptly notify the Person
against whom indemnification is sought of such complaint, notice, claim or
action, and such indemnifying Person shall have the right to investigate and
defend any such loss, claim, damage, liability or action. The Person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Person against whom
indemnification is sought (unless the indemnifying party fails to promptly
defend, in which case the fees and expenses of such separate counsel shall be
home by the Person against whom indemnification is sought). In no event shall a
Person against whom indemnification is sought be obligated to indemnify any
Person for any settlement of any claim or action effected without the
indemnifying Person's prior written consent.
7. Compliance with Rule 144. In the event that the Company (i) registers
a class of securities under Section 12 of the Exchange Act or (ii) shall
commence to file reports under Section 13 or 15(d) of the Exchange Act,
thereafter, the Company will use its best efforts thereafter to file with the
Commission such information as is required under the Exchange Act for so long as
there are holders of Registrable Securities; and in such event, the Company
shall use its best efforts to take all action as may be required as a condition
to the availability of Rule 144 under the Securities Act (or any comparable
successor rules). The Company shall furnish to any holder of Registrable
Securities upon request a written statement executed by the Company as to the
steps it has taken to comply with the current public information requirement of
Rule 144 (or such comparable successor rules). After the occurrence of the first
underwritten public offering of Common Stock of the Company pursuant to an
offering
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<PAGE>
registered under the Securities Act on Form S-1 or Form SB-1 (or any comparable
successor forms), subject to the limitations on transfers imposed by this
Agreement, the Company shall use its best efforts to facilitate and expedite
transfers of Registrable Securities pursuant to Rule 144 under the Securities
Act, which efforts shall include timely notice to its transfer agent to expedite
such transfers of Registrable Securities.
8. "Market Stand-off" Agreement. In connection with the Company's
initial underwritten public offering, the holders of Registrable Securities, if
requested in good faith by the Company and the managing underwriter of the
Company's securities, shall agree not to sell or otherwise transfer or dispose
of any securities of the Company held by them (except for any securities sold
pursuant to such registration statement) for a period following the effective
date of the applicable registration statement as agreed to by such parties,
provided, however, that in no event shall such period exceed 180 days. In
connection with any other underwritten public offering by the Company, to the
extent holders of not less than a majority of the Registrable Securities have
agreed with the managing underwriter(s) not to sell or otherwise transfer or
dispose of any of the Registrable Securities held by each of them for a period
of time after the effective date of any such registration statement in order to
effect an orderly public distribution thereof, then each holder of Registrable
Securities, if requested in good faith by the Company and the managing
underwriter, shall enter into and execute such an agreement with such managing
underwriter(s) and the Company pertaining to a restriction on the transfer of
any securities of the Company then held by them (and not included in such
registration) during such same time period and on the same terms and conditions
as the agreement made by said holders of a majority of the Registrable
Securities.
9. Amendments. The provisions of this Agreement may be amended, and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of at least sixty-seven percent (67%) of the Registrable
Securities.
10. Transferability of Registration Rights. The registration rights set
forth in this Agreement are transferable to each transferee of Registrable
Securities, other than a transferee whose activities, products or services are
competitive with the activities, products or services of the Company as of the
date of such transfer. Each subsequent holder of Registrable Securities must
consent in writing to be bound by the terms and conditions of this Agreement in
order to acquire the rights granted pursuant to this Agreement.
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<PAGE>
11. Rights Which May Be Granted to Subsequent Investors. Other than
permitted transferees of Registrable Securities under Section 10 hereof, the
Company shall not, without the prior written consent of holders of at least
fifty-one percent (51%) of the Registrable Securities grant any other demand
registration rights to any third parties which could be exercised by such third
party within the twelve months following the initial public offering of the
Common Stock; provided that if third parties are granted more than one demand
right that can be exercised after such period the holders of Registrable
Securities shall be granted one additional demand registration right. The
Company shall not amend the 1996 Registration Rights Agreement in any manner or
grant any piggy-back registration rights which would adversely affects the
holders of Registrable Securities without the prior written consent of the
holders of Registrable Securities.
12. Damages. The Company recognizes and agrees that each holder of
Registrable Securities will not have an adequate remedy if the Company fails to
comply with the terms and provisions of this Agreement and that damages will not
be readily ascertainable, and the Company expressly agrees that, in the event of
such failure, it shall not oppose an application by any holder of Registrable
Securities or any other Person entitled to the benefits of this Agreement
requiring specific performance of any and all provisions hereof or enjoining the
Company from continuing to commit any such breach of this Agreement.
13. Miscellaneous.
(a) All notices, requests, demands and other communications provided
for hereunder shall be in writing and mailed (by first class registered or
certified mail, postage prepaid), telegraphed, sent by express overnight courier
service or electronic facsimile transmission (with a copy by mail), or delivered
to the applicable party at the addresses indicated below:
If to the Company:
Preferred Payment Systems, Inc.
1230 East Diehl Road, Suite 300
Naperville, IL 60563
Attention: Steven E. Nelson
Telecopy No.: (708) 245-0740
With a copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606-5096
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<PAGE>
Attention: Bernard S. Kramer, Esq.
Telecopy No.: (312) 984-3669
If to the Shareholders:
Don P. Greenberg
21 Hollyberry Court
Rockville, MD 20852
With a copy to:
Tucker, Flyer & Lewis
1615 L Street, N.W.
Suite 400
Washington, DC 20036
Attention: Lawrence T. Yanowitch, Esq.
Telecopy No.: (202) 429-3231
If to any other holder of Registrable Securities:
At such Person's address for notice as set forth in the books and records
of the Company
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to other parties complying as to delivery with
the terms of this subsection (a). All such notices, requests, demands and other
communications shall, when mailed, telegraphed or sent, respectively, be
effective (i) two days after being deposited in the mail or (ii) one day after
being delivered to the telegraph company, deposited with the express overnight
courier service or sent by electronic facsimile transmission, respectively,
addressed as aforesaid.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
(c) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(d) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed as of the date first set forth above.
PREFERRED PAYMENT SYSTEMS, INC.
By: ----------------------------------------
Name: Steven E. Nelson
Title: President
SHAREHOLDERS:
--------------------------------------------
Don P. Greenberg
Trust FBO Miriam Greenberg
By: ----------------------------------------
Trustee
Trust FBO Amy Greenberg
By: ----------------------------------------
Trustee
Trust FBO Daniel Greenberg
By: ----------------------------------------
Trustee
Trust FBO David Greenberg
By: ---------------------------------------
Trustee
Trust FBO Robert Greenberg
By: ----------------------------------------
Trustee
---------------------------------------------
Sonny Bloom
---------------------------------------------
Timothy C. Smith
<PAGE>
SCHEDULE A
----------
to
Registration Rights Agreement
List of Shareholders
--------------------
Don P. Greenberg
Trust FBO Miriam Greenberg
Trust FBO Amy Greenberg
Trust FBO Daniel Greenberg
Trust FBO David Greenberg
Trust FBO Robert Greenberg
Sonny Bloom
Timothy C. Smith
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated as of this 30th day
of August, 1996, by and between Preferred Payment Systems, Inc., a Delaware
corporation ("PPS"), and Steven E. Nelson (the "Employee").
WHEREAS, PPS and Employee are parties to an employment agreement dated
January 1, 1994, which agreement is hereby amended and superseded in its
entirety;
WHEREAS, certain investors have agreed to provide financing (the
"Financing") to PPS subject to the terms of that certain Convertible Note
Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof by
and among PPS, the shareholders identified therein (the "Shareholders"), and the
investors identified therein (the "Investors"), the proceeds of which will be
used to fund a dividend to Employee and other shareholders; and
WHEREAS, it is a condition to the Financing that the Company and the
Employee agree to the terms of employment of Employee as provided hereunder.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and for other good and valuable considerations, the parties agree as
follows:
1. Employment and Position. Employee shall be employed as President and
Chief Executive Officer of PPS and shall serve subject to the direction of the
Board of Directors of PPS upon the terms, covenants and conditions hereinafter
set forth.
2. Initial Term. The effective date of this Agreement is September 1,
1996 and this Agreement shall control the employment relationship through August
31, 1998, unless sooner terminated as provided for herein.
3. Extension of Term. At the end of the initial term, this Agreement will
automatically renew for successive one-year periods, unless and until terminated
by either party giving the other party notice of the intent not to renew the
Agreement within thirty (30) days of the expiration of the initial term or a
renewal term, as appropriate, or as otherwise provided for herein. The terms of
this Agreement, if extended, shall remain the same as set forth herein.
6
<PAGE>
4. Compensation.
A. Base Salary. For the period commencing on September 1, 1996 and
ending August 31, 1997, PPS shall pay Employee a base salary of One Hundred
Forty Thousand Dollars ($140,000), payable biweekly. For all periods after
September 1, 1997, PPS shall pay Employee an annual base salary of One Hundred
Eighty Thousand Dollars ($180,000), payable biweekly.
B. Bonus. Upon the achievement of all of the covenants for a quarter
that are set forth in the $25 Million Credit Agreement among PPS, certain
lenders party thereto, Fleet National Bank, as co-administrator, and NationsBank
of Texas, N.A., as Administrative Lender, for each of the first four quarters
following the date hereof, PPS shall pay Employee a bonus of $9,000, payable
within 30 days after the end of such quarter. In addition to the foregoing
bonus, the Employee shall be entitled to participate in a bonus plan and receive
a bonus under such plan as may be established in the sole discretion of the
Compensation Committee.
5. Reimbursement for Expenses. Employee shall be reimbursed for all
reasonable, ordinary and necessary expenses upon receipt of appropriate receipts
and expense reports according to standard procedures established in the PPS
policy manual.
6. Duties. Employee shall serve as President and Chief Executive Officer
of the Company. In such positions, Employee shall have such duties and
authority as shall be determined from time to time by the Board of Directors of
the Company. It is agreed that Employee's duties shall be performed with
diligence, loyalty, good faith and due care under the circumstances of the
specific duty performed. During the term of his employment hereunder, Employee
will devote substantially all of his business time and efforts to the
performance of his duties hereunder.
7. Benefits. Employee will be entitled to employee benefits of the
Company, including, without limitation, vacation days, major medical, extended
medical and extended disability insurance on the same basis as those benefits
are generally made available to executives of the Company.
8. Disability and Sickness. If Employee is unable to perform his services
by reason of illness or incapacity, for a period of less than ninety days, the
compensation otherwise payable to Employee during that ninety day period shall
be paid in full during the period of such illness. In the event the illness
shall extend for longer than ninety days, compensation from PPS shall cease.
Employee's full compensation shall be
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<PAGE>
reinstated upon his return to employment and discharge of his full duties
hereunder. Notwithstanding anything herein to the contrary, PPS may terminate
this Agreement at any time after Employee has been absent from his employment
for whatever unauthorized cause (including illness), for a continuous period of
more than ninety days, and, except as provided for in Paragraph 10 below, all
obligations of PPS hereunder shall cease upon such termination.
9. Termination for Cause. In addition to the other provisions hereof, PPS
may terminate this Agreement upon written notice to Employee, effective upon
receipt, for any of the following causes:
A. fraud, embezzlement or other material dishonesty of the Employee
with respect to the Employer or any subsidiary or affiliate thereof;
B. the Employee's conviction or plea of nolo contendere to (A) a
felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or
fraud;
C. gross negligence or willful misconduct of the Employee with
respect to the Employer or any subsidiary or affiliate thereof; provided,
however, if susceptible to cure, following notice and a 10 business day
opportunity to cure;
D. substantial and continued breach by the Employee of the Employee's
obligations hereunder; provided, however, if susceptible to cure, following
notice and a 10 business day opportunity to cure; or
E. Competing with PPS during the terms of this Agreement, or
disclosures of an Confidential Information.
If this Agreement is terminated by PPS for any of these reasons, Employee
shall not be entitled to any further compensation or benefits from, and shall
have no claims against PPS.
10. Other Terminations. If Employee should terminate his employment with
PPS for any reason, PPS shall have no further obligations to him under this
Agreement or otherwise; provided that if PPS should terminate Employee's
employment under this Agreement or any extension thereof (as provided in
Paragraph 3, above) for any reason other than those set forth in Paragraph 9
above or Employee terminates his employment for Good Reason (as defined below),
then Employee shall be entitled to receive as severance pay an amount equal to
one week's worth of his Base Salary multiplied by the number of years or
portions thereof
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(rounded to the highest whole number) that Employee has been employed by PPS.
For the purposes hereof, "Good Reason" shall mean (i) any reduction in
Employee's Base Salary as in effect on the date hereof as the same may be
increased from time to time or any material decrease in Employee's benefits
(except as such benefits may be decreased for all employees of the Company) or
(ii) the office where Employee works is relocated more than 50 miles away from
where Employee currently works.
11. Confidential Information. In this Agreement:
A. "Confidential Information" means information, not generally known,
and proprietary to PPS, including trade secret information, about their
processes and products, including information relating to fee negotiation
methodology, research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling, leasing, servicing, finance and
business systems and techniques. All information disclosed to Employee, or
which Employee obtains access, whether originated by him or others, during the
period of his employment, which he has a reasonable basis to believe to be
Confidential Information, or which is treated by PPS as being Confidential
Information, shall be presumed to be Confidential Information.
B. "Inventions" means discoveries, improvements and ideas (whether or
not shown or described in writing or reduced to practice) works of authorship,
whether or not patentable or copyrightable, (1) which related directly to the
business of PPS, or (2) which related to their actual or demonstrable
anticipated research or development, or (3) which result from any work performed
by Employee for PPS, or (4) for which equipment, supplies, facility or trade
secret information of PPS is used, or (5) which is developed on any PPS time.
C. "Conflicting Product" means any product, process, system or
service of any person or organization other than PPS, in existence or under
development, which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system or service which Employee was involved
with or had knowledge of (in either a sales or a non-sales capacity) during his
employment by PPS or about which he acquired Confidential Information.
D. "Conflicting Organization" means any person or organization which
is engaged in or about to become engaged in, research on or development,
production, marketing, leasing, selling or servicing of a Conflicting Product.
With respect to Inventions made, authored or conceived by Employee,
either solely or jointly with others (1) during his
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<PAGE>
employment, whether or not during normal working hours or whether or not at PPS'
premises, or (2) within two (2) years after termination of his employment, he
will:
E. Keep accurate, complete and timely records of such Inventions,
which records shall be PPS' property and be retained on PPS' premises.
F. Promptly and fully disclose and described such Inventions in
writing to PPS.
G. Assign (and he does hereby assign) to PPS all of his rights to
such Inventions, and to applications for letters patent and/or copyright in all
countries and to letters patent and/or copyrights granted upon such inventions
in all countries.
H. Acknowledge and deliver promptly to PPS (without charge to them
but at their expenses) such written instruments and to do such other acts as may
be necessary in the opinion of PPS to preserve property rights against
forfeiture, abandonment or loss and to obtain and maintain letters patent and/or
copyrights and to vest the entire right and title thereto to PPS.
NOTICE: This is to notify Employee that this paragraph of the "Employee
Agreement" he is being asked to sign as a condition of his employment
does not apply to an Invention for which no equipment, supplies,
facility or trade secret information of PPS was used and which was
developed entirely on his own time, and which (1) does not relate (a)
directly to the business of PPS, or (b) to their actual or
demonstrably anticipated research or development, or (2) does not
result from any work performed by him for PPS.
I. Except as required in his duties to PPS, Employee will never,
either during this employment or anytime thereafter, use or disclose any
Confidential Information as defined hereinabove. Upon termination of Employee's
employment with PPS, all records, any composition, articles, devices, and other
items which disclose or embody Confidential Information including all copies or
specimens thereof in his possession, whether prepared or made by him or others,
will be left with or immediately returned to PPS. Except as listed at the end
of this Agreement, Employee will not assert any rights under any Inventions as
having been made, conceived, authored or acquired by him prior to his being
employed by PPS.
J. The Employee hereby confirms that the Employee is not bound by the
terms of any agreement with any previous employer or other party which restricts
in any way the Employee's
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<PAGE>
use or disclosure of information or the Employee's engagement in any business.
The Employee represents to PPS that the Employee's execution of this Agreement,
the Employee's employment with PPS and the performance of the Employee's
proposed duties for PPS will not violate any obligations the Employee may have
to any such previous employer or other party.
12. Noncompetition. Employee hereby agrees that during the term of this
Agreement and for a period of two (2) years from the termination of his
employment for any reason, he will neither directly nor indirectly engage or be
interested in any business competing with PPS or their successors, or directly
or indirectly engage or be interested in any business competing with PPS or
their successors, nor directly or indirectly have any interest to own, manage,
operate, control, or be connected with as a stockholder, joint venturer,
officer, employee, partner, or consultant, or otherwise engage or invest or
participate in any business which shall compete with PPS or successor of PPS in
the continental United States. Neither shall Employee solicit business from any
client or customer of PPS or any source of referrals for PPS, wherever located,
nor shall the Employee hire or attempt to employ, recruit or otherwise solicit,
induce or influence any person to leave employment with PPS during such two (2)
year period following termination of his employment. In addition, for a period
of two (2) years after the termination of this employment with PPS, Employee:
A. Will inform any new employer, prior to accepting employment, of
the existence of this Employee Agreement and provide such employer with a copy
thereof.
B. If he has been or is employed by PPS in a sales capacity, he will
not render services in the United States, directly or indirectly, to any
Conflicting Organization in connection with the development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of any
Conflicting Product to any person or organization upon whom he called, or whose
account he supervised on behalf of PPS, at any time during his employment.
C. If he has been or is employed by PPS in a non-sales capacity, he
will not render to any Conflicting Organization, services, directly or
indirectly, in the United States or in any country in which PPS has a plant for
manufacturing a product upon which he worked during his employment or in which
PPS provided a service in which he participated during his employment, except
that he may accept employment with a large Conflicting Organization whose
business is diversified (and which has separate and distinct divisions), and
which as to part of its business is not a Conflicting Organization, provided
PPS, prior
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<PAGE>
to his accepting such employment, shall receive separate written assurances
satisfactory to them from such Conflicting Organization and from Employee, that
he will not render services directly or indirectly in connection with any
Conflicting Product.
The parties hereto agree that damages would be an inadequate remedy for PPS
in the event of a breach or threatened breach of this Agreement, and thus, in
any such event, PPS may, either with or without pursuing and potential damage
remedies, immediately obtain and enforce an injunction prohibiting Employee from
violating this Agreement and Employee waives any requirements that PPS post a
bond in the event of such injunction proceeding.
13. Employment Policies. Employee shall be given a copy of the employment
policies which shall be deemed to be an integral part of the Agreement and by
reference are incorporated herein; provided, however, that if and to the extent
PPS' employment policies are contrary to or inconsistent with this Agreement,
this Agreement shall be controlling. Copies of said employment policies shall be
available for copying and inspection from PPS during any regular business day.
14. Death During Employment. If Employee dies during the term of this
Agreement, PPS shall pay to the estate of Employee the compensation which would
otherwise be payable to Employee up to the end of the month in which the death
occurs. In addition, Employee shall receive death benefits to the extent, if
any, provided under any group insurance policy maintained for qualifying
employees of PPS.
15. Breach or Enforcement of the Agreement. In the event of a legal
action by either party based upon this Agreement, the prevailing party is
entitled to an award of costs of court, attorneys' fees, experts' fees, and any
other cost or expense reasonably incurred in prosecuting the action. PPS shall
be entitled to temporary and permanent injunctive relief, in addition to any
other remedies provided at law or in equity, in the event Employee breaches his
obligations under Sections 11 and 12 of this Agreement.
16. Jurisdiction, Construction and Venue. This Agreement has been
negotiated and executed and is to be performed in the State of Illinois, and all
of its terms, covenants and conditions shall be construed according to the laws
thereof. In the event of a legal action by either party based on this Agreement,
each party submits to jurisdiction of the State of Illinois, and agrees that
said jurisdiction is the sole jurisdiction in which a legal action relating to
the Agreement may be initiated.
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<PAGE>
17. Notices. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
Employee and/or PPS as follows:
Preferred Payment Systems, Inc. 27 Lakeside Lane
1230 East Diehl Road, Suite 300 Fox Lake, IL 60020
Naperville, IL 60563
In the event of a change of address, the party making the change shall
notify the other in writing. If no notice of change is stated, notice shall be
effective if delivered to the address stated herein.
18. Waiver. No term or provision hereof shall be deemed to have been
waived and no breach excused unless the waiver or excuse is in writing executed
by the party claimed to have waived or excused performance. Any waiver or
excuse, whether express or implied, shall not operate as an excuse or waiver for
any subsequent or different breach or failure to perform.
19. Severability. In the event any paragraph, section or portion of this
Agreement shall be found void, unconstitutional or unenforceable, the remaining
terms, covenants and conditions of this Agreement shall remain in full force and
effect, and the portion found to be void, unenforceable or unconstitutional
shall be stricken and the remaining terms hereof shall be construed as though
said portion did not exist.
20. Benefit of Agreement. This Agreement contemplates the personal
services of Employee and may not be assigned by him. The rights and obligations
of PPS under this Agreement shall inure to the benefit of and shall be binding
upon the transferee, successors and assigns of PPS, unless terminated as
provided herein.
21. Entire Agreement. This instrument contains the entire Agreement
between the parties, and supersedes all prior written or oral agreements between
the parties, including the Employment Agreement between the parties dated
January 1, 1994. It may not be modified or amended except by an agreement in
writing signed by both parties.
* * * *
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<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated as of this ____ day
of August, 1996, by and between Preferred Payment Systems, Inc., a Delaware
corporation ("PPS"), and James Doody (the "Employee").
WHEREAS, PPS and Employee are parties to an employment agreement dated
January 1, 1994, which agreement is hereby amended and superseded in its
entirety;
WHEREAS, certain investors have agreed to provide financing (the
"Financing") to PPS subject to the terms of that certain Convertible Note
Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof by
and among PPS, the shareholders identified therein (the "Shareholders"), and the
investors identified therein (the "Investors"), the proceeds of which will be
used to fund a dividend to Employee and other shareholders; and
WHEREAS, it is a condition to the Financing that the Company and the
Employee agree to the terms of employment of Employee as provided hereunder.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and for other good and valuable considerations, the parties agree as
follows:
1. Employment and Position. Employee shall be employed as Executive Vice
President of PPS and shall serve subject to the direction of the Board of
Directors of PPS upon the terms, covenants and conditions hereinafter set forth.
2. Initial Term. The effective date of this Agreement is September 1,
1996 and this Agreement shall control the employment relationship through August
31, 1998, unless sooner terminated as provided for herein.
3. Extension of Term. At the end of the initial term, this Agreement will
automatically renew for successive one-year periods, unless and until terminated
by either party giving the other party notice of the intent not to renew the
Agreement within thirty (30) days of the expiration of the initial term or a
renewal term, as appropriate, or as otherwise provided for herein. The terms of
this Agreement, if extended, shall remain the same as set forth herein.
<PAGE>
4. Compensation.
A. Base Salary. For the period commencing on September 1, 1996 and
ending August 31, 1997, PPS shall pay Employee a base salary of One Hundred
Forty Thousand Dollars ($140,000), payable biweekly. For all periods after
September 1, 1997, PPS shall pay Employee an annual base salary of One Hundred
Eighty Thousand Dollars ($180,000), payable biweekly.
B. Bonus. Upon the achievement of all of the covenants for a quarter
that are set forth in the $25 Million Credit Agreement among PPS, certain
lenders party thereto, Fleet National Bank, as co-administrator, and NationsBank
of Texas, N.A., as Administrative Lender, for each of the first four quarters
following the date hereof, PPS shall pay Employee a bonus of $9,000 payable
within 30 days after the end of such quarter. In addition to the foregoing
bonus, the Employee shall be entitled to participate in a bonus plan and receive
a bonus under such plan as may be established in the sole discretion of the
Compensation Committee.
5. Reimbursement for Expenses. Employee shall be reimbursed for all
reasonable, ordinary and necessary expenses upon receipt of appropriate receipts
and expense reports according to standard procedures established in the PPS
policy manual.
6. Duties. Employee shall serve as Executive Vice President of the
Company. In such positions, Employee shall have such duties and authority as
shall be determined from time to time by the Board of Directors of the Company.
It is agreed that Employee's duties shall be performed with diligence, loyalty,
good faith and due care under the circumstances of the specific duty performed.
During the term of his employment hereunder, Employee will devote substantially
all of his business time and efforts to the performance of his duties hereunder.
7. Benefits. Employee will be entitled to employee benefits of the
Company, including, without limitation, vacation days, major medical, extended
medical and extended disability insurance on the same basis as those benefits
are generally made available to executives of the Company.
8. Disability and Sickness. If Employee is unable to perform his services
by reason of illness or incapacity, for a period of less than ninety days, the
compensation otherwise payable to Employee during that ninety day period shall
be paid in full during the period of such illness. In the event the illness
shall extend for longer than ninety days, compensation
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<PAGE>
from PPS shall cease. Employee's full compensation shall be reinstated upon his
return to employment and discharge of his full duties hereunder. Notwithstanding
anything herein to the contrary, PPS may terminate this Agreement at any time
after Employee has been absent from his employment for whatever unauthorized
cause (including illness), for a continuous period of more than ninety days,
and, except as provided for in Paragraph 10 below, all obligations of PPS
hereunder shall cease upon such termination.
9. Termination for Cause. In addition to the other provisions hereof, PPS
may terminate this Agreement upon written notice to Employee, effective upon
receipt, for any of the following causes:
A. fraud, embezzlement or other material dishonesty of the Employee
with respect to the Employer or any subsidiary or affiliate thereof;
B. the Employee's conviction or plea of nolo contendere to (A) a
felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or
fraud;
C. gross negligence or willful misconduct of the Employee with
respect to the Employer or any subsidiary or affiliate thereof; provided,
however, if susceptible to cure, following notice and a 10 business day
opportunity to cure;
D. substantial and continued breach by the Employee of the Employee's
obligations hereunder; provided, however, if susceptible to cure, following
notice and a 10 business day opportunity to cure; or
E. Competing with PPS during the terms of this Agreement, or
disclosures of an Confidential Information.
If this Agreement is terminated by PPS for any of these reasons, Employee
shall not be entitled to any further compensation or benefits from, and shall
have no claims against PPS.
10. Other Terminations. If Employee should terminate his employment with
PPS for any reason, PPS shall have no further obligations to him under this
Agreement or otherwise; provided that if PPS should terminate Employee's
employment under this Agreement or any extension thereof (as provided in
Paragraph 3,above) for any reason other than those set forth in Paragraph 9
above or Employee terminates his employment for Good Reason (as defined below),
then Employee shall be entitled to receive as
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<PAGE>
severance pay an amount equal to one week's worth of his Base Salary multiplied
by the number of years or portions thereof (rounded to the highest whole number)
that Employee has been employed by PPS. For the purposes hereof, "Good Reason"
shall mean (i) any reduction in Employee's Base Salary as in effect on the date
hereof as the same may be increased from time to time or any material decrease
in Employee's benefits (except as such benefits may be decreased for all
employees of the Company) or (ii) the office where Employee works is relocated
more than 50 miles away from where Employee currently works.
11. Confidential Information. In this Agreement:
A. "Confidential Information" means information, not generally known,
and proprietary to PPS, including trade secret information, about their
processes and products, including information relating to fee negotiation
methodology, research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling, leasing, servicing, finance and
business systems and techniques. All information disclosed to Employee, or which
Employee obtains access, whether originated by him or others, during the period
of his employment, which he has a reasonable basis to believe to be Confidential
Information, or which is treated by PPS as being Confidential Information, shall
be presumed to be Confidential Information.
B. "Inventions" means discoveries, improvements and ideas (whether or
not shown or described in writing or reduced to practice) works of authorship,
whether or not patentable or copyrightable, (1) which related directly to the
business of PPS, or (2) which related to their actual or demonstrable
anticipated research or development, or (3) which result from any work performed
by Employee for PPS, or (4) for which equipment, supplies, facility or trade
secret information of PPS is used, or (5) which is developed on any PPS time.
C. "Conflicting Product" means any product, process, system or
service of any person or organization other than PPS, in existence or under
development, which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system or service which Employee was involved
with or had knowledge of (in either a sales or a non-sales capacity) during his
employment by PPS or about which he acquired Confidential Information.
D. "Conflicting Organization" means any person or organization which
is engaged in or about to become engaged in, research on or development,
production, marketing, leasing, selling or servicing of a Conflicting Product.
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<PAGE>
With respect to Inventions made, authored or conceived by Employee,
either solely or jointly with others (1) during his employment, whether or not
during normal working hours or whether or not at PPS' premises, or (2) within
two (2) years after termination of his employment, he will:
E. Keep accurate, complete and timely records of such Inventions,
which records shall be PPS' property and be retained on PPS' premises.
F. Promptly and fully disclose and described such Inventions in
writing to PPS.
G. Assign (and he does hereby assign) to PPS all of his rights to
such Inventions, and to applications for letters patent and/or copyright in all
countries and to letters patent and/or copyrights granted upon such inventions
in all countries.
H. Acknowledge and deliver promptly to PPS (without charge to them
but at their expenses) such written instruments and to do such other acts as may
be necessary in the opinion of PPS to preserve property rights against
forfeiture, abandonment or loss and to obtain and maintain letters patent and/or
copyrights and to vest the entire right and title thereto to PPS.
NOTICE: This is to notify Employee that this paragraph of the "Employee
Agreement" he is being asked to sign as a condition of his employment
does not apply to an Invention for which no equipment, supplies,
facility or trade secret information of PPS was used and which was
developed entirely on his own time, and which (1) does not relate (a)
directly to the business of PPS, or (b) to their actual or
demonstrably anticipated research or development, or (2) does not
result from any work performed by him for PPS.
I. Except as required in his duties to PPS, Employee will never,
either during this employment or anytime thereafter, use or disclose any
Confidential Information as defined hereinabove. Upon termination of Employee's
employment with PPS, all records, any composition, articles, devices, and other
items which disclose or embody Confidential Information including all copies or
specimens thereof in his possession, whether prepared or made by him or others,
will be left with or immediately returned to PPS. Except as listed at the end of
this Agreement, Employee will not assert any rights under any Inventions as
having been made, conceived, authored or acquired by him prior to his being
employed by PPS.
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<PAGE>
J. The Employee hereby confirms that the Employee is not bound by
the terms of any agreement with any previous employer or other party which
restricts in any way the Employee's use or disclosure of information or the
Employee's engagement in any business. The Employee represents to PPS that the
Employee's execution of this Agreement, the Employee's employment with PPS and
the performance of the Employee's proposed duties for PPS will not violate any
obligations the Employee may have to any such previous employer or other party.
12. Noncompetition. Employee hereby agrees that during the term of this
Agreement and for a period of two (2) years from the termination of his
employment for any reason, he will neither directly nor indirectly engage or be
interested in any business competing with PPS or their successors, or directly
or indirectly engage or be interested in any business competing with PPS or
their successors, nor directly or indirectly have any interest to own, manage,
operate, control, or be connected with as a stockholder, joint venturer,
officer, employee, partner, or consultant, or otherwise engage or invest or
participate in any business which shall compete with PPS or successor of PPS in
the continental United States. Neither shall Employee solicit business from any
client or customer of PPS or any source of referrals for PPS, wherever located,
nor shall the Employee hire or attempt to employ, recruit or otherwise solicit,
induce or influence any person to leave employment with PPS during such two (2)
year period following termination of his employment. In addition, for a period
of two (2) years after the termination of this employment with PPS, Employee:
A. Will inform any new employer, prior to accepting employment, of
the existence of this Employee Agreement and provide such employer with a copy
thereof.
B. If he has been or is employed by PPS in a sales capacity, he will
not render services in the United States, directly or indirectly, to any
Conflicting Organization in connection with the development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of any
Conflicting Product to any person or organization upon whom he called, or whose
account he supervised on behalf of PPS, at any time during his employment.
C. If he has been or is employed by PPS in a non-sales capacity,
he will not render to any Conflicting Organization, services, directly or
indirectly, in the United States or in any country in which PPS has a plant for
manufacturing a product upon which he worked during his employment or in which
PPS provided a service in which he participated during his employment, except
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<PAGE>
that he may accept employment with a large Conflicting Organization whose
business is diversified (and which has separate and distinct divisions), and
which as to part of its business is not a Conflicting Organization, provided
PPS, prior to his accepting such employment, shall receive separate written
assurances satisfactory to them from such Conflicting Organization and from
Employee, that he will not render services directly or indirectly in connection
with any Conflicting Product.
The parties hereto agree that damages would be an inadequate remedy for PPS
in the event of a breach or threatened breach of this Agreement, and thus, in
any such event, PPS may, either with or without pursuing and potential damage
remedies, immediately obtain and enforce an injunction prohibiting Employee from
violating this Agreement and Employee waives any requirements that PPS post a
bond in the event of such injunction proceeding.
13. Employment Policies. Employee shall be given a copy of the employment
policies which shall be deemed to be an integral part of the Agreement and by
reference are incorporated herein; provided, however, that if and to the extent
PPS' employment policies are contrary to or inconsistent with this Agreement,
this Agreement shall be controlling. Copies of said employment policies shall be
available for copying and inspection from PPS during any regular business day.
14. Death During Employment. If Employee dies during the term of this
Agreement, PPS shall pay to the estate of Employee the compensation which would
otherwise be payable to Employee up to the end of the month in which the death
occurs. In addition, Employee shall receive death benefits to the extent, if
any, provided under any group insurance policy maintained for qualifying
employees of PPS.
15. Breach or Enforcement of the Agreement. In the event of a legal
action by either party based upon this Agreement, the prevailing party is
entitled to an award of costs of court, attorneys' fees, experts' fees, and any
other cost or expense reasonably incurred in prosecuting the action. PPS shall
be entitled to temporary and permanent injunctive relief, in addition to any
other remedies provided at law or in equity, in the event Employee breaches his
obligations under Sections 11 and 12 of this Agreement.
16. Jurisdiction, Construction and Venue. This Agreement has been
negotiated and executed and is to be performed in the State of Illinois, and all
of its terms, covenants and conditions shall be construed according to the laws
thereof. In the event
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<PAGE>
of a legal action by either party based on this Agreement, each party submits to
jurisdiction of the State of Illinois, and agrees that said jurisdiction is the
sole jurisdiction in which a legal action relating to the Agreement may be
initiated.
17. Notices. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
Employee and/or PPS as follows:
Preferred Payment Systems, Inc. 3308 Scottsdale Ct.
1230 East Diehl Road, Suite 300 Naperville, IL 60564
Naperville, IL 60563
In the event of a change of address, the party making the change shall
notify the other in writing. If no notice of change is stated, notice shall be
effective if delivered to the address stated herein.
18. Waiver. No term or provision hereof shall be deemed to have been
waived and no breach excused unless the waiver or excuse is in writing executed
by the party claimed to have waived or excused performance. Any waiver or
excuse, whether express or implied, shall not operate as an excuse or waiver for
any subsequent or different breach or failure to perform.
19. Severability. in the event any paragraph, section or portion of this
Agreement shall be found void, unconstitutional or unenforceable, the remaining
terms, covenants and conditions of this Agreement shall remain in full force and
effect, and the portion found to be void, unenforceable or unconstitutional
shall be stricken and the remaining terms hereof shall be construed as though
said portion did not exist.
20. Benefit of Agreement. This Agreement contemplates the personal
services of Employee and may not be assigned by him. The rights and obligations
of PPS under this Agreement shall inure to the benefit of and shall be binding
upon the transferee, successors and assigns of PPS, unless terminated as
provided herein.
21. Entire Agreement. This instrument contains the entire Agreement
between the parties, and supersedes all prior written or oral agreements between
the parties, including the Employment Agreements between the parties dated
January 1, 1994. It may not be modified or amended except by an agreement in
writing signed by both parties.
* * * *
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<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated as of this ____ day
of August, 1996, by and between Preferred Payment Systems, Inc., a Delaware
corporation ("PPS"), and Byron W. Smith (the "Employee").
WHEREAS, PPS and Employee are parties to an employment agreement dated
January 1, 1994, which agreement is hereby amended and superseded in its
entirety;
WHEREAS, certain investors have agreed to provide financing (the
"Financing") to PPS subject to the terms of that certain Convertible Note
Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof by
and among PPS, the shareholders identified therein (the "Shareholders"), and the
investors identified therein (the "Investors"), the proceeds of which will be
used to fund a dividend to Employee and other shareholders; and
WHEREAS, it is a condition to the Financing that the Company and the
Employee agree to the terms of employment of Employee as provided hereunder.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and for other good and valuable considerations, the parties agree as
follows:
1. Employment and Position. Employee shall be employed as Executive Vice
President and Chief Operating Officer of PPS and shall serve subject to the
direction of the Board of Directors of PPS upon the terms, covenants and
conditions hereinafter set forth.
