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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997
REGISTRATION NO. 333-23189
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 7374 94-2976066
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
</TABLE>
5934 GIBRALTAR DRIVE
PLEASANTON, CA 94588
(510) 734-9990
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
THOMAS H. SINTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5934 GIBRALTAR DRIVE
PLEASANTON, CA 94588
(510) 734-9990
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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ALAN K. AUSTIN KENNETH L. GUERNSEY
ELIZABETH R. FLINT KARYN R. SMITH
ELIZABETH M. KURR RICHARD S. JASEN
THOMAS I. SAVAGE COOLEY GODWARD LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARITIME PLAZA
PROFESSIONAL CORPORATION 20TH FLOOR
650 PAGE MILL ROAD SAN FRANCISCO, CA 94111
PALO ALTO, CA 94304-1050 (415) 693-2000
(415) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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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, as amended, 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 delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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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 SOLICITATION 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 THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 14, 1997
LOGO
2,000,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by
ProBusiness Services, Inc. ("ProBusiness" or 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 will be between
$10.00 and $12.00 per share. See "Underwriting" for information relating to the
method of determining the initial public offering price.
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(1)
DISCOUNTS AND
COMMISSIONS
- -------------------------------------------------------------------------------------------------
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Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(2).......................... $ $ $
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</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $1,585,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
---------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY WILLIAM BLAIR & COMPANY
The date of this Prospectus is , 1997
<PAGE> 3
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR THE
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, 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
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PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Capitalization........................................................................ 16
Dilution.............................................................................. 17
Selected Financial Data............................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Business.............................................................................. 26
Management............................................................................ 35
Certain Transactions.................................................................. 42
Principal Stockholders................................................................ 43
Description of Capital Stock.......................................................... 44
Shares Eligible for Future Sale....................................................... 47
Underwriting.......................................................................... 48
Legal Matters......................................................................... 50
Experts............................................................................... 50
Change in Accountants................................................................. 50
Additional Information................................................................ 50
Index to Financial Statements......................................................... F-1
</TABLE>
ProBusiness(R) is a registered trademark of the Company. BeneSphere
Administrators(TM) and Enrollnet(TM) are trademarks of the Company. This
Prospectus also includes trade names and trademarks of companies other than
ProBusiness.
The Company was incorporated in California in October 1984 and intends to
reincorporate in Delaware prior to this offering. The Company's executive
offices are located at 5934 Gibraltar Drive, Pleasanton, California 94588, and
its telephone number is (510) 734-9990.
3
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated,
all information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and gives effect to (i) a reincorporation of the Company
in Delaware prior to this offering, (ii) the conversion of all outstanding
shares of the Company's Preferred Stock into Common Stock automatically upon the
completion of this offering and (iii) the issuance of 160,956 shares of Common
Stock upon the net exercise of warrants upon the completion of this offering.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company is a leading provider of employee administrative services for
large employers, typically with over 250 employees. The Company's primary
service offerings are payroll processing, payroll tax filing, human resources
software and benefits administration, including the enrollment and processing of
flexible benefit plans and COBRA programs. The Company's proprietary PC-based
payroll system offers the cost-effective benefits of outsourcing and high levels
of client service, while providing the flexibility, control, customization and
integration of an in-house system. As of June 30, 1997, the Company provided
services to approximately 1,100 clients and provided payroll processing services
to 425 clients with an aggregate of approximately 380,000 employees and an
average of approximately 900 employees. For the quarter ended June 30, 1997, the
Company processed 2.9 million checks for the Company's payroll clients. The
Company's clients include: 3Com Corporation, Abbott Laboratories, Airtouch
Communications Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell
Computer Corporation, The Gillette Company, Kellogg USA Inc., LSI Logic
Corporation, Michaels Stores, Inc., Netscape Communications Corp., Sunglass Hut
International, Inc., TCI Cablevision, Toyota Motor Corporation, Watkins-Johnson
Company and Williams-Sonoma, Inc.