2. Initial Term. The effective date of this Agreement is September 1,
1996 and this Agreement shall control the employment relationship through August
31, 1998, unless sooner terminated as provided for herein.
3. Extension of Term. At the end of the initial term, this Agreement will
automatically renew for successive one-year periods, unless and until terminated
by either party giving the other party notice of the intent not to renew the
Agreement within thirty (30) days of the expiration of the initial term or a
renewal term, as appropriate, or as otherwise provided for herein. The terms of
this Agreement, if extended, shall remain the same as set forth herein.
<PAGE>
4. Compensation.
------------
A. Base Salary. For the period commencing on September 1, 1997 and
ending August 31, 1997, PPS shall pay Employee a base salary of One Hundred
Forty Thousand Dollars ($140,000), payable biweekly. For all periods after
September 1, 1997, PPS shall pay Employee an annual base salary of One Hundred
Eighty Thousand Dollars ($180,000), payable biweekly.
B. Bonus. Upon the achievement of all of the covenants for a quarter
that are set forth in the $25 Million Credit Agreement among PPS, certain
lenders party thereto, Fleet National Bank, as co-administrator, and NationsBank
of Texas, N.A., as Administrative Lender, for each of the first four quarters
following the date hereof, PPS shall pay Employee a bonus of $9,000 payable
within 30 days after the end of such quarter. In addition to the foregoing
bonus, the Employee shall be entitled to participate in a bonus plan and receive
a bonus under such plan as may be established in the sole discretion of the
Compensation Committee.
5. Reimbursement for Expenses. Employee shall be reimbursed for all
reasonable, ordinary and necessary expenses upon receipt of appropriate receipts
and expense reports according to standard procedures established in the PPS
policy manual.
6. Duties. Employee shall serve as Executive Vice President and Chief
Operating Officer of the Company. In such positions, Employee shall have such
duties and authority as shall be determined from time to time by the Board of
Directors of the Company. It is agreed that Employee's duties shall be
performed with diligence, loyalty, good faith and due care under the
circumstances of the specific duty performed. During the term of his employment
hereunder, Employee will devote substantially all of his business time and
efforts to the performance of his duties hereunder.
7. Benefits. Employee will be entitled to employee benefits of the
Company, including, without limitation, vacation days, major medical, extended
medical and extended disability insurance on the same basis as those benefits
are generally made available to executives of the Company.
8. Disability and Sickness. If Employee is unable to perform his services
by reason of illness or incapacity, for a period of less than ninety days, the
compensation otherwise payable to Employee during that ninety day period shall
be paid in full during the period of such illness. In the event the illness
shall extend for longer than ninety days, compensation
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<PAGE>
from PPS shall cease. Employee's full compensation shall be reinstated upon his
return to employment and discharge of his full duties hereunder. Notwithstanding
anything herein to the contrary, PPS may terminate this Agreement at any time
after Employee has been absent from his employment for whatever unauthorized
cause (including illness), for a continuous period of more than ninety days,
and, except as provided for in Paragraph 10 below, all obligations of PPS
hereunder shall cease upon such termination.
9. Termination for Cause. In addition to the other provisions hereof, PPS
may terminate this Agreement upon written notice to Employee, effective upon
receipt, for any of the following causes:
A. fraud, embezzlement or other material dishonesty of the Employee
with respect to the Employer or any subsidiary or affiliate thereof;
B. the Employee's conviction or plea of nolo contendere to (A) a
felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or
fraud;
C. gross negligence or willful misconduct of the Employee with
respect to the Employer or any subsidiary or affiliate thereof; provided,
however, if susceptible to cure, following notice and a 10 business day
opportunity to cure;
D. substantial and continued breach by the Employee of the Employee's
obligations hereunder; provided, however, if susceptible to cure, following
notice and a 10 business day opportunity to cure; or
E. Competing with PPS during the terms of this Agreement, or
disclosures of an Confidential Information.
If this Agreement is terminated by PPS for any of these reasons, Employee
shall not be entitled to any further compensation or benefits from, and shall
have no claims against PPS.
10. Other Terminations. If Employee should terminate his employment with
PPS for any reason, PPS shall have no further obligations to him under this
Agreement or otherwise; provided that if PPS should terminate Employee's
employment under this Agreement or any extension thereof (as provided in
Paragraph 3, above) for any reason other than those set forth in Paragraph 9
above or Employee terminates his employment for Good Reason (as defined below),
then Employee shall be entitled to receive as severance pay an amount equal to
one week's worth of his Base
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<PAGE>
Salary multiplied by the number of years or portions thereof (rounded to the
highest whole number) that Employee has been employed by PPS. For the purposes
hereof, "Good Reason" shall mean (i) any reduction in Employee's Base Salary as
in effect on the date hereof as the same may be increased from time to time or
any material decrease in Employee's benefits (except as such benefits may be
decreased for all employees of the Company) or (ii) the office where Employee
works is relocated more than 50 miles away from where Employee currently works.
11. Confidential Information. In this Agreement:
------------------------
A. "Confidential Information" means information, not generally known,
and proprietary to PPS, including trade secret information, about their
processes and products, including information relating to fee negotiation
methodology, research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling, leasing, servicing, finance and
business systems and techniques. All information disclosed to Employee, or
which Employee obtains access, whether originated by him or others, during the
period of his employment, which he has a reasonable basis to believe to be
Confidential Information, or which is treated by PPS as being Confidential
Information, shall be presumed to be Confidential Information.
B. "Inventions" means discoveries, improvements and ideas (whether or
not shown or described in writing or reduced to practice) works of authorship,
whether or not patentable or copyrightable, (1) which related directly to the
business of PPS, or (2) which related to their actual or demonstrable
anticipated research or development, or (3) which result from any work performed
by Employee for PPS, or (4) for which equipment, supplies, facility or trade
secret information of PPS is used, or (5) which is developed on any PPS time.
C. "Conflicting Product" means any product, process, system or
service of any person or organization other than PPS, in existence or under
development, which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system or service which Employee was involved
with or had knowledge of (in either a sales or a non-sales capacity) during his
employment by PPS or about which he acquired Confidential Information.
D. "Conflicting Organization" means any person or organization which
is engaged in or about to become engaged in, research on or development,
production, marketing, leasing, selling or servicing of a Conflicting Product.
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<PAGE>
With respect to Inventions made, authored or conceived by Employee,
either solely or jointly with others (1) during his employment, whether or not
during normal working hours or whether or not at PPS' premises, or (2) within
two (2) years after termination of his employment, he will:
E. Keep accurate, complete and timely records of such Inventions,
which records shall be PPS' property and be retained on PPS' premises.
F. Promptly and fully disclose and described such Inventions in
writing to PPS.
G. Assign (and he does hereby assign) to PPS all of his rights to
such Inventions, and to applications for letters patent and/or copyright in all
countries and to letters patent and/or copyrights granted upon such inventions
in all countries.
H. Acknowledge and deliver promptly to PPS (without charge to them
but at their expenses) such written instruments and to do such other acts as may
be necessary in the opinion of PPS to preserve property rights against
forfeiture, abandonment or loss and to obtain and maintain letters patent and/or
copyrights and to vest the entire right and title thereto to PPS.
NOTICE: This is to notify Employee that this paragraph of the "Employee
Agreement" he is being asked to sign as a condition of his employment
does not apply to an Invention for which no equipment, supplies,
facility or trade secret information of PPS was used and which was
developed entirely on his own time, and which (1) does not relate (a)
directly to the business of PPS, or (b) to their actual or
demonstrably anticipated research or development, or (2) does not
result from any work performed by him for PPS.
I. Except as required in his duties to PPS, Employee will never,
either during this employment or anytime thereafter, use or disclose any
Confidential Information as defined hereinabove. Upon termination of Employee's
employment with PPS, all records, any composition, articles, devices, and other
items which disclose or embody Confidential Information including all copies or
specimens thereof in his possession, whether prepared or made by him or others,
will be left with or immediately returned to PPS. Except as listed at the end
of this Agreement, Employee will not assert any rights under any Inventions as
having been made, conceived, authored or acquired by him prior to his being
employed by PPS.
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<PAGE>
J. The Employee hereby confirms that the Employee is not bound by the
terms of any agreement with any previous employer or other party which restricts
in any way the Employee's use or disclosure of information or the Employee's
engagement in any business. The Employee represents to PPS that the Employee's
execution of this Agreement, the Employee's employment with PPS and the
performance of the Employee's proposed duties for PPS will not violate any
obligations the Employee may have to any such previous employer or other party.
12. Noncompetition. Employee hereby agrees that during the term of this
Agreement and for a period of two (2) years from the termination of his
employment for any reason, he will neither directly nor indirectly engage or be
interested in any business competing with PPS or their successors, or directly
or indirectly engage or be interested in any business competing with PPS or
their successors, nor directly or indirectly have any interest to own, manage,
operate, control, or be connected with as a stockholder, joint venturer,
officer, employee, partner, or consultant, or otherwise engage or invest or
participate in any business which shall compete with PPS or successor of PPS in
the continental United States. Neither shall Employee solicit business from any
client or customer of PPS or any source of referrals for PPS, wherever located,
nor shall the Employee hire or attempt to employ, recruit or otherwise solicit,
induce or influence any person to leave employment with PPS during such two (2)
year period following termination of his employment. In addition, for a period
of two (2) years after the termination of this employment with PPS, Employee:
A. Will inform any new employer, prior to accepting employment, of
the existence of this Employee Agreement and provide such employer with a copy
thereof.
B. If he has been or is employed by PPS in a sales capacity, he will
not render services in the United States, directly or indirectly, to any
Conflicting Organization in connection with the development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of any
Conflicting Product to any person or organization upon whom he called, or whose
account he supervised on behalf of PPS, at any time during his employment.
C. If he has been or is employed by PPS in a non-sales capacity, he
will not render to any Conflicting Organization, services, directly or
indirectly, in the United States or in any country in which PPS has a plant for
manufacturing a product upon which he worked during his employment or in which
PPS provided a service in which he participated during his employment, except
that he may accept employment with a large Conflicting
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<PAGE>
Organization whose business is diversified (and which has separate and distinct
divisions), and which as to part of its business is not a Conflicting
Organization, provided PPS, prior to his accepting such employment, shall
receive separate written assurances satisfactory to them from such Conflicting
Organization and from Employee, that he will not render services directly or
indirectly in connection with any Conflicting Product.
The parties hereto agree that damages would be an inadequate remedy for PPS
in the event of a breach or threatened breach of this Agreement, and thus, in
any such event, PPS may, either with or without pursuing and potential damage
remedies, immediately obtain and enforce an injunction prohibiting Employee from
violating this Agreement and Employee waives any requirements that PPS post a
bond in the event of such injunction proceeding.
13. Employment Policies. Employee shall be given a copy of the employment
policies which shall be deemed to be an integral part of the Agreement and by
reference are incorporated herein; provided, however, that if and to the extent
PPS' employment policies are contrary to or inconsistent with this Agreement,
this Agreement shall be controlling. Copies of said employment policies shall
be available for copying and inspection from PPS during any regular business
day.
14. Death During Employment. If Employee dies during the term of this
Agreement, PPS shall pay to the estate of Employee the compensation which would
otherwise be payable to Employee up to the end of the month in which the death
occurs. In addition, Employee shall receive death benefits to the extent, if
any, provided under any group insurance policy maintained for qualifying
employees of PPS.
15. Breach or Enforcement of the Agreement. In the event of a legal
action by either party based upon this Agreement, the prevailing party is
entitled to an award of costs of court, attorneys' fees, experts' fees, and any
other cost or expense reasonably incurred in prosecuting the action. PPS shall
be entitled to temporary and permanent injunctive relief, in addition to any
other remedies provided at law or in equity, in the event Employee breaches his
obligations under Sections 11 and 12 of this Agreement.
16. Jurisdiction, Construction and Venue. This Agreement has been
negotiated and executed and is to be performed in the State of Illinois, and all
of its terms, covenants and conditions shall be construed according to the laws
thereof. In the event of a legal action by either party based on this Agreement,
each party submits to jurisdiction of the State of Illinois, and
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<PAGE>
agrees that said jurisdiction is the sole jurisdiction in which a legal action
relating to the Agreement may be initiated.
17. Notices. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
Employee and/or PPS as follows:
Preferred Payment Systems, Inc. 3579 Apple Mill Cove
1230 East Diehl Road, Suite 300 Salt Lake City, UT 84109
Naperville, IL 60563
In the event of a change of address, the party making the change shall
notify the other in writing. If no notice of change is stated, notice shall be
effective if delivered to the address stated herein.
18. Waiver. No term or provision hereof shall be deemed to have been
waived and no breach excused unless the waiver or excuse is in writing executed
by the party claimed to have waived or excused performance. Any waiver or
excuse, whether express or implied, shall not operate as an excuse or waiver for
any subsequent or different breach or failure to perform.
19. Severability. in the event any paragraph, section or portion of this
Agreement shall be found void, unconstitutional or unenforceable, the remaining
terms, covenants and conditions of this Agreement shall remain in full force and
effect, and the portion found to be void, unenforceable or unconstitutional
shall be stricken and the remaining terms hereof shall be construed as though
said portion did not exist.
20. Benefit of Agreement. This Agreement contemplates the personal
services of Employee and may not be assigned by him. The rights and obligations
of PPS under this Agreement shall inure to the benefit of and shall be binding
upon the transferee, successors and assigns of PPS, unless terminated as
provided herein.
21. Entire Agreement. This instrument contains the entire Agreement
between the parties, and supersedes all prior written or oral agreements between
the parties, including the Employment Agreements between the parties dated
January 1, 1994. It may not be modified or amended except by an agreement in
writing signed by both parties.
* * * *
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<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated as of this ____ day
of August, 1996, by and between Preferred Payment Systems, Inc., a Delaware
corporation ("PPS"), and Craig Cunningham (the "Employee").
WHEREAS, PPS and Employee are parties to an employment agreement dated
January 1, 1994, which agreement is hereby amended and superseded in its
entirety;
WHEREAS, certain investors have agreed to provide financing (the
"Financing") to PPS subject to the terms of that certain Convertible Note
Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof by
and among PPS, the shareholders identified therein (the "Shareholders"), and the
investors identified therein (the "Investors"), the proceeds of which will be
used to fund a dividend to Employee and other shareholders; and
WHEREAS, it is a condition to the Financing that the Company and the
Employee agree to the terms of employment of Employee as provided hereunder.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and for other good and valuable considerations, the parties agree as
follows:
1. Employment and Position. Employee shall be employed as Executive Vice
President and Assistant Secretary of PPS and shall serve subject to the
direction of the Board of Directors of PPS upon the terms, covenants and
conditions hereinafter set forth.
2. Initial Term. The effective date of this Agreement is September 1, 1996
and this Agreement shall control the employment relationship through August 31,
1998, unless sooner terminated as provided for herein.
3. Extension of Term. At the end of the initial term, this Agreement will
automatically renew for successive one-year periods, unless and until terminated
by either party giving the other party notice of the intent not to renew the
Agreement within thirty (30) days of the expiration of the initial term or a
renewal term, as appropriate, or as otherwise provided for herein. The terms of
this Agreement, if extended, shall remain the same as set forth herein.
<PAGE>
4. Compensation.
A. Base Salary. For the period commencing on September 1, 1996 and
ending August 31, 1997, PPS shall pay Employee a base salary of One Hundred
Forty Thousand Dollars ($140,000), payable biweekly. For all periods after
September 1, 1997, PPS shall pay Employee an annual base salary of One Hundred
Eighty Thousand Dollars ($180,000), payable biweekly.
B. Bonus. Upon the achievement of all of the covenants for a quarter
that are set forth in the $25 Million Credit Agreement among PPS, certain
lenders party thereto, Fleet National Bank, as co-administrator, and NationsBank
of Texas, N.A., as Administrative Lender, for each of the first four quarters
following the date hereof, PPS shall pay Employee a bonus of $9,000 payable
within 30 days after the end of such quarter. In addition to the foregoing
bonus, the Employee shall be entitled to participate in a bonus plan and receive
a bonus under such plan as may be established in the sole discretion of the
Compensation Committee.
5. Reimbursement for Expenses. Employee shall be reimbursed for all
reasonable, ordinary and necessary expenses upon receipt of appropriate receipts
and expense reports according to standard procedures established in the PPS
policy manual.
6. Duties. Employee shall serve as Executive Vice President and Assistant
Secretary of the Company. In such positions, Employee shall have such duties and
authority as shall be determined from time to time by the Board of Directors of
the Company. It is agreed that Employee's duties shall be performed with
diligence, loyalty, good faith and due care under the circumstances of the
specific duty performed. During the term of his employment hereunder, Employee
will devote substantially all of his business time and efforts to the
performance of his duties hereunder.
7. Benefits. Employee will be entitled to employee benefits of the Company,
including, without limitation, vacation days, major medical, extended medical
and extended disability insurance on the same basis as those benefits are
generally made available to executives of the Company.
8. Disability and Sickness. If Employee is unable to perform his services
by reason of illness or incapacity, for a period of less than ninety days, the
compensation otherwise payable to Employee during that ninety day period shall
be paid in full during the period of such illness. In the event the illness
shall extend for longer than ninety days, compensation
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<PAGE>
from PPS shall cease. Employee's full compensation shall be reinstated upon his
return to employment and discharge of his full duties hereunder. Notwithstanding
anything herein to the contrary, PPS may terminate this Agreement at any time
after Employee has been absent from his employment for whatever unauthorized
cause (including illness), for a continuous period of more than ninety days,
and, except as provided for in Paragraph 10 below, all obligations of PPS
hereunder shall cease upon such termination.
9. Termination for Cause. In addition to the other provisions hereof, PPS
may terminate this Agreement upon written notice to Employee, effective upon
receipt, for any of the following causes:
A. fraud, embezzlement or other material dishonesty of the Employee
with respect to the Employer or any subsidiary or affiliate thereof;
B. the Employee's conviction or plea of nolo contendere to (A) a
felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or
fraud;
C. gross negligence or willful misconduct of the Employee with respect
to the Employer or any subsidiary or affiliate thereof; provided, however, if
susceptible to cure, following notice and a 10 business day opportunity to cure;
D. substantial and continued breach by the Employee of the Employee's
obligations hereunder; provided, however, if susceptible to cure, following
notice and a 10 business day opportunity to cure; or
E. Competing with PPS during the terms of this Agreement, or
disclosures of an Confidential Information.
If this Agreement is terminated by PPS for any of these reasons, Employee
shall not be entitled to any further compensation or benefits from, and shall
have no claims against PPS.
10. Other Terminations. If Employee should terminate his employment with
PPS for any reason, PPS shall have no further obligations to him under this
Agreement or otherwise; provided that if PPS should terminate Employee's
employment under this Agreement or any extension thereof (as provided in
Paragraph 3, above) for any reason other than those set forth in Paragraph 9
above or Employee terminates his employment for Good Reason (as defined below),
then Employee shall be entitled to receive as severance pay an amount equal to
one week's worth of his Base
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<PAGE>
Salary multiplied by the number of years or portions thereof (rounded to the
highest whole number) that Employee has been employed by PPS. For the purposes
hereof, "Good Reason" shall mean (i) any reduction in Employee's Base Salary as
in effect on the date hereof as the same may be increased from time to time or
any material decrease in Employee's benefits (except as such benefits may be
decreased for all employees of the Company) or (ii) the office where Employee
works is relocated more than 50 miles away from where Employee currently works.
11. Confidential Information. In this Agreement:
A. "Confidential Information" means information, not generally known,
and proprietary to PPS, including trade secret information, about their
processes and products, including information relating to fee negotiation
methodology, research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling, leasing, servicing, finance and
business systems and techniques. All information disclosed to Employee, or which
Employee obtains access, whether originated by him or others, during the period
of his employment, which he has a reasonable basis to believe to be Confidential
Information, or which is treated by PPS as being Confidential Information, shall
be presumed to be Confidential Information.
B. "Inventions" means discoveries, improvements and ideas (whether or
not shown or described in writing or reduced to practice) works of authorship,
whether or not patentable or copyrightable, (1) which related directly to the
business of PPS, or (2) which related to their actual or demonstrable
anticipated research or development, or (3) which result from any work performed
by Employee for PPS, or (4) for which equipment, supplies, facility or trade
secret information of PPS is used, or (5) which is developed on any PPS time.
C. "Conflicting Product" means any product, process, system or service
of any person or organization other than PPS, in existence or under development,
which is the same as or similar to or competes with, or has a usage allied to, a
product, process, system or service which Employee was involved with or had
knowledge of (in either a sales or a non-sales capacity) during his employment
by PPS or about which he acquired Confidential Information.
D. "Conflicting Organization" means any person or organization which
is engaged in or about to become engaged in, research on or development,
production, marketing, leasing, selling or servicing of a Conflicting Product.
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<PAGE>
With respect to Inventions made, authored or conceived by Employee,
either solely or jointly with others (1) during his employment, whether or not
during normal working hours or whether or not at PPS' premises, or (2) within
two (2) years after termination of his employment, he will:
E. Keep accurate, complete and timely records of such Inventions,
which records shall be PPS' property and be retained on PPS' premises.
F. Promptly and fully disclose and described such Inventions in
writing to PPS.
G. Assign (and he does hereby assign) to PPS all of his rights to
such Inventions, and to applications for letters patent and/or copyright in all
countries and to letters patent and/or copyrights granted upon such inventions
in all countries.
H. Acknowledge and deliver promptly to PPS (without charge to them
but at their expenses) such written instruments and to do such other acts as may
be necessary in the opinion of PPS to preserve property rights against
forfeiture, abandonment or loss and to obtain and maintain letters patent and/or
copyrights and to vest the entire right and title thereto to PPS.
NOTICE: This is to notify Employee that this paragraph of the "Employee
Agreement" he is being asked to sign as a condition of his employment
does not apply to an Invention for which no equipment, supplies,
facility or trade secret information of PPS was used and which was
developed entirely on his own time, and which (1) does not relate (a)
directly to the business of PPS, or (b) to their actual or
demonstrably anticipated research or development, or (2) does not
result from any work performed by him for PPS.
I. Except as required in his duties to PPS, Employee will never,
either during this employment or anytime thereafter, use or disclose any
Confidential Information as defined hereinabove. Upon termination of Employee's
employment with PPS, all records, any composition, articles, devices, and other
items which disclose or embody Confidential Information including all copies or
specimens thereof in his possession, whether prepared or made by him or others,
will be left with or immediately returned to PPS. Except as listed at the end
of this Agreement, Employee will not assert any rights under any Inventions as
having been made, conceived, authored or acquired by him prior to his being
employed by PPS.
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<PAGE>
J. The Employee hereby confirms that the Employee is not bound by the
terms of any agreement with any previous employer or other party which restricts
in any way the Employee's use or disclosure of information or the Employee's
engagement in any business. The Employee represents to PPS that the Employee's
execution of this Agreement, the Employee's employment with PPS and the
performance of the Employee's proposed duties for PPS will not violate any
obligations the Employee may have to any such previous employer or other party.
12. Noncompetition. Employee hereby agrees that during the term of this
Agreement and for a period of two (2) years from the termination of his
employment for any reason, he will neither directly nor indirectly engage or be
interested in any business competing with PPS or their successors, or directly
or indirectly engage or be interested in any business competing with PPS or
their successors, nor directly or indirectly have any interest to own, manage,
operate, control, or be connected with as a stockholder, joint venturer,
officer, employee, partner, or consultant, or otherwise engage or invest or
participate in any business which shall compete with PPS or successor of PPS in
the continental United States. Neither shall Employee solicit business from any
client or customer of PPS or any source of referrals for PPS, wherever located,
nor shall the Employee hire or attempt to employ, recruit or otherwise solicit,
induce or influence any person to leave employment with PPS during such two (2)
year period following termination of his employment. In addition, for a period
of two (2) years after the termination of this employment with PPS, Employee:
A. Will inform any new employer, prior to accepting employment, of
the existence of this Employee Agreement and provide such employer with a copy
thereof.
B. If he has been or is employed by PPS in a sales capacity, he will
not render services in the United States, directly or indirectly, to any
Conflicting Organization in connection with the development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of any
Conflicting Product to any person or organization upon whom he called, or whose
account he supervised on behalf of PPS, at any time during his employment.
C. If he has been or is employed by PPS in a non-sales capacity, he
will not render to any Conflicting Organization, services, directly or
indirectly, in the United States or in any country in which PPS has a plant for
manufacturing a product upon which he worked during his employment or in which
PPS provided a service in which he participated during his employment, except
that he may accept employment with a large Conflicting
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<PAGE>
Organization whose business is diversified (and which has separate and distinct
divisions), and which as to part of its business is not a Conflicting
Organization, provided PPS, prior to his accepting such employment, shall
receive separate written assurances satisfactory to them from such Conflicting
Organization and from Employee, that he will not render services directly or
indirectly in connection with any Conflicting Product.
The parties hereto agree that damages would be an inadequate remedy for PPS
in the event of a breach or threatened breach of this Agreement, and thus, in
any such event, PPS may, either with or without pursuing and potential damage
remedies, immediately obtain and enforce an injunction prohibiting Employee from
violating this Agreement and Employee waives any requirements that PPS post a
bond in the event of such injunction proceeding.
13. Employment Policies. Employee shall be given a copy of the employment
policies which shall be deemed to be an integral part of the Agreement and by
reference are incorporated herein; provided, however, that if and to the extent
PPS' employment policies are contrary to or inconsistent with this Agreement,
this Agreement shall be controlling. Copies of said employment policies shall
be available for copying and inspection from PPS during any regular business
day.
14. Death During Employment. If Employee dies during the term of this
Agreement, PPS shall pay to the estate of Employee the compensation which would
otherwise be payable to Employee up to the end of the month in which the death
occurs. In addition, Employee shall receive death benefits to the extent, if
any, provided under any group insurance policy maintained for qualifying
employees of PPS.
15. Breach or Enforcement of the Agreement. In the event of a legal
action by either party based upon this Agreement, the prevailing party is
entitled to an award of costs of court, attorneys' fees, experts' fees, and any
other cost or expense reasonably incurred in prosecuting the action. PPS shall
be entitled to temporary and permanent injunctive relief, in addition to any
other remedies provided at law or in equity, in the event Employee breaches his
obligations under Sections 11 and 12 of this Agreement.
16. Jurisdiction, Construction and Venue. This Agreement has been
negotiated and executed and is to be performed in the State of Illinois, and all
of its terms, covenants and conditions shall be construed according to the laws
thereof. In the event of a legal action by either party based on this
Agreement, each party submits to jurisdiction of the State of Illinois, and
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<PAGE>
agrees that said jurisdiction is the sole jurisdiction in which a legal action
relating to the Agreement may be initiated.
17. Notices. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
Employee and/or PPS as follows:
Preferred Payment Systems, Inc. 612 Steamboat
1230 East Diehl Road, Suite 300 Naperville, IL 60564
Naperville, IL 60563
In the event of a change of address, the party making the change shall
notify the other in writing. If no notice of change is stated, notice shall be
effective if delivered to the address stated herein.
18. Waiver. No term or provision hereof shall be deemed to have been
waived and no breach excused unless the waiver or excuse is in writing executed
by the party claimed to have waived or excused performance. Any waiver or
excuse, whether express or implied, shall not operate as an excuse or waiver for
any subsequent or different breach or failure to perform.
19. Severability. in the event any paragraph, section or portion of this
Agreement shall be found void, unconstitutional or unenforceable, the remaining
terms, covenants and conditions of this Agreement shall remain in full force and
effect, and the portion found to be void, unenforceable or unconstitutional
shall be stricken and the remaining terms hereof shall be construed as though
said portion did not exist.
20. Benefit of Agreement. This Agreement contemplates the personal
services of Employee and may not be assigned by him. The rights and obligations
of PPS under this Agreement shall inure to the benefit of and shall be binding
upon the transferee, successors and assigns of PPS, unless terminated as
provided herein.
21. Entire Agreement. This instrument contains the entire Agreement
between the parties, and supersedes all prior written or oral agreements between
the parties, including the Employment Agreements between the parties dated
January 1, 1994. It may not be modified or amended except by an agreement in
writing signed by both parties.
* * * *
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<PAGE>
EXHIBIT 10.5
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated as of this ____ day
of August, 1996, by and between Preferred Payment Systems, Inc., a Delaware
corporation ("PPS"), and Brent Anderson (the "Employee").
WHEREAS, PPS and Employee are parties to an employment agreement dated
January 1, 1994, which agreement is hereby amended and superseded in its
entirety;
WHEREAS, certain investors have agreed to provide financing (the
"Financing") to PPS subject to the terms of that certain Convertible Note
Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof by
and among PPS, the shareholders identified therein (the "Shareholders"), and the
investors identified therein (the "Investors"), the proceeds of which will be
used to fund a dividend to Employee and other shareholders; and
WHEREAS, it is a condition to the Financing that the Company and the
Employee agree to the terms of employment of Employee as provided hereunder.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein and for other good and valuable considerations, the parties agree as
follows:
1. Employment and Position. Employee shall be employed as Secretary and
Treasurer of PPS and shall serve subject to the direction of the Board of
Directors of PPS upon the terms, covenants and conditions hereinafter set forth.
2. Initial Term. The effective date of this Agreement is September 1,
1996 and this Agreement shall control the employment relationship through August
31, 1998, unless sooner terminated as provided for herein.
3. Extension of Term. At the end of the initial term, this Agreement will
automatically renew for successive one-year periods, unless and until terminated
by either party giving the other party notice of the intent not to renew the
Agreement within thirty (30) days of the expiration of the initial term or a
renewal term, as appropriate, or as otherwise provided for herein. The terms of
this Agreement, if extended, shall remain the same as set forth herein.
<PAGE>
4. Compensation.
A. Base Salary. For the period commencing on September 1, 1996 and
ending August 31, 1997, PPS shall pay Employee a base salary of One Hundred
Eight Thousand Dollars ($108,000), payable biweekly. For all periods after
September 1, 1997, PPS shall pay Employee an annual base salary of One Hundred
Twenty-Eight Thousand Dollars ($128,000), payable biweekly.
B. Bonus. Upon the achievement of all of the covenants for a quarter
that are set forth in the $25 Million Credit Agreement among PPS, certain
lenders party thereto, Fleet National Bank, as co-administrator, and NationsBank
of Texas, N.A., as Administrative Lender, for each of the first four quarters
following the date hereof, PPS shall pay Employee a bonus of $5,000 payable
within 30 days after the end of such quarter. In addition to the foregoing
bonus, the Employee shall be entitled to participate in a bonus plan and receive
a bonus under such plan as may be established in the sole discretion of the
Compensation Committee.
5. Reimbursement for Expenses. Employee shall be reimbursed for all
reasonable, ordinary and necessary expenses upon receipt of appropriate receipts
and expense reports according to standard procedures established in the PPS
policy manual.
6. Duties. Employee shall serve as Secretary and Treasurer of the
Company. In such positions, Employee shall have such duties and authority as
shall be determined from time to time by the Board of Directors of the Company.
It is agreed that Employee's duties shall be performed with diligence, loyalty,
good faith and due care under the circumstances of the specific duty performed.
During the term of his employment hereunder, Employee will devote substantially
all of his business time and efforts to the performance of his duties hereunder.
7. Benefits. Employee will be entitled to employee benefits of the
Company, including, without limitation, vacation days, major medical, extended
medical and extended disability insurance on the same basis as those benefits
are generally made available to executives of the Company.
8. Disability and Sickness. If Employee is unable to perform his services
by reason of illness or incapacity, for a period of less than ninety days, the
compensation otherwise payable to Employee during that ninety day period shall
be paid in full during the period of such illness. In the event the illness
shall extend for longer than ninety days, compensation from PPS shall cease.
Employee's full compensation shall be
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<PAGE>
reinstated upon his return to employment and discharge of his full duties
hereunder. Notwithstanding anything herein to the contrary, PPS may terminate
this Agreement at any time after Employee has been absent from his employment
for whatever unauthorized cause (including illness), for a continuous period of
more than ninety days, and, except as provided for in Paragraph 10 below, all
obligations of PPS hereunder shall cease upon such termination.
9. Termination for Cause. In addition to the other provisions hereof, PPS
may terminate this Agreement upon written notice to Employee, effective upon
receipt, for any of the following causes:
A. fraud, embezzlement or other material dishonesty of the Employee
with respect to the Employer or any subsidiary or affiliate thereof;
B. the Employee's conviction or plea of nolo contendere to (A) a
felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or
fraud;
C. gross negligence or willful misconduct of the Employee with
respect to the Employer or any subsidiary or affiliate thereof; provided,
however, if susceptible to cure, following notice and a 10 business day
opportunity to cure;
D. substantial and continued breach by the Employee of the Employee's
obligations hereunder; provided, however, if susceptible to cure, following
notice and a 10 business day opportunity to cure; or
E. Competing with PPS during the terms of this Agreement, or
disclosures of an Confidential Information.
If this Agreement is terminated by PPS for any of these reasons, Employee
shall not be entitled to any further compensation or benefits from, and shall
have no claims against PPS.
10. Other Terminations. If Employee should terminate his employment with
PPS for any reason, PPS shall have no further obligations to him under this
Agreement or otherwise; provided that if PPS should terminate Employee's
employment under this Agreement or any extension thereof (as provided in
Paragraph 3, above) for any reason other than those set forth in Paragraph 9
above or Employee terminates his employment for Good Reason (as defined below),
then Employee shall be entitled to receive as severance pay an amount equal to
one week's worth of his Base Salary multiplied by the number of years or
portions thereof
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<PAGE>
(rounded to the highest whole number) that Employee has been employed by PPS.
For the purposes hereof, "Good Reason" shall mean (i) any reduction in
Employee's Base Salary as in effect on the date hereof as the same may be
increased from time to time or any material decrease in Employee's benefits
(except as such benefits may be decreased for all employees of the Company) or
(ii) the office where Employee works is relocated more than 50 miles away from
where Employee currently works.
11. Confidential Information. In this Agreement:
A. "Confidential Information" means information, not generally known,
and proprietary to PPS, including trade secret information, about their
processes and products, including information relating to fee negotiation
methodology, research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling, leasing, servicing, finance and
business systems and techniques. All information disclosed to Employee, or
which Employee obtains access, whether originated by him or others, during the
period of his employment, which he has a reasonable basis to believe to be
Confidential Information, or which is treated by PPS as being Confidential
Information, shall be presumed to be Confidential Information.
B. "Inventions" means discoveries, improvements and ideas (whether or
not shown or described in writing or reduced to practice) works of authorship,
whether or not patentable or copyrightable, (1) which related directly to the
business of PPS, or (2) which related to their actual or demonstrable
anticipated research or development, or (3) which result from any work performed
by Employee for PPS, or (4) for which equipment, supplies, facility or trade
secret information of PPS is used, or (5) which is developed on any PPS time.
C. "Conflicting Product" means any product, process, system or
service of any person or organization other than PPS, in existence or under
development, which is the same as or similar to or competes with, or has a usage
allied to, a product, process, system or service which Employee was involved
with or had knowledge of (in either a sales or a non-sales capacity) during his
employment by PPS or about which he acquired Confidential Information.
D. "Conflicting Organization" means any person or organization which
is engaged in or about to become engaged in, research on or development,
production, marketing, leasing, selling or servicing of a Conflicting Product.
With respect to Inventions made, authored or conceived by Employee,
either solely or jointly with others (1) during his
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<PAGE>
employment, whether or not during normal working hours or whether or not at PPS'
premises, or (2) within two (2) years after termination of his employment, he
will:
E. Keep accurate, complete and timely records of such Inventions,
which records shall be PPS' property and be retained on PPS' premises.
F. Promptly and fully disclose and described such Inventions in
writing to PPS.
G. Assign (and he does hereby assign) to PPS all of his rights to
such Inventions, and to applications for letters patent and/or copyright in all
countries and to letters patent and/or copyrights granted upon such inventions
in all countries.
H. Acknowledge and deliver promptly to PPS (without charge to them
but at their expenses) such written instruments and to do such other acts as may
be necessary in the opinion of PPS to preserve property rights against
forfeiture, abandonment or loss and to obtain and maintain letters patent and/or
copyrights and to vest the entire right and title thereto to PPS.
NOTICE: This is to notify Employee that this paragraph of the "Employee
Agreement" he is being asked to sign as a condition of his employment
does not apply to an Invention for which no equipment, supplies,
facility or trade secret information of PPS was used and which was
developed entirely on his own time, and which (1) does not relate (a)
directly to the business of PPS, or (b) to their actual or
demonstrably anticipated research or development, or (2) does not
result from any work performed by him for PPS.
I. Except as required in his duties to PPS, Employee will never,
either during this employment or anytime thereafter, use or disclose any
Confidential Information as defined hereinabove. Upon termination of Employee's
employment with PPS, all records, any composition, articles, devices, and other
items which disclose or embody Confidential Information including all copies or
specimens thereof in his possession, whether prepared or made by him or others,
will be left with or immediately returned to PPS. Except as listed at the end
of this Agreement, Employee will not assert any rights under any Inventions as
having been made, conceived, authored or acquired by him prior to his being
employed by PPS.
J. The Employee hereby confirms that the Employee is not bound by the
terms of any agreement with any previous employer or other party which restricts
in any way the Employee's
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<PAGE>
use or disclosure of information or the Employee's engagement in any business.
The Employee represents to PPS that the Employee's execution of this Agreement,
the Employee's employment with PPS and the performance of the Employee's
proposed duties for PPS will not violate any obligations the Employee may have
to any such previous employer or other party.
12. Noncompetition. Employee hereby agrees that during the term of this
Agreement and for a period of two (2) years from the termination of his
employment for any reason, he will neither directly nor indirectly engage or be
interested in any business competing with PPS or their successors, or directly
or indirectly engage or be interested in any business competing with PPS or
their successors, nor directly or indirectly have any interest to own, manage,
operate, control, or be connected with as a stockholder, joint venturer,
officer, employee, partner, or consultant, or otherwise engage or invest or
participate in any business which shall compete with PPS or successor of PPS in
the continental United States. Neither shall Employee solicit business from any
client or customer of PPS or any source of referrals for PPS, wherever located,
nor shall the Employee hire or attempt to employ, recruit or otherwise solicit,
induce or influence any person to leave employment with PPS during such two (2)
year period following termination of his employment. In addition, for a period
of two (2) years after the termination of this employment with PPS, Employee:
A. Will inform any new employer, prior to accepting employment, of
the existence of this Employee Agreement and provide such employer with a copy
thereof.
B. If he has been or is employed by PPS in a sales capacity, he will
not render services in the United States, directly or indirectly, to any
Conflicting Organization in connection with the development, manufacture,
marketing, sale, merchandising, leasing, servicing or promotion of any
Conflicting Product to any person or organization upon whom he called, or whose
account he supervised on behalf of PPS, at any time during his employment.
C. If he has been or is employed by PPS in a non-sales capacity, he
will not render to any Conflicting Organization, services, directly or
indirectly, in the United States or in any country in which PPS has a plant for
manufacturing a product upon which he worked during his employment or in which
PPS provided a service in which he participated during his employment, except
that he may accept employment with a large Conflicting Organization whose
business is diversified (and which has separate and distinct divisions), and
which as to part of its business is not a Conflicting Organization, provided
PPS, prior
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<PAGE>
to his accepting such employment, shall receive separate written assurances
satisfactory to them from such Conflicting Organization and from Employee, that
he will not render services directly or indirectly in connection with any
Conflicting Product.
The parties hereto agree that damages would be an inadequate remedy for PPS
in the event of a breach or threatened breach of this Agreement, and thus, in
any such event, PPS may, either with or without pursuing and potential damage
remedies, immediately obtain and enforce an injunction prohibiting Employee from
violating this Agreement and Employee waives any requirements that PPS post a
bond in the event of such injunction proceeding.
13. Employment Policies. Employee shall be given a copy of the employment
policies which shall be deemed to be an integral part of the Agreement and by
reference are incorporated herein; provided, however, that if and to the extent
PPS' employment policies are contrary to or inconsistent with this Agreement,
this Agreement shall be controlling. Copies of said employment policies shall
be available for copying and inspection from PPS during any regular business
day.
14. Death During Employment. If Employee dies during the term of this
Agreement, PPS shall pay to the estate of Employee the compensation which would
otherwise be payable to Employee up to the end of the month in which the death
occurs. In addition, Employee shall receive death benefits to the extent, if
any, provided under any group insurance policy maintained for qualifying
employees of PPS.
15. Breach or Enforcement of the Agreement. In the event of a legal
action by either party based upon this Agreement, the prevailing party is
entitled to an award of costs of court, attorneys' fees, experts' fees, and any
other cost or expense reasonably incurred in prosecuting the action. PPS shall
be entitled to temporary and permanent injunctive relief, in addition to any
other remedies provided at law or in equity, in the event Employee breaches his
obligations under Sections 11 and 12 of this Agreement.
16. Jurisdiction, Construction and Venue. This Agreement has been
negotiated and executed and is to be performed in the State of Illinois, and all
of its terms, covenants and conditions shall be construed according to the laws
thereof. In the event of a legal action by either party based on this
Agreement, each party submits to jurisdiction of the State of Illinois, and
agrees that said jurisdiction is the sole jurisdiction in which a legal action
relating to the Agreement may be initiated.
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<PAGE>
17. Notices. Any notices required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
Employee and/or PPS as follows:
Preferred Payment Systems, Inc. 11781 Brook Mill Lane
1230 East Diehl Road, Suite 300 Sandy, UT 84092
Naperville, IL 60563
In the event of a change of address, the party making the change shall
notify the other in writing. If no notice of change is stated, notice shall be
effective if delivered to the address stated herein.
18. Waiver. No term or provision hereof shall be deemed to have been
waived and no breach excused unless the waiver or excuse is in writing executed
by the party claimed to have waived or excused performance. Any waiver or
excuse, whether express or implied, shall not operate as an excuse or waiver for
any subsequent or different breach or failure to perform.
19. Severability. in the event any paragraph, section or portion of this
Agreement shall be found void, unconstitutional or unenforceable, the remaining
terms, covenants and conditions of this Agreement shall remain in full force and
effect, and the portion found to be void, unenforceable or unconstitutional
shall be stricken and the remaining terms hereof shall be construed as though
said portion did not exist.
20. Benefit of Agreement. This Agreement contemplates the personal
services of Employee and may not be assigned by him. The rights and obligations
of PPS under this Agreement shall inure to the benefit of and shall be binding
upon the transferee, successors and assigns of PPS, unless terminated as
provided herein.
21. Entire Agreement. This instrument contains the entire Agreement
between the parties, and supersedes all prior written or oral agreements between
the parties, including the Employment Agreements between the parties dated
January 1, 1994. It may not be modified or amended except by an agreement in
writing signed by both parties.
* * * *
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<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
1996 INCENTIVE STOCK PLAN
1. Purpose. The Amended and Restated 1996 Incentive Stock Plan (the
"Plan") amends and restates the 1996 Incentive Stock Plan adopted on August 30,
1996. The Plan is intended to provide incentives which will attract and retain
highly competent persons as officers, key employees, directors and independent
consultants of Preferred Payment Systems, Inc., a Delaware corporation (the
"Company"), and its subsidiaries, including Preferred Payment Systems, L.L.C.,
by providing them opportunities to acquire shares of Common Stock of the Company
("Common Stock") or to receive monetary payments based on the value of such
shares pursuant to the Benefits described herein.
2. Administration. The Plan will be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"), appointed
by the Board from among its members. The Committee is authorized, subject to the
provisions of the Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Plan and to make such
determinations and interpretations and to take such action in connection with
the Plan and any Benefits granted hereunder as it deems necessary or advisable.
All determinations and interpretations made by the Committee shall be binding
and conclusive on all participants and their legal representatives. No member of
the Board, no member of the Committee and no employee of the Company shall be
liable for any act or failure to act hereunder, by any other member or employee
or by any agent to whom duties in connection with the administration of this
Plan have been delegated or, except in circumstances involving his or her bad
faith, gross negligence or fraud, for any act or failure to act by the member or
employee.
3. Participants. Participants will consist of such key employees
(including officers and directors) and independent consultants of the Company or
its subsidiaries as the Committee in its sole discretion determines to be
significantly responsible for the success and future growth and profitability of
the Company and whom the Committee may designate from time to time to receive
Benefits under the Plan. Designation of a participant in any year shall not
require the Committee to designate such person to receive a Benefit in any other
year or, once designated, to receive the same type or amount of Benefit as
granted to the participant in any year. The Committee shall consider such
factors as it deems pertinent in selecting participants and in determining the
type and amount of their respective Benefits.
<PAGE>
4. Types of Benefits. Benefits under the Plan may be granted in any one
or a combination of (a) Incentive Stock Options and (b) Non-qualified Stock
Options.
5. Shares Reserved under the Plan. There is hereby reserved for issuance
under the Plan an aggregate of 325,000 shares of Common Stock, which may be
authorized but unissued or treasury shares. Any shares subject to stock options
or issued under such options may thereafter be subject to new options under this
Plan if there is a lapse, expiration or termination of any such options prior to
issuance of the shares or if shares are issued under such options, and
thereafter are reacquired by the Company without consideration pursuant to
rights reserved by the Company upon issuance thereof.
6. Stock Options. Incentive Stock Options and Non-qualified Stock
Options will consist of stock options to purchase Common Stock at purchase
prices not less than 100% of the fair market value of the Common Stock on the
date the option is granted. Incentive Stock Options granted to a participant
that holds more than 10% of the issued and outstanding shares of Common Stock
("Ten Percent Holders") will consist of stock options to purchase Common Stock
at purchase price not less than 110% of the fair market value of the Common
Stock on the date the option is granted. Said purchase price may be paid by
check or, in the discretion of the Committee, by the delivery (or certification
of ownership) of shares of Common Stock of the Company. In the discretion of the
Committee, payment may also be made by delivering a properly executed exercise
notice to the Company, together with a copy of the irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds to
pay the exercise price. All stock options granted hereunder shall become vested
and exercised in installments at such times as shall be determined by the
Committee at the date of grant. Non-qualified Stock Options shall be exercisable
not later than fifteen years after the date they are granted; Incentive Stock
Options shall be exercisable not later than ten years after the date they are
granted; and Incentive Stock Options granted to Ten Percent Holders shall be
exercisable not later than five years after the date they are granted. In the
event of termination of employment, all stock options shall terminate at such
times and upon such conditions or circumstances as the Committee shall in its
discretion set forth in such option at the date of grant or subsequently. The
aggregate fair market value (determined as of the time the option is granted) of
the Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by a participant during any calendar year (under all option
plans of the Company and its subsidiary corporations) shall not exceed $100,000.
Options designated as "incentive stock options" that fail to continue to
meet the requirements of Section 422 of the Internal Revenue Code shall be
redesignated as nonqualified options for
<PAGE>
Federal income tax purposes automatically without further action by the
Committee on the date of such failure to continue to meet the requirements of
Section 422 of the Code.
The Committee may provide, either at the time of grant or subsequently,
that a stock option include the right to acquire a replacement stock option upon
exercise of the original stock option (in whole or in part) prior to termination
of employment of the participant and through payment of the exercise price in
shares of Common Stock. The terms and conditions of a replacement option shall
be determined by the Committee in its sole discretion.
7. Adjustment Provisions.
(a) If the Company shall at any time change the number of issued
shares of Common Stock without new consideration to the Company (such as by
stock dividends or stock splits), the total number of shares reserved for
issuance under this Plan and the number of shares covered by each outstanding
Benefit shall be adjusted so that the aggregate consideration payable to the
Company and the value of each such Benefit shall not be changed. The Committee
may also provide for the continuation of Benefits or for other equitable
adjustments after changes in the Common Stock resulting from reorganization,
sale, merger, consolidation or similar occurrence.
(b) Notwithstanding any other provision of this Plan, and without
affecting the number of shares otherwise reserved or available hereunder, the
Committee may authorize the issuance or assumption of Benefits in connection
with any merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem appropriate.
(c) In the case of any merger, consolidation or combination of the
Company with or into another corporation, other than a merger, consolidation or
combination in which the Company is the continuing corporation and which does
not result in the outstanding Common Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof (an
"Acquisition"):
(i) any participant to whom a stock option has been granted under
the Plan shall have the right (subject to the provisions of the Plan and any
limitation applicable to such option) thereafter and during the term of such
option, to receive upon exercise thereof the Acquisition Consideration (as
defined below) receivable upon such Acquisition by a holder of the number of
shares of Common Stock which might have been obtained upon exercise of such
option or portion thereof, as the case may be, immediately prior to such
Acquisition;
<PAGE>
The term "Acquisition Consideration" shall mean the kind and amount of
shares of the surviving or new corporation, cash, securities, evidence of
indebtedness, other property or any combination thereof receivable in respect of
one share of Common Stock of the Company upon consummation of an Acquisition.
8. Nontransferability. Each Benefit granted under the Plan shall not be
transferable otherwise than by will or the laws of descent and distribution, and
shall be exercisable, during the participant's lifetime, only by the
participant. In the event of the death of a participant, each Benefit
theretofore granted to him shall be exercisable within the period after his
death established by the Committee at the time of grant (but not beyond the
stated duration of the Benefit) and then only:
(a) By the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's rights
under the Benefit shall pass by will or the laws of descent and distribution;
and
(b) To the extent that the deceased participant was entitled to do so
at the date of his death.
Notwithstanding the foregoing, at the discretion of the Committee, an award of a
Benefit may permit the transferability of the Benefit by the participant solely
to members of the participant's immediate family or trusts or family
partnerships for the benefit of such persons subject to such terms and
conditions as may be established by the Committee.
9. Other Provisions. The award of any Benefit under the Plan may also be
subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines appropriate,
including without limitation, provisions for the installment purchase of Common
Stock under Stock Options, provisions to assist the participant in financing the
acquisition of Common Stock, restrictions on resale or other disposition,
provisions for the acceleration of exercisability of Benefits in the event of a
change of control of the Company, provisions for the payment of the value of the
Benefits to participants in the event of a change of control of the Company,
provisions to comply with Federal and state securities laws, or understandings
or conditions as to the participant's employment in addition to those
specifically provided for under the Plan.
10. Rules. The Committee may establish such rules and regulations as it
considers desirable for the administration of the Plan.
11. Manner of Action by Committee. Except as required under that certain
Convertible Note Purchase Agreement dated August 30, 1996, as is may be amended
from time to time, among
<PAGE>
the Company, the Investors listed on Exhibit A thereto and the Shareholders
listed on Exhibit B thereto, a majority of the members of the Committee
qualified to act on a question may act by meeting or by writing signed without
meeting and may execute, or delegate to one of its members authority to execute
any instrument or document required. The Committee may delegate the performance
of ministerial functions in connection with the Plan to such person or persons
as the Committee may select. The costs of administration of the Plan will be
paid by the Company.
12. Fair Market Value. For purposes hereof, fair market value of Common
Stock shall be determined by the Committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question but was classified as a national market issue, then the Fair
Market Value shall be equal to the last-transaction price quoted by the
Nasdaq National Market system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the Nasdaq National Market
system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
13. Taxes. The Company shall be entitled if necessary or desirable to pay
or withhold the amount of any tax attributable to any amounts payable under the
Plan after giving the person entitled to receive such amount notice as far in
advance as practicable, and the Company may defer making payment as to any
Benefit if any such tax may be pending until indemnified to its satisfaction.
When a person is required to pay to the Company an amount required to be
withheld under applicable tax laws in connection with exercises of Non-qualified
Stock Options or other Benefits under the Plan, the Committee may, in its
discretion and subject to such rules as it may adopt, permit such person to
satisfy the obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock having a fair market value equal to the amount
required to be withheld.
<PAGE>
14. Tenure. A participant's right, if any, to continue to serve the
Company and its subsidiaries as an officer, employee, or otherwise, shall not be
enlarged or otherwise affected by his designation as a participant under the
Plan.
15. Amendment and Termination. The terms and conditions applicable to any
Benefit granted under the Plan may be amended or modified by mutual agreement
between the Company and the participant or such other persons as may then have
an interest therein. Also, by mutual agreement between the Company and a
participant hereunder, or under any other present or future plan of the Company,
stock options or other Benefits may be granted to such participant in
substitution and exchange for, and in cancellation of, any Benefits previously
granted such participant under this Plan, or any Benefit previously or hereafter
granted to him under any other present or future plan of the Company. The Board
of Directors may amend the Plan from time to time or terminate the Plan at any
time. However, no action authorized by this paragraph shall reduce the amount of
any existing Benefit or change the terms and conditions thereof without the
participant's consent. The Board of Directors may amend the Plan in any respect
without stockholder approval if stockholder approval is not then required to
comply with applicable federal, state or other regulatory requirements.
16. Stockholder Approval. The Plan was adopted by the Board of Directors
and the Stockholders of the Company on July 31, 1997. This Plan shall continue
in effect until terminated by the Board pursuant to Section 18; provided,
however, that no Incentive Stock Option shall be granted more than ten years
after the date of the adoption of this Plan by the Board.
<PAGE>
Exhibit 10.9
1996 REPLACEMENT STOCK OPTION PLAN
1. Purpose. The 1996 Replacement Stock Option Plan (the "Plan") is
intended to provide incentives which will attract and retain highly competent
persons as officers, key employees, directors and independent consultants of
Preferred Payment Systems, Inc., a Delaware corporation (the "Company") and its
subsidiaries, by providing them opportunities to acquire shares of Common Stock
of the Company ("Common Stock").
2. Administration. The Plan will be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"), appointed
by the Board from among its members.
3. Participants. Participants will consist of such key employees
(including officers and directors) and independent consultants of the Company or
its subsidiaries as the Committee in its sole discretion determines to be
significantly responsible for the success and future growth and profitability of
the Company and whom the Committee may designate from time to time to receive
Benefits under the Plan. Designation of a participant in any year shall not
require the Committee to designate such person to receive a Benefit in any other
year or, once designated, to receive the same type or amount of Benefit as
granted to the participant in any year. The Committee shall consider such
factors as it deems pertinent in selecting participants and in determining the
type and amount of their respective Benefits.
4. Types of Benefits. Benefits under the Plan may be granted in any one
or a combination of (a) Incentive Stock Options; and (b) Non-qualified Stock
Options; all as described below.
5. Shares Reserved under the Plan. There is hereby reserved for issuance
under the Plan an aggregate of 27,833 shares of Common Stock, which may be
authorized but unissued or treasury shares.
6. Stock Options. Incentive Stock Options and Non-qualified Stock Options
will consist of stock options to purchase Common Stock at purchase prices not
less than 100% of the fair market value of the Common Stock on the date the
option is granted. Incentive Stock Options granted to a participant that holds
more than 10% of the issued and outstanding shares of Common Stock ("Ten Percent
Holders") will consist of stock options to purchase Common Stock at purchase
price not less than 110% of the fair market value of the Common Stock on the
date the option is granted. Said purchase price may be paid by check or, in the
discretion of the Committee, by the delivery (or certification of ownership) of
shares of Common Stock of the Company. In the discretion of the Committee,
payment may also be made by delivering a properly executed exercise notice to
the
<PAGE>
Company, together with a copy of the irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds to pay the
exercise price. Non-qualified Stock Options shall be exercisable not later than
fifteen years after the date they are granted; Incentive Stock Options shall be
exercisable not later than ten years after the date they are granted; and
Incentive Stock Options granted to Ten Percent Holders shall be exercisable not
later than five years after the date they are granted. In the event of
termination of employment, all stock options shall terminate at such times and
upon such conditions or circumstances as the Committee shall in its discretion
set forth in such option at the date of grant or subsequently. The aggregate
fair market value (determined as of the time the option is granted) of the
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by a participant during any calendar year (under all option plans
of the Company and its subsidiary corporations) shall not exceed $100,000.
7. Adjustment Provisions.
(a) If the Company shall at any time change the number of issued
shares of Common Stock without new consideration to the Company (such as by
stock dividends or stock splits), the total number of shares reserved for
issuance under this Plan and the number of shares covered by each outstanding
Benefit shall be adjusted so that the aggregate consideration payable to the
Company and the value of each such Benefit shall not be changed. The Committee
may also provide for the continuation of Benefits or for other equitable
adjustments after changes in the Common Stock resulting from reorganization,
sale, merger, consolidation or similar occurrence.
(b) Notwithstanding any other provision of this Plan, and without
affecting the number of shares otherwise reserved or available hereunder, the
Committee may authorize the issuance or assumption of Benefits in connection
with any merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem appropriate.
(c) In the case of any merger, consolidation or combination of the
Company with or into another corporation, other than a merger, consolidation or
combination in which the Company is the continuing corporation and which does
not result in the outstanding Common Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof (an
"Acquisition"), any participant to whom a stock option has been granted under
the Plan shall have the right (subject to the provisions of the Plan and any
limitation applicable to such option) thereafter and during the term of such
option, to receive upon exercise thereof the Acquisition Consideration (as
defined below) receivable upon such Acquisition
-2-
<PAGE>
by a holder of the number of shares of Common Stock which might have been
obtained upon exercise of such option or portion thereof, as the case may be,
immediately prior to such Acquisition.
The term "Acquisition Consideration" shall mean the kind and amount of
shares of the surviving or new corporation, cash, securities, evidence of
indebtedness, other property or any combination thereof receivable in respect of
one share of Common Stock of the Company upon consummation of an Acquisition.
8. Nontransferability. Each Benefit granted under the Plan to an employee
shall not be transferable by him otherwise than by will or the laws of descent
and distribution, and shall be exercisable, during his lifetime, only by him. In
the event of the death of a participant, each Benefit theretofore granted to him
shall be exercisable within the period after his death established by the
Committee at the time of grant (but not beyond the stated duration of the
Benefit) and then only:
(a) By the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's rights
under the Benefit shall pass by will or the laws of descent and distribution;
and
(b) To the extent that the deceased participant was entitled to do so
at the date of his death.
Notwithstanding the foregoing, at the discretion of the Committee, an award of a
Benefit may permit the transferability of the Benefit by the participant solely
to members of the participant's immediate family or trusts or family
partnerships for the benefit of such persons subject to such terms and
conditions as may be established by the Committee.
9. Other Provisions. The award of any Benefit under the Plan may also be
subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines appropriate,
including without limitation, provisions for the installment purchase of Common
Stock under Stock Options, provisions to assist the participant in financing the
acquisition of Common Stock, restrictions on resale or other disposition,
provisions for the acceleration of exercisability of Benefits in the event of a
change of control of the Company, provisions for the payment of the value of the
Benefits to participants in the event of a change of control of the Company,
provisions to comply with Federal and state securities laws, or understandings
or conditions as to the participant's employment in addition to those
specifically provided for under the Plan.
-3-
<PAGE>
10. Rules. The Committee may establish such rules and regulations as it
considers desirable for the administration of the Plan.
11. Manner of Action by Committee. Except as required under that certain
Convertible Note Purchase Agreement dated August 30, 1996, as is may be amended
from time to time, among the Company, the Investors listed on Exhibit A thereto
and the Shareholders listed on Exhibit B thereto, a majority of the members of
the Committee qualified to act on a question may act by meeting or by writing
signed without meeting and may execute, or delegate to one of its members
authority to execute any instrument or document required. The Committee may
delegate the performance of ministerial functions in connection with the Plan to
such person or persons as the Committee may select. The costs of administration
of the Plan will be paid by the Company.
12. Fair Market Value. For purposes hereof, fair market value of Common
Stock shall be determined by the Committee as follows:
(a) If the Common Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Stock was traded over-the-counter on the date in
question but was classified as a national market issue, then the Fair
Market Value shall be equal to the last-transaction price quoted by the
Nasdaq National Market system for such date;
(c) If the Common Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the Nasdaq National Market
system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
13. Taxes. The Company shall be entitled if necessary or desirable to pay
or withhold the amount of any tax attributable to any amounts payable under the
Plan after giving the person entitled to receive such amount notice as far in
advance as practicable, and the Company may defer making payment as to any
Benefit if any such tax may be pending until indemnified to its satisfaction.
When a person is required to pay to the Company an amount required to be
withheld under applicable tax laws in connection with exercises of Non-qualified
Stock Options or other
-4-
<PAGE>
Benefits under the Plan, the Committee may, in its discretion and subject to
such rules as it may adopt, permit such person to satisfy the obligation, in
whole or in part, by electing to have the Company withhold shares of Common
Stock having a fair market value equal to the amount required to be withheld.
14. Tenure. A participant's right, if any, to continue to serve the
Company and its subsidiaries as an officer, employee, or otherwise, shall not be
enlarged or otherwise affected by his designation as a participant under the
Plan.
15. Amendment and Termination. The terms and conditions applicable to any
Benefit granted under the Plan may be amended or modified by mutual agreement
between the Company and the participant or such other persons as may then have
an interest therein. Also, by mutual agreement between the Company and a
participant hereunder, or under any other present or future plan of the Company,
stock options or other Benefits may be granted to such participant in
substitution and exchange for, and in cancellation of, any Benefits previously
granted such participant under this Plan, or any Benefit previously or hereafter
granted to him under any other present or future plan of the Company. The Board
of Directors may amend the Plan from time to time or terminate the Plan at any
time. However, no action authorized by this paragraph shall reduce the amount of
any existing Benefit or change the terms and conditions thereof without the
participant's consent. The Board of Directors may amend the Plan in any respect
without stockholder approval if stockholder approval is not then required to
comply with applicable federal, state or other regulatory requirements.
16. Stockholder Approval. The Plan was adopted by the Board of Directors
and the Stockholders of the Company on ____________, 1996. This Plan shall
continue in effect until terminated by the Board pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended; provided, however, that no
Incentive Stock Option shall be granted more than ten years after the date of
the adoption of this Plan by the Board.
-5-
<PAGE>
EXHIBIT 10.10
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (herein "Sublease") is entered into as of the
_____ day of February, 1997, by and between The Burlington Northern and Santa Fe
Railway Company, a Delaware Corporation as successor in interest to Burlington
Northern Railroad Company, (herein "Sublessor") and Preferred Payment Systems,
Inc. an Illinois Corporation (herein "Sublessee").
RECITALS:
1. Sublessor, as tenant, entered into a Lease Agreement with 1230 Diehl
Associates, LTD Partnership (herein "Diehl"), as landlord, dated January 16,
1985, leasing approximately 40,000 square feet of office space (the "Prime Lease
Space") located on part of the third (3rd) and all of the (4th) floors of that
certain office building (herein the "Building") located at 1230 East Diehl Road,
Naperville, Illinois. The Lease Agreement is attached hereto as Exhibit "A" and
incorporated herein for all purposes as if the same were set forth at length,
which Lease Agreement is hereinafter referred to as the Prime Lease".
2. The parties hereto have agreed that Sublessor shall sublet 28,983
rentable square feet ("RSF") of the Prime Lease Space being part of the third
(3rd), and a part of the fourth (4th) floors of the Building ("Sublease Space")
to Sublessee upon the terms and conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, for and in consideration of the covenants of the parties
contained herein hereby agree as follows:
1. Demise. Sublessor hereby subleases and demises to Sublessee and
Sublessee hereby agrees to take and sublease from Sublessor, for the term
hereinafter specified, the Sublease Space described above.
2. Sublease Term. The term of this Sublease shall commence upon February
1, 1997 and shall continue until April 30, 2000.
<PAGE>
3. Base Rental. Sublessee shall pay to Sublessor as base rental hereunder
varying amounts as follows:
<TABLE>
<CAPTION>
Monthly Per Annum Rent
----------- ---------------
Period Installment Per Square Foot
------ ----------- ---------------
<S> <C> <C>
2/1/97 to 2/28/97 -0- -0-
3/1/97 to 4/30/97 28,983.00 12.00
5/1/97 to 2/28/98 35,021.13 14.50
3/1/98 to 2/28/99 38,354.17 15.88
3/1/99 to 4/30/00 39,899.93 16.52
</TABLE>
4. Security Deposit. Upon the execution hereof Sublessee shall pay to
Sublessor a Security Deposit (herein so called) in the amount of $35,021.13. The
Security Deposit shall be held by Sublessor without liability for interest and
as security for the performance by Sublessee of Sublessee's covenants and
obligations under this Sublease, it being expressly understood that such deposit
shall not be considered an advance payment of rental or a measure of Sublessor's
damages in case of default by Sublessee. Upon the occurrence of any event of
default by Sublessee, Sublessor may, from time to time, without prejudice to any
other remedy, use such deposit to the extent necessary to make good any
arrearages of base rental, additional rent and any other damage, injury, expense
or liability caused to Sublessor by such event of default. Following any such
application of the Security Deposit Sublessee shall pay to Sublessor on demand
the amount so applied in order to restore the Security Deposit to its original
amount. If Sublessee is not then in default hereunder, any remaining balance of
such deposit shall be returned by Sublessor to Sublessee upon the expiration of
the term of this Sublease.
5. Additional Rent for Increases in Basic Costs. In addition to the base
rental specified in paragraph three (3) above, Sublessee shall also pay to
Sublessor, as additional rent, Sublessee's prorata share of the amount which
Sublessor is obligated to pay to Diehl under the Prime Lease as a result of an
increase in Taxes and Operating Expenses (as such term is defined in Section 22
of the Prime Lease) for calendar years 1998, and following, over the increase in
Taxes and Operating Expenses which Sublessor is obligated to pay to Diehl under
the Prime Lease for calendar year 1997. Sublessee's "prorata share" shall mean
a fraction, the numerator of which is 28,983 and the denominator of which is
40,000 RSF. Sublessor shall have the option to estimate annually in advance
Sublessee's prorata share of increases in Taxes and Operating Expenses and
require payment monthly in advance using the same prorata calculations payable
by Sublessor under the Prime Lease. Additional rent shall be payable to
Sublessor by Sublessee within ten (10) days of receipt of invoice.
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<PAGE>
6. Time and Place of Payment. Base rental and additional rent shall be
payable to Sublessor at the address set forth herein for rental payments unless
Sublessee is notified otherwise in writing by Sublessor. Base rental shall be
payable monthly, in advance, on the first day of each month during the term of
this Sublease.
7. Permitted Use. The Sublease space shall be used for general offices
only and for no other purpose.
8. No Assignment or Subletting. Sublessee shall not assign this Sublease
or sublet the Sublease Space in whole or in part, and shall not permit
Sublessee's interest in this Sublease to be vested in any third party by
operation of law or otherwise, without the Sublessor's consent and the consent
of Diehl which Sublessor agrees to make an effort to obtain; provided, however,
that Sublessor shall not be required to make any payment to Diehl in connection
with obtaining Diehl's consent, and that Sublessee shall reimburse Sublessor for
all reasonable out-of-pocket expenses including legal and advisory fees incurred
by Sublessor in connection with obtaining Diehl's and Sublessor's consent.
9. Additional Services at Sublessee's Cost. In the event Sublessee shall
procure any additional services from the Building, such as after-hour air
conditioning, etc., Sublessee shall pay for same at the rates charged by Diehl
and shall make payment, within ten (10) days after receipt of an invoice for
same, directly to Sublessor or Diehl, as Sublessor shall direct. Any sums
payable by Sublessee as a result of additional services shall be additional rent
and collectible as such. In the event Sublessee is delinquent by five or more
days in paying for such additional services then Sublessor shall be permitted,
in addition to all other remedies resulting from such default under this
Sublease, to instruct Diehl to refuse to provide any future additional services
to Sublessee.
10. Sublease Space Improvements. Sublessee accepts the Sublease Space in
an "AS-IS" condition and expressly waives any and all representations or
warranties, express or implied, relating to the condition, habitability or
compliance with applicable laws, codes and ordinances of the Sublease Space and
the Building. Upon the termination of this Sublease, Sublessee shall return to
Sublessor the Sublease Space in the same condition as it existed upon the date
hereof, reasonable wear and tear excepted. Sublessee specifically acknowledges
that all alterations, additions and improvements hereafter made to the Sublease
Space are subject to Diehl's prior written consent in accordance with the terms
of the Prime Lease.
-3-
<PAGE>
11. Electric. Beginning February 1, 1997 and continuing throughout the
term of the lease. Sublessee shall pay monthly in arrears within ten (10) days
of invoicing its prorata share (72%... 28,983 NRSF / 40,000 NRSF) of electric
submetered to Sublessor.
12. Prime Lease. This Sublease is subject to and subordinate to the Prime
Lease. Except as may be inconsistent with the terms hereof all of the terms,
covenants and conditions in the Prime Lease applicable to the Sublease Space
shall be applicable to this Sublease with the same force and effect as if
Sublessor were the landlord under the Prime Lease and Sublessee were the tenant
thereunder, and in any case of any breach or default hereof by Sublessee,
Sublessor shall have all rights against Sublessee as would be available to the
landlord against the tenant under the Prime Lease if such breach were by the
tenant thereunder. Further, Sublessee assumes all of the obligations of
Sublessor to Diehl under the Prime Lease insofar as such relate to the Sublease
Space during the term of this Sublease and to the extent that such obligations
of Sublessor to Diehl under the Prime Lease are not inconsistent with the terms,
covenants and conditions of this Sublease. Diehl is the third party beneficiary
of this assumption commitment.
13. Services. Notwithstanding anything herein contained, the only
services to which Sublessee is entitled hereunder are those to which Sublessor
is entitled under the Prime Lease applicable to the Sublease Space and that for
all such services and rights Sublessee will look to the landlord under the Prime
Lease. Sublessor shall cooperate with Sublessee in Sublessee's attempts to
obtain such services; however, Sublessor will have no liability or obligation to
Sublessee with respect to any failure by landlord under the Prime Lease to
furnish such services.
14. Compliance with Prime Lease. Sublessee represents that it has read
and is familiar with the terms of the Prime Lease attached hereto as Exhibit "A"
and Sublessee hereby agrees to keep all information contained in the Prime Lease
confidential and shall not copy, distribute or in any manner disseminate the
Prime Lease or any portion thereof Sublessee shall neither do nor permit
anything to be done which would cause the Prime Lease to be terminated or
forfeited by any right of termination of forfeiture reserved or vested in the
landlord under the Prime Lease, and Sublessee shall indemnify and hold Sublessor
harmless from and against all claims of any kind whatsoever by reason of any
action, breach or default on the part of Sublessee.
15. Insurance. Sublessee shall procure and maintain the insurance
required of Sublessor in Section 17 of the Prime Lease
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<PAGE>
naming Diehl and Sublessor as an additional insured thereunder except Sublessee
shall not have the right to self insure.
16. No Renewals. Notwithstanding any of the provisions contained to the
contrary in the Prime Lease, Sublessee shall have no options to renew the term
of this Sublease for the renewal terms granted to Sublessor in the Prime Lease.
17. Parking. All spaces currently used by Sublessor shall be available
for use by Sublessee prorata.
18. Late Rent. In the event any installment of base rental or additional
rental due hereunder is not paid to Sublessor by the fifth (5th) day of the
month in which it is due, in addition to any other remedy Sublessor may be
entitled to, Sublessee shall pay to Sublessor a late charge in the amount of
five percent (5%) of such amount so due.
19. Events of Default. The following events shall be deemed to be events
of default by Sublessee under this Sublease:
(i) Sublessee shall fail to pay when due any base rental, additional
rent or other sums payable by Sublessee hereunder and such failure
continues for a period of 3 days after written notice from Sublessor to
Sublessee of such failure provided, however, that Sublessor shall not be
obligated to give more than two (2) such notices in any twelve-month
period, and any failure to pay when due after two such notices in any
twelve-month period shall immediately constitute an event of default
hereunder.
(ii) Sublessee shall fail to comply with or observe any other term,
covenant or provision of this lease and such failure shall continue for
twenty (20) days after written notice to Sublessee of such failure;
provided, however, that if such failure cannot, in the exercise of
reasonable diligence, be cured in twenty 20 days, then an event of default
shall not exist if Sublessee commences its curative efforts within such
twenty 20 day period and thereafter diligently prosecutes same until
completion.
(iii) Sublessee shall file a petition under any section or chapter of
the Federal Bankruptcy Code or any successor statute or any present or
future comparable state law (herein collectively the "Bankruptcy Code"); or
Sublessee shall have entered against it an order for relief in any
proceedings filed against Sublessee under any section or chapter of the
Bankruptcy Code; or a petition proposing the entry of an order for relief
as against Sublessee under any section or chapter of the Bankruptcy Code
shall be filed
-5-
<PAGE>
in any court and such petition shall not be discharged or denied within
sixty (60) days after the filing thereof.
(iv) Sublessee shall become insolvent, shall make a transfer in fraud
of creditors, shall make an assignment for the benefit of creditors, shall
generally not pay its debts as they become due, or shall admit in writing
its inability to pay its debts as they become due.
(v) A receiver or trustee shall be appointed for all or substantially
all of the assets of Sublessee or of the Sublease Space, or any of
Sublessee's property located thereon in any proceeding brought by
Sublessee, or any such receiver or trustee shall be appointed in any
proceeding brought against Sublessee and shall not be discharged within
sixty (60) days after such appointment.
(vi) Sublessee shall commit any act which constitutes a breach or
default under the Prime Lease.