Many large businesses have found that outsourcing non-core functions
reduces costs, improves service, quality and efficiency, allows personnel to
focus on core competencies and enhances productivity through access to advanced
technologies. In recent years, payroll processing and benefits administration
have increased in complexity due to continual changes in regulations and
increasingly sophisticated employee benefits plans. As a result, the demand for
outsourcing employee administrative services has grown significantly and is
expected to continue to grow over the next several years. According to a
third-party industry study, it is estimated that third-party payroll and payroll
tax services alone generated approximately $3.4 billion in revenue in 1995 and
will generate approximately $7.4 billion in revenue in 2000.
The Company differentiates itself from its competitors through its
proprietary technology, high quality, responsive and professional client service
and focus on the needs of large employers. ProBusiness develops a business
partnership with each client by assessing each client's payroll processing
needs, reengineering and designing the client's payroll systems and processes
and implementing a cost-effective solution. The Company maintains an ongoing
relationship with each client using a strategic team of specialists led by a
personal account manager who proactively manages each client's account and
marshals the resources of the team to meet the client's specific needs.
ProBusiness maintains a low client-to-account manager ratio to offer clients
accessible and responsive account management. The Company believes that its low
client-to-account manager ratio and its focus on client service are key factors
in enabling the Company to achieve a high payroll client retention rate, which
was approximately 92% for fiscal year 1997.
The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy to
accomplish its objective includes expanding its client base by increasing its
direct sales force, offering additional services to existing clients, developing
a comprehensive and fully integrated suite of employee administrative services,
and increasing the breadth of its service offerings and features. The Company is
committed to maintaining the high levels of professional and personal service
that it believes have allowed it to establish a competitive advantage in its
industry.
In March 1997, entities affiliated with General Atlantic Partners LLC
("General Atlantic") purchased $10.0 million of Preferred Stock of the Company.
As a result, General Atlantic will own approximately 11% of the Company's
outstanding Common Stock upon the completion of this offering. General Atlantic
is a private equity investment firm.
4
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THE OFFERING
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Common Stock offered by the Company............................ 2,000,000 shares
Common Stock to be outstanding after this offering............. 10,147,301 shares(1)
Use of proceeds................................................ To repay indebtedness and for working
capital and potential acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......................... PRBZ
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
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<CAPTION>
YEAR ENDED JUNE 30,
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PRO FORMA
1995 1996 1997 1997(2)
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STATEMENTS OF OPERATIONS DATA:
Revenue............................................ $7,095 $13,863 $27,374 $29,030
Operating expenses:
Cost of providing services....................... 2,703 6,435 13,659 14,541
General and administrative expenses.............. 1,304 2,054 4,282 5,719
Research and development expenses................ 1,038 1,257 2,841 2,841
Client acquisition costs......................... 2,943 5,388 11,706 12,514
Acquisition of in-process technology............. -- 711 -- --
------- ------ ------- -------
Total operating expenses........................... 7,988 15,845 32,488 35,615
------- ------ ------- -------
Loss from operations............................... (893) (1,982) (5,114) (6,585)
Interest expense................................... (86) (473) (1,190) (1,212)
Other income....................................... -- 69 59 59
------- ------ ------- -------
Net loss........................................... $ (979) $(2,386) $(6,245) $(7,738)
======= ====== ======= =======
Pro forma net loss per share(3).................... $ (0.74) $ (0.92)
======= =======
Shares used in computing pro forma net loss per
share(3)......................................... 8,451 8,451
======= =======
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JUNE 30, 1997
---------------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)(4)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 5,047 $ 17,772
Payroll tax funds invested............................................. 177,626 177,626
Working capital........................................................ 534 13,259
Total assets........................................................... 200,435 213,160
Payroll tax funds collected but unremitted............................. 177,626 177,626
Long-term debt and note payable to stockholder, less current portion... 8,917 2,858
Capital lease obligations, less current portion........................ 1,898 1,898
Total stockholders' equity............................................. 3,869 22,653
</TABLE>
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(1) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to
outstanding options; (ii) 171,892 shares of Common Stock issuable upon
exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan; and
(iv) 500,000 shares of Common Stock reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan. Also excludes a warrant issued
after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock
and 249,250 shares of Common Stock issuable upon exercise of options granted
after June 30, 1997 with an exercise price of $9.00 per share. See
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.