20. Remedies. Upon the occurrence of any event of default specified in
this lease, in addition to any other remedies available at law, Sublessor shall
have the option to pursue any one or more of the following remedies without any
additional notice or demand whatsoever:
(i) Terminate this Sublease in which event Sublessee shall
immediately surrender the Sublease Space to Sublessor, and if Sublessee
fails to do so, Sublessor may, without prejudice to any other remedy which
it may have for possession or arrearages in rent with process of law, enter
upon and take possession and expel or remove Sublessee and any other person
who may be occupying said Sublease Space or any part thereof, without being
liable for prosecution or any claim for damages therefor, and Sublessee
agrees to pay to Sublessor on demand the amount of all loss and damage
which Sublessor may suffer by reason of such termination whether through
inability to relet the Sublease Space on satisfactory terms or otherwise,
including the present value of all rental and other charges for the
remainder of the Sublease term less the fair rental value of the Sublease
Space for the remainder of the Sublease term (also discounted to present
value) based on base rentals which would be received from a comparable
Sublease and comparable term and taking into account, among other things,
the condition of the Sublease Space, market conditions and the period of
time the Sublease Space may reasonably remain unsubleased before Sublessor
is able to relet the same to a suitable replacement tenant it being agreed
that Sublessor
-6-
<PAGE>
shall have no obligation to relet or to attempt to relet the Sublease
Space.
(ii) Enter upon and take possession of the Sublease Space, without
terminating this Sublease, and with process of law expel or remove
Sublessee and any other person who may be occupying the Sublease Space or
any part thereof, without being liable for prosecution or any claim for
damages thereof, and if Sublessor so elects, relet the Sublease Space on
such terms as Sublessor shall deem advisable and receive the rent therefor;
and Sublessee agrees to pay to Sublessor on demand any deficiency in rent
received that may arise by reason of such reletting for the remainder of
the Sublease term.
(iii) Enter upon the Sublease Space, without terminating this
Sublease, and without being liable for prosecution or any claim for damages
therefor, and do whatever Sublessee is obligated to do under the terms of
this Sublease; and Sublessee agrees to reimburse Sublessor on demand for
any expenses which Sublessor may incur in thus effecting compliance with
Sublessee's obligations under this Sublease, and Sublessee further agrees
that Sublessor shall not be liable for any damages resulting to the
Sublessee from such action.
No re-entry or taking possession of the Sublease Space by Sublessor shall
be construed as an election on its part to terminate this Sublease, unless a
written notice of such intention be given to Sublessee. Notwithstanding any
such reletting or re-entry or taking possession, Sublessor may at any time
thereafter elect to terminate this Sublease for a previous default. Pursuit of
any of the foregoing remedies shall not preclude pursuit of any of the other
remedies herein provided or any other remedies provided by law, nor shall
pursuit of any remedy herein provided constitute a forfeiture or waiver of any
rent due to Sublessor hereunder or of any damages accruing to Sublessor by
reason of the violation of any of the terms, provisions and covenants herein
contained. Sublessor's acceptance of rent following an event of default
hereunder shall not be construed as Sublessor's waiver of such event of default.
No waiver by Sublessor of any violation or breach of any of the terms,
provisions, and covenants herein contained shall be deemed to constitute, or be
construed as, a waiver of any other violation or default. The loss or damage
that Sublessor may suffer by reason of termination of this Sublease or the
deficiency from any reletting as provided for above shall include, without
limitation, the reasonable expense of repossession (including attorneys' fees),
any reasonable repairs or remodeling undertaken by Sublessor following
possession,
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<PAGE>
reasonable expenses of removal and storage of personal property, if
any, and any reasonable brokerage fee incurred in connection with such
reletting.
21. Notices. Any notice or demand letter which either party may or must
give to the other hereunder shall be in writing and delivered personally or sent
by certified mail, return receipt requested to Sublessor as follows:
The Burlington Northern and Santa Fe
Railway Company
Attn: Ricci L. Gardner, Vice-President
P.O. Box 961050
Fort Worth, Texas 76161-0050
(817) 352-6460, (817) 352-7115 fax
with copy to: The Burlington Northern and Santa Fe
Railway Company
Attn: Senior Vice President and
General Counsel
777 Main Street
3800 Continental Plaza
Fort Worth, Texas 76102
with copy to: Harold H. Ginsburg
Southern Asset Service Corporation
2610 Fairmount Street
Dallas, Texas 75201
(214) 871-7313, (214) 871-2023 fax
Rental Payments to: Fraunshuh Management Company
c/o SD5 - 12-0942
P.O. Box 86
Minneapolis, MN 55486-0942
(612) 228-9456
(512) 223-5652 fax
and if to Sublessee, as follows:
Preferred Payment Systems, Inc.
1230 East Diehl Road
Suite 300
Naperville, IL 60563
Attention: Steve E. Nelson
(630)245-4510, (630) 245-0740 fax
Either party may, by notice in writing, direct that future notices or
demand be sent to a different address.
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<PAGE>
22. Holding Over. Sublessee recognizes and acknowledges that if it holds
over the Sublease Space after the expiration of the term of this Sublease that
such holding over will cause Sublessor to be in a hold over status under the
Prime Lease and that such a holding over by Sublessee will expose Sublessor to
substantially increased rents, costs and damage claims pursuant to the terms of
the Prime Lease. Accordingly, Sublessee agrees that any holding over by it,
which holding over is specifically not permitted, will be as a tenancy at will
only and that Sublessee will indemnify and hold Sublessor harmless of and from
any and all increased rents, claims, demands, damages, costs and expenses,
including reasonable attorneys' fees, suffered by Sublessor as a result of such
holding over.
23. Consents. Whenever, pursuant to the terms of this Sublease, one party
is prohibited from taking action without the consent of the other party, then
the party whose consent is required agrees that it shall not unreasonably
withhold or delay the giving of such consent.
24. Environmental Indemnity. Sublessee expressly warrants that it will
keep the premises free from hazardous materials as defined by the environmental
protection agency or any other such agency for law or regulation promulgated by
government of legislative authority, provided, however, that Sublessee may keep
customary office supplies (which may be defined as hazardous materials) in
amounts and in a manner permitted by applicable law. In the event that any such
hazardous materials are found to be present in or on the premises or on the
property upon which the premises are situated and such materials are placed
there as a result of acts or omissions of Sublessee (even if such acts or
omissions constitute a rightful use of the premises in all other respects),
Sublessee shall initiate immediate cleanup and removal of such materials at its
sole expense. Sublessor may, but shall not be required, to consider the
existence of such materials produced by Sublessee as an event of default and may
thereby terminate this sublease in addition to any other right or remedy
provided under this sublease or in law or at equity. Sublessee shall indemnify,
defend and hold Sublessor and Diehl harmless from and against any loss, cost
(including reasonable attorney fees), claim, liability, or damage (including
fines or penalties imposed by any governmental agency) arising out of the
presence or removal of such hazardous material occasioned by Sublessee.
Sublessor expressly warrants that it will keep the premises free from hazardous
materials as defined by the environmental protection agency or any other such
agency or law or regulation promulgated by government or legislative authority,
provided, however, that Sublessor may keep customary office supplies and
building cleaning and maintenance supplies (which may be defined
-9-
<PAGE>
as hazardous materials) in amounts and in a manner permitted by applicable law.
In the event that any such hazardous materials are found to be present in or on
the premises or on the property upon which the premises are situated and such
materials are placed there as a result of acts or omissions of Sublessor (even
if such acts or omissions constitute a rightful use of the premises in all other
respects). Sublessor shall initiate immediate cleanup and removal of such
materials at its sole expense. Sublessee may, but shall not be required, to
consider the existence of such materials produced by Sublessor as an event of
default and may thereby terminate this sublease in addition to any other right
or remedy provided under this sublease or in law or at equity. Further,
Sublessor shall indemnify, defend and hold Sublessee and Diehl harmless from and
against any loss, cost (including reasonable attorney fees), claim liability, or
damage (including fines or penalties imposed by any governmental agency) arising
out of the presence or removal of any such hazardous material occasioned by
Sublessor.
25. Entire Agreement. All prior understandings and agreements between the
parties are merged within this Sublease, which alone fully and completely sets
forth the understanding of the parties; and this Sublease may not be changed or
terminated orally or in any manner other than by agreement in writing and signed
by the party against whom enforcement of the changes or termination is sought,
and approved in writing by Diehl.
26. Survival. The covenants and agreements herein contained shall be
binding and inure to the benefit of Sublessor, Sublessee and their respective
successors and assigns.
27. Existence of Broker. Sublessee represents and warrants that it has
not contacted or dealt with any real estate broker or agent in connection with
the execution of this lease, except as listed below, and Sublessee agrees to
indemnify and hold harmless Sublessor against all liabilities and costs
(including but not limited to attorneys' fees) incurred by Sublessor as a result
of Sublessee's breach of the warranties and representations contained herein.
Broker: None
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease Agreement
effective as of the day and year first above written.
SUBLESSOR:
----------
The Burlington Northern and Santa Fe Railway Company
(Successor in interest to Burlington Northern Railroad
Company)
By:________________________
Name: Ricci L. Gardner
Title: Vice President
SUBLESSEE:
---------
Preferred Payment Systems, Inc.
By:
Name: Steven E. Nelson
Title: President
-11-
<PAGE>
EXHIBIT "A"
-----------
Prime Lease
-----------
-12-
<PAGE>
CONSENT TO SUBLEASE
THIS CONSENT TO SUBLEASE is made this 28th day of May, 1997, between 1230
DIEHL ASSOCIATES LIMITED PARTNERSHIP, A New Jersey limited partnership
("Landlord") and THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY (formerly
known as BURLINGTON NORTHERN RAILROAD COMPANY), a Delaware corporation
("Tenant")
WITNESSETH:
-----------
A. Pursuant to an office lease (the "Prime Lease") dated January 16, 1985,
American National Bank and Trust Company of Chicago, not personally, but
solely as Trustee under a Trust Agreement dated November 22, 1983, and
known as Trust Number 59764, leased to Tenant certain premises (the
"Premises") located on the 3rd and 4th floors of that certain office
building located at 1230 East Diehl Road, Naperville, Illinois.
B. Landlord is now the owner of the aforesaid building and the landlord
under the Prime Lease.
C. Tenant desires to sublease a portion of the Premises (the "Subleased
Premises") to Preferred Payment Systems, Inc., an Illinois corporation
("Subtenant"), pursuant to a certain First Amendment to Sublease Agreement
(the "Sublease"), a copy of which is attached hereto as Exhibit "A".
D. Tenant desires to obtain the consent of Landlord to the First Amendment
to Sublease Agreement and Landlord is willing to give such consent on the
following terms and conditions:
1. Consent. Landlord hereby consents to the Sublease, in the form
attached hereto as Exhibit "A," provided that:
a. The Sublease is, and at all times shall be, subject and
subordinate to the Prime Lease and to all of the terms and
provisions contained in the Prime Lease.
b. Tenant is not hereby released or discharged from any
obligation or liability, whether past, present or future,
under the Prime Lease (including liability during any
renewal term of the Prime Lease, liability for any expansion
space included in the Premises or liability with respect to
the Premises).
<PAGE>
c. Landlord does not hereby waive any claims or rights of
Landlord against Tenant under the Prime Lease, including,
without limitation, the right of Landlord to receive rental
and other consideration payable under the Sublease in excess
of the rent payable to Tenant under the Prime Lease for the
Subleased Premises.
d. No modification, amendment or revision of the Sublease to or
from the form attached hereto as Exhibit "A" shall hereafter
be made without the further consent of Landlord, which shall
not be unreasonably withheld or delayed.
e. No addition, alteration or improvement shall be made to the
Premises without the prior written consent of Landlord,
which shall not be unreasonably withheld or delayed, and any
such addition, alteration or improvement shall be made
subject to Paragraph 10 of the Prime Lease.
f. Such consent is limited to the Sublease and shall not
relieve Tenant from its obligation to obtain the consent of
Landlord to (i) any future sublease or Sublease of the
Premises, or any part thereof, (ii) any assignment of the
interest of Tenant under the Prime Lease, or (iii) any
assignment of the interest of Subtenant under the Sublease.
g. Landlord approves the pro rata use of Tenant's reserved
parking spaces by Subtenant pursuant to Paragraph 17 of the
Sublease, provided that such spaces are from and part of the
fifteen (15) reserved parking spaces to be provided to
Tenant under Paragraph 27 of the Prime Lease and the use of
such parking spaces by Subtenant shall be subject to and in
accordance with the provisions of Paragraph 27 of the Prime
Lease.
2. Representation. Tenant hereby represents to Landlord that the
Sublease attached hereto as Exhibit "A" (i) is a correct and
complete copy of the document it purports to be, and (ii)
contains the entire agreement and understanding between Tenant
and Subtenant with regard to the subject matter contained
thereof, specifically including, without limitation, all
agreements concerning rent and other consideration payable by
Subtenant to Tenant for the Subleased Premises.
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<PAGE>
3. Indemnification. Tenant hereby agrees to indemnify and hold
harmless Landlord, its partners, the 'managing agent of the
Building and their respective officers, directors, employees and
agents from and against any and all liabilities and claims for
brokerage commissions and fees arising out of or in connection
with the Sublease or the Subleased Premises.
4. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of Landlord, Tenant and their respective
successors and permitted assigns.
IN WITNESS WHEREOF, this instrument is executed as of the day and year
aforesaid.
LANDLORD
--------
1230 DIEHL ASSOCIATES LIMITED PARTNERSHIP, a New
Jersey limited partnership
By: _____________________________
Name: _____________________________
Title: _____________________________
TENANT
------
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY
COMPANY (formerly known as BURLINGTON NORTHERN
RAILROAD COMPANY), a Delaware corporation
By: _____________________________
Name: _____________________________
Title: _____________________________
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<PAGE>
CONSENT TO SUBTENANT
Subtenant hereby joins in the execution of this instrument for
purposes of evidencing its consent thereto and its agreement to be bound by the
terms and provisions hereof.
PREFERRED PAYMENT SYSTEMS, INC., a Delaware
corporation
By: /s/ Steven E. Nelson
------------------------------------
Name: Steve E. Nelson
Title: President and CEO
-4-
<PAGE>
FIRST AMENDMENT TO SUBLEASE AGREEMENT
-------------------------------------
THIS FIRST AMENDMENT TO SUBLEASE AGREEMENT ("Amendment") is entered into
effective as of the 28th day of May, 1997, by and between THE BURLINGTON
NORTHERN AND SANTA FE RAILWAY COMPANY (formerly known as BURLINGTON NORTHERN
RAILROAD COMPANY), a Delaware corporation ("Sublessor") and PREFERRED PAYMENT
SYSTEMS, INC., an Illinois Corporation ("Sublessee").
RECITALS:
---------
1. Sublessor and Sublessee entered into that certain Sublease Agreement
("Sublease") dated February 28, 1997, pursuant to which Sublessor subleased
to Sublessee all of the third and pan of the fourth floor of the building
located at 1230 East Diehl Road, Naperville, Illinois ("Building);
2. Sublessee now desires to sublease the balance of the fourth floor of
the Building and to amend the Sublease;
3. Sublessor desires to sublease the balance of the fourth floor of the
Building on the terms and conditions set forth in this Amendment;
4. All capitalized terms not otherwise defined in this Amendment shall
have the meanings ascribed to them in the Sublease.
AGREEMENT:
----------
NOW THEREFORE, in consideration of the foregoing premises and the mutual
covenants and benefits to be derived by Sublessor and Sublessee, it is agreed as
follows:
1. Additional Demise. Sublessor hereby subleases and demises to
Sublessee, and Sublessee hereby agrees to take and sublease from Sublessor,
for the term hereinafter specified, the balance of the fourth floor of the
Building, containing approximately 11,017 rentable square feet of office
space ("Additional Space").
2. Additional Space Term. The Space shall become a part of the Sublease
Space on July 1, 1997, and the Additional Space shall thereafter be deemed
a part of the Sublease Space for all purposes and subject to the Sublease.
3. Additional Space Base Rental. Sublessee shall pay to Sublessor as base
rental for the Additional Space varying amounts as follows:
<PAGE>
<TABLE>
<CAPTION>
Monthly
Period Per Annum Rate Installment
- ------ -------------- -----------
<S> <C> <C>
Prior to December 31, 1997 $0.00 per rentable square foot $ 0.00
January 1, 1998 - February 28, 1998 $17.34 per rentable square foot $15,919.57
March 1, 1998 - February 28, 1999 $18.72 per rentable square foot $17,186.52
March 1, 1999 - May 31, 2000 $19.36 per rentable square foot $17,774.09
</TABLE>
4. Base Rental Payments. Sublessee shall pay the base rental for the
Additional Space in monthly installments, calculated on the basis of the
foregoing rental rates in effect from time to time, commencing January 1,
1998 and continuing on the first day of each month thereafter until the
expiration of the term of the Sublease.
5. Additional Rent. The provisions of Section 5 of the Sublease shall, in
all things, be applicable to the Additional Space. Section 5 of the
Sublease is hereby amended to provide that, effective as of July 1, 1997,
Sublessee's "pro rata share" shall, as a result of the Additional Space,
mean 100%.
6. Extension of Sublease Term. Section 2 of the Sublease shall be and
hereby is amended to provide that the expiration of the term is extended
from April 30, 2000 to May 31, 2000.
7. Additional Space Conditions. Sublessee agrees to accept the Additional
Space in "AS IS" condition and acknowledges that (i) Sublessor has no duty
or obligation to make improvements or additions thereto, or to finish funds
to Sublessee for it to do so, and (ii) Sublessor makes no representations
or warranties, expressed or implied, as to the conditions, habituality,
tenantability, usefulness or any other matter concerning the Additional
Space.
8. Increase in Electrical Obligations. Effective July l,1997, the
provisions of Section 11 of the Sublease shall be and hereby are amended to
increase the percentage of Sublessee's electrical payment obligations from
72% of the submetered usage to 100% of the submetered usage.
9. Brokers. Sublessee reaffirms, with respect to the Additional Space,
the provisions of Section 27 of the Sublease, entitled "Existence of
Broker."
10. Ratification. The terms and provisions of the Sublease, as amended by
this Amendment, are hereby ratified and declared to be in full force and
effect.
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<PAGE>
11. Consent. Sublessor and Sublessee recognize that it is a condition
precedent to the efficacy of this Amendment that Diehl grant its written
consent to same. In the event that such consent has not been obtained
within thirty (30) days after the effective date of this Amendment, this
Amendment shall be null and void.
IN WITNESS WHEREOF we have set our hands effective as of the date first
above written.
SUBLESSOR
---------
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY
COMPANY (formerly known as BURLINGTON NORTHERN
RAILROAD COMPANY), a Delaware corporation
By:
-------------------------------
Name:
Title: Vice President
SUBLESSEE
---------
PREFERRED PAYMENT SYSTEMS, INC., a Delaware
corporation
By: /s/ Steven E. Nelson
---------------------------------
Name: Steven E. Nelson
Title: President and CEO
-3-
<PAGE>
I N D E X
---------
<TABLE>
<CAPTION>
Paragraph Page
--------- ----
<S> <C> <C>
1. BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS.... 4
2. PREMISES AND TERM........................................ 5
3. RENT..................................................... 6
5. SERVICES................................................. 7
6. POSSESSION, USE AND ENJOYMENT............................ 9
7. CONDITION OF PREMISES.................................... 10
8. ASSIGNMENT AND SUBLETTING................................ 11
9. MAINTENANCE AND REPAIR................................... 13
10. ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL
OCCUPANCY................................................ 14
11. WAIVER OF CLAIMS AND INDEMNITY........................... 16
12. LANDLORD'S REMEDIES...................................... 19
13. SURRENDER OF PREMISES.................................... 20
14. HOLDING OVER............................................. 21
15. DAMAGE BY FIRE OR OTHER CASUALTY......................... 22
16. CONDEMNATION............................................. 23
17. INSURANCE................................................ 25
18. RULES AND REGULATIONS.................................... 27
19. LANDLORD'S RIGHTS........................................ 29
20. ESTOPPEL CERTIFICATE..................................... 30
21. RELOCATION OF TENANT..................................... 30
22. ADJUSTMENTS TO MONTHLY BASE RENT......................... 31
23. REAL ESTATE BROKERS...................................... 38
24. SUBORDINATION AND ATTORNMENT............................. 39
25. NOTICES.................................................. 40
26. MISCELLANEOUS............................................ 41
27. PARKING.................................................. 43
28. INTENTIONALLY OMITTED.................................... 43
29. RIGHTS OF REFUSAL........................................ 43
30. EXPANSION OPTIONS........................................ 46
31. RENEWAL OPTIONS.......................................... 53
32. MICROWAVE................................................ 55
33. BUILDING LOBBY........................................... 56
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
34. IDENTITY.................................................. 56
35. ARBITRATION............................................... 57
36. CANCELLATION OPTIONS...................................... 59
37. RENT ABATEMENT............................................ 60
</TABLE>
<PAGE>
OFFICE LEASE
1.
BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS
1.1 BASIC LEASE PROVISIONS
The following are the basic lease provisions of this Lease and are subject
to all of the terms and provisions of this Lease:
A. BUILDING & ADDRESS:
1230 East Diehl Road Building
1230 East Diehl Road
Naperville, Illinois 60540
B. LANDLORD & ADDRESS:
American National Bank and Trust Company of Chicago, not
personally but solely as Trustee under Trust Agreement dated November 22,
1983 and known as Trust No. 59764
c/o Bellemead Development Corporation
1250 East Diehl Road
Naperville, Illinois 60540
C. TENANT & CURRENT ADDRESS:
Burlington Northern Railroad Company
777 Main Street
Fort Worth, Texas 76102
Attention: Joseph R. Galassi, Vice President
Sales and Property Management
D. DATE OF LEASE: January 16, 1985
E. LEASE TERM: Fifteen (15) years
F. COMMENCEMENT DATE OF TERM: May 1, 1985
G. EXPIRATION DATE OF TERM: April 30, 2000
H. MONTHLY BASE RENT:
<TABLE>
<CAPTION>
Annual Rate of
Monthly Base Rent
Period Monthly Base Rent Per Square Foot
- ------ ----------------- -----------------
<S> <C> <C>
First 1-1/2 years of Term $ 0* $ 0
Next 8-1/2 years of Term 54,166.67 16.25
Remaining 5 years of Term 86,666.67 26.00
</TABLE>
I. RENTABLE SQUARE FEET OF THE PREMISES Floor 3 - 16,250
- --------------------
* Notwithstanding that Tenant shall not be obligated to pay Monthly Base Rent
for the first 1-1/2 years of the Term, Tenant shall pay all adjustments to
Monthly Base Rent under paragraph 22.02 of this Lease which become due
during said 1-1/2 year period.
<PAGE>
UPON WHICH MONTHLY BASE RENT AND ADJUSTED Floor 4 - 23,750
------
MONTHLY BASE RENT IS CALCULATED: Total 40,000
J. SECURITY DEPOSIT: None
K. BROKER: Dean Topping & Company
L. RENTABLE SQUARE FEET OF THE BUILDING: 94,245 square feet
M. TENANT'S PROPORTIONATE SHARE: 42.443%
1.2 IDENTIFICATION OF EXHIBITS
The exhibits set forth below and attached to this Lease are incorporated in
this Lease by this reference and are hereby made a part of this Lease:
EXHIBIT A - Plans of Premises
EXHIBIT B - Work Letter Agreement
EXHIBIT C - Confirmation of Commencement Date and Expiration Date
EXHIBIT D - HVAC Specifications
EXHIBIT E - Cleaning Specifications
EXHIBIT F - Parking
EXHIBIT G - Memorandum of Lease
2.
PREMISES AND TERM
2.1 LEASE OF PREMISES
Landlord leases to Tenant and Tenant leases from Landlord the premises (the
"Premises") outlined in red on Exhibit A, which are contained in the office
building described in Paragraph 1.1A (the "Building") upon the following terms
and conditions. The "Premises" shall be the space leased from time to time
hereunder taking into account adjustments thereto (e.g. under the provisions of
Paragraphs 16, 21, 29 and 30).
2.2 TERM OF LEASE
The term of this Lease (the "Term") shall commence (the "Commencement
Date") on the earlier to occur of (i) the date that Tenant first occupies all or
substantially all of the Premises for the conduct of its business, or (ii) the
date set forth in Paragraph 1.1F of this Lease. The Term shall expire on the
date (the "Expiration Date") specified in Paragraph 1.1G of this Lease, subject
to extension as provided in Paragraph 31 hereof, and unless sooner terminated as
otherwise provided in this Lease. Notwithstanding the foregoing provisions of
this Paragraph 2.2, the Commencement Date and the Expiration Date may be
extended in accordance with Paragraph D of the work letter agreement attached
hereto as Exhibit B (the "Work Agreement").
2.3 PRE-TERM OCCUPANCY
Tenant may take possession of any portion of the Premises prior to the date
set forth in Paragraph 1.1F; provided that (i) the tenant improvements for such
portion of the Premises have been substantially completed, (ii) a certificate of
occupancy or partial or temporary certificate of occupancy for such portion of
the
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<PAGE>
Premises has been obtained by Landlord from the City of Naperville, Illinois
(Landlord agrees to use its reasonable best efforts to obtain such certificates
as soon as possible), (iii) such occupancy will not delay or Interfere with the
construction of the tenant improvements in the remainder of the Premises, (iv)
Tenant shall pay Rent for such pre-Term occupancy immediately upon the initial
date of such occupancy and on the first day of each calendar month thereafter to
and including the month during which the Commencement Date occurs, at an annual
rate of Monthly Base Rent per square foot of rentable area equal to $16.25,
which Rent shall be determined and paid for each one-half floor increment, or
any portion thereof, so occupied by Tenant with Rent being prorated for any
partial month at the beginning and/or end of such pre-Term occupancy, and (v)
all of the covenants and provisions of this Lease shall apply to such pre-Term
occupancy except Paragraphs 21 and 22, and except that Landlord's obligation to
provide the services specified in Paragraph 5.01 shall be limited to the extent
such services are available to be provided.
2.4 INSTALLATION OF EQUIPMENT BY TENANT
If prior to the Commencement Date, Tenant shall enter the Premises to make
any installation of Tenant's equipment, fixtures or furnishings, or for the
conduct of business, Landlord shall have no liability or obligation for the care
or preservation of Tenant's property.
2.5 AGREEMENT STATING COMMENCEMENT AND EXPIRATION DATES OF LEASE
Upon request by Landlord or Tenant after the Commencement Dates Landlord
and Tenant will sign and deliver to each other an agreement in the form attached
hereto as Exhibit C, confirming the actual Commencement Date and the Expiration
Date.
3.
RENT
Tenant agrees to pay to Landlord c/o Bellemead Development Corporation, a
Delaware corporations 1250 East Diehl Road, Naperville, Illinois 60540, or at
such other place in the United States designated by Landlord by notice to
Tenant, without any prior notice or demand and without any set-off or deduction
whatsoever except as expressly provided otherwise herein, base rent in the
monthly amounts stated in Paragraph 1.1H ("Monthly Base Rent"). Monthly Base
Rent is subject to adjustment pursuant to Paragraph 22, and as adjusted is
called "Adjusted Monthly Base Rent." Adjusted Monthly Base Rent shall be paid
monthly in advance on the first day of each month of the Term for which it is
due hereunder. Adjusted Monthly Base Rent (and abatements thereof) shall be
prorated for partial months within the Term (or within such abatement periods).
All charges, costs and sums required to be paid by Tenant to Landlord under this
Lease and under the Work Agreement, in addition to Monthly Base Rent and
Adjusted Monthly Base Rent, shall be considered additional rent, and Monthly
Base Rent, Adjusted Monthly Base Rent and additional rent shall be collectively
called "Rent." Tenant's covenant to pay Rent shall be independent of every other
covenant in this Lease, except such covenants which expressly define, modify or
limit the payment of Rent.
4.
INTENTIONALLY OMITTED
-5-
<PAGE>
5.
SERVICES
5.1 GENERAL SERVICES
Landlord shall provide the following services (subject to the provisions of
this Lease and applicable legal restrictions):
(1) heat and air-conditioning in the Premises, Monday through Friday,
excluding Saturdays, Sundays and "national holidays," from 8:00 A.M. to
6:00 P.M., substantially in accordance with the HVAC specifications set
forth in Exhibit D attached;
(2) city water from the regular Building fixtures for drinking,
lavatory and toilet purposes only;
(3) cleaning services in the Premises Monday through Friday, excluding
Saturdays, Sundays and "national holidays", in accordance with the cleaning
specifications attached hereto as Exhibit E;
(4) operatorless passenger elevator service to and from the Premises
in common with other tenants of the Building, 24 hours per day, every day
of the year, subject to fire or other casualty, condemnation and necessary
repairs, replacements and maintenance; and
(5) A Building Directory Board in the ground floor lobby of the
Building in which Landlord, at its expenses shall provide Tenant with space
for Tenant's Proportionate Share of the available tenant names on said
Building Directory Board, provided, that so long as there is demised under
this Lease, not less than the initial rentable area specified in Paragraph
1.1I, Landlord shall provide Tenant with space on said Building Directory
Board for not less than 40 tenant names. Such names shall be promptly
changed by Landlord as Tenant from time to time requests, but such changes
shall be at Tenant's reasonable expense (for Landlord's direct out-of-
pocket Costs) therefor, if Landlord retains an outside independent
contractor to effectuate such name changes. Tenant, at its expense, may,
with Landlord's prior written consent of Tenant's design (which consent
shall not be unreasonably withheld or delayed) install the Burlington
Northern standard logo on said Building Directory Board.
Notwithstanding the provisions of this Paragraph 5.1, nothing in this Paragraph
5.1 shall affect or reduce Tenant's obligation to pay any escalation in
Operating Expenses as set forth in Paragraph 22.2 of this Lease, as subject to
Paragraphs 15.3 and 37 hereof. For purposes of this Paragraph 5.1, "national
holidays" shall mean and include New Years Day, President's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
5.2 ADDITIONAL AND AFTER-HOUR SERVICES
Landlord shall not be obligated to furnish any services or utilities, other
than those stated in Paragraph 5.1 above. Notwithstanding the foregoing, if
Tenant shall require heating or air-conditioning outside the hours and days
specified in Paragraph 5.1(1), Landlord shall (subject to the provisions of this
Lease and applicable legal restrictions) furnish the same for the floor or
floors or half-floors, or less, as provided below, and at the times specified in
a written request of Tenant delivered to Landlord not less than a reasonable
time (which shall not require more than 24 hours' prior notice) before the
requested commencement of such service. Tenant shall pay Landlord within 30 days
after receipt of
-6-
<PAGE>
a bill therefor, Landlord's costs for providing any such services at an hourly
rate calculated as follows:
(a) the costs for weekend and holiday service shall be $90.00 per hour
of necessary operation if all the pertinent Building equipment for both
wings of the Building is being operated, and $61.00 per hour of necessary
operation if Tenant requests that the equipment be operated for only
certain portions of the Premises located entirely within either the north
or the east wing of the Building and provided that said portions are
demised as a half-floor and are in conformance with the design capabilities
of the HVAC system for the Building. Such costs ($90.00 and $61.00)
represent Landlord's direct out-of-pocket costs for the power, materials
and labor for the operation of the equipment and Landlord agrees to use
reasonable efforts at all times to minimize such costs; and
(b) the costs for weeknight service shall be Landlord's out-of-pocket
costs for the powers materials and labor for the operation of the equipment
to provide such service during such time.
Notwithstanding the foregoing, the costs described in the preceding
subparagraphs (a) and (b) shall in the future be increased or decreased, as the
case may be, from time to time during the Term by the amount of all increases or
decreases in Landlord's actual out-of-pocket costs for energy, materials and/or
labor in furnishing such services from and after the date of this Lease. If more
than one tenant of the Building is furnished such service for the same hour(s),
it is understood that the cost will be prorated if such proration is reasonably
possible and practical. If Tenant fails to make any such payment, Landlord may
without notice to Tenant and in addition to Landlord's other remedies under this
Lease, discontinue any or all of such additional or after-hour services until
such failure is corrected. No such discontinuance of any service shall result in
any liability of Landlord to Tenants or be considered an eviction or a
disturbance of Tenant's use of the Premises, or relieve Tenant from its
obligation to pay all Rent when due or from any other obligation of Tenant under
this Lease.
5.3 TENANT'S UTILITIES
Subject to the provisions of the Work Agreement, Tenant, at Tenant's cost
and expense, shall make arrangements directly with the telephone company and the
entity providing electric service to the Building for telephone service, the
installation of wires and cables therefor, and all electric power or current
desired by Tenant in the Premises. Tenant shall pay, for all telephone and
electric service used or consumed in the Premises, including without limitation
the cost of such Installation of wires and cables for such service. Any
installation of telephone service in the Premises by Tenant shall be in
compliance with the National Electric Code 300-22.
5.4 DELAYS IN FURNISHING SERVICES
Notwithstanding anything to the contrary set forth in this Lease, Landlord
shall not be liable for damages for any failure or delay in furnishing any
service or utility described in Paragraph 5.1 or 5.2 above if such failure or
delay is caused in whole or in part by any one or more of the causes specified
in Paragraph 2607 of this Lease. No such failure or delay caused in whole or in
part by any one or more of the causes specified in Paragraph 26.7 of this Lease
shall result in any liability of Landlord to Tenant or be deemed to be an
eviction or disturbance of Tenant's use or possession of the Premises, or
relieve Tenant from its obligation to pay all Rent when due or from any other
obligation of Tenant under this Lease, except as provided in Paragraph 37 below.
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Landlord agrees to promptly commence and diligently pursue action to restore any
services or utilities interrupted as provided above.
6.
POSSESSION, USE AND ENJOYMENT
6.1 POSSESSION AND USE OF PREMISES
Tenant shall be entitled to Possession of half floor portions of the
Premises when the tenant improvements for each such half-floor portion is
"substantially completed" (as defined in the Work Agreement). Tenant shall
occupy and use the Premises only for general office purposes (and activities
incidental to general office use), and for no other use or purposes; provided,
that such general office use shall include, to the extent permitted by
applicable zoning codes, the following specific purposes:
(a) Cafeterias, kitchens, pantries, and dining rooms for the feeding
of employees and guests of Tenant;
(b) Recreation rooms for employees of Tenant;
(c) Vending machines and snack bars for the sale of food,
confections, non-alcoholic beverages, cigars and cigarettes, newspapers and
other convenience items to employees of Tenant;
(d) business machines, equipment for printing, producing and
reproducing of forms, circulars and other materials used in connection with
the conduct of Tenant's business, and equipment for the production of such
blue prints, photostats and other materials as Tenant may require for the
transactions of its business, but not for sale to others;
(e) A library for Tenant and its employees;
(f) Computers and other electronic data processing equipment;
(g) Board rooms and conference rooms;
(h) Training rooms for employees, customers and clients of Tenant;
(i) Safe and vault area;
(j) Audio visual and closed circuit television facilities;
(k) Exercise and health room facility for employees of Tenant;
including locker rooms, showers and related facilities;
(l) Radio and other electronic communication facilities; and
(m) Facilities for storage of equipment and supplies in connection
with the foregoing.
Tenant shall not occupy or use the Premises or permit the use or occupancy of
the Premises for any purpose or in any manner which:
(1) is unlawful or in violation of any applicable legal,
governmental or quasi-governmental requirement ordinance or rule
(including the rules of the Board of Fire Underwriters);
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(2) may be unreasonably dangerous to persons or property outside
of the Premises;
(3) would invalidate or increase the amount of premiums under
the Policies of insurance described in Paragraph 17.2 carried by
Landlord and affecting the Building or covering its operation or
violate the terms thereof and unless, if any additional amounts of
insurance premiums are payable as a result of Tenant's Occupancy or
use of the Premises in violation of this clause, Tenant pays to
Landlord the additional amounts on demand as they become due under the
applicable insurance policies;
(4) may create a nuisance, or injure the reputation of the
Building;
(5) would violate applicable zoning codes.
6.2 QUIET ENJOYMENT
So long as neither this Lease nor Tenant's right to Possession of the
Premises has been terminated, Landlord covenants that Tenant shall have peaceful
and quiet enjoyment of the Premises, subject to (i) the provisions of this
Lease, (ii) any governmental action, and (iii) any cause beyond the reasonable
control of Landlord.
7.
CONDITION OF PREMISES
Tenant shall give Landlord two written lists (the "Punch Lists",
collectively), the first of which shall be given within 30 days after Tenant
takes possession of substantially all of the Premises and shall designate all
patent defects claimed by Tenant in that portion of the improvements installed
by Landlord in the Premises under the Work Agreement which are substantially
completed as of such date of possession by Tenant, and the second of which shall
be given within 30 days after the remaining portion of the improvements
installed by Landlord in the Premises under the Work Agreement are substantially
completed and shall designate all patent defects claimed by Tenant in such
remaining portion of the improvements. Except as otherwise expressly provided
herein and except for defects stated in the Punch Lists and latent defects not
discoverable by Tenant within 30 days after Possession, but disclosed by written
notice given by Tenant to Landlord prior to the expiration of the first year of
the Term, Tenant shall be conclusively Presumed to have accepted the Premises
and all tenant improvements installed by Landlord therein in the condition
existing on the date Tenant first takes possession of the Premises and to have
waived all claims relating to the condition of the Premises and such tenant
improvements, subject however to the provisions of Paragraphs 9.1 and 37. No
agreement of Landlord to alter, remodel, decorate, clean or improve the Premises
or the Building and no representation or warranty regarding the condition of the
Premises or the Building or regarding any other matter of any kind or nature has
been made by or on behalf of Landlord to Tenant, except as expressly stated in
this Lease or in the Work Agreement. Landlord agrees to promptly and diligently
correct all defects or deficiencies in the improvements installed by Landlord in
the Premises, as set forth in the Punch Lists, or in any subsequent written
notice of latent defects given by Tenant to Landlord prior to the expiration of
the first year of the Term; provided that Landlord reserves the right to contest
or dispute any such defect or deficiency claimed by Tenant I in which event such
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corrections need not be made by Landlord until such time as the dispute is
conclusively decided.
8.
ASSIGNMENT AND SUBLETTING
8.1 ASSIGNMENT AND SUBLETTING
Without the prior written consent of Landlord, Tenant shall not (i)
sublease all or any part of the Premises or assign, convey, encumber, mortgage,
pledge, hypothecate or otherwise transfer or permit the transfer of the interest
of Tenant in this Lease, in whole or in part, by operation of law or otherwise,
or (ii) permit the use and occupancy of all or any part of the Premises by any
party other than Tenant, its agents, employees, invitees and guests. Landlord
agrees that Landlord's consent to a proposed sublease or proposed assignment of
this Lease by Tenant shall not be unreasonably withheld or delayed. Further,
Landlord agrees that the interest of Burlington Northern Railroad Company ("BN")
under this Lease may be encumbered by a blanket bond indenture now or hereafter
covering substantially all of the assets of BN; provided, however, that if the
leasehold estate of BN shall be taken on foreclosure, execution or other process
of law under any such blanket bond indenture (or voluntary assignment or
transfer in lieu of foreclosure or execution) such action shall constitute an
event of a default by Tenant under this Lease. If Tenant desires to assign
Tenant's interest in this Lease or enter into any sublease of all or any part of
the Premises. Tenant shall, after compliance with Paragraph 8.02 below, deliver
written notice of such intent to Landlord together with a copy of the proposed
assignment or sublease at least 30 days prior to the effective date of the
proposed assignment or commencement date of the term of the proposed sublease.
Any sublease approved by Landlord shall be expressly subject to the terms and
conditions of this Lease. Tenant shall, in addition to Tenant's other
obligations under this Lease (including the obligation to pay all Adjusted
Monthly Base Rent when due) pay to Landlord with respect to each approved
sublease and each approved assignment entered into by Tenant (excluding any
sublease or assignment by BN to an "affiliate"), 50% of the "net profits"
realized by Tenant under such sublease or assignment. As used herein "net
profits" shall mean with respect to each approved assignment or approved
sublease, the aggregate amount for all rents, additional rents, charges and
consideration paid to or recovered by Tenant, from time to time, under or with
respect to such sublease or assignment, less the sum of (a) the underlying Rent,
additional rents and other charges payable hereunder applicable to the portion
of the Premises so subleased or assigned, (b) amounts reimbursed by Tenant to
the assignee or sublessee in connection with such assignment or sublease, (c)
expenditures for direct costs and expenses of advertising, leasing commissions,
attorneys fees and alterations or additions to the portion of the Premises so
subleased or assigned, and another direct costs and expenses paid by Tenant in
connection with the consummation, performance or enforcement of such sublease or
assignment (which, for purposes of calculation of net profits shall, if required
by generally accepted accounting principles, be capitalized and amortized over
the term of the assignment or sublease), and (d) the unamortized or unrecovered
initial moving expenses of Tenant and Tenant's costs of improvements to the
Premises to the extent related to the occupancy of the Premises by Tenant or an
affiliate of Tenant and to the extent paid by Tenant with respect to the portion
of the Premises so subleased or assigned as determined in accordance with
generally accepted accounting principles consistently applied. Tenant agrees-to
provide Landlord within 30 days after the execution of any sublease or
assignment, a full and detailed accounting of all expenses and
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costs paid or incurred by Tenant prior to such execution in connection with such
sublease or assignment. Tenant shall make monthly payments to Landlord of
Landlord's share of net profits with respect to any sublease or assignment, each
such payment to be made within 30 days after each month during which any such
net profits are realized. Tenant shall submit with each such payment. Tenant's
calculation of the net profits for the month for which such payment is made,
which calculation shall be certified as accurate by an officer of Tenant;
provided, such calculation and certificate shall be necessary only as changes
are made from calculations and certificates previously made. In the event of any
approved sublease or approved assignment, Tenant shall not be released or
discharged from any liability, whether past, present or future, under this
Lease, including any renewal term of this Lease approved by Landlord. For the
purpose of this Paragraph, except to the extent expressly provided herein, an
assignment shall be considered to include with respect only to any approved
assignee of this Lease, a change in the majority ownership or control of such
assignee, if such assignee is a partnership or a corporation whose shares of
stock are not traded publicly. With respect to any assignment which results by
reason of a sale of stock in an assignee of Tenant, Landlord's right to 50% of
the net profits realized from such assignment shall only arise if this Lease
constitutes at least 50% of the value of the assets of such assignee as of the
date of such assignment. In no event shall there exist at any time during the
Term, more than two subleases and/or assignments affecting space on any floor
upon which the Premises are located, each of which such subleases and
assignments demises less than 2,000 square feet of rentable area of the
Premises. Notwithstanding anything contained herein to the contrary, Tenant
shall have the right to assign this Lease or sublease the Premises, or any part
thereof, to an "affiliate" without the prior written consent of Landlord, but
upon prior written notice to Landlord and subject to all of the other provisions
of this Lease, specifically including, without limitation, the continuation of
liability of Tenant under this Lease. For purposes of this Lease, "affiliate"
shall mean any person, corporation or other entity controlling, controlled by,
or under common control with BN (or its successors as a result of merger,
consolidation or transfer of substantially all the assets of BN). The term
"control" as used herein shall mean the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of such
controlled person through the ownership, directly or indirectly, of more than
fifty-percent (50%) of the voting or equity securities in any such controlled
person.
8.2 RECAPTURE
If Tenant desires to assign this Lease or to sublease all or any part of
the Premises, Tenant shall give Landlord written notice of such intent
("Tenant's Notice") prior to Tenant entering into such assignment or sublease.
Tenant's Notice for a proposed sublease shall identify the space to be
subleased, the name of the proposed subtenant, the proposed commencement date
and expiration date of the term of such sublease, the rental and other salient
terms and conditions applicable to the proposed sublease. Tenant's Notice for a
proposed assignment shall identify the proposed effective date of such
assignment, the name of the proposed assignee, the consideration to be paid for
the proposed assignment and all other salient terms and conditions applicable to
such assignment. Landlord shall thereupon have the option to exclude from the
Promises covered by this Lease (i) all of the Premises, if Tenant's Notice
specifies a proposed assignment, or (ii) the portion of the Premises described
in Tenant's Notice, if Tenant's Notice specifies a proposed sublease, but only
if the term (counting all renewal or extension terms granted in such sublease)
of such sublease expires on any date occurring during or after the
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last year of the Term of this Lease (provided, that if on or before the date
that Tenant gives Tenant's Notice with respect to such sublease, Tenant
exercises any Renewal Option under Paragraph 31 hereof, "last year of the Term
of this Lease" as used herein shall mean the last year of the Renewal Term for
which such Renewal Option was exercised), which exclusion shall be effective as
of the proposed effective date of assignment or the proposed commencement date
of sublease, as the case may be, as specified in Tenant's Notice.
Notwithstanding the foregoing to the contrary, Landlord shall have no recapture
options hereunder with respect to any sublease entered into by Tenant during the
last five years of the initial Term of this Lease; provided, however, that with
respect to any such sublease, if Tenant exercises any Renewal Option under
(Paragraph 31 hereof, Landlord shall be entitled to 100% of the net profit in
lieu of 50% of the net profits) under Paragraph 8.1 above, realized with respect
to such sublease during all Renewal Terms of this Lease. Landlord may exercise
said recapture option by giving Tenant written notice within 20 days after
receipt by Landlord of Tenant's Notice of the proposed assignment or sublease.
If Landlord exercises said option, Tenant shall surrender possession of the
space to be excluded from this Lease on the effective date of exclusion of said
space from this Lease, and neither party hereto shall have any further rights or
liabilities with respect to said space under this Lease except as otherwise
specified in this Lease, and further provided that Tenant shall pay when due all
Rent accruing under this Lease with respect to said space prior to the effective
date of exclusion of said space from this Lease. Effective as of the date of
exclusion of any portion of the Premises covered by this Lease pursuant to this
paragraph: (i) the Monthly Base Rents specified in Paragraph 1.1H shall each be
reduced in the same proportion as the number of rentable square feet by the
portion of the Premises so excluded bears to the number of rentable square feet
of the Premises immediately prior to such exclusion; (ii) the rentable square
feet of the Premises specified in Paragraph 1.1I shall be decreased by the
number of rentable square feet of the portion of the Premises so excluded as
determined in accordance with Paragraph 22.1G hereof; (iii) Tenant's
Proportionate Share shall be adjusted accordingly; and (iv) there shall be no
restrictions on Landlord reletting the portion of the Premises so excluded to
any other tenant, including, without limitation, any proposed sublessee or
assignee of Tenant. If Landlord does not exercise said option, Tenant may not
thereafter (i) enter into a sublease or assignment which contains material
differences from the sublease or assignment described in Tenant's Notice, nor
(ii) enter into a sublease or assignment which is identical to the sublease or
assignment described in Tenant's Notices but which is entered into after the
date which is 120 days after the date that Tenant's Notice is delivered to
Landlord, without again complying with the provisions of this Paragraph 8.2 and
affording Landlord the rights to recapture space as hereinabove provided.
Notwithstanding anything contained herein to the contrary, the provisions of
this Paragraph 8.2 shall not apply to any assignment or sublease to an affiliate
of Tenant.
9.
MAINTENANCE AND REPAIR
9.1 LANDLORD'S MAINTENANCE AND REPAIR
Subject to the provisions of Paragraphs 5.3, 9.2, 11.1, 15, 17.4, 26.7 and
the other provisions of this Lease, Landlord, at its expense, shall keep and
maintain the Building in a standard consistent with other first-class office
buildings in the "Corridor" (as defined in paragraph 30.8), and in accordance
with all applicable legal, governmental and quasi-governmental requirements,
ordinances and rules (including the Board of Fire
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Underwriters) which are valid and enforceable and in connection therewith shall
maintain and make necessary repairs to the structural elements of the Building,
including but not limited to the roof, curtain wall, exterior doors and exterior
windows of the Building, the standard electrical Plumbing, heating ventilation
and air conditioning systems located in the Building, the elevators and the
common and public areas of the Building and the land upon which the Building is
situated (the "Land"), including the ground floor lobby and public corridors,
together with the parking area for the Building, as shown in Exhibit F,
landscaping and walkways; provided, however:
(1) Landlord shall not be responsible for the maintenance or repair
of any such systems which are supplemental or special to the Building's
standard systems and which exclusively serve the Premises, whether
installed pursuant to the Work Agreement or otherwise, and whether located
within or outside of the Premises;
(2) Landlord shall not be responsible for any maintenance or repair
of any floor coverings or wall coverings in the Premises.
Notwithstanding the foregoing provisions of this Paragraph 9.1, nothing in this
Paragraph 9.1 shall affect or reduce Tenant's obligation to pay any escalation
in Operating Expenses as set forth in Paragraph 22.2 of this Lease, as subject
to Paragraphs 15.3 and 37 hereof.
9.2 TENANT'S MAINTENANCE AND REPAIR
Subject to the provisions of Paragraphs 9.01, 11.02, 15 and 17.4, Tenant,
at its expense, shall from and after the Commencement Date, keep, maintain and
repair the Premises and all contents therein in good order and operating
condition (normal wear and tear accepted) and in accordance with all applicable
legal governmental and quasi-governmental requirements, ordinances and rules
(including the Board of Fire Underwriters) which are valid and enforceable. By
way of inclusion and not limitation, but subject to Paragraphs 9.1, 11.2, 15 and
17.4, Tenant, at its expense, shall maintain and repair in good operating
condition the electrical, lighting, plumbing, heating ventilating and air
conditioning systems in the Premises which are supplemental or special to the
Building's standard systems, and Tenant shall pay for all maintenance, repair
and replacement of all lighting fixtures, electrical switches, electrical
outlets, lamps, bulbs, tubes, ballasts and starters in the Premises.
10.
ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL OCCUPANCY
10.1 TENANT'S ALTERATIONS SUBSEQUENT TO INITIAL OCCUPANCY
Tenant shall not, without the prior written consent of Landlord (which
consent shall not be unreasonably withheld or delayed), make or cause to be made
any alterations, improvements, additions or installations in or to the Premises
subsequent to the initial occupancy of the Premises by Tenant. Notwithstanding
the foregoing, Tenant may without Landlord's prior written consent but subject
to all of the other provisions of this Lease, decorate or redecorate the
Premises, including painting, installation of floor coverings and installation
of wall coverings, but excluding any structural work (e.g. relocation of any
doors or partitions) and excluding any work involving any mechanical, electrical
or plumbing system, equipment or lines consents, before commencement of any
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such work or delivery of any materials into the Premises or the Building, Tenant
shall furnish to Landlord for approval: architectural plans and specifications,
names and addresses of all contractors, contracts, necessary permits and
licenses, certificates of insurance and instruments of indemnification against
any and all claims, costs, expenses, damages and liabilities which may arise in
connection with such work, all in such form and amount as may be satisfactory to
Landlord (acting reasonably). In addition, prior to commencement of any such
work or delivery of any materials into the Premises, Tenant shall provide
Landlord with evidence reasonably satisfactory to Landlord of Tenant's ability
to pay for such work and materials in full, and, if the cost of such work will
exceed $100,000 so long as BN or an affiliate is effecting such work or
acquiring such materials (otherwise $50,000) and if requested by Landlord,
Tenant shall deposit with Landlord at such time, cash or, at Tenant's option, a
letter of credit, in amounts sufficient to provide full security for the payment
of said work and materials. Subject to Paragraphs 11 and 17.4, Tenant agrees to
hold Landlord, its beneficiary, the partners of such beneficiary and each of
their respective agents and employees forever harmless against all claims and
liabilities of every kind, nature and description which may arise out of or in
any way be connected with such work. All such work shall be performed only by
contractors or mechanics approved by Landlord (which approval shall not be
unreasonably withheld or delayed) and which are licensed, bonded and insured
under policies satisfactory to Landlord. If Landlord in good faith determines
that such work will cause labor disharmony in connection with other construction
in the Building or in the operation of the Building, then all such work shall be
performed only by union labor. Such work shall be performed in such manner as
will not unreasonably interfere with the normal conduct of business in the
Building. Tenant's agents, contractors, workmen, mechanics and suppliers shall
work in harmony and not unreasonably interfere with Landlord's agents and
contractors or the general operation of the Building. If at any time such work
shall cause or threaten to cause disharmony or interference, including labor
disharmony, Landlord may reasonably restrict Tenant's authority to continue to
perform such work. Tenant shall pay the cost of all such work. Upon completion
of such work, Tenant shall furnish Landlord with contractors' affidavits and
full and final waivers of lien and receipted bills covering all labor and
materials expended. All such work shall be in compliance with all applicable
legal, governmental and quasi-governmental requirements, ordinances and rules
(including the Board of Fire Underwriters), and all requirements of applicable
Insurance companies. All such work shall be done in a good and workmanlike
manner and with the use of good grades of materials. Tenant shall permit
Landlord, if Landlord so desires, at Landlord's expense, to observe and inspect
construction operations in connection with such work; provided, however, that
such observation and inspection or right to observe and inspect by Landlord
shall not constitute any warranty by Landlord to Tenant of the adequacy of the
design, workmanship or quality of such work or materials for Tenant's intended
use or impose any liability upon Landlord in connection with the performance of
such work. All alterations, improvements, additions and installations to or on
the Premises shall (subject to Paragraph 13) become part of the Premises at the
time of their installation and shall remain in the Premises at the expiration or
termination of this Lease, or termination of Tenant's right of possession of the
Premises, without compensation or credit to Tenant. Tenant, at its sole expense,
may, subject to all of the terms and conditions of this Paragraph 10.01 and this
Lease, install security systems, additional safety and security devices,
auxiliary emergency electrical power equipment and supplies, a key system or
other system to control access of all elevators to floors wholly occupied by
Tenant and alterations within the Premises as may be required to increase the
floor load limitation in the event it is necessary for Tenant to place a load
upon any floor exceeding
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the current floor load capacity, inter-floor interior stairs connecting
contiguous floors within the Premises, self contained HVAC and humidity control
units not served by the Building's water systems; provided, however, that all
such work shall be subject to the design requirements and limitations of the
Building, applicable Building codes and shall be performed in such manner as
will minimize interference with the operation of the Building and the use and
occupancy of other tenants of the Building. Landlord may condition its consent
to any such non-standard alteration, improvement, addition or installation on
the removal of same by Tenant, at Tenant's expense, at the expiration or
termination of this Lease, as provided in Paragraph 13.
10.2 LIENS
Subject to the following sentence, Tenant shall not permit any lien or
claim for lien of any mechanic, laborer or supplier or any other lien to be
filed against the Premises, the Building, the Land or any part of such property
arising out of work performed, or alleged to have been performed by, or at the
direction of, or on behalf of Tenant, except liens arising out of any work
performed by Landlord for Tenant under the Work Agreement (unless such liens
arise by reason of Tenant's failure to pay its share of the cost of such work).
If any such lien or claim for lien is filed Tenant shall within 10 days after
such filing either have such lien or claim for lien released of record or shall
deliver to Landlord a bond or other security in form, content, amount, and
issued by a company satisfactory to Landlord indemnifying Landlord, its partners
and others designated by Landlord against all costs and liabilities resulting
from such lien or claim for lien and the foreclosure or attempted foreclosure
thereof. If Tenant fails to have such lien or claim for lien so released or to
deliver such bond to Landlord, Landlord, in addition to the other rights and
remedies under this Lease and without investigating the validity of such lien
and after five days prior notice to Tenant, may pay or discharge the same and
Tenant shall reimburse Landlord upon demand for the amount so paid by Landlord,
including Landlord's reasonable expenses and attorneys' fees.
10.3 LANDLORD'S ALTERATIONS
Landlord agrees that unless required by law Landlord shall not without the
prior written consent of Tenant (which consent shall not be unreasonably
withheld or delayed) make any alterations, additions or improvements to the
Building which would (i) materially adversely affect access to the Building or
the Premises, (ii) materially adversely affect the design or character of the
ground floor lobby of the Building, or (iii) materially increase the amount of
adjustments to Monthly Base Rent payable by Tenant under Paragraph 22 of this
Lease.
11.
WAIVER OF CLAIMS AND INDEMNITY
11.1 TENANT WAIVER
Notwithstanding any provision in this Lease to the contrary, neither
Landlord, nor its beneficiary, nor the partners of such beneficiary, nor their
respective agents or employees shall be liable to Tenant, or to Tenant's agents
or employees, for:
(a) any damage to property or (except in the event of negligence or
willful misconduct of Landlord, its beneficiary, the partners of such
beneficiary or their respective duly authorized agents or employees) any
injury to person due to the condition or design of or any defect in the
Building or
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its mechanical systems and equipment which may exist or occur, or due to
the Building or the land upon which it is situated, or any part thereof,
becoming out of repair, or by defect in or failure of pipes or wiring, or
by the backing up of drains, or by the bursting or leaking of pipes,
faucets, and plumbing fixtures, or by gas, water, steam, electricity, or
oil leaking, escaping, or flowing into the Premises or other portions of
the Building or the land upon which the Building is situated; or
(b) any damage to property or (except in the event of negligence or
willful misconduct of Landlord, its beneficiary, the partners of such
beneficiary or their respective duly authorized agents or employees) any
injury to person that may be occasioned by or through the acts or omissions
of other tenants in the Building or of any other person whatsoever; or
(c) any loss or damage to any property or injury to any person
occasioned by theft, fire, act of God, public enemy, injunction, riot,
insurrection, war, court order, requisition, or order of government
authority, or nay other matter beyond the control of Landlord.
11.2 LANDLORD WAIVER
Notwithstanding any provision in this Lease to the contrary, neither Tenant
nor its agents or employees shall be liable to Landlord, its beneficiary, the
partners of such beneficiary, or their respective agents or employees, for:
(a) any damage to Property or (except in the event of negligence or
willful misconduct of Tenant, or its duly authorized agents or employees)
any injury to person due to the condition or design of or any defect in the
Premises or its mechanical systems or equipment which may exist or occur.
or due to the Premises, or, any part thereof, becoming out of repair, or by
defect in or failure of pipes or wiring, or by the backing up of drains, or
by the bursting or leaking of pipes, faucets, and plumbing fixtures, or by
gas, water, steam, electricity, or oil leaking, escaping, or flowing into
the Premises or other portions of the Building or the land upon which the
Building is situated; or
(b) any damage to property or (except in the event of negligence or
willful misconduct of Tenant, or its duly authorized agents or employees)
any injury to person that may be occasioned by or through acts or omissions
of any other person whatsoever;
(c) any loss or damage to any property or injury to any person
occasioned by theft, fire, act of God, public enemy, injunction, riot,
insurrection, war, court order, requisition, or order of governmental
authority, or any other matter beyond the control of Tenant.
11.3 TENANT INDEMNIFICATION
Tenant agrees that it will indemnify and hold and save Landlord, its
beneficiary, the partners of such beneficiary and their respective agents and
employees, whole and harmless of, from, and against (a) all fines, suits,
losses, costs, liabilities, claims, demands, actions, and judgments of every
kind and character by reason of any breach, violation, or nonperformance of any
term. provision, covenant, agreements or condition on the part of Tenant under
this lease and (b) all claims, demands, actions, damages, losses, costs,
liabilities, expenses, and judgments suffered by, recovered from, or asserted
against Landlord or any of such indemnitees on account of injury to person or
damage to the
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property of parties other than Landlord or Tenant occurring in or about the
Building, to the extent that any such damage or injury may be incident to, arise
out of, or be caused, either proximately or remotely, by the negligence or
willful misconduct of Tenant or any of its duly authorized agents or employees,
or when any such injury or damage is the result, proximate or remote, of the
violation by Tenant or any of its duly authorized agents or employees of any
law, ordinance, or governmental order of any kind, or (except to the extent due
to any defect in the Building not caused by Tenant, its duly authorized agents
or employees) when any such injury or damage may in any other way arise from or
out of the negligence or willful misconduct of Tenant or any of its duly
authorized agents or employees in connection with occupancy or use by Tenant,
its duly authorized agents or employees, of the Premises. Such indemnification
of Landlord by Tenant shall be effective only to the extent that Landlord's
indemnification of Tenant pursuant to Paragraph 11.4 is not effective. Tenant
covenants and agrees that in case Landlord or any of such indemnitees shall be
made a party to any litigation commenced by or against Tenant with respect to
which Tenant has agreed to indemnify Landlord and such other indemnitees
hereunder, or relating to this Lease or to the Premises, then Tenant shall and
will pay all reasonable costs and expense, including reasonable attorneys' fees
and court costs, incurred by Landlord or such indemnities by virtue of any such
litigation, to the extent contemplated by such indemnification, and the amount
of all such costs and expenses, including reasonable attorneys' fees and court
costs, shall be a demand obligation owing by Tenant to Landlord.
11.4 LANDLORD INDEMNIFICATION
Landlord agrees that it will indemnify and hold and save Tenant and its
agents and employees whole and harmless of, from, and against (a) all fines,
suits, losses, costs, liabilities, claims, demands, actions, and judgments of
every kind and character by reason of any breach, violation, or nonperformance
of any term, provision, covenant, agreement, or condition on the part of
Landlord under this Lease and (b) all claims, demands, actions, damages, losses,
costs, liabilities, expenses and judgments suffered by, recovered from, or
asserted against Tenant or any of such indemnitees on account of injury to
person or damage to the property of parties other than Landlord or Tenant
occurring anywhere in or about the Building other than the Premises, to the
extent that any such damage or injury may be incident to, arise out of, or be
caused, either proximately or remotely, by the negligence or willful misconduct
of Landlord, its beneficiary, the partners of such beneficiary or any of their
respective duly authorized agents or employees, or when any such injury or
damage is the result, proximate or remote, of the violation by Landlord, its
beneficiary, the partners of such beneficiary or any of their respective duly
authorized agents or employees of any law, ordinance, or governmental order of
any kind. Such indemnification of Tenant by Landlord shall be effective only to
the extent that Tenant's indemnification of Landlord pursuant to Paragraph 11.3
is not effective. Landlord covenants and agrees that in case Tenant or any of
such indemnitees shall be made a party to any litigation with respect to which
Landlord has agreed to indemnify Tenant and such other indemnitees hereunder,
then Landlord shall and will pay all reasonable costs and expenses, including
reasonable attorneys' fees and court costs, incurred by Tenant or such
indemnitees by virtue of any such litigation, to the extent contemplated by such
indemnification, and the amount of all such costs and expenses, including
reasonable attorneys' fees and court costs, shall be a demand obligation owing
by Landlord to Tenant.
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12.
LANDLORD'S REMEDIES
12.1 EVENTS OF DEFAULT
Each of the following shall constitute an event of default by Tenant under
this Lease:
(a) Tenant shall fail to pay any installment of Rent when due;
provided, however, that with respect to the first two such failures in any
year of the Term, no default shall be deemed to have occurred unless Tenant
additionally fails to cure such default within 5 days after written notice
to Tenant;
(b) Tenant fails to observe or perform any of the other covenants,
conditions or provisions of this Lease or the Work Agreement to be observed
or performed by Tenant and fails to cure such default within 20 days after
written notice to Tenant; provided, that if such default is not susceptible
to being cured within said 20-day period, but Tenant immediately commences
such cure and thereafter actively, diligently and continuously prosecutes
such cure to completion (including providing to Landlord with weekly
written status reports of the progress of such cure), then said 20-day
period shall be extended so long as Tenant is so actively, diligently and
continuously prosecuting such cure, but in no event shall said 20-day
period be extended by more than 60 days;
(c) Tenant shall become insolvent, or shall make an assignment for
the benefit of creditors, or shall make a transfer in fraud of creditors,
or shall generally not pay its debts as they become due, or shall admit in
writing its inability to pay its debts as they become due;
(d) Tenant files a petition under any section or chapter of the
Bankruptcy Code, or any amendment, replacement or substitution thereof; or
a petition proposing the entry of an order for relief against Tenant under
any section or chapter of the Bankruptcy Code or under any present or
future law or statute of the United States shall be filed in any court, and
with respect to any such petition filed against Tenant, the same shall not
be discharged or denied within 180 days after the filing thereof;
(e) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant; or
(f) The leasehold estate of Tenant hereunder shall be taken on
execution or other process of law in any action against Tenant.
12.2 LANDLORD'S REMEDIES
Upon the occurrence of an event of default by Tenant under this Lease,
Landlord, at its option, without further notice or demand to Tenant, may in
addition to all other rights and remedies provided in this Lease, at law or in
equity:
A. Terminate this Lease and Tenant's right of possession of the Premises,
and recover all damages to which Landlord is entitled under laws specifically
including, without limitation, all Landlord's expenses of reletting (including
repairs, alterations, improvements, additions, decorations, legal fees and
brokerage commissions), or
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B. Terminate Tenant's right of possession of the Premises without
terminating this Lease, in which event Landlord shall, if and to the extent
required by law, take reasonable measures to mitigate the damages recoverable
against Tenant and in connection therewith, relet the Premises, or any part
thereof for the account of Tenant, for such rent and term and upon such terms
and conditions as are acceptable to Landlord. For purposes of such reletting,
Landlord is authorized to decorate, repair, alter and improve the Premises to
the extent reasonably necessary. If Landlord does not relet the Premises, then
Tenant shall pay Landlord monthly on the first day of each month during the
period that Tenant's right of possession is terminated, a sum equal to the
amount of Rent due under this Lease for such month (less any amount which
Landlord could have realized if Landlord relet the Premises to a reputable,
creditworthy substitute tenant procured by Tenant and presented to Landlord in
writing, which substitute tenant was ready, willing and able to lease the entire
Premises from Landlord under a lease in form identical to the form of this
Lease). If the Premises are relet and a sufficient sum is not realized from such
reletting after payment of all Landlord's expenses of reletting (including
repairs, alterations, improvements, additions, decorations, legal fees and
brokerage commissions) to satisfy the payment of Rent due under this Lease for
any month, Tenant shall pay Landlord any such deficiency monthly upon demand.
Tenant agrees that Landlord may file suit to recover any sums due to Landlord
under this section from time to time and that such suit or recovery of any
amount due Landlord shall not be any defense to any subsequent action brought
for any amount not previously reduced to judgment in favor of Landlord. If
Landlord elects to terminate Tenant's right to possession only without
terminating this Lease, Landlord may, at its option, enter into the Premises,
remove Tenant's signs and other evidences of tenancy, and take and hold
possession thereof, as stated in Article 13; provided, however, that such entry
and possession shall not terminate this Lease or release Tenant, in whole or in
part, from Tenant's obligation to pay the Rent reserved hereunder for the full
Term or from any other obligation of Tenant under this Lease.
12.3 BANKRUPTCY CURE
If an event of default occurs by reason of an occurrence under either
Paragraph 12.1(c), (d) or (e) above, and if BN has theretofore assigned this
Lease to an approved assignee (other than an affiliate), and if such occurrence
involves such assignee, then so long as BN (or such an affiliate) continues to
pay and perform to the extent not paid or performed by such assignee (or other
parties involved in the applicable proceedings) all obligations of Tenant under
and in accordance with this Lease, such occurrence shall not constitute an event
of default by Tenant under this Lease.
12.4 ATTORNEYS' FEES
Each party shall pay upon demand, all costs and expenses, including
attorneys' fees, incurred by the other party in successfully enforcing such
first party's obligations under this Lease and the Work Agreement, or resulting
from such first party's established default under this Lease.
13.
SURRENDER OF PREMISES
Upon the expiration or termination of this Lease or termination of Tenant's
right of possession of the Premises, Tenant shall surrender and vacate the
Premises immediately and deliver possession thereof to Landlord in a clean, good
and tenantable
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condition, ordinary wear and fire and other casualties not caused by Tenant
excepted, subject however to the provisions of Paragraphs 11 and 17.4. Upon any
termination which occurs other than by reason of Tenant's default, Tenant shall
be entitled to remove from the Premises prior to such termination all moveable
trade fixtures and personal property of Tenant, including, without limitation,
movable office furniture, movable office equipment (e.g., printing, photographic
or copying machines) and readily movable partitions installed by Tenant, any
signs installed by Tenant, any speakers and communication systems installed by
Tenant and artifacts and special items or built-ins of an historic nature to BN,
without credit or compensation from Landlord in any such case; provided, Tenant
immediately shall repair all damage resulting from such removal so as to restore
the Premises to a tenantable condition subject however to the provisions of
Paragraphs 11 and 17.4 and to the obligations of Landlord under Paragraph 15.4.
In the event possession of the Premises is not immediately delivered to Landlord
or if Tenant shall fail to remove any movable trade fixtures or personal
property which Tenant is entitled to remove, Landlord may remove same without
any liability to Tenant. Any movable trade fixtures and personal property which
may be removed from the Premises by Tenant but which are not so removed, and all
improvements made by Tenant to the Premises which are not or cannot be removed
as otherwise provided herein, shall be conclusively presumed to have been
abandoned by Tenant and title to such property, shall pass to Landlord without
any payment or credit, and Landlord may, at its option and at Tenant's expense,
store, keep and/or dispose of such property. In addition to the foregoing,
Tenant shall upon the expiration or termination of this Lease or termination of
Tenant's right to possession of the Premises, remove any improvement,
alteration, addition or improvement made to the Premises by or on behalf of
Tenant and repair all damage resulting from such removal so as to restore the
Premises to a tenantable condition, if Landlord requests any such removal by
written notice given to Tenant prior to the expiration or termination of this
Lease, and provided that Landlord's original consent to the installation of such
improvement, alteration, addition or improvement was conditioned upon Tenant's
removal of same, at Landlord's request, upon the expiration or termination of
this Lease.
14.
HOLDING OVER
Tenant shall pay Landlord double the fair rental value of the Premises, as
determined by Landlord (but in no event less than double the Adjusted Monthly
Base Rent then applicable under this Lease) for each month or partial month
during which Tenant retains possession of the Premises, or any part of the
Premises, after the expiration or termination of this Lease. Tenant shall be
liable to Landlord for all reasonably foreseeable damages which Landlord shall
suffer by reason of any holding over by Tenant without Landlord's written
consent and Tenant shall indemnify Landlord against all reasonably foreseeable
claims made by any other tenant or prospective tenant against Landlord resulting
from delay by Landlord in delivering possession of the Premises, or any part
thereof, to such other tenant or prospective tenant, due to such holding over by
Tenant. The provisions of this Article shall not constitute a waiver by Landlord
or any re-entry rights of Landlord available under this Lease or by law. If
Tenant retains possession of the Premises, or any part of the Premises, for 30
days after the expiration or termination of this Lease, then Landlord, at
Landlord's election expressed in written notice to Tenant. given within thirty
(30) days after the expiration of the aforesaid 30-day period (but in any event
prior to the vacation of the Premises by Tenant), may, in addition to all other
rights and remedies
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available to Landlord under this Lease. constitute such holding over as a
renewal of this Lease for a period of one year on the same provisions as are set
forth in this Lease, but for a Monthly Base Rent equal to the then fair monthly
base rental value of the Premises, as determined by Landlord (but in no event
less than the Adjusted Monthly Base Rent then payable by Tenant under this
Lease).
15.
DAMAGE BY FIRE OR OTHER CASUALTY
15.1 SUBSTANTIAL UNTENANTABILITY
If either the Premises or the Building is rendered "substantially
untenantable" by fire or other casualty, Landlord may elect by giving Tenant
written notice within 120 days after the date of said fire or casualty, either
to:
(1) terminate this Lease all of the date of the fire or other
casualty; provided that Landlord concurrently or prior to the termination
of this Lease also terminates the leases of all other office tenants of the
Building (if and to the extent such other leases so permit such
termination) and does not enter into new leases or grant rights of
occupancy in the Building to any such other tenants (or parties under their
control or under common control with them) within six months after such
termination; or
(2) proceed to repair or restore the Premises or the Building, other
than leasehold improvements and personal property installed by Tenant, to
substantially the same condition as existed immediately prior to such fire
or casualty.
If Landlord elects to proceed pursuant to subsection (2) above, Landlord's
notice shall contain Landlord's reasonable estimate of the time required to
substantially complete such repair or restoration. If such estimate indicates
that the time so required will exceed 360 days from the date of the casualty,
then Tenant shall have the right to terminate this Lease as of the date of such
casualty by giving written notice to Landlord not later than 20 days after the
date of Landlord's notice. If Landlord's estimate indicates that the repair or
restoration can be substantially completed within 360 days, or if Tenant fails
to exercise its said right to terminate this Lease, this Lease shall remain in
force and effect. For purposes of this Paragraph 15, the Building (excluding the
Premises) shall be deemed so damaged by fire or other casualty that it is
"substantially untenantable" only if the costs to repair the same would exceed
one-third of the full replacement cost (excluding foundations) of the Building.
15.2 INSUBSTANTIAL UNTENANTABILITY
If the Premises are damaged by fire or other casualty but are not rendered
substantially untenantable, then neither Landlord nor Tenant shall have the
right to terminate this Lease. Notwithstanding the foregoing, if such damage
occurs during the last 24 months of the then existing Terms and provided Tenant
does not within 30 days after the occurrence of such fire or casualty exercise
any then executor Renewal Options under Paragraph 31 hereof, Landlord shall have
the right to terminate this Lease but only with respect to each one-half floor
increment of the Premises then covered by this Lease which increment would not
reasonably be available for occupancy by Tenant under this Lease for at least
one year following the estimated date of completion of repairs or restorations
to such increment. Landlord may exercise such
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termination option by giving written notice thereof to Tenant within 60 days
after the date of such fire or other casualty.
15.3 RENT ABATEMENT
If all or any part of the Premises are damaged, or the Building is damaged
so as to materially adversely affect normal access to the Premises, by fire or
other casualty and this Lease is not terminated, Adjusted Monthly Base Rent
shall abate for all or that part of the Premises which are untenantable (or
normal access thereto is materially adversely affected) on a per diem and
proportionate area basis from the date of the fire or other casualty until
Landlord has substantially completed the repair and restoration work which it is
required to perform, provided, that as a result of such fire or other casualty,
Tenant does not occupy the portion of the Premises which are untenantable during
such period (save and except any such occupancy thereof which is of an
extraordinary nature necessary to preserve systems, files and security).