(2) The pro forma statement of operations for the year ended June 30, 1997 has
been prepared as if the acquisitions of BeneSphere Administrators, Inc. and
Dimension Solutions, Inc. had occurred as of July 1, 1996. See Selected
Unaudited Pro Forma Condensed Consolidated Financial Information.
(3) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness
Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed
Consolidated Financial Information for explanations of the determination of
the shares used in computing pro forma net loss per share.
(4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company and the receipt and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
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RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered by this Prospectus.
OPERATING LOSSES; NEED TO COMMIT TO EXPENSES IN ADVANCE OF REVENUES
The Company has experienced significant operating losses since its
inception and expects to incur significant operating losses in the future due to
continued client acquisition costs, investments in research and development and
costs associated with expanding its sales efforts and operations to new
geographic regions. As of June 30, 1997, the Company had an accumulated deficit
of approximately $19.0 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process generally takes three to nine months or longer, and the implementation
process generally takes three to six months or longer. In connection with the
acquisition of each new client, the Company incurs substantial client
acquisition costs, which consist primarily of sales and implementation expenses
and, to a lesser extent, marketing expenses. The Company's ability to achieve
profitability will depend in part upon its ability to attract and retain new
clients, offer new services and features and achieve market acceptance of new
services. There can be no assurance that the Company will achieve or sustain
profitability in the future. The Company has made acquisitions in the past and
intends to pursue acquisitions in the future. In connection with acquisitions,
the Company has in the past incurred and will likely incur in the future costs
associated with adding personnel, integrating technology and increasing overhead
to support the acquired business, acquiring in-process technology and
amortization expenses related to goodwill. As a result, such acquisitions have
had and any future acquisition could have an adverse effect on the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is characterized by significant seasonality. As a
result, the Company's revenue has been subject to significant seasonal
fluctuations, with the largest percentage of annual revenue being realized in
the third and fourth fiscal quarters, primarily due to new clients beginning
services in January (the beginning of the tax year and the Company's third
fiscal quarter) and higher interest income earned on tax funds. Further, the
Company's operating expenses are typically higher as a percentage of revenue in
the first and second fiscal quarters as the Company increases personnel to
acquire new clients and to implement and provide services to such new clients, a
large percentage of which begin services in January.
The Company's quarterly operating results have in the past and will in the
future vary significantly depending on a variety of factors, including the
number and size of new clients starting services, the decision of one or more
clients to delay or cancel implementation or ongoing services, interest rates,
seasonality, the ability of the Company to design, develop and introduce new
services and features for existing services on a timely basis, transition costs
to new technologies, expenses incurred for geographic expansion, risks
associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of its clients, and general
economic factors. Revenue from new clients represents a significant portion of
quarterly revenue in the third and fourth fiscal quarters. A substantial
majority of the Company's operating expenses, particularly personnel and related
costs, depreciation and rent, is relatively fixed in advance of any particular
quarter. The Company's agreements with its clients generally do not have
significant penalties for cancellation. As a result, any decision by a client to
delay or cancel implementation of the Company's services or the Company's
underutilization of personnel may cause significant variations in operating
results in a
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particular quarter and could result in losses for such quarter. As the Company
secures larger clients, the time required for implementing the Company's
services increases, which could contribute to larger fluctuations in revenue.
Interest income earned from investing payroll tax funds, which is a significant
portion of the Company's revenue, is vulnerable to fluctuations in interest
rates. In addition, the Company's business may be affected by shifts in the
general health of the economy, client staff reductions, strikes, acquisitions of
its client by other companies and other downturns. There can be no assurance
that the Company's future revenue and results of operations will not vary
substantially. It is possible that in some future quarter the Company's results
of operations will be below the expectations of public market analysts and
investors. In either case, the market price of the Company's Common Stock could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH ACQUISITIONS
In January 1997, the Company acquired BeneSphere Administrators, Inc.