15.4 LANDLORD'S REPAIRS
If the Building or the Premises are not so damaged by fire or other
casualty as to render either of same substantially untenantable, or so as to
materially adversely affect normal access to the Premises, or even if so
damaged, neither Landlord nor Tenant elects to terminate this Lease as provided
in either Paragraph 15.1 or 15.2 above, Landlord shall diligently commence to
repair and restore the damaged portions of the Premises and the Building and
shall proceed with due diligence to restore the Building and the Premises (other
than personal property installed by Tenant) to substantially the same condition
as same existed immediately prior to such fire or other casualty. Landlord shall
bear the cost of such restoration of the improvements to the Premises made by or
for Tenant, up to an amount equal to the sum of (i) the cost of the Standards of
Construction (as defined in the Work Agreement) for the damaged portions of the
Premises, plus (ii) the amount of all allowances granted by Landlord to Tenant
for the original construction of tenant improvements to the damaged portions of
the Premises, and Tenant shall bear all additional costs of such restoration of
said improvements.
16.
CONDEMNATION
16.1 DEFINITIONS
As used herein, the following terms shall have the respective meanings
hereinafter set forth unless the context specifies or clearly requires
otherwise:
(a) "Condemnation" shall mean the exercise by any duly authorized
governmental authority, public authority or private corporation having the
power to acquire real property and improvements or easements thereon for
authorized public or other purposes, or any purchase or other acquisition
in lieu of such condemnation, or any voluntary sale by Landlord, to any
public or quasi-public board, agency, person, corporate or otherwise,
having the power of condemnation, either under threat of condemnation or
which condemnation proceedings are pending, or any other action by any such
authority or person which is held by a court of competent jurisdiction to
constitute an exercise of the power of eminent domain.
(b) "Date of Taking" shall mean the date on which any condemning
authority is entitled to lawful possession of all
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or a part of the Premises, the Building and/or the parking areas of the
Building.
(c) "Taking" shall mean a Taking during the Term of this Lease of all
or a part of the Premises, the Building and/or the parking areas for the
Building, as a result of Condemnation.
16.2 ENTIRE TAKING
(a) In the event of a Taking of all the Premises, the Term of this
Lease shall expire as of the Date of Taking. Any compensation will be
distributed as provided in Paragraphs 16.4, 16.5, 16.6 and 16.7.
(b) In the event of a Taking of (i) a part, but less than all, of the
Premises, or (ii) a Taking of all or a material portion of the parking
areas for the Building, and provided that Landlord does not provide
reasonable alternative parking areas or parking facilities to Tenant, or
(iii) a Taking of all or a portion of the Building other than the Premises,
in any which event results in Tenant's inability to use the Premises or the
remaining portions of the Premises economically and effectively as
necessary by Tenant, or there shall be a Taking of a substantial portion of
the Premises for a limited period of more than 24 months, the Term of this
Lease shall expire as of the Date of Taking. Any award or compensation will
be distributed as provided in Paragraphs 16.5 and 16.6 below.
16.3 PARTIAL TAKING
In the event of a Taking of less than all of the Premises, or of all or
part of the parking areas for the Building, or of all or a portion of the
Building other than the Premises, and if this Lease shall not have terminated
pursuant to Paragraph 16.2 above, this Lease shall remain in full force and
effect with respect to the remainder of the Premises and such parking areas
except that there shall be a fair and equitable reduction of the rent payable by
Tenant from and after the Date of Taking, taking into account the amount,
location and value of that part of the Premises and parking areas which were the
subject of the Taking and any diminution in Tenant's ability to use the Premises
economically and effectively as necessary by Tenant. Any award or compensation
will be distributed as provided in Paragraphs 16.5 and 16.6 below.
16.4 TAKING FOR LIMITED PERIOD
If there shall be a Taking of all or any portion of the Premises for a
limited period of less than 24 months, this Lease shall not terminate and Tenant
shall be entitled to receive the entire award therefor (whether paid as damages,
rent or otherwise), and the obligations of Tenant hereunder for the payment of
rent shall continue unabated to the extent such rent is not paid by the
authority or party effecting the Taking or another party.
16.5 DIVISION OF PROCEEDS
(a) Landlord shall be entitled to receive the entire awards and
proceeds of any Taking, except or otherwise expressly provided herein.
(b) Tenant shall be entitled to receive such portion of such awards or
proceeds as shall represent compensation for the then value of all
leasehold improvements paid for by Tenant and then existing on the
Premises, but Tenant shall not be entitled to any award for the value, if
any, of the unexpired leasehold of this Lease.
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(c) If Landlord and Tenant cannot agree as to the respective portions
of any award or proceeds resulting from a Taking, the respective values of
the interest of Landlord and Tenant shall be determined by arbitration
pursuant to Paragraph 35 hereof. The arbitrators shall be bound to make
such division of any award in accordance with the terms of this Lease.
16.6 AWARDS AND DAMAGES
Except as specifically provided in this Paragraph 16, Landlord reserves all
rights to awards or damages to the Building, the Premises and all parking areas
for the Building resulting from any Taking.
16.7 APPEARANCE BY LANDLORD AND TENANT
Landlord and Tenant may each appear in any condemnation or eminent domain
proceedings and be represented by their respective counsel.
16.8 NOTICE OF POSSIBLE TAKING
Promptly after obtaining knowledge thereof, Landlord or Tenant, as the case
may be, shall notify the other of any pending or threatened Taking affecting the
Premises, the Building and/or the parking areas for the Building, and neither
Landlord nor Tenant shall, without the prior written consent of the other, make
any voluntary agreement with the condemning authority which could affect any
award to which the other might be entitled as a result of such Taking pursuant
to the preceding provisions of this Paragraph 16.
17.
INSURANCE
17.1 TENANT'S INSURANCE
Tenant, at its expense, shall maintain in force during the Term:
(1) comprehensive general public liability insurance, which shall
include coverage for personal liability, contractual liability, tenant's
legal liability, bodily injury, death and property damage, all on an
occurrence basis with respect to the business carried on, in or from the
Premises (including Tenant's microwave dishes, whip antennae and sign
installations, as described in Paragraphs 32 and 34) and Tenant's use and
occupancy of the Premises, with coverage for any one occurrence or claim of
not less than $1,000.000 or such other amount as is customarily carried at
the time by prudent tenants of property similar to the Building and located
in the Corridor, and which Landlord may reasonably require upon not less
than six months' prior written notice; and such insurance against All Risks
(including sprinkler leakage) for the full replacement cost of all
betterments to the Premises paid for by Tenant and all office equipment,
furniture, trade fixtures and other items of personal property on the
Premises, which insurance shall include Landlord, its beneficiary and the
partners of such beneficiary as additional insureds; and
(2) insurance against such other perils and in such amounts as
Landlord may from time to time reasonably require upon not less than 30
days' prior written notice, such requirement to be made on the basis that
the required
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insurance is customary at the time for prudent tenants of properties
similar to the Building and located in the Corridor.
Each of the aforesaid policies shall contain an undertaking by the insurer
that such policy will not lapse or be cancelled, except after not less than 30
days' prior written notice to Landlord. Tenant shall furnish to Landlord, if and
whenever requested by it, certificates as to the insurance from time to time
effected by Tenant and its renewal or continuation in force. Notwithstanding the
foregoing to the contrary, so long as BN or an affiliate of BN is the Tenant
under this Lease and provided that the net worth of BN (or such affiliate) is
not less than $1,000,000,000, BN (or such affiliate) may elect to self-insure
against the risks and perils referred to herein and not maintain the insurance
specified in this Paragraph 17.1.
17.2 LANDLORD'S INSURANCE
Landlord shall procure and maintain throughout the Term (a) all risk
property damage insurance including fire, extended coverage, vandalism and
malicious mischief upon the Building in an amount of not less than ninety
percent (90%) of the replacement cost thereof (excluding foundations), and (b)
comprehensive liability insurance, which shall include coverage for personal
liability, contractual liability, landlord's legal liability, bodily injury,
death and property damage, all on an occurrence basis, insuring Landlord against
any and all liability for injury to or death of a person or persons and for
damage to or destruction of property, and other risks described above, the
limits of such policy or policies to be in an amount not less than $1,000,000
combined single limit. Each of the aforesaid policies shall contain an
undertaking by the insurer that such policy will not lapse or be cancelled,
except after not less than 30 days' prior written notice to Tenant. Landlord
shall furnish to Tenant, if and whenever requested by it, certificates or other
evidence reasonably acceptable to Tenant as to the insurance from time to time
effected by Landlord and its renewal or continuation in force. Any insurance
required by the terms of this Lease to be carried by Landlord may be under a
blanket policy (or policies) covering other properties of Landlord and/or
parties related to Landlord. If such insurance is maintained under a blanket
policy, on request of Tenant, Landlord shall procure and deliver to Tenant a
statement from the insurer or general agent of the insurer setting forth the
coverage maintained and the amounts thereof allocated to the risks intended to
be insured hereunder.
17.3 FORM OF INSURANCE
All insurance required to be carried by either party hereunder shall be in
forms customarily applicable to landlords or tenants, as the case may be, of
comparable buildings located in the Corridor and written by an insurance company
or companies having a general policyholders' rating of not less that A and a
financial rating of Class X as stated in the most current available Best's
Insurance Reports, and licensed to do business in the State of Illinois.
17.4 RELEASES OF LIABILITY AND WAIVER OF SUBROGATION
Notwithstanding any provision in this Lease to the contrary, each party
hereto waives any and every claim which arises or may arise in its favor and
against the other party hereto, or anyone claiming through or under either of
them, by way of subrogation or otherwise, during the Term (or upon the
expiration or termination of the Term of this Lease) for any and all loss of, or
damage to, or condition of, the Premises, the Building, the tenant improvements,
and property located on or within the foregoing, resulting from fire or any
other casualty or peril which would be
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insured under any fire and all-risk (or extended risk) property damage insurance
policy, or a peril which is actually insureds, whether or not such loss or
damage is caused by the fault or negligence of the other party or anyone for
whom such other party may be responsible, or otherwise due to any other cause
for which such party would have liability under applicable laws, and whether or
not such insurance is in effect or the amount of coverage by such insurance.
Such waivers shall be in addition to, and not in limitation or derogation of,
any other waiver or release contained in this Lease with respect to any loss or
damage to property of the parties hereto. Inasmuch as the above mutual waivers
will preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
hereby agrees immediately to give to each insurance company which has issued to
its policies of fire and extended coverage insurance, written notice of the
terms of such mutual waivers, and to have such insurance policies properly
endorsed, if necessary, to prevent the invalidation of such insurance coverages
by reason of such waivers.
18.
RULES AND REGULATIONS
Tenant agrees that Tenant and each of Tenant's employees agents and
invitees shall comply with the following rules and regulations and with all
reasonable modifications and additions thereto which Landlord may from time to
time make; provided that such modifications and additions are in Landlord's good
faith Judgment reasonably necessary for the efficient operation of the Building
and further provided that same are not inconsistent with the provisions of this
Lease: (1) Any sign, lettering, picture, notice or advertisement installed
within the Premises which is visible from the public corridors within the
Building shall be installed in such manner and be of such character and style as
Landlord shall approve in writing, which approval shall not be unreasonably
withheld or delayed. No sign, lettering, picture, notice or advertisement shall
be placed on any outside window or in a position to be visible from outside the
Building; (2) Intentionally Omitted; (3) Tenant shall not use the name of the
Building for Tenant's business address after Tenant vacates the Premises; (4)
Sidewalks, entrances, passages, courts, corridors, (except corridors on full
floors occupied by Tenant), elevators and stairways in and about the Premises
shall not be obstructed nor shall objects be placed against glass partitions,
doors or windows which would be unsightly from the corridors of the Building or
from the exterior of the Building; (5) No animals, pets, bicycles or other
vehicles shall be brought or permitted to be in the Building or the Premises;
(6) Room to room canvasses to solicit business from other tenants of the
Building are not permitted; (7) Tenant shall not waste electricity, water or air
conditioning and shall cooperate fully with Landlord in all reasonable action
consistent with Tenant's use and enjoyment of the Premises at all times, in a
manner consistent with this Lease and a first class office building to assure
the effective and efficient operation of the heating and air conditioning
systems of the Building. All controls shall be adjusted only by authorized
building personnel; (8) All corridor doors (except corridors on full floors
occupied by Tenant) shall remain closed at all times when not in use; (9) No
locks or similar devices shall be attached to any door except by Landlord and
Landlord shall have the right to retain a key to all such locks; provided, that
Tenant may, subject to applicable fire and building codes, retain all keys to
certain security areas within the Premises, but further provided that (i)
Landlord shall have no obligation to clean such security areas, and (ii)
Landlord may in case of emergencies, use reasonable force to enter into such
security areas, without liability of Landlord to Tenant; (10)
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Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage, provided Landlord reasonably cooperates with Tenant in
effecting such protection. Except during Tenant's normal business hours, Tenant
shall keep all doors to the Premises locked and other means of entry to the
Premises closed and secured; (11) Except as otherwise provided in this Lease,
only machinery or mechanical devices of a nature directly related to Tenant's
ordinary use of the Premises shall be installed, placed or used in the Premises
(and any temporary use of machines) and the installation and use of all such
machinery and mechanical devices is subject to the other rules contained in this
Article 18 and the other portions of this Lease; (12) All cleaning, repairing,
janitorial, decorating, painting or other services and work in and about the
Premises shall be done only by authorized Building personnel; provided that
Tenant may, subject to the other provisions of this Lease, use its own employees
to perform any such work, and Landlord agrees that its consent to outside
contractors of Tenant shall not be unreasonably withheld or delayed; (13) Safes,
furniture, equipment, machines and other large or bulky articles shall be
brought to the Building and into and out of the Premises at such times and in
such manner as the Landlord shall reasonably direct (including the designation
of elevator) and at Tenant's sole risk and cost; (14) Subject to the other
provisions of this Lease, Tenant shall not in any manner deface or damage the
Building; (15) Inflammables such as gasoline, kerosene, naphtha and benzene
(excluding small amounts of fluids used in Tenant's duplicating machines), or
explosives or any other articles of an intrinsically dangerous nature are not
permitted in the Building or Premises; (16) Tenant acknowledges that the maximum
amount of electrical current which can safely be used in the Premises, taking
into account the capacity of the electric wiring of the Building and the
Premises and the needs of other tenants is as specified in Paragraph B1--
Electrical Construction--in the Work Agreement and Tenant shall not use more
than such safe capacity, unless Tenant, at its expense, installs special
protective equipment or increased capacity. Landlord's consent to the
installation of electrical equipment shall not relieve Tenant from the
obligation not to use more electricity than such safe capacity unless it makes
or installs special protective equipment or increased capacity; (17) To the
extent permitted by law (but not obligating Tenant to institute any judicial or
administrative proceeding), Tenant shall not permit picketing or other union
activity involving its employees in the Building, except in those locations and
subject to time and other limitations as to which Landlord may give prior
written consent, which consent shall not be unreasonably withheld or delayed;
(18) Tenant shall not enter into or upon any storage, heating, ventilation, air-
conditioning, mechanical or elevator machinery housing areas of the Building,
except as reasonably necessary in case of an emergency; (19) Tenant shall not
distribute literature, flyers, handouts or pamphlets of any type in any of the
common areas of the Building, without the prior written consent of Landlord;
(20) Except as otherwise permitted under Paragraph 6.01, Tenant shall not cook,
otherwise prepare or sell any food or beverages in or from the Premises; (21)
Tenant shall not permit the use of any apparatus for sound production or
transmission in such manner that the sound so transmitted or produced shall
unreasonably disturb any other tenant of the Building; (22) Tenant shall keep
all electrical and mechanical apparatus free of such vibration, noise and air
waves which may unreasonably disturb any other tenant of the Building; (23)
Tenant shall not permit odors or vapors to emanate from the Premises which would
unreasonably disturb any other tenant of the Building; (24) Tenant shall not
place a load upon any floor of the Premises exceeding the floor load capacity of
the Building (i.e. 80 psf live load plus 20 psf partition load), unless Tenants
at its expense, installs necessary support for increased floor loads; and (25)
No floor covering shall be affixed to any floor in the Premises by means of glue
or other adhesive,
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unless the installation procedure is approved by Landlord, which approval shall
not be unreasonably withheld or delayed;
Landlord shall not be responsible for the violation of any of the foregoing
rules and regulations by other tenants of the Building and shall not be
obligated to enforce the same against other tenants; provided, that Landlord
shall use reasonable efforts to administer such rules and regulations consistent
with other first class office buildings located in the Corridor.
19.
LANDLORD'S RIGHTS
Landlord shall have the following rights exercisable without notice (except
as expressly provided to the contrary in this Lease) and without being deemed an
eviction or disturbance of Tenant's use or possession of the Premises or giving
rise to any claim for set-off or abatement of Rent: (1) Subject to Paragraph 34,
to change the name or street address of the Building; provided, that unless a
street address change is required by law, Landlord shall not change the street
address of the Building without giving Tenant at least 90 days' prior written
notice thereof (or alternatively, agree to reimburse Tenant for reasonable costs
to replace stationery and other business materials of Tenant which are then in
stock and contain the address of the Building; (2) Subject to Paragraph 34, to
install, affix and maintain all signs on the exterior of the Building, the
interior of the Building and/or on Lot 3 in the Naperville Corporate Center
Subdivision in Naperville, Illinois; (3) To designate and/or approve (which
approval shall not be unreasonably withheld or delayed) prior to installation,
all types of signs, window shades, blinds, drapes or other similar items, and
all internal lighting that may be visible from the exterior of the Premises; (4)
To display the Premises (excluding Tenant's security areas) to prospective
tenants at reasonable hours upon prior reasonable notice during the last 24
months of the Term; provided, that Tenant may, at it's election, appoint a
representative to accompany Landlord during any such display; (5) Subject to the
other provisions of this Lease, to change the arrangement, size, configuration
and/or decoration of entrances, exits, doors, closets, atriums, storage areas,
corridors, boiler rooms, mechanical rooms, elevators, washrooms, hallways,
lobbies, trash and rubbish areas and stairs in or about the Building and to
change the arrangement, size and/or configuration of the parking areas,
driveways, entrances, exits and all other areas on Lot 3 in the Naperville
Corporate Center Subdivision in Naperville Illinois. provided that no such
change shall materially adversely affect access to the Premises and further
provided that no such changes shall be made to the Premises except as required
by law; (6) To grant to any party the exclusive right to conduct any business or
render any service in or to the Building, provided such exclusive right shall
not operate to prohibit Tenant from using the Premises for the purposes
permitted hereunder or obligate Tenant to deal with or obtain services from such
party instead of other parties; (7) To have access for Landlord and other
tenants of the Building to any mail choates and boxes located in or on the
Premises according to the rules of the United States Post Office; (8) To close
the Building after normal business hours, except that Tenant and its employees
and invitees shall be entitled to admission to the Building at all times under
such reasonable regulations as Landlord prescribes; (9) Subject to Paragraph
18(9) hereof, to retain at all times master keys or pass keys to the Premises;
(10) To install, operate and maintain security systems which monitor, by closed
circuit television or otherwise, all persons entering and leaving the Building;
and (11) To take any and all reasonable measures, including inspections and
repairs to the Premises or to the Building as may be necessary or desirable in
the operation or
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protection thereof and to install and maintain pipes, ducts, conduits, wires and
structural elements located in the Premises which serve other parts or other
tenants of the Building; provided, however, that in the exercise of any such
right, Landlord agrees to give Tenant prior reasonable notice thereof (except in
case of emergencies) and shall exercise such right in such manner as will not
unreasonably interfere with Tenant's business operations, and if any such action
reduces space available for Tenant's exclusive use, the area of the Premises
shall be appropriately changed for all purposes of this Lease.
20.
ESTOPPEL CERTIFICATE
Tenant shall from time to time, upon not less than 20 days' prior written
request by Landlord or any mortgagee or ground lessor of the Building, or any
prospective purchaser of the Building, deliver to such mortgagee, ground lessor
or purchaser, a statement in writing signed by Tenant certifying to the extent
Tenant believes the same to be true:
(1) That this Lease and the Work Agreement are unmodified and in
full force and effect only if there have been modifications, that this
lease and the Work Agreement, as modified, are in full force and
effect;
(2) The amount of Adjusted Monthly Base Rent then payable under this
Lease and the date to which Rent has been paid;
(3) That, to the best of Tenant's knowledge, Landlord is not in
default under this Lease or any work letter agreement, or, if in default, a
detailed description of such default(s);
(4) That Tenant is or is not in possession of the Premises, as the
case may be; and
(5) Such other information pertaining to the status of this Lease as
may be reasonably requested by such mortgagee, ground lessor or purchaser.
No such statement or certification, or any statements therein, shall constitute
a waiver of or in any way affect any claim against any party to this Lease, or
any obligation, right or interest arising under this Lease, but Tenant agrees as
between Tenant and such mortgagee, ground lessor or purchaser, such statement or
certification and all statements contained therein shall be binding and
conclusive.
21.
RELOCATION OF TENANT
At any time after the date of this Lease, Landlord may substitute for
certain space (the "Relocated Premises") consisting of any portion of the
Premises (provided that such portion consists of all portions of the Premises
horizontally contiguous thereto) which are located on any floor of the Building
upon which Tenant then occupies less than 50% of the rentable area thereof,
other premises in the Building (the "New Premises"), in which event the New
Premises shall be deemed to be the Relocated Premises for all purposes under
this Lease, provided: the New Premises shall be substantially similar to the
Relocated Premises in area, configuration and installations made by or for
Tenant, if Tenant (or any assignee or subtenant of Tenant) is then occupying the
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Relocated Premises, Landlord shall arrange for the move and pay the actual
moving expenses of Tenant, its property and equipment to the New Premises, which
move shall to the extent reasonably possible take place outside of Tenant's
normal business hours; Landlord shall give Tenant not less than 45 days prior
written notice of such substitution; and Landlord, at its expense, shall improve
the New Premises prior to such substitution, with improvements substantially
similar to those in the Relocated Premises at the time of such substitution,
including reinstallation of any communication lines.
22.
ADJUSTMENTS TO MONTHLY BASE RENT
22.1 DEFINITIONS
For the purposes of this Paragraph 22, the following words and phrases
shall have the following meanings:
A. "Adjustment Date" shall mean each January 1 occurring within the Term.
B. "Adjustment Year" shall mean each calendar year during which an
Adjustment Date occurs.
C. "Base Year" shall mean the calendar year 1985.
D. "Operating Expenses" shall be defined by the following list of
Inclusions and Exclusions:
(A) Operating Expenses for the Base Year and any succeeding calendar
year shall include the following costs and expenditures to the extent
reasonably incurred in the ordinary course of, and fairly and equitably
allocated to, the operations of the Building and the Land (the "Project"
collectively):
1. Compensation provided in the form of:
(a) Salaries and such other compensation (including payroll
taxes, welfare, retirement, vacation, holiday, other paid
absences and other fringe benefits) as well as adjustments
thereto, payable to the on-premises manager, assistant manager,
on-site bookkeeper, secretary, and any other on-site personnel
required for performing services rendered in connection with the
repair, maintenance and operation of the Project.
(b) Wages, salaries and such other compensation and
benefits (including payroll taxes, welfare, retirement, vacations
holiday, other paid absences and other fringe benefits) as well
as adjustments thereto, for employees, independent contractors or
agents of Landlord performing services rendered in connection
with the normal operation, repair and maintenance of the Project
such as the following:
(i) Elevator operations, including Lobby Director, if any;
(ii) Window cleaners, miscellaneous handymen, janitors,
cleaning personnel and porters engaged in cleaning, repairing and
maintaining the Project, its equipment and fixtures;
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(iii) Watchmen, caretakers and person engaged in patrolling
and protecting;
(iv) Engineers, mechanics, electricians plumbers and
persons engaged in the operation, repair and maintenance of the
heating, air conditioning, ventilating, plumbing, electrical and
elevator systems;
(v) Plumbers, operating engineers and electricians engaged
in connection with the operation, normal repairs and normal
maintenance of the Project.
2. The uniforms of employees specified in subparagraph 1 above and the
cleaning, replacement and pressing thereof;
3. Normal repairs to and normal physical maintenance of the Project
including landscaping, mechanical, equipment and appurtenances thereto and the
cost of ordinary supplies, small tools, materials and equipment used in
connection therewith which, in accordance with generally accepted accounting
principles, would not be capitalized.
4. Premiums and other charges incurred by Landlord with respect to the
following insurance on the Project:
(a) Fire and extended coverage insurance, including earthquakes,
windstorm, hail, explosion, and rental loss;
(b) rioting, attending a strike, civil commotion, aircraft, vehicle
and smoke insurance;
(c) public liability and property damage insurance;
(d) elevator insurance;
(e) worker's compensation insurance for the employees specified in
subparagraph 1 above;
(f) boiler and machinery insurance, sprinkler leakage, water damages,
water damage, legal liability, burglary, fidelity and pilferage insurance
on equipment and materials;
(g) health, accident and group life insurance for the employees
specified in subparagraph 1 above; and
(h) such other insurance as is customarily carried by operators of
other comparable buildings.
5. Costs incurred in connection with inspection and servicing, including
all outside maintenance contracts necessary or proper for the operation and
maintenance of the Project, including, without limitation, janitorial and window
cleaning, rubbish removal, exterminating, water treatment, elevator, electrical,
plumbing, mechanical equipment, landscape maintenance and the cost of ordinary
materials. small tools, supplies and equipment used in connection therewith;
6. Payroll taxes, federal state and local unemployment taxes, and social
security taxes payable in connection with the employment of any of the employees
specified in subparagraph 1 above;
7. Sales, use and excise taxes on goods and services purchased by
Landlord to properly operate or maintain the Project and its equipment;
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8. Licenses, permits and inspection fees;
9. To the extent not included as part of management fees under
subparagraph A(9) below, auditor's fees. if any. for public accounting normally
required for the operation and maintenance of the Project and the administration
of the leases for space in the Building, including costs for accounting services
provided in support of audit preparation by manager to the extent that such
services can be reasonably expected to reduce services required of independent
CPAs and costs associated therewith.
10. Utility Costs, including but not limited to electricity, natural gas,
water, sewer and garbage removal;
11. Management fees calculated as a percentage of revenues from rental of
office and retail areas (such Percentage fees not to exceed reasonable and
customary fees for building management of comparable buildings located in the
Corridor and other general and administrative expanses of the manager incurred
in operating the Building, including but not limited to professional fees, on-
site office supplies, postage and telephone which can be directly allocated to
or associated with the management and operation of the Building.
12. Consumable Supplies, including not limited to paper goods, trash
liners and liquid soap;
13. Amortization of capital improvements made subsequent to the initial
development of the Building which are (a) designed with a reasonable probability
of improving the operating efficiency of the Building, provided that such
amortization costs shall not exceed expected savings in operating costs
resulting from such capital improvements, or (b) required by laws adopted
subsequent to the date of this Lease, or (c) made in connection with a fire,
windstorm or other casualty, or by the exercise of the right of eminent domain,
but only to the extent of costs in excess of insurance proceeds or condemnation
awards received by Landlord; all such amortization to be determined in
accordance with generally accepted accounting principles consistently applied.
14. Any other expense which, under generally accepted accounting
principles would be considered a normal maintenance by the exercise of the right
of eminent domain, to the extent of insurance proceeds or condemnation awards
received by Landlord;
(A) Operating Expense for the Base Year or any subsequent year shall
exclude the following costs and expenditures;
1. Repairs or other work occasioned by fire, windstorm or other
casualty of a nature described in subparagraph (A)4 above, or by the
exercise of the right of eminent domain, to the extent of insurance
proceeds or condemnation awards received by Landlord;
2. Leasing commissions, attorneys' fees, costs and disbursements and
other expenses incurred in connection with negotiations or,disputes with
tenants or other occupants or prospective tenants or other occupants, or
associated with the enforcement of any leases or the defense of Landlord's
title to or interest in the Project;
3. Costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving or decorating, painting or redecorating
space for tenants or other occupants or vacant tenant space (excluding
normal repairs and maintenance);
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4. Landlord's costs of any services sold to tenants or other
occupants for which Landlord is entitled to be reimbursed by such tenants
or other occupants as an additional charge or rental over and above the
base rent and rent adjustments payable under the lease with such tenants or
other occupants;
5. Costs incurred by Landlord for alterations or additions which are
considered capital improvements and replacements under generally accepted
accounting principles, except as described in subparagraph (A)13 above;
6. Depreciation or amortization of costs required to be capitalized
in accordance with generally accepted accounting practices, except as
described in subparagraph (A)13 above;
7. Costs of a capital nature, including but not limited to, capital
improvements, capital repairs, capital equipment, and capital tools, all as
determined in accordance with generally accepted accounting principles,
except as provided in subparagraph (A)13 above;
8. Expenses in connection with services or other benefits of a type
which are not provided to Tenant, but which are provided to another tenant
or occupant;
9. Costs incurred due to violation by Landlord or any tenant of the
terms and conditions of any lease;
10. Overhead and profit increment paid to subsidiaries or affiliates
of Landlord for supplies or other materials to the extent that the costs of
such supplies or materials exceed the costs that would have been paid had
the supplies or materials been provided by unaffiliated parties on a
competitive basis;
11. Interest on debt or amortization payments on any mortgages or
deeds of trust;
12. Rental under any ground or underlying lease or leases;
13. Landlord's general corporate overhead and general administrative
expenses, except for reimbursement for out-of-pocket costs for postage,
photocopies and telephone costs incurred in operating the Building;
14. Any compensation paid to clerks, attendants or other persons in
commercial concessions operated by Landlord;
15. All items and services to the extent for which Tenant directly
reimburses Landlord (other than through this Paragraph 22) or pays third
persons or which Landlord provides selectively to one or more tenants or
occupants of the Project (other than Tenant) without reimbursement;
16. Advertising and promotional expenditures;
17. Any other expense which, under generally accepted accounting
principles, would not be considered a normal maintenance or operating
expense except as otherwise specifically provided herein (including
subparagraph (A)13 above);
18. Rentals and other related expenses, if any, insurance major
leasing air conditioning, heating elevators or other like installations in
the Building ordinarily considered to be of a capital nature;
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19. Expenses in the nature of interest, fines or penalties;
20. Operating Expenses for any year shall be reduced by the amount of
any refunds or rebates received by Landlord in such year for the operation
of the Building, whether such refund or rebate relates to such year or a
preceding year;
E. "Taxes" shall mean all federal, state and local governmental taxes,
assessments and charges (including transit or transit district taxes or
assessments) of every kind or nature including without limitation general real
estate taxes, which Landlord or its beneficiary shall pay or become obligated to
pay because of or in connection with the ownership, leasing, management, control
or operation of the Project, or of the personal property, fixtures, machinery,
equipment, systems and apparatus located therein or used in connection therewith
(including any rental or similar taxes levied in lieu of or in addition to
general real and/or personal property taxes), which Taxes shall, if they pertain
to property in addition to the Project, be fairly and equitably allocated to the
Project. For purposes hereof, Taxes for any year shall be Taxes which are due
for payment or paid in that year rather than Taxes which are assessed or become
a lien during such year. There shall be included in Taxes for any year the
amount of all fees, costs and expenses (including reasonable attorneys' fees)
paid by Landlord during such year in seeking or obtaining any refund or
reduction of Taxes. Taxes in any year shall be reduced by the net amount of any
tax refund received by Landlord during such year. Taxes shall not include any
federal, state or local sales, use, franchise, capital stock, inheritance,
general income, gift or estate taxes, except that if a change occurs in the
method of taxation resulting in whole or in part in the substitution of any such
taxes, or any other assessments for any Taxes as above defined, such substituted
taxes or assessments shall be included in the Taxes (to the extent of such
substitution).
F. "Tenant's Proportionate Share" shall mean the percentage set forth in
Paragraph 1.1M of this Lease. Tenants Proportionate Share is calculated by
dividing the rentable area of the Premises as set forth in Paragraph 1.1L by the
rentable area of the Building as set forth in Paragraph 1.1L. The initial
rentable area of the Premises, the initial rentable area of the Building and the
initial Tenants Proportionate Share have been determined in accordance with
Paragraph 22.1G below, have been mutually agreed upon by Landlord and Tenant and
shall be binding and conclusive upon Landlord and Tenant.
G. "Rentable area" with respect to any space in the Building shall mean
the area of such space as calculated and measured in accordance with the
following definitions of single and multi-tenancy floors:
Single-tenant floor: The rentable area of a single tenancy floor shall be
computed by measuring to the glass line of the outer Building wall, and
shall include all area within the outside walls plus such floor's
proportionate share of the ground floor atrium, less stairs, elevator
shafts, flues, pipe shafts and vertical ducts, but no deductions shall be
made for columns or other projections necessary to the Building.
Multi-tenancy floor: The rentable area of a multi-tenancy floor shall
include all space within the demising walls (measured from the mid-point of
demising walls and in the case of exterior walls, measured from the glass
line of the outer Building wall), plus Tenant's proportionate floor share
of (i) any non-tenant areas on such floor, including, without limitation.
elevator lobbies, corridors, toilet rooms, air
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conditioning rooms, fan rooms, janitor closets, electrical closets and
telephone closets, and (ii) such floor's proportionate share of the ground
floor atrium. No deductions shall be made for columns or other projections
necessary to the Building.
22.2 ADJUSTMENTS TO MONTHLY BASE RENT
Monthly Base Rent shall be increased effective on and after each Adjustment
Date to and including the day immediately preceding the following Adjustment
Date by an amount equal to one twelfth (1/12th) of the sum of:
(1) Tenant's Proportionate Share of the excess of Taxes for each such
Adjustment Year over Taxes for the Base Year; plus
(2) Tenant's Proportionate Share of the excess of Operating Expenses
for each such Adjustment Year over Operating Expenses for the Base Year.
22.3 PROJECTIONS AND PAYMENTS
For the purpose of calculating and paying increases in Monthly Base Rent
under Paragraph 22.02(2) above for each Adjustment year, Landlord may make
reasonable estimates forecasts or projections (collectively, the "projections")
of Operating Expenses for such Adjustment Year. Notwithstanding the foregoing,
the Projections of Operating Expenses for any Adjustment Year shall not exceed
the greater of (a) 110% of the actual Operating Expenses for the immediately
preceding calendar year, or (b) the percentage increase in the actual Operating
Expenses for the immediately preceding calendar year over the actual Operating
Expenses for the calendar year immediately preceding such immediately preceding
calendar year, plus in either (a) or (b) above, such extraordinary additional
costs (e.g., fuel or energy costs, or cleaning expenses) which Landlord can
reasonably substantiate by applicable rate increases or new contracts. Within
approximately 60 days following each Adjustment Date, Landlord shall deliver to
Tenant a written statement setting forth the Projections of Operating Expenses
for the Adjustment Year in which such Adjustment Date occurs, and providing a
calculation of the increase in installments of Monthly Base Rent to become
effective as of said Adjustment Date; provided, however, that the failure of
Landlord to provide any such statement within said period shall not relieve
Tenant from its obligation to continue to pay Adjusted Monthly Base Rent at the
rate then in effect under this Lease, and, within ten days following the date on
which Landlord delivers such statement to Tenant, Tenant shall pay any increases
in Monthly Base Rent reflected thereby effective retroactively to the most
recently preceding Adjustment Date. For purposes of calculating and paying
increases in Monthly Base Rent under Paragraph 22.02(l) above for any Adjustment
Year, Landlord will deliver to Tenant after receipt by Landlord, a copy of any
Tax bill which is due for payment in such Adjustment Year, together with
Landlord's statement for the increase in Monthly Base Rent which is due under
Paragraph 22.2(1) above by reason of such Tax bill. Tenant shall then pay to
Landlord within 15 days after receipt of each such Tax bill and statement from
Landlord (but in no event shall such payment be required more than twenty (20)
days prior to the date that such Tax bill is due for payment), the amount shown
on such statement. If any Taxes are payable in equal or varying amounts at
different times during an Adjustment Year, then Landlord's statement shall
reflect the proportion that such equal or varying amount bears to the amount by
which the total Taxes for said Adjustment Year exceeds the Taxes for the Base
Year.
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22.4 READJUSTMENT
On or about April 1st following the end of each Adjustment Year, or at such
later time as Landlord shall be able to determine the actual amounts of
Operating Expenses and Taxes for the Adjustment year last ended, Landlord shall
notify Tenant in writing of such actual amounts, certified true and accurate by
an authorized officer of Landlord. If such actual amounts exceed the Projections
for such Adjustment Year, then Tenant shall, within 30 days after the date of
such written notice from Landlord, pay to Landlord an amount equal to the excess
of the Adjusted Monthly Base Rent payable for the Adjustment Year last ended
based upon actual Operating Expenses and Taxes for such year over the total
Adjusted Monthly Base Rent paid by Tenant during such Adjustment Year. The
obligation to make such payments for the last year of the Term shall survive the
expiration or earlier termination of the Term. If the total Adjusted Monthly
Base Rent paid by Tenant during such Adjustment Year exceeds the amount thereof
payable, for such Year based upon actual Operating Expenses and Taxes for such
Adjustment Year, then Landlord shall credit such excess to installments of
Adjusted Monthly Base Rent payable after the date of Landlord's notice until
such excess has been exhausted, or if this Lease shall expire prior to full
application of such excess, Landlord shall promptly pay to Tenant the balance
thereof not theretofore applied against Rent. No interest or penalties shall
accrue on any amounts which Tenant is obligated to pay to Landlord or which
Landlord is obligated to credit or pay to Tenant by reason of this Paragraph
except after such payment is due and demanded.
22.5 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses and
Taxes in accordance with sound accounting and management practices, provided
that all Rent when due has been paid in full, the books and records shall be
available to Tenant for Inspection, upon prior reasonable notice. Such
inspection shall take place, at Landlord's election, either at (a) the offices
of the Building or (b) the main office of Bellemead Development Corporation, 280
Corporate Center, Four Becker Farm Road, Roseland, New Jersey 07068. All
expenses of such inspection shall be borne by Tenant; provided, that if any
Landlord's statement of actual Operating Expenses or actual Taxes is found to
have contained an error prejudicial to Tenant of 10% or more of the actual
amount of Operating Expenses or the actual amount of Taxes to be reflected by
such statement, the cost of such inspection shall be paid by Landlord. In such
event, Landlord shall promptly refund to Tenant any overcharges paid by Tenant,
plus interest thereon at the default rate specified in Paragraph 26.1 hereof.
22.6 NO DECREASES IN MONTHLY BASE RENT
Notwithstanding anything to the contrary contained in this Lease, Monthly
Base Rent shall not be adjusted or decreased pursuant to this Paragraph 22 below
the amounts set forth in Paragraph 1.1H.
22.7 PARTIAL OCCUPANCY FOR OPERATING EXPENSES
For the purpose of calculating Operating Expenses for the Base Year, (i) if
the average number of rentable square feet occupied by tenants during the Base
Year in the Building is less than 89,533 rentable square feet, Landlord shall
make a determination ("Landlord's Base Year Determination") of what the
operating Expenses for the Base Year would have been if during the entire Base
Year an average of 89,533 rentable square feet were occupied by tenants in the
Building, and (ii) if the Building was not operated during the entire Base Year,
Landlord shall annualize all components of Operating Expenses incurred during
the Base Year
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which would have been increased if the Building had been fully operational for
the entire Base Year. For the purpose of calculating Operating Expenses for any
Adjustment Year, (i) if the average number of rentable square feet occupied by
tenants during such Adjustment Year in the Building is less than 89,533 rentable
square feet, Landlord shall make a determination ("Landlord's Adjustment Year
Determination") of what the Operating Expenses for such Adjustment Year would
have been if during all of such Adjustment Year an average 89,533 rentable
square were occupied by tenants in the Building, and (ii) if the Building was
not operated during the entire Adjustment Year, Landlord shall annualize all
components of Operating Expense incurred during such Adjustment year which would
have been increased if the Building had been fully operational for the entire
Adjustment Year. Nothing contained herein shall preclude Tenant from contesting
Landlord's Base Year Determination and/or any Landlord's Adjustment Year
Determination, in accordance with the provisions of this Lease, and provided
that Tenant pays when due, all adjustments to Monthly Base Rent which Landlord
calculates as owing by Tenant under this Paragraph 22.
22.8 ASSESSMENTS FOR REAL ESTATE TAXES
For the purpose of calculating Taxes for the Base Year, if the Lisle
Township Assessor does not establish a hypothetical full value for the Building
for purposes of determining the 1984 general real estate taxes for the Building
(which Taxes are payable in 1985), then Landlord and Tenant agree that Taxes for
the Base Year shall be determined by applying the 1984 real estate tax rate and
applicable state multipliers to the assessed valuation of the Building and the
Land for the first year that the Lisle Township Assessor establishes a
hypothetical full-value for the Building and without regard to any partial
assessment factor that the Assessor may apply for such year. For the purpose of
calculating Taxes for any Adjustment Years if the assessed valuation of the
Building for the immediately preceding calendar year (the "Prior Year") was
determined by the Lisle Township Assessor by applying to the hypothetical full
value of the Building for such Prior Year, as determined by said Assessor, any
partial assessment factor, then Taxes for such Adjustment Year shall be
determined under this Lease as if the assessed evaluation of the Building for
the Prior Year had been determined on the basis of the hypothetical full value
of the Building for such Prior Year, without regard to such partial assessment
factor. For purposes of this Lease, Landlord and Tenant agree that "hypothetical
full value" shall mean the value of the Building, as determined by the Lisle
Township Assessor, without regard to any partial assessment factor that may be
applied by said Assessor to such value, based upon the degree of completion of
the building, the level of occupancy of the Building, or otherwise.
23.
REAL ESTATE BROKERS
Tenant represents and warrants to Landlord that, except for the Broker
named in Paragraph 1.1K and Cushman Realty Corporation, Los Angeles, California,
Tenant represents and warrants to Landlord that, except for the Broker
California, Tenant has not dealt with any real estate broker, salesperson, or
finder in connection with this Lease, and no such person initiated or
Participated in the negotiation of this Lease, or showed the Premises to Tenant.
Tenant agrees to indemnify, defend and hold harmless Landlord, its
beneficiaries, and each of their respective agents and employees from and
against any and all liabilities and claims for commissions and fees arising out
of a breach of the foregoing representation and warranty. Landlord shall be
responsible for the payment of all commissions payable by reason of this Lease
to the broker specified
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in Paragraph 1.1K, based upon a separate written agreement between Landlord and
said broker.
24.
SUBORDINATION AND ATTORNMENT
24.1 SUBORDINATION
This Lease and all rights of Tenant hereunder are subject and subordinate
to the mortgage or trust deed currently affecting the Building and the Land and
(b) to any and all increases, renewals, modifications, consolidations,
replacements, and extensions of such mortgage or trust deed. Landlord shall use
its reasonable best efforts to obtain and deliver to Tenant on or before the
Commencement Date, a non-disturbance agreement in the form described in
Paragraph 24.2 from the holder of the mortgage or trust deed currently affecting
the Building and Land. In the event that Landlord fails to furnish to the
Tenant with such non-disturbance agreement on or before the Commencement Date,
Tenant may terminate this Lease by giving Landlord written notice prior to the
date which is 30 days after the Commencement Date which right to terminate shall
constitute Tenant's sole remedy and Landlord's sole liability for Landlord's
failure to furnish such non-disturbance agreement.
24.2 FUTURE SUBORDINATION
Subject to the Provisions of the following sentence, this Lease and all
rights of Tenant hereunder are subject and subordinate (a) to any mortgage or
trust deed, blanket or otherwise, or ground lease which may hereafter affect the
Building, the Land or Landlord's leasehold estate in the Land, and (b) to any
and all increases, renewals, modifications, consolidations, replacements, and
extensions of any such mortgage, trust deed or ground lease. This provision is
hereby declared by Landlord and Tenant to be self-operative and no further
instrument shall be required to effect such subordination of this lease,
provided that, no such subordination shall be effective until the holder of any
such mortgage or trust deed, or lessor under any such ground lease shall duly
execute and deliver to Tenant a binding non-disturbance agreement under the
terms of which such holder or lessor agrees that, so long as this Lease is not
terminated for Tenant's default, (i) this Lease and the estate hereby created
shall not be terminated, (ii) Tenant shall not be joined in any foreclosure or
other proceedings brought by such mortgagee or beneficiary to enforce its
mortgage or trust deed, or by such lessor to enforce or terminate its lease, and
(iii) Tenant's possession or enjoyment of the Premises under the terms of this
Lease shall not be interfered with by, in, or as a result of any foreclosure
action or other proceedings brought to enforce such mortgage or trust deed, or
termination of such lease.
24.3 FUTURE EVIDENCE OF SUBORDINATION AND NONDISTURBANCE
As to any mortgage or deed of trust as to which subordination is effective
pursuant to Paragraph 24.1 or Paragraph 24.2, Tenant shall, upon demand at any
time or times, execute, acknowledge and deliver to Landlord any and all
instruments and certificates that may be necessary or proper to more effectively
subordinate this Lease and all rights of Tenant hereunder to any such mortgage,
trust deed or lease, or to confirm or evidence such subordination and the
attornment provided in Paragraph 24.4; provided, however, Tenant shall not be
required to execute and deliver any documents or instruments which would create
any obligations in addition to Tenant's obligations, or impair its rights or
interests under the provisions of this Lease, or to execute and deliver any such
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document until it has received the nondisturbance agreement as referred to in
Paragraph 24.1 or 24.2, as applicable.
24.4 ATTORNMENT
Tenant covenants and agrees, in the event any proceedings are brought for
the foreclosure of any mortgage or trust deed to which this Lease is subject and
subordinate, or in the event of a termination of any lease to which this Lease
may become subordinate, or if the Building be sold pursuant to any mortgage or
trust deed to which this Lease is subject and subordinate, to attorn to the
purchaser upon any foreclosure sale or trustee's sale, or the lessor upon any
such termination of such ground lease, if so required by the purchaser, grantee
by conveyance in lieu of foreclosure, or lessor, and to recognize the purchaser,
grantee or lessor, as the case may be, as the landlord under this Lease,
provided such purchaser, grantee or lessor agrees in writing to be bound to
Tenant as landlord hereunder with respect to liabilities and obligations of
Landlord under this Lease accruing after such sale or conveyance. Tenant agrees
to execute and deliver at any time and from time to time, upon the request of
Landlord or of any holder(s) of any of the indebtedness or other obligations
secured by any mortgage or deed of trust, or any lessor under a ground lease,
referred to in the preceding sentence, any instrument or certificate which may
be reasonably appropriate and requested in any foreclosure or termination
proceeding or otherwise to evidence the foregoing attornment, provided Tenant
has been furnished the non-disturbance agreement specified in Paragraph 24.1 or
Paragraph 24.2, as appropriate, and provided that such instrument or certificate
would not create obligations on Tenant in addition to Tenant's obligations,
impair Tenant's rights or interests under the provisions of this Lease.
Provided the provisions hereof for the furnishing of non-disturbance agreements
are complied with and such agreements are being performed Tenant further waives
the provisions of any statute or rule of law, now or hereafter in effect, which
may give or purport to give Tenant any right or election to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event any foreclosure proceeding is brought, or trustee's sale occurs, or
ground lease is terminated, and agrees that this Lease shall not be affected in
any way whatsoever by any foreclosure proceeding, trustee's sale or termination
of ground lease, unless the holder(s) of the indebtedness or other obligations
secured by the mortgage or trust deed, or lessor under the ground lease shall
declare otherwise.
25.
NOTICES
All notices required or permitted to be given under this Lease shall be in
writing and shall be deemed given and delivered, whether or not received, on the
date when personally delivered (and receipted for) or three days following the
date when deposited in the United States Mail, postage prepaid and properly
addressed, certified mail, return receipt requested, provided, that with respect
to notices of default, delivery shall not be deemed given until actual delivery
or tender of actual delivery is given, at the following addresses:
(1) To Landlord: c/o Bellemead Development Corporation, 1250 East
Diehl Road, Naperville, Illinois 60540 or such other address as Landlord
shall designate by written notice to Tenant with copies to Franklin L.
Friedman, Greenberger, Krauss & Jacobs, Chartered, 180 North LaSalle
Street, Suite 2700, Chicago, Illinois 60601, and John Pershing, Esq.,
Bellemead Development Corporation, 280 Corporate Center, Four Becker Farm
Road, New Jersey 07068; and
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(2) To Tenant: At the address specified in Paragraph 1.1C prior to
the Commencement Date with a copy to 547 W. Jackson Blvd, Chicago, Illinois
60606, Attention: Regional Vice President, and at the Premises after the
Commencement Date, Attention: Regional Vice President, with a copy to the
address specified in Paragraph 1.1C, or such other address as Tenant shall
designate by written notice to Landlord.
26.
MISCELLANEOUS
26.1 LATE CHARGES
All delinquent Rent shall bear interest at the maximum rate permitted by
law or 2% in excess of the Prime Rate as published by The First National Bank of
Chicago as in effect from time to time, whichever is less, from the date due
until paid.
26.2 ENTIRE AGREEMENT
This Lease and the Exhibits attached hereto contain the entire agreement
between Landlord and Tenant concerning the Premises and there are no other
agreements, either oral or written, between Landlord and Tenant. Concurrently
herewith Landlord and Tenant agree to execute and record a Memorandum of Lease
in the form attached hereto as Exhibit G.
26.3 EVIDENCE OF AUTHORITY
Tenant and Landlord shall deliver to each other, concurrently with the
signing of this Lease, certified resolutions or other evidence of authority for
the signing and delivery of this Lease and the performance by such party of its
obligations under this Lease.
26.4 ACCORD AND SATISFACTION
No payment by either party or receipt by either party of a lesser or
greater amount than any installment or payment of Rent or other amounts due
hereunder shall be deemed to be other than on account, and no endorsement or
statement on any check or any letter accompanying any check or payment of Rent
shall be deemed an accord and satisfaction, and either party may make or accept
such check or payment without prejudice to such party's right to recover the
balance or recover the excess of such installment or payment of Rent or such
other amount and such party may pursue any remedies available to such party to
effect such recovery. No receipt of money by Landlord from Tenant after the
termination of this Lease or Tenant's right of possession of the Premises shall
reinstate, continue or extend the Term. Further, if Tenant incurs any expense
or liability or suffers any damage in complying with any demand of Landlord, or
in correcting any condition that Landlord asserts as a breach of an obligation
of Tenant hereunder, Tenant shall be entitled to contest its obligation to meet
such demand or correct such condition and to recover from Landlord all expenses,
damages and losses suffered by Tenant in connection therewith together with
interest thereon at the rate specified in Paragraph 26.1.
26.5 LANDLORD'S OBLIGATIONS ON SALE OF BUILDING
In the event of any sale or other transfer of the Building, Landlord shall
be entirely freed and relieved of all agreements and obligations of Landlord
under this Lease accruing or to be performed after the date of such sale or
transfer provided that the purchaser or transferee shall agree in writing, duly
executed to be bound as and to perform the obligations of Landlord under and in
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accordance with the terms and conditions of this Lease and further, provided
that any such sale or transfer shall be subject to this Lease and shall not
operate to terminate this Lease.
26.6 BINDING EFFECT
This Lease shall be binding upon and inure to the benefit of Landlord and
its successors and assigns. This Lease shall be binding upon and inure to the
benefit of Tenant and its successors and permitted assigns.
26.7 FORCE MAJEURE
Neither party hereto shall be deemed in default with respect to any of the
terms, covenants, conditions and provisions of this Lease on such party's part
to be performed to the extent such party's failure to timely perform same is due
to any strike, lockout, labor trouble (whether legal or illegal), civil
disorder, inability to procure materials (provided reasonable diligence is
exercised in obtaining the same), failure of power, restrictive governmental
laws or regulations, riots, insurrections, war, fuel shortages, accidents,
casualties, Acts of God, acts caused directly or indirectly by the other party
hereto (or such other party's agents, employees or invitees), mechanical
breakdown, repair, servicing or any other cause beyond the reasonable control of
such party; provided that the provisions of this Paragraph 26.7 shall not apply
to the payment of any sums (including Rent) required hereunder, or to Tenant's
obligation to vacate the Premises upon the expiration or termination of the Term
of this Lease; and provided further the party whose default is excused pursuant
to this Paragraph 26.7 shall commence and continue with all due diligence to
correct the condition which is the basis of the default.
26.8 CAPTIONS
The Paragraph captions in this Lease are inserted only as a matter of
convenience and in no way define, limit, construe, or describe the scope or
intent of such Paragraphs.
26.9 APPLICABLE LAW
This Lease shall be construed in accordance with the laws of the State of
Illinois.
26.10 TIME
Time is of the essence of this Lease and the performance of all obligations
hereunder.
26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES
If Tenant fails timely to perform any of its duties under this Lease or the
Work Agreement, Landlord shall have the right (but not the obligation), after
the expiration of any grace period elsewhere under this Lease or the Work
Agreement expressly granted to Tenant for the performance of such duty, to
perform such duty on behalf and at the expense of Tenant without further prior
notice to Tenant, and all sums expended or expenses incurred by Landlord in
performing such duty shall be deemed to be additional Rent under this Lease and
shall be due and payable upon demand by Landlord.
26.12 TENANT'S REMEDIES
Tenant agrees that in the event of a default by Landlord under this Lease,
Tenant shall give written notice thereof to all mortgagees and ground lessors of
the Premises, or any interest therein, and a period of 30 days within which to
cure or cause to
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be cured such default, prior to proceeding to enforce any rights or remedies of
Tenant under this Lease; provided, however, that such obligation to notify such
mortgagees and ground lessors shall not operate to postpone the commencement of
any rent abatement period, arising under the provisions of this Lease.
26.13 EXHIBITS
All Exhibits attached hereto and signed or initialed both by Landlord and
Tenant shall be deemed to be a part hereof and are hereby incorporated into this
Lease.
27.
PARKING
So long as Tenant is not in default under this Lease, Tenant and its agents
invitees and employees shall have a license without direct charge to Tenant (but
subject to Tenant's obligation to pay escalation in Operating Expenses as set
forth in Paragraph 22.2 of this Lease) to use (in accordance with the provisions
of this Lease) in the aggregate 3.3 parking spaces in the location specified by
Landlord on Lot 3 in the Naperville Corporate Center Subdivision in Naperville,
Illinois and delineated on attached Exhibit F for each 1.000 rentable square
feet from time to time comprising the Premises for the purpose of parking
automobiles used by any of such persons; provided 15 parking spaces out of said
total number of parking spaces hereby licensed to Tenant shall be reserved
parking spaces to be located at the locations shown on Exhibit F attached hereto
(subject to relocation of same to as compare a location as possible if required
by law or necessitated by condemnation), and the balance of said total number of
parking spaces hereby licensed to Tenant shall be unreserved parking spaces; and
further provided,
(1) neither Tenant nor its agents, invitees or employees shall use in
the aggregate more than such number of parking spaces on such Lot 3;
(2) Tenant acknowledges, understands and agrees that Landlord shall
not be liable or responsible for enforcing such license or preventing any
violation thereof; and
(3) Subject to Paragraph 16, Landlord shall have the right (in
addition to all other remedies available to Landlord under this Lease, at
law or in equity) to proportionately reduce the aggregate parking spaces
herein licensed to Tenant in the event of any Taking of any part of such
Lot 3 which reduces the number or parking spaces on such Lot 3 or in the
event of any other occurrence not caused by Landlord which reduces the
number of parking spaces on such Lot 3.
28.
INTENTIONALLY OMITTED
29.
RIGHTS OF REFUSAL
29.1 DEFINITION
For purposes of this Lease, "Refusal Space" shall mean all of the rentable
area located on the third floor of the Building which
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is not part of the original Premises demised under this Lease, and which
contains 7,500 square feet of rentable area.
29.2 REFUSAL RIGHTS
If Landlord desires at any time to lease the Refusal Space or any portion
thereof to a third party tenant, Landlord shall give Tenant written notice of
such intent ("Landlord's Notice") prior to Landlord entering into such lease,
which Landlord's Notice shall designate (i) the specific location and actual
rentable area of the portion of the Refusal Space which Landlord desires to
lease, as determined in accordance with Paragraph 22.1G hereof, together with a
designation of that portion of the Refusal Space, if any, in which Landlord
desires to grant expansion options or rights in connection with the lease of
such first portion of the Refusal Space, (ii) the proposed occupancy date for
such Refusal Space, (iii) the lease term (the "Third Party Term") for which
Landlord desires to lease such Refusal Space, (iv) the annual rate(s) of Monthly
Base Rent per square foot of rentable area (plus all fixed and/or indexed
increases to said rate(s)) which Landlord desires to charge for such portion of
the Refusal Space, (v) the base year which Landlord desires to utilize for
purposes of determining adjustments to Monthly Base Rent under Paragraph 22
hereof with respect to such Refusal Space, (vi) the per rentable square foot
tenant improvement allowance, if any, which Landlord is willing to provide to
improve such Refusal Space, and (vii) whether such portion of the Refusal Space
was to constitute part or all of the First Option Space or the Second Option
Space. Tenant shall then have a right (the "Refusal Right") to lease all, but
not less than all, of the Refusal Space described in Landlord's Notice, upon the
following terms and conditions:
(1) Tenant shall give Landlord written notice of its election to
exercise the Refusal Right within ten (10) days after Landlord gives Tenant
Landlord's Notice; and
(2) There does not exist an event of default under Paragraph 12.1(a)
of this Lease either on the date Tenant exercises the Refusal Rights or,
unless waived in writing by Landlord, on the proposed lease term
commencement date for such portion of the Refusal Space.
If Tenant does not timely or properly exercise the Refusal Right, Landlord may
at any time within 180 days thereafter lease such portion of the Refusal Space
(or any portion of the Refusal Space containing not more or less than 1,000
square feet of rentable area than the rentable area of the applicable portion of
the Refusal Space designated in Landlord's Notice), and may at any time
thereafter lease the portion of the Refusal Space, if any, designated as
expansion space in Landlord's Notice, to any third party tenant on such terms
and conditions as are satisfactory to Landlord in its sole discretion, but which
are not substantially less favorable to Landlord than those set forth in
Landlord's Notice for such Refusal Space, without again complying with the
provisions of this Paragraph 29 and affording Tenant a subsequent Refusal Right
to lease such portion of the Refusal Space. No failure to exercise any right
arising under this Paragraph 29 shall affect in any way any option existing or
arising under Paragraphs 30 or 31.
29.3 TERMS
If Tenant exercises a Refusal Right:
(1) The applicable Refusal Space shall be leased to Tenant for a lease
term and Tenant shall pay Rent for the Refusal Space commencing on the
earlier to occur of (a) the date that the Standards of Construction for
such Refusal Space
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are substantially completed, or would have been substantially completed,
but for delays caused by Tenant, or (b) the date Tenant first occupies all
or any part of such Refusal Space for the conduct of business. The term of
lease for such Refusal Space shall be coterminate with the Term for the
original Premises covered by this Lease (notwithstanding, that the
Expiration Date of the Term of this Lease for the original Premises covered
by this Lease may occur after the expiration date of the Third Party Term
specified in Landlord's Notice).
(2) The annual rate of Monthly Base Rent per square floor of rentable
area applicable to such Refusal Space shall be equal to the annual rate(s)
of Monthly Base Rent per square foot of rentable area set forth in
Landlord's Notice (including all fixed and/or indexed increases to said
rate(s)-specified in Landlord's Notice) for the period coinciding with the
Third Party Term. The annual rate of Monthly Base Rent per square foot
applicable to such Refusal Space shall be increased effective as of (a) the
date coinciding with the expiration date of the Third Party Term, and (b)
effective as of the earlier to occur of (i) the date which is five years
after the date coinciding with the expiration date of the Third Party Term
or (ii) the commencement date of the eleventh year of the Term for the
original Premises covered by this Lease (and if such earlier date is the
date specified in clause (i) herein, then the annual rate of Monthly Base
Rent per square foot of rentable area applicable to such Refusal Space
shall be increased again on the date specified in clause (ii) herein), to
an amount equal to the greater of (y) the highest annual rate of Adjusted
Monthly Base Rent per square foot then in effect under this Lease with
respect to any space then covered by this Lease, or (z) the "market rate"
to be designated by Landlord to Tenant on or about such date;
(3) Except as set forth in Paragraph 37, there shall be no abatement
of Monthly Base Rent or Adjusted Monthly Base Rent for such Refusal Space;
(4) The Monthly Base Rent applicable to such Refusal Space shall be
subject to immediate increase under Paragraph 22.2 of this Lease. For
purposes of such increases, (i) Tenant's Proportionate Share for such
Refusal Space shall be calculated by dividing the number of square feet of
rentable area of such Refusal Space (as designated in Landlord's Notice for
such Refusal Space) by the number of square feet of rentable area in the
Building as set forth in Paragraph 1.1L (as adjusted for changes in the
Building), and (ii) the Base Year (with respect to both Taxes and Operating
Expenses) shall be deemed to be the base year specified in Landlord's
Notice for such Refusal Space, and such Base Year shall be deemed changed
as of each date of increase in the annual rate of Hourly Base Rent per
square foot of rentable area for such Refusal Space, as hereinabove
provided, to either the year immediately preceding the year during which
the annual rate of Monthly Base Rent per square foot of rentable area for
such Refusal Space is increased, if the increase in said annual rate is to
the "market rate," or the year being utilized as the Base Year for the
applicable space, if the increase in said annual rate is to the highest
annual rate applicable to any space then covered by this Lease.
(5) Tenant shall be entitled to have the applicable Refusal Space
improved by Landlord in accordance with the standard work letter agreement
then in effect for the Building and with a tenant improvement allowance
equal to the tenant improvement allowance, if any, specified in Landlord's
Notice for such Refusal Right. Tenant shall furnish to Landlord, Tenant's
Plans and Specifications for the tenant improvements
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for such Refusal Space not later than the date which is 90 days prior to
the occupancy date specified in Landlord's Notice for such Refusal Space.
Landlord shall use its reasonable best efforts to cause the tenant
improvements for such Refusal Space to be substantially completed on or
before the occupancy date specified in Landlord's Notice for such Refusal
Space, subject to Tenant caused delays, delays incurred by reason of either
nonstandard work required by Tenant or "long lead time materials" (as
defined in Paragraph 36E) and delays of the nature described in Paragraph
26.7; and
(6) The minimum and maximum rentable areas for the First Option Space
and/or the Second Option Space (as such terms are defined in Paragraph 30),
as specified in Landlord's Notice, shall such be reduced by the rentable
area contained in such Refusal Space, as to which Tenant so exercises its
rights under this Paragraph 29.
All of the provisions of this Lease to the extent not inconsistent with the
above provisions shall apply to such Refusal Space, as to which Tenant so
exercises its rights under this Paragraph 29.
29.4 AMENDMENT
If Tenant exercises a Refusal Right, Landlord and Tenant shall execute and
deliver an amendment to this Lease reflecting the inclusion of the applicable
Refusal Space in the Premises covered by this Lease on the terms provided above,
which amendment shall be executed and delivered promptly after Landlord gives
the applicable Landlord's Notice to Tenant.
29.5 MARKET
For Purposes of this Paragraph 29, market rate" shall have the same meaning
as such term is defined in Paragraph 30.8, substituting for such purposes the
words "Refusal Space" for the words "Option Space," whenever such words appear.
29.6 TERMINATION
Each Refusal Right shall automatically terminate upon the earlier to occur
of (1) the expiration or termination of this Lease, (2) the termination of
Tenant's right to possession of the Premises, (3) the assignment of this Lease
by Tenant (other than an assignment by BN to an affiliate), (4) the existence at
any time during the Term of subleases (excluding subleases by BN to affiliates),
which collectively demise in excess of 50% of the rentable area then comprising
the Premises, or (5) the failure of Tenant to timely or properly exercise such
Refusal Right.
30.
EXPANSION OPTIONS
30.1 DEFINITIONS
For purposes of this Paragraph 30, (i) "First Option Space", shall mean
between 3,000 and 7,500 square feet of rentable area in the Building, the actual
total area (as determined in accordance with Paragraph 22.G hereof) which shall
be hereafter designated by Landlord to Tenant, as hereinafter provided, but
provided that the First Option Space shall all be contiguous to itself, (ii)
"Second Option Space" shall mean between 7,500 and 14,000 square feet of
rentable area in the Building, the actual total area (as determined in
accordance with Paragraph 22.G hereof) and specific location or locations of
which shall be hereafter designated by Landlord to Tenant, as hereinafter
provided, but provided that the Second
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Option Space shall all be contiguous to itself and further provided that the
First Option Space and/or Second Option Space shall include all of the Refusal
Space (as defined in Paragraph 29.1) to the extent not previously included in
the Premises covered by this Lease pursuant to Paragraph 29, or otherwise, and
(iii) "Third Option Space" shall mean between 8,000 and 14,000 square feet of
rentable area in the Building, the actual total area (as determined in
accordance with Paragraph 22.G hereof) and specific location or locations of
which shall be hereafter designated by Landlord to Tenant, as hereinafter
provided, but provided that the Third Option Space shall all be contiguous to
itself. It is agreed that with respect to any Option Space located on the first
floor of the Building such space shall be deemed contiguous to itself
notwithstanding that the first floor fire corridors or any portion thereof, may
separate some portions of said Option Space.
30.2 FIRST EXPANSION OPTION
Tenant shall have an option (the "First Expansion Option") to lease the
First Option Space for a lease term or terms commencing, at Landlords option, on
either one or two dates (but if two dates, such dates shall not be more than one
year apart) to be hereafter designated by Landlord to Tenant, but which shall
occur during the period (the "First Option Period") commencing on the first day
of the third year of the Term and expiring on the last day of the fourth year of
the Term, upon the following terms and conditions:
(1) Tenant may exercise the First Expansion option, upon the following
terms and conditions:
(a) Tenant gives Landlord written notice of Tenant's election to
exercise the First Expansion Option on or before the date which is
eighteen (18) months after the Commencement Date of the Term; and
(b) There does not exist an event of default under Paragraph
12.1(a) of this Lease either on the date that Tenant exercises the
First Expansion Option, or, unless waived in writing by Landlord, on
the proposed lease term commencement date for any First Option Space.
(2) If Tenant exercises the First Expansion Option, Landlord shall
give Tenant written notice or notices ("Landlord's Notices") designating
(a) the date or dates upon which the First Option Space shall be available
for occupancy and which portion of the First Option Space shall be
available on each such date, with respect to such parts of the First Option
Space which have previously been improved, or the date or dates upon which
the First Option Space shall be available for commencement of construction
of tenant improvements, and which portion of the First Option Space shall
be available on each such dates with respect to such parts of the First
Option Space which have not previously been improved, each of which such
Landlord's Notices to be given not later than five months prior to the
applicable availability date set forth therein, and all of such Landlord's
Notices shall collectively provide to Tenant availability dates for all of
the First Option Space within the First Option Period, (b) Landlord's
determination of the "market rate" to apply to each portion of the First
Option Space, and (c) the per rentable square floor tenant improvement
allowance, if any, which Landlord is willing to provide to improve the
applicable First Option Space. Tenant may revoke its exercise of the First
Expansion Option by giving Landlord written notice thereof within 10 days
after Landlord gives Tenant the first Landlord's Notice with respect to the
First Expansion Option, in which event the First Expansion Option shall
thereby terminate in its entirety and
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Tenant shall have further options to lease the First option Space, or any
portions thereof.
30.3 SECOND EXPANSION OPTION
Tenant shall have an option (the "Second Expansion Option") to lease the
Second Option Space for a lease term or terms commencing, at Landlord's option,
on either one or two dates (but if two dates, such dates shall not be more than
one year apart) to be hereafter designated by Landlord to Tenant, but which
shall occur during the period (the "Second Option Period") commencing on the
first day of the fifth year of the Term and expiring on the last day of the
seventh year of the Term, upon the following terms and conditions:
(1) Tenant may exercise the Second Expansion option, upon the
following terms and conditions:
(a) Tenant gives Landlord written notice of Tenant's election to
exercise the Second Expansion Option on or before the date which is 42
months after the Commencement Date of the Term; and
(b) There does not exist an event of default under Paragraph
12.1(a) of this Lease either on the date that Tenant exercises the
Second Expansion Option, or, unless waived in writing by Landlord, on
the proposed lease term commencement date for any Second Option Space.
(2) If Tenant exercises the Second Expansion Option, Landlord shall
give Tenant written notice or notices ("Landlord's Notices") designating
(a) the date or dates upon which the Second Option Space shall be available
for occupancy and which portion of the Second Option Space shall be
available on each such date, with respect to such parts of the Second
Option Space which have previously been improved, or the date or dates upon
which the Second Option Space shall be available for commencement of
construction of tenant improvements, and which portion of the Second Option
Space shall be available on each such date, with respect to such parts of
the Second Option Space which have not previously been improved, each of
which such Landlord's Notices to be given not later than five months prior
to the applicable availability date set forth therein, and all of such
Landlord's Notices shall collectively provide to Tenant availability dates
for all of the Second Option Space within the Second Option Period, (b)
Landlord's determination of the "market rate" to apply to each portion of
the Second Option Space, and (c) the per rentable square foot tenant
improvement allowance, if any, which Landlord is willing to provide to
improve the applicable Second Option Space. Tenant may revoke its exercise
of the Second Expansion Option by giving Landlord written notice thereof
within 10 days after Landlord gives Tenant the first Landlord's Notice with
respect to the Second Expansion Option, in which event the Second Expansion
Option shall thereby terminate in its entirety and Tenant shall have no
further options to lease the Second Option Space, or any portions thereof.
30.4 THIRD EXPANSION OPTION
Tenant shall have an option (the "Third Expansion Option") to lease the
Third Option Space for a lease term or terms commencing, at Landlord's option,
on either one or two dates (but if two dates, such dates shall not be more than
one year apart) to be hereafter designated by Landlord to Tenant, but which
shall occur during the period (the "Third Option Period") commencing on the
first day of
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the ninth year of the Term and expiring on the last day of the eleventh year of
the Term, upon the following terms and conditions:
(1) Tenant may exercise the Third Expansion Option, upon the
following terms and conditions:
(a) Tenant gives Landlord written notice of Tenant's election to
exercise the Third Expansion Option on or before the date which is 90
months after the Commencement Date of the Term; and
(b) There does not exist an event of default under Paragraph
12.1(a) of this Lease either on the date that Tenant exercises the
Third Expansion Option, or, unless waived in writing by Landlord, on
the proposed lease term commencement date for any Third Option Space.
(2) Landlord shall give Tenant written notice or notices ("Landlord's
Notice") designating (a) the date or dates upon which the Third Option
Space shall be available for occupancy and which portion of the Third
Option Space shall be available on each such date, with respect to such
parts of the Third Option Space which have previously been improved, or the
date or dates upon which the Third Option Space shall be available for
commencement of construction of tenant improvements, and which portion of
the Third Option Space shall be available on each such date, with respect
to such parts of the Third Option Space which have not previously been
improved, each of which such Landlord's Notices to be given not later than
five months prior to the applicable availability date set forth therein,
and all of such Landlord's Notices shall collectively provide to Tenant
availability dates for all of the Third Option Space within the Third
Option Period, (b) Landlord's determination of the "market rate" to apply
to each portion of the Third Option Space, and (c) the per rentable square
foot tenant improvement allowance, if any, which Landlord is willing to
provide to improve the applicable Third Option Space. Tenant may revoke its
exercise of the Third Expansion Option by giving Landlord written notice
thereof within 10 days after Landlord gives Tenant the first Landlord's
Notice with respect to the Third Expansion Option, in which event the Third
Expansion Option shall thereby terminate in its entirety and Tenant shall
have no further options to lease the Third Option Space, or any portions
thereof.
30.5 OFF-LEASE EXPANSION OPTIONS
Landlord agrees to give Tenant written notice ("Landlord's Notice") of the
expiration date of each lease (a "Third Party Lease") hereafter entered into by
Landlord and a third party tenant at any time during the Term of this Lease for
any space (the "Off-Lease Option Space") in the Building, which said Landlord's
notice shall be given not later than the date which is six months prior to the
expiration date of such Third Party Lease (after taking into account all renewal
or extension terms of such Third Party Lease, irrespective of whether such
renewal or extension terms arise by reason of the exercise by the tenant
thereunder of any renewal or extension options or by the separate negotiation
between Landlord and such tenant); provided, however, that if at any time any
Third Party Lease shall terminate prior to its expiration date, whether by
reason of a default by the tenant thereunder, or otherwise, and the tenant
thereunder has vacated the Off-Lease Option Space covered by such Third Party
Lease, Landlord may give Tenant an additional Landlord's Notice with respect to
such Third Party Lease after such termination and vacation. Each such
Landlord's Notice shall designate (a) the actual total rentable square feet (as
determined in accordance with Paragraph 22.1G) and specific location of the
applicable Off-Lease Option Space, (b) the date
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upon which the applicable Off-Lease Option Space shall be available for
occupancy, which date shall be the day immediately following the expiration date
of the applicable Third Party Lease (or the date which is 30 days after the date
Landlord's Notice is given to Tenant, if such Landlord's Notice pertains to an
early termination of a Third Party Lease), but provided, that such date shall be
further extended if necessary, to the date upon which the tenant under said
Third Party Lease vacates the Off-Lease Option Space, it being understood that
Landlord agrees to use its reasonable best efforts to cause such tenant to
vacate as soon as possible, (c) Landlord's determination of the "market rate" to
apply to the applicable Off-Lease Option Space, and (d) if all or any part of
the applicable Off-Lease Option Space was intended by Landlord to comprise any
part of the First Option Space, the Second Option Space and/or the Third Option
Space, and if so, which part of such Option Space said Off-Lease Option Space,
or applicable part thereof, was to comprise. Tenant shall thereupon have an
option (an "Off-Lease Expansion Option") to lease all, but not less than all, of
the Off-Lease Option Space described in Landlord's Notice, upon the following
terms and conditions:
(1) Tenant gives Landlord written notice of Tenant's election to
exercise the Off-Lease Expansion Option within 30 days after Landlord gives
Landlord's Notice to Tenant; and
(2) There does not exist an event of default under Paragraph 12.1(a)
of this Lease either on the date that Tenant exercises the Off-Lease
Expansion Option or unless waived in writing by Landlord, on the proposed
lease term commencement date for the applicable Off-Lease Option Space.