("BeneSphere"), a provider of benefits administration services. The integration
of BeneSphere's business with the Company's business has placed and will
continue to place a significant burden on the Company's management. Such
integration is subject to risks commonly encountered in making such
acquisitions, including, among others, loss of key personnel of the acquired
company, the difficulty associated with assimilating the personnel and
operations of the acquired company, the potential disruption of the Company's
ongoing business, the maintenance of uniform standards, controls, procedures and
policies, and the impairment of the Company's reputation and relationships with
employees and clients. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with its acquisition of BeneSphere.
While the Company has no current agreements or negotiations underway with
respect to any acquisition, the Company intends to make additional acquisitions
of complementary services, technologies or businesses. There can be no assurance
that any future acquisition will be completed or that, if completed, will be
effectively assimilated into the Company's business. In addition, future
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations or on the market price of the Company's Common Stock. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION SERVICES
The Company's payroll tax service is subject to various risks resulting
from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
calculate and transfer to the Company contributed employer and employee tax
funds. The Company processes the data received from the client and remits the
funds along with a tax return to the appropriate tax authorities when due.
Tracking, processing and paying such tax liabilities is complex. Errors and
omissions have occurred in the past and may occur in the future in connection
with such service. The Company is subject to large cash penalties imposed by tax
authorities for late filings or underpayment of taxes. To date, such penalties
have not been significant. However, there can be no assurance that any
liabilities associated with such penalties will not have a material adverse
effect on the Company's business, financial condition or results of operations.
There can be no assurance that the Company's reserves or insurance for such
penalties will be adequate. In addition, failure by the Company to make timely
or accurate tax return filings or pay tax liabilities when due on behalf of
clients may damage the Company's reputation and could adversely affect its
relationships with existing clients and its ability to gain new clients.
The Company's payroll tax service is also dependent upon government
regulations, which are subject to continuous changes. Failure by the Company to
implement these changes into its services and technology in a timely manner
would have a material adverse effect on the Company's business,
7
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financial condition and results of operations. In addition, since a significant
portion of the Company's revenue is derived from interest earned from investing
on collected but unremitted payroll tax funds, changes in policies relating to
withholding federal or state income taxes or reduction in the time allowed for
taxpayers to remit payment for taxes owed to government authorities would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's benefits administration services are subject to various risks
resulting from errors and omissions in processing and filing COBRA or other
benefit plan forms in accordance with governmental regulations and the
respective plans. The Company processes data received from employees and
employers and is subject to penalties for any late or misfiled plan forms. There
can be no assurance the Company's reserves or insurance for such penalties will
be adequate. In addition, failure to properly file plan forms would have a
material adverse effect on the Company's reputation, which could adversely
affect its relationships with existing clients and its ability to gain new
clients. The Company's benefits administration services are also dependent upon
government regulations which are subject to continuous changes that could reduce
or eliminate the need for benefits administration services.
The Company has access to confidential information and to client funds. As
a result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions insurance will be adequate to cover any such claims. Such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Service Offerings."
INVESTMENT RISKS
The Company invests funds, including payroll tax funds transferred to it by
clients until the Company remits the funds to tax authorities when due. The
Company typically invests these funds in short-term financial instruments such
as overnight U.S. government direct and agency obligations repurchase
agreements, commercial paper rated A-1 and/or P-1 and money market funds with
underlying credit quality of AA or better. These investments are exposed to
several risks, including credit risks from the possible inability of the
borrowers to meet the terms of their obligations under the financial
instruments. The Company would be liable for any losses on such investments.
Interest income earned from investing these funds represents a significant
portion of the Company's results of operations. As a result, the Company's
business, financial condition and results of operations are significantly
impacted by interest rate fluctuations. The Company has recently entered into an
interest rate swap agreement to minimize the impact of interest rate
fluctuations. In the event the dollar amount of the Company's invested funds
falls below a specified threshold, the Company would have swap payment
obligations, which could have a material adverse effect on the Company's results
of operations. There can be no assurance that the Company would have sufficient
funds to meet any such swap payment obligations. A default by the Company under
the swap agreement could result in acceleration and set-off by the bank of all
outstanding contracts under the swap agreement, and could result in
cross-defaults of other debt agreements of the Company, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MANAGEMENT OF GROWTH
The Company's business has grown significantly in size and complexity over
the past three years, which has placed significant demands on the Company's
management, systems, internal controls, and financial and physical resources. In
order to meet such demands, the Company intends to continue to hire new
employees, open new offices to gain clients in new geographic regions and invest
in new equipment or make other capital expenditures. In addition, the Company
expects that it will need to develop further its financial and managerial
controls and reporting systems and procedures to accommodate any future growth.
Failure to expand any of the foregoing areas in an efficient manner
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could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is currently in the process of
integrating BeneSphere's business with the Company's business. The Company has
established a processing center in Southern California and intends to open new
sales offices to gain new clients. In addition, the Company has leased a larger
facility to house its operations in Pleasanton, California, which the Company
expects will be completed in late 1997. There can be no assurance that the
Company will be able to effectively integrate BeneSphere's business or establish
such facilities on a timely basis. In addition, the Company's growth may depend
to some extent on its ability to successfully complete strategic acquisitions to
expand or complement its existing business. There can be no assurance that
suitable acquisitions can be identified, consummated or successfully integrated
into the Company's operations. Any inability to manage growth effectively could
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUBSTANTIAL COMPETITION
The market for the Company's services is intensely competitive, subject to
rapid change and significantly affected by new service introductions and other
market activities of industry participants. The Company primarily competes with
several public and private payroll service providers such as Automatic Data
Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller,
regional competitors. Many of these companies have longer operating histories,
greater financial, technical, marketing and other resources, greater name
recognition and a larger number of clients than the Company. In addition, many
of these companies offer more services or features than the Company and have
processing facilities located throughout the United States. The Company also
competes with in-house employee services departments and, to a lesser extent,
banks and local payroll companies. With respect to benefits administration
services, the Company competes with insurance companies, benefits consultants
and other local benefits outsourcing companies. The Company may also compete
with marketers of related products and services that may offer payroll or
benefits administration services in the future. The Company has experienced, and
expects to continue to experience, competition from new entrants into its
markets. Increased competition could result in pricing pressures, loss of market
share and loss of clients, any of which could have a material adverse effect on
the Company's business, financial condition or results of operations. The
failure of the Company to compete successfully would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; RISKS OF SOFTWARE DEFECTS
The technologies in which the Company has invested to date are rapidly
evolving and have short life cycles, which requires the Company to anticipate
and rapidly adapt to technological changes. In addition, the Company's industry
is characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The introduction of services embodying new technologies and the emergence of new
industry standards and practices can render existing services obsolete and
unmarketable. The Company's future success will depend, in part, on its ability
to develop advanced technologies, enhance its existing services with new
features, add new services that address the changing needs of its clients, and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. Several of the Company's competitors
invest substantially greater amounts in research and development than the
Company, which may allow them to introduce new services or features before the
Company. Even if the Company is able to develop new technologies in a timely
manner, it may incur substantial costs in deploying new services and features to
its clients, including costs of additional personnel. If the Company is unable
to develop and introduce new services and new features of existing services in a
timely or cost-effective manner, the Company's business, financial condition and
results of operations could be materially adversely affected. See
"Business -- Service Offerings" and "-- Research and Development."
9
<PAGE> 11
Application software used by the Company may contain defects or failures
when introduced or when new versions or enhancements are released. The Company
has in the past discovered software defects in certain of its applications, in
some cases only after its systems have been used by clients. There can be no
assurance that future defects will not be discovered in existing or new
applications or releases. Any such occurrence could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Business -- Technology" and "-- Research and Development."
DEPENDENCE ON THIRD-PARTY PROVIDERS
The Company depends on third-party courier services to deliver paychecks to
clients. The Company does not have any formal written agreements with any of the
courier services that it uses. Such courier services have been in the past and
may be in the future unable to timely pick up or deliver the paychecks from the
Company to its clients for a variety of reasons, including employee strikes,
storms or other adverse weather conditions, earthquakes or other natural
disasters, logistical or mechanical failures or accidents. Failure by the
Company to deliver client paychecks on a timely basis would have a material
adverse effect on the Company's business, financial condition and results of
operations and could damage the Company's reputation and adversely affect its
relationships with existing clients and its ability to gain new clients.
DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA
The Company currently conducts substantially all of its payroll and payroll
tax processing and production at the Company's headquarters located in
Pleasanton, California. The Company has recently established an alternative
processing center in Irvine, California and is in the process of establishing a
back-up facility at that site. The Company establishes for each client a
complete set of payroll data at the Pleasanton processing center. In the event
of a disaster in Pleasanton, clients would be able to process payroll checks
based on the data they have on site if necessary. There can be no assurance that
the Company's disaster recovery procedures are sufficient or that the data
recovered at the client site would be sufficient to allow the client to
calculate and produce payroll in a timely fashion.
The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL
The Company's success depends to a significant degree on its ability to
attract and retain experienced employees. There is substantial competition for
experienced personnel, which the Company expects to continue. Many of the
companies with which the Company competes for experienced personnel have greater
financial and other resources than the Company. The Company may in the future
experience difficulty in recruiting sufficient numbers of qualified personnel.
The inability to attract and retain experienced personnel as required could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition," "-- Employees" and
"Management."
10
<PAGE> 12
RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION
A substantial majority of the Company's revenue has been derived from
clients located in the western United States. The Company's ability to achieve
significant future revenue growth will in large part depend on its ability to
gain new clients throughout the United States. Currently, the Company has eight
sales representatives located outside of California, and the Company intends to
locate additional sales representatives in major metropolitan areas throughout
the United States. The Company opened a sales office in Irvine, California in
February 1995. Substantially all production for the Company's clients has been
maintained at the Company's headquarters in Pleasanton, California. The Company
recently moved a portion of the production services to its new facility in
Irvine, California. The Company also expects to open additional sales offices in
the future. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
on the Company's management and operating and financial systems. The Company
will be required to continue to implement and improve its systems on a timely
basis and in such a manner as is necessary to accommodate the increased number
of transactions and clients and the increased size of the Company's operations.
Any failure to implement and improve the Company's systems or to hire and retain
the appropriate personnel to manage its operations would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, an increase in the Company's operating expenses from its planned
expansion will have a material adverse effect on the Company's business,
financial condition and results of operations if revenue does not increase to
support such expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales and Marketing."
RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW SERVICES FEATURES
The Company's future business, financial condition and results of
operations will continue to depend upon the Company's ability to add new
services or enhancements to existing services that address the needs of the
market. Failure by the Company to successfully design, develop and introduce new
services or enhancements on a timely basis could prevent the Company from
maintaining existing client relationships, gaining new clients or expanding its
markets and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Research and
Development."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend on the performance of the Company's
senior management and other key employees. The Company's senior management team
does not have prior executive management experience in publicly traded
companies. The loss of the services of any senior management or other key
employee could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company generally does not
enter into employment or noncompetition agreements with its employees. If one or
more of the Company's key employees resigns from the Company to join a
competitor or to form a competitor, the loss of such personnel and any resulting
loss of existing or potential clients to any such competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of the loss of any key personnel, there can
be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices, procedures or client
lists by a former employee or that such disclosure or use would not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is dependent in part upon its proprietary software
technology. The Company has no patents, patent applications or registered
copyrights. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company
distributes its services under software license agreements that grant clients
11
<PAGE> 13
licenses to use the Company's services and contain various provisions protecting
the Company's ownership and the confidentiality of the underlying technology.
The Company generally enters into confidentiality and/or license agreements with
its employees and existing and potential clients, and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation or independent third-party
development of the Company's technology. There can be no assurance that the
Company's services and technology do not infringe any existing