Notwithstanding the foregoing to the contrary, with respect to any space or
spaces in the Building at any location or locations to be hereafter designated
by Landlord but which space or spaces do not contain more than 12,000 square
feet of rentable area in the aggregate, the Landlord's Notice or Notices for
such space may subordinate Tenant's Off-Lease Expansion Option therein to any
expansion option or right then in favor of any other tenant of the Building.
30.6 TERMS
If Tenant exercises any Expansion Option granted in this Paragraph 30:
(1) The applicable Option Space shall be leased to Tenant for a lease
term, and Tenant shall pay Rent for such Option Space, commencing on the
earlier to occur of (a) the occupancy date specified in Landlord's Notice
for such Option Space, if such Option Space has previously been improved,
unless Tenant desires to make further tenant improvements to such Option
Space, in which event such date shall be extended to the reasonable
completion date for such tenant improvements but in no event shall such
extension be more than 60 days, (b) the date that the Standards of
Construction for such Option Space are substantially completed, or would
have been substantially completed but for delays caused by Tenant, if such
Option Space has not previously been improved, (c) the date Tenant first
occupies such Option Space for the conduct of business. The term of lease
for all of such Option Space shall be coterminate with the Term for the
original Premises covered by this Lease;
(2) The annual rate of Monthly Base Rent per square foot applicable to
such Option Space shall be equal to the greater of (a) the "market rate,"
as determined pursuant to Paragraph 30.08, or (b) the highest annual rate
of Adjusted Monthly Base Rent per square foot then in effect under this
Lease with
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respect to any space then covered by this Lease. If the commencement date
of the lease term for such Option Space is prior to the commencement date
of the eleventh year of the Term for the original Premises covered by this
Lease, the annual rate of Monthly Base Rent per square foot applicable to
such Option Space shall be increased effective as of the earlier to occur
of (i) the date which is five years after the commencement date of the
lease term for such Option Space, or (ii) the commencement date of the
eleventh year of the Term for the original Premises covered by this Lease
(and if such earlier date is the date specified in clause (i) herein then
the annual rate of Monthly Base Rent per square foot applicable to such
Option Space shall be increased again on the date specified in clause (ii)
herein), to an amount equal to the greater of (y) the highest annual rate
of Adjusted Monthly Base Rent per square foot then in effect under this
Lease with respect to any space then covered by this Lease, or (z) the
"market rate" designated by Landlord to Tenant on or about such date (and
to be determined pursuant to Paragraph 30-08). The Monthly Base Rent
applicable to such Option Space shall be subject to immediate increase
under Paragraph 22.02 of this Lease. For purposes of such increases, (i)
Tenant's Proportionate Share for such Option Space shall be calculated by
dividing the number of square feet of rentable area of such Option Space
(as designated in Landlord's Notice for such Option Space) by the number of
square feet of rentable area in the Building as set forth in Paragraph 1.1L
(as adjusted for changes in the Building), and (ii) the Base Year (with
respect to both Taxes and Operating Expenses) shall be deemed changed to
either the year immediately preceding the year during which the lease term
for such Option Space commences, if the annual rate of Monthly Base Rent
per square foot of rentable area applicable to such Option Space is the
"market rate", or the year(s) being utilized as the Base Year for the
applicable space, if the annual rate of Monthly Base Rent per square foot
of rentable area applicable to such Option Space is the highest annual rate
of Monthly Base Rent per square foot of rentable area applicable to any
space then covered by this Lease, and such Base Year shall be deemed
further changed as of each date of increase in the annual rate of Monthly
Base Rent per square foot of rentable area for such Option Space, as
hereinabove provided, to either the year during which the annual rate of
Monthly Base Rent per square foot of rentable area for such Option Space is
increased, if the increase in said annual rate is to the "market rate", or
the year being utilized as the Base Year for the applicable space, if the
increase in said annual rate is to the highest annual rate applicable to
any space then covered by this Lease.
(3) There shall be no abatement of Monthly Base Rent or Adjusted
Monthly Base Rent for such Option Space (except as specifically provided in
Paragraph 30.6(1)(a) or pursuant to Paragraph 37); and
(4) If such Option Space has previously been improved, Tenant shall
accept such Option Space in an "as-is" physical condition (save and except
any prior damage thereto from fire or other casualty, which damage shall be
repaired by Landlord), and Tenant shall not be entitled to receive any
agreement, credit or allowance from Landlord for the improvement of such
Option Space. If such Option Space has not previously been improved,
Tenant shall be entitled to have such Option Space improved by Landlord in
accordance with the standard work letter and Standards of Construction then
in effect for the Building, and Tenant shall be entitled to the tenant
improvement allowance, if any, specified in Landlord's Notice for such
Option Space. Tenant shall furnish to Landlord, Tenant's Plans and
Specifications for the tenant
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improvements for such Option Space not later than the date which is 90 days
prior to the occupancy date specified in Landlord's Notice for such Option
Space. Landlord shall use its reasonable best efforts to cause the tenant
improvements for such Option Space to be substantially completed on or
before the occupancy date specified in Landlord's Notice for such Option
Space, subject to Tenant caused delays, delays incurred by reason either of
non-standard work required by Tenant or "long lead time materials" (as
defined in Paragraph 36E) and delays of the nature described in Paragraph
26.7.
(5) If such Expansion Option is an Off-Lease Expansion Option, and if
Landlord's Notice specifies that Landlord intended all or any part of the
applicable Off-Lease Option Space to comprise part of the First Option
Spaces Second Option Space and/or Third Option Space, then the minimum and
maximum rentable areas of the First Option Space, Second Option Space
and/or Third Option Space, as the case may be, shall each thereby be deemed
reduced by the area contained in the applicable Off-Lease Option Space as
to which Tenant exercises its right to lease hereunder.
All of the provisions of this Lease to the extent not inconsistent with the
above provisions shall apply to the applicable Option Space.
30.7 AMENDMENT
If Tenant exercises any Expansion Option, Landlord and Tenant shall execute
and deliver an amendment to this Lease reflecting the inclusion of the
applicable Option Space in the Premises covered by this Lease on the terms
provided above, which Amendment shall be executed and delivered promptly after
Landlord gives Landlord's Notice to Tenant.
30.8 MARKET
For purposes of this Paragraph 30, "market rate" shall mean the annual
rate(s) of Monthly Base Rent per square foot (plus all fixed and/or indexed
increases to said rate(s)), then prevailing under leases with terms commencing
on or about the commencement date of the lease term for the applicable Option
Space, or the effective date of increase in the annual rate of Monthly Base Rent
per square foot, as the case may be, for comparable space in first-class office
buildings (including the Building) located within the area (the "Corridor") 1/2
mile north and 1/2 mile south of Interstate 5 Tollway as it exists for a
distance of 3 miles east and 3 miles west from Naperville Road, taking into
account all relevant factors, including condition, age, quality and area of such
Option Space, allowances to tenants (e.g. payments to tenants for construction
of tenant improvements or costs of moving), operating costs reflected in base
rental rates, expansion and renewal options, amenities (of the building and
surrounding area, such as access to major highways and proximity to hotels and
restaurants), parking availability and costs thereof, services included and
quality of construction. With respect to the "market rate" designated in any
Landlord's Notice, the same shall be binding upon Landlord and Tenant unless
Tenant disputes same by giving Landlord written notice thereof within 15 days
after Landlord gives Landlord's Notice to Tenant. If Tenant so disputes any
"market rate", Landlord and Tenant agree to attempt in good faith to negotiate
and agree upon such "market rate" (including at least-one personal meeting). If
Landlord and Tenant have failed to agree on the "market rate" within 30 days
after Tenant gives Tenant's written notice of dispute to Landlord, the "market
rate" shall be determined by arbitration in accordance with Paragraph 35 hereof.
Notwithstanding any dispute between Landlord and Tenant concerning "market
rate," Tenant shall pay the "market rate"
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designated in the applicable Landlord's Notice, until such time as such dispute
may be conclusively decided, after which Tenant shall pay at the rate decided
and shall be entitled to recover from Landlord any excess rent previously paid,
plus interest thereon at the rate specified in Paragraph 26.1.
30.9 TERMINATION
Each Expansion Option described herein shall automatically terminate and
become null and void upon the earlier to occur of (1) the expiration or
termination of this Lease, (2) the termination of Tenant's right to possession
of the Premises under the terms of this Lease, (3) the assignment of this Lease
by Tenant (other than an assignment by BN to an affiliate), (4) the existence at
any time during the Term of subleases (excluding subleases to affiliates of BN),
which collectively demise in excess of 50% of the rentable area then comprising
the Premises, or (5) the failure of Tenant to timely or properly exercise such
Expansion Option.
31.
RENEWAL OPTIONS
31.1 RENEWAL OPTIONS
Tenant shall have two separate option(s) (the "Renewal Options",
collectively) to renew the original Term for two separate, successive periods of
five (5) years each, such two (2) periods to follow consecutively upon the
expiration of the initial Term (said five (5) periods being hereinafter
collectively called the "Renewal Terms"), each such Renewal Term to apply,
notwithstanding any other provisions of this Lease, to the contrary, to all (but
not less than all) of the Premises (including the original Premises plus all
Option Space and Refusal Space) demised under this Lease as of the expiration
date of the immediately preceding Term, upon the following terms and conditions:
(1) Tenant gives Landlord written notice or its election to exercise
each such Renewal Option as follows: (a) with respect to the First Renewal
Option, such notice shall be given not less than the date which is 15
months prior to the Expiration Date of the initial Term; and (b) with
respect to the second Renewal Option, such notice shall be given not later
then the date which is 15 months prior to the Expiration Date of the first
Renewal Term; and
(2) There does not exist an event of default under Paragraph 12.1(a)
of this Lease either on the date Tenant delivers any notice required under
(1) above or, unless waived in writing by Landlord, on the Expiration Date
of the initial Term, or on the Expiration Date of the first Renewal Term,
as applicable.
If Tenant exercises any Renewal Option, Landlord shall give Tenant a written
notice ("Landlord's Notice") not later than 6 months prior to the commencement
date of the applicable Renewal Term, designating Landlord's determination of the
"market rate."
31.2 TERMS
If Tenant exercises either Renewal Option:
(1) The annual rate of Monthly Base Rent per square foot of rentable
area of the Premises (including the original Premises and all Option Space
and Refusal Space then included in the Premises) shall be equal to the
greater of (a) the
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"market rate," as designated in Landlord's Notice for such Renewal Term
(subject to Paragraph 31.4), or (b) the highest annual rate of Adjusted
Monthly Base Rent per square foot of rentable area in effect under this
Lease as of the Expiration Date of the Term immediately preceding the
applicable Renewal Term, with respect to any space then covered by this
Lease. The Monthly Base Rent applicable to the Premises for such Renewal
Term shall be subject to immediate increase under Paragraph 22.2 of this
Lease. For purposes of such increases, (i) Tenant's Proportionate Share
for the applicable Renewal Term shall be calculated by dividing the number
of square feet of rentable area of the entire Premises (including the
original Premises and all Option Space and Refusal Space then included in
the Premises) by the number of square feet of rentable area in the Building
as set forth in Paragraph 1.1L (as adjusted for changes to the Building),
and (ii) the Base Year (with respect to both Operating Expenses and Taxes)
shall be deemed changed to either the year, immediately preceding the year
during which the applicable Renewal Term commences, if the annual rate of
Monthly Base Rent per square foot of rentable area to apply to the
applicable Renewal Term is the "market rate," or the year(s) being utilized
as the Base Year for the applicable space, if the annual rate of Monthly
Base Rent per square foot of rentable area to apply to the applicable
Renewal Term is the highest annual rate of Monthly Base Rent per square
foot of rentable area applicable to any space then covered by this Lease;
(2) Except as provided in Paragraph 37, there shall be no abatement of
Monthly Base Rent or Adjusted Monthly Base Rent for such Renewal Term;
(3) Tenant shall accept the Premises on the commencement date of such
Renewal Term in an "as-is" physical condition (save and except any prior
damage thereto from fire or other casualty, which damage shall be repaired
by Landlord), and Tenant shall not be entitled to receive any agreement,
credit or allowance from Landlord for the improvement of the Premises;
(4) The phrase "but only if the term of such sublease expires on any
date occurring during the last year of the Term of this Lease" appearing in
clause (ii) of the fourth sentence of Paragraph 8.2 shall not apply to any
assignment or sublease entered into during any Renewal Term, and Landlord
shall have full recapture rights under Paragraph 8.2 with respect to any
such assignment or sublease;
(5) The provisions of Paragraphs 29, 30 and 36 shall not apply to such
Renewal Term; and
(6) Tenant may not in any event exercise the Renewal Options in such
manner as to extend the initial Term by a total of more than ten years.
All of the provision of this Lease to the extent not inconsistent with the above
provisions shall apply to such Renewal Term.
31.3 AMENDMENT
If Tenant exercises any Renewal Option, Landlord and Tenant shall execute
and deliver an amendment to this Lease reflecting the renewal of the initial
Term, or the first Renewal Term, as the case may be, on the terms provided
above, which amendment shall be executed and delivered promptly after Landlord
gives Landlord's Notice to Tenant.
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31.4 DEFINITIONS
For purposes of this Paragraph 31, "market rate," shall mean the annual
rate(s) of Monthly Base Rent per square foot (plus all fixed and/or indexed
increases to said rate(s)), then prevailing under leases with terms commencing
on or about the commencement date of the applicable Renewal Term, for comparable
space in first-class office buildings (including the Building) located within
the Corridor, taking into account all relevant factors, including condition,
age, quality and area of the Premises, allowances to tenants (e.g. payments to
tenants for construction of tenant improvements or costs of moving), operating
costs reflected in base rental rates, expansion and renewal options, amenities
(of the building and surrounding area, such as access to major highways and
proximity to hotels and restaurants), parking availability and costs thereof,
services included and quality of construction. With respect to the "market rate"
designated in Landlord's Notice, the same shall be binding upon Landlord and
Tenant unless Tenant disputes same by giving Landlord written notice thereof
within 15 days after Landlord gives Landlord's Notice to Tenant. If Tenant so
disputes any "market rate," Landlord and Tenant agree to attempt in good faith
to negotiate and agree upon such "market rate" (including at least one personal
meeting). If Landlord and Tenant have failed to agree on the "market rate"
within 30 days after Tenant gives Tenant's written notice of dispute to
Landlord, the "market rate" shall be determined by arbitration in accordance
with Paragraph 35 hereof. Notwithstanding any dispute between Landlord and
Tenant concerning "market rate", Tenant shall pay the "market rate" designated
in the applicable Landlord's Notice, until such time as such dispute may be
conclusively decided, after which Tenant shall pay at the rate decided and shall
be entitled to recover from Landlord any excess rent previously paid, plus
interest thereon at the rate specified in Paragraph 26.1.
31.5 TERMINATION
All Renewal Options shall automatically terminate and become null and void
upon the earlier to occur of (1) the expiration or termination of this Lease,
(2) the termination of Tenant's right to possession of the Premises, (3) the
assignment of this Lease by Tenant (other than an assignment by BN to an
affiliate), (4) the existence at any time during the Term of subleases
(excluding subleases BN to affiliates), which collectively demise in excess of
50% of the rentable area then comprising the Premises, or (5) the failure of
Tenant to timely or properly exercise any Renewal Option.
32.
MICROWAVE
Subject to all applicable codes and legal restrictions, Landlord grants to
Tenant the right to install, operate and maintain on the roof of the Building at
all times during the Term, up to but not more than three microwave dishes, each
not to exceed 8 feet in diameter, and up to but not more than six whip antennas.
The microwave dishes and whip antennas shall be installed at locations selected
by Tenant and approved by Landlord (which approval shall not be unreasonably
withheld or delayed) and shall be compatible with the design requirements of the
Building. To the extent permitted by law, Landlord shall prohibit the
installation of any additional microwave dishes, antennae or towers to the roof
of the Building which will interfere with Tenant's microwave dishes or antennae.
In addition, Tenant shall have the right to construct equipment enclosures at
locations to be approved by Landlord for accommodation of such microwave dishes
and antennae installed on said roof, if required by Tenant which approval shall
not be
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unreasonably withheld or delayed. Tenant shall have the right to install
necessary conduit and sleeving from the roof to the point of connection in the
Premises. All work for installation of said microwave dishes and whip antennae
shall be performed in accordance with the provisions of Paragraph 10 of this
Lease, specifically including, without limitation, the right of Landlord to
approve Tenant's plans and specifications and the right of Landlord to supervise
such installations, which approval shall not be unreasonably withheld or
delayed, and which supervision will be reasonable and will not interfere with
the progress of such installations. The installation, operation, maintenance and
removal of said dishes and antennae shall be at Tenant's sole cost, liability
and expense (and such costs shall not be included for purposes of determining
Landlord's $15 per square foot buildout cost under Paragraph C of the Work
Agreement). Tenant agrees to obtain all necessary federal, state, and local
licenses and permits necessary to install, operate and maintain said dishes and
antennae. Tenant agrees to install, operate and maintain said dishes and
antennae in a good, safe, legal and businesslike manner and so as to avoid any
interference with the operation of the Building or the use or enjoyment by any
other tenant of the Building or of its promises (except possible interference
with other installations on the roof of the Building). Tenant agrees to
indemnify, defend and hold harmless Landlord, its beneficiaries and each of
their respective agents and employees from all claims, liabilities, damages and
expenses (including attorneys' fees) asserted against or incurred by any of said
parties and arising from or by reason of the installation, maintenance,
operation or removal of said dishes or antennae (unless the same is based upon
contractual rights or restrictions given or granted to, or agreed upon with,
third parties by Landlord, its beneficiary, or their respective agents or
employees); provided, that nothing herein shall require Tenant to indemnify,
defend or hold harmless any party for any liability or expenses occasioned by
the fault or negligence of such party or any officer, agent or employee of such
party. Upon the expiration or termination of this Lease or termination of
Tenant's right to possession of the Premises, Tenant, at its expense, shall
remove said dishes and/or antennae, if requested by Landlord, and repair and
restore any damage to the Building caused by such removal.
33.
BUILDING LOBBY
Landlord agrees to consult with Tenant with respect to all art work which
Landlord desires to install in the ground floor lobby of the Building. Tenant
shall have the right to approve all such art work and Landlord will not install
any art without Tenant's approval; provided, however, that nothing contained
herein shall require Landlord to install any art work in said lobby. Landlord,
at Landlord's expense and at Tenant's option, shall upon written notice from
Tenant to Landlord given prior to March 1, 1985, change the present color of the
vinyl wallcovering located in the atrium of the Building to a color mutually
acceptable to Tenant and Landlord.
34.
IDENTITY
Subject to applicable codes and legal restrictions, Tenant may install one
monument sign (the "Sign") identifying Tenant and to be located near (but not
on) the exterior of the Building, which location shall be designated by
Landlord. The Sign shall be consistent with the design, size, color, shape and
materials of
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existing exterior sign monuments in the Naperville Corporate Center Subdivision
and shall be subject to Landlord's approval as to such design, size, color,
shape and materials, which consent shall not be unreasonably withheld or
delayed. Tenant shall provide Landlord on or before September 1, 1985, Tenant's
plans, drawings and specifications for the Sign. The installation, operation,
maintenance and removal of the Sign shall be at Tenant's sole cost, liability
and expense (and such costs shall not be included for purposes of determining
Landlord's $15 per square foot buildout cost under Paragraph C of the Work
Agreement). All work necessary to install the Sign shall be performed in
accordance with the provisions of Paragraph 10 of this Lease. Tenant agrees to
obtain all necessary federal, state and local licenses and permits to install,
operate and maintain the Sign. Except for liability or expenses occasioned by
the fault or negligence of Landlord, its beneficiary, or their respective agents
or employees, Tenant agrees to indemnify, defend and hold harmless Landlord, its
beneficiaries and each of their respective agents and employees from all claims,
liabilities, damages and expenses (including attorneys' fees) asserted against
or incurred by any of said parties and arising from or by reason of the
installation maintenance, operation or removal of the Sign (unless the same is
based upon contractual rights or restrictions given or granted to, or agreed
upon with, third parties by Landlord, its beneficiary or their respective agents
or employees). Upon the expiration or termination of this Lease or termination
of Tenant's right to possession of the Premises, Tenant, at its expense, shall
remove the Sign, if requested by Landlord and repair and restore any damage
caused by such removal. Landlord agrees that so long as (i) the space leased
under this Lease comprises not less than 40% of the rentable area of the
Building, and (ii) BN (or its affiliates) actually occupy not less than 25% of
the rentable area of the Building, then (y) Landlord will not install or permit
the installation of any signs on the exterior of the Building identifying any
other tenant of the Building or any owner or mortgagee of the Building
(excluding signs identifying any retail tenant of the Building, including,
without limitation, any banks travel agency or restaurant), or (z) name the
Building after any other tenant of the Building or any owner or mortgagee of the
Building or any other person or party without Tenant's prior written consent.
Nothing contained herein shall be deemed a grant by Landlord to Tenant of any
exclusive sign rights or the right to name the Building, and, Landlord expressly
reserves the right to install and to permit other tenant, and users to install
signs either inside (including the ground floor lobby) or outside the Building,
including, without limitation, the right to install exterior monuments or other
signs identifying other tenants of the Building, or identifying the Building as
the 1230 E. Diehl Road Building, or such other name or names which do not
include any corporate or individual identity as Landlord may hereafter designate
from time to time. Notwithstanding the foregoing to the contrary, Landlord
agrees that Landlord will not install or permit the installation of any sign in
the ground floor lobby of the Building, or any interior sign that is visible
from the outside of the Building, or any exterior free-standing pylon (or other
type) sign identifying any tenant of the Building, if Landlord exercising good
faith judgment, determines that such sign will materially detract from the
image, appearance and first-class nature of the Building.
35.
ARBITRATION
Except as hereinafter provided to the contrary, any matter in dispute under
this Lease shall be settled by arbitration on the request of either party
hereto; provided, however, that with respect to any dispute concerning the
payment of Rent, as
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<PAGE>
determined by Landlord (including, without limitation, Landlord's determination
of adjustments to Monthly Base Rent under Paragraph 22 hereof and Landlord's
determination of the "market rate" hereunder) or the performance of any
obligation of Tenant hereunder as determined by Landlord, Tenant shall not be
entitled to withhold payment of such Rent or refrain from performance of such
obligation pending such arbitration decision, and Landlord reserves all rights
and remedies of Landlord (judicial, or otherwise, including without limitation,
the right to institute forcible entry and detainer actions) for nonpayment of
Rent by Tenant under this Lease. Such arbitration shall be performed in
accordance with the following provisions:
(1) The party desiring such arbitration shall give written notice to
that effect to the other party and shall in such notice appoint a
disinterested person of recognized competence in the field involved as
arbitrator on its behalf. Within fifteen (15) days thereafter, the other
party shall by written notice to the original party, appoint a second
disinterested person of recognized competence in such field. Within twenty
(20) days thereafter, the arbitrators thus appointed shall appoint a third
disinterested person of recognized competence in such field, and such three
arbitrators shall as promptly as possible determine such matter; provided,
however, that:
(a) if the second arbitrator shall not have been appointed as
aforesaid, the first arbitrator shall proceed to determine such
matter; and
(b) if the two arbitrators appointed by the parties shall be
unable to agree, within twenty (20) days after the appointment of the
second arbitrator, upon the appointment of a third arbitrator, they
shall give written notice of such failure to agree to the parties,
and, if the parties fail to agree upon the selection of such third
arbitrator within twenty (20) days after the arbitrators appointed by
the parties give notice as aforesaid, then within twenty (20) days
thereafter either of the parties upon written notice to the other
party hereto may request such appointment by the American Arbitration
Association (or any organization successor thereto), or in its
absence, refusal, failure or inability to act, may apply for a court
appointment of such arbitrator.
If any arbitrator shall die, become disqualified or incapacitated, or shall fail
or refuse to act before the matter or matters subjected to such arbitration
shall have been determined, then in place of such arbitrator, an arbitrator
shall promptly be appointed in the same manner as the arbitrator who shall have
died or become disqualified or incapacitated or shall have failed or refused to
act.
(2) The arbitration shall be conducted to the extent consistent with
this Paragraph 35, in accordance with the then prevailing rules of the
American Arbitration Association (or any organization successor thereto) in
the City of Chicago, Illinois. In any such arbitration proceeding each
party shall have full access to the relevant books and records of the other
party and the power to call for testimony any employee, agent or officer of
any other party and all other rights to discovery afforded under the then
applicable Federal Rules of Civil Procedure or rules or laws applicable to
federal court proceedings adopted in lieu thereof, all of which shall be
fully enforceable by the arbitrators or, if they fail to effect such an
enforcement, by the United States District
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<PAGE>
Court for the Northern District of Illinois or any state court having
jurisdiction.
(3) The arbitrators shall render their decision and award, upon the
concurrence of at least two of their number, unless only one arbitrator
shall have been appointed and in that event the decision of one arbitrator
shall be binding, within thirty (30) days after the appointment of the
third arbitrator. Such decision and award shall be in writing and
counterpart copies thereof shall be delivered to each of the parties. In
rendering such decision and award, the arbitrators shall not add to,
subtract from or otherwise modify the provisions of this Lease. Judgment in
a court of competent jurisdiction may be had on the decision and award of
the arbitrators so rendered.
(4) If for any reason whatsoever a written decision and award of the
arbitrators shall not be rendered within sixty (60) days after the
appointment of such arbitrators, then, at any time thereafter before such
decision and award shall have been rendered, either party may apply to the
United States District Court of the Northern District of Illinois or to any
other court having jurisdiction and exercising the functions similar to
those now exercised by such court, by action, proceeding or otherwise (but
not by a new arbitration proceeding) as may be proper to determine the
question in dispute consistently with the provisions of this Lease.
(5) Each party shall pay the fees and expenses of the one of the two
original arbitrators appointed by or for such party and the fees and
expenses of the third arbitrator and all other expenses of the arbitration
shall be borne by the parties equally.
(6) Notwithstanding the provisions of this Paragraph 35, if any delay
in complying with any requirement of this Lease by Tenant might subject
Landlord to any fine or penalty, or to prosecution for a crime, or if it
would constitute a default by Landlord under any mortgage or lease,
Landlord may exercise its right under Paragraph 26.11 to remedy such
default and in such event the questions to be determined by the arbitrators
under this Paragraph 35 shall include whether and to what extent Tenant is
liable under Paragraph 26.11 for Landlord's costs and expenses of curing
such default and whether and to what extent Landlord may be liable to
Tenant for damages.
(7) Notwithstanding anything to the contrary elsewhere provided in
this Lease, if the subject matter of a dispute which is provided in this
Lease to be determined by arbitration is one which would directly affect
the liability of an insurer under any of the policies of insurance referred
to in Paragraph 17 and the party which is the insured under such policy so
notifies the other party, the dispute shall not be determined by
arbitration and the parties shall be left to such other remedies as they
may have.
36.
CANCELLATION OPTIONS
A. If the tenant improvements (the "Tenant Work") which Landlord is
obligated to perform under the Work Agreement with respect only to the original
Premises covered by this Lease is not substantially completed on or before June
1, 1985 (which date shall be extended by the number of days of all delays (i)
causes by Tenant under this Lease, (ii) attributable to any non-standard work
required by Tenant or "long lead time materials" or (iii) of the
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nature described in Paragraph 26.07). Tenant shall be entitled to a one day
abatement of Monthly Base Rent for each day in the period commencing on June 1,
1985 (as such date may be extended as aforesaid) and expiring on the date upon
which the Tenant Work is substantially completed, which abatement shall commence
to apply on the day immediately following the expiration date of the first 1-1/2
years of the Term.
B. If the Tenant Work is not substantially completed on or before November
1, 1985 (which date shall be extended by the number of days in all delays (i)
caused by Tenant under this Lease, (ii) attributable to any nonstandard work
required by Tenant or "long lead time materials", or (iii) of the nature
described in Paragraph 26.07), Tenant shall have the option to cancel this Lease
by giving Landlord written notice of cancellation prior to November 30, 1985 (as
such date may be extended as aforesaid).
C. If the Tenant Work is not substantially completed on or before May 1,
1986 (which date shall be extended by the number of days in all delays (i)
caused by Tenant under this Lease, or (ii) attributable to any non-standard work
required by Tenant or "long lead time materials," but which date shall not be
extended by any delays of the nature described in Paragraph 26.07), Tenant shall
have the option to cancel this Lease by giving Landlord written notice of
cancellation prior to May 31, 1986 as such date may be extended as aforesaid).
D. The abatement and cancellation options specified in Paragraph A, B and C
above shall constitute Tenant's sole remedies and Landlord's sole liability for
failure of Landlord to substantially complete the Tenant Work.
E. For purposes of this Lease (including the Work Agreement), "long lead
time materials" shall mean those non-standard items which cannot reasonably be
purchased and installed by Landlord within the time necessary to substantially
complete the applicable tenant improvements on or before the date such tenant
improvements are to be substantially completed under the applicable provisions
of this Lease.
37.
RENT ABATEMENT
If (i) by reason of any failure or delay in furnishing any service or
utility described in Paragraph 5.01 or Paragraph 5.02 above, or by reason of any
conditions requiring repairs, maintenance or corrections to the Building
required to be made by Landlord under Paragraphs 7, 9 or 19 hereof, the
Premises, or any portion thereof, are rendered untenantable or normal access to
the same is rendered impractical for substantial portions of normal business
hours of 5 consecutive business days, and (ii) Tenant gives Landlord written
notice promptly upon the occurrence of such untenantability, and (iii) Tenant
vacates the Premises, or the portions thereof which are rendered untenantable
(save and except for any occupancy thereof which is of an extraordinary nature
necessary to preserve systems, files and security), then Adjusted Monthly Base
Rent shall abate (not be owing) for the period (the "Abatement Period")
commencing on the day immediately following the aforesaid 5-day period and
expiring on the earlier to occur of (y) the date of restoration of such services
or utilities, or completion of such repairs, maintenance or corrections, as the
case may be, or (z) the date upon which Tenant resumes occupancy of the
Premises, or applicable portion thereof, for the conduct of business. If the
Abatement Period exceeds 120 days, Tenant may terminate this Lease by giving
Landlord written notice of termination prior to the expiration of 10 days after
the expiration
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<PAGE>
of said 120-day period, in which event neither party shall have any further
rights, estates, liabilities or obligations under this Lease, except as
otherwise specifically survive the termination of this Lease. Notwithstanding
the previous sentence to the contrary, if the failure or delay in furnishing
services or utilities or completing the repairs, maintenance or corrections to
the Building, as the case may be, is attributable in whole or in part to any
cause specified in Paragraph 26.07, the period set forth in the preceding
sentence shall be extended for the period of the failure or delay attributable
to such causes, but not more than 180 days in the aggregate.
LANDLORD: TENANT:
- --------- -------
AMERICAN NATIONAL BANK AND TRUST BURLINGTON NORTHERN RAILROAD
COMPANY OF CHICAGO, not personally COMPANY, a Delaware corporation
but solely as Trustee under a Trust
Agreement dated November 22, 1983
and known as Trust No. 59764
No. 59764 By:_______________________________
Title:____________________________
By:_____________________________
Title:__________________________ Attest:___________________________
(SEAL) Title:____________________________
(SEAL)
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<PAGE>
EXHIBIT A
---------
THAT PART OF LOT 3 IN NAPERVILLE CORPORATE CENTER, BEING A SUBDIVISION IN
SECTION 5, TOWNSHIP 38 NORTH, RANGE 10, EAST OF THE THIRD PRINCIPAL MERIDIAN,
ACCORDING TO THE PLAT THEREOF RECORDED OCTOBER 4, 1979 AS DOCUMENT R79-90422,
DESCRIBED AS COMMENCING AT THE NORTH EAST CORNER OF SAID LOT 3 (BEING ALSO THE
NORTH WEST CORNER OF LOT 2 IN SAID NAPERVILLE CORPORATE CENTER); THENCE SOUTH 0
DEGREES 18 MINUTES 13 SECONDS EAST ALONG THE EAST LINE OF SAID LOT 3 A DISTANCE
OF 565.90 FEET TO THE SOUTH WEST CORNER OF SAID LOT 2; THENCE SOUTH 89 DEGREES
41 MINUTES 47 SECONDS WEST ALONG THE WESTERLY EXTENSION OF THE SOUTH LINE OF
SAID LOT 2, A DISTANCE OF 295.02 FEET; THENCE NORTH 0 DEGREES 18 MINUTES 13
SECONDS WEST 40.00 FEET; THENCE SOUTH 89 DEGREES 41 MINUTES 47 SECONDS WEST
235.66 FEET TO THE POINT OF BEGINNING; THENCE SOUTH 0 DEGREES 18 MINUTES 13
SECONDS EAST 248.00 FEET; THENCE NORTH 89 DEGREES 41 MINUTES 47 SECONDS EAST
76.00 FEET; THENCE SOUTH 0 DEGREES 18 MINUTES 13 SECONDS EAST 246.00 FEET;
THENCE NORTH 89 DEGREES 41 MINUTES 47 SECONDS EAST 28.00 FEET; THENCE SOUTH 0
DEGREES 18 MINUTES 13 SECONDS EAST 62.00 FEET TO THE SOUTH LINE OF SAID LOT 3;
THENCE SOUTH 89 DEGREES 41 MINUTES 47 SECONDS WEST ALONG THE SOUTH LINE OF SAID
LOT 3 A DISTANCE OF 437.19 FEET TO THE INTERSECTION OF SAID SOUTH LINE WITH A
LINE WHICH IS 868.00 FEET EAST OF AN PARALLEL WITH THE WEST LINE OF SAID LOT 3
(MEASURED AT RIGHT ANGLES THERETO); THENCE NORTH 1 DEGREES 34 MINUTES 13 SECONDS
EAST ALONG SAID PARALLEL LINE 621.99 FEET TO THE NORTHWESTERLY LINE OF SAID LOT
3; THENCE NORTH 54 DEGREES 52 MINUTES 41 SECONDS EAST ALONG THE NORTHWESTERLY
LINE 124.27 FEET; THENCE SOUTH 35 DEGREES 07 MINUTES 19 SECONDS EAST 49.46 FEET
TO A POINT OF CURVATURE; THENCE IN A SOUTHEASTERLY DIRECTION ALONG A CURVE
CONCAVE TO THE NORTH EAST, HAVING A RADIUS OF 317.00 FEET, AN ARC DISTANCE OF
144.33 FEET; THENCE NORTH 89 DEGREES 41 MINUTES 47 SECONDS EAST 76.48 FEET TO
THE PLACE OF BEGINNING, IN DUPAGE COUNTY, ILLINOIS.
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<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PREFERRED PAYMENT SYSTEMS, INC.
1. Preferred Payment Systems, L.L.C.
(a limited liability company organized under the laws of the State of
Delaware, of which Preferred Payment Systems, Inc. is the sole Member)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
Arthur Andersen LLP
November 21, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated June 26, 1997, except for Note 9, for which the date is July
31, 1997, on our audit of the financial statements of About Health, Inc. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
November 21, 1997
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<PERIOD-TYPE> 9-MOS OTHER
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 1,260,730 2,164,528
<SECURITIES> 0 0
<RECEIVABLES> 8,021,639 3,597,958
<ALLOWANCES> 283,129 50,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,282,369 5,762,486
<PP&E> 1,398,985 1,290,650
<DEPRECIATION> 992,709 731,582
<TOTAL-ASSETS> 39,148,271 8,296,902
<CURRENT-LIABILITIES> 10,609,186 5,794,724
<BONDS> 0 0
0 0
0 0
<COMMON> 12,102 11,866
<OTHER-SE> (26,774,712) (30,984,961)
<TOTAL-LIABILITY-AND-EQUITY> 39,148,271 8,296,902
<SALES> 23,855,798 22,995,806
<TOTAL-REVENUES> 23,855,798 22,995,806
<CGS> 6,194,665 6,335,990
<TOTAL-COSTS> 6,194,665 6,335,990
<OTHER-EXPENSES> 8,923,053 8,673,848
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,517,267 909,515
<INCOME-PRETAX> 4,834,401 6,904,990
<INCOME-TAX> 2,488,325 2,830,581
<INCOME-CONTINUING> 0 0
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<NET-INCOME> 3,846,862 4,296,705
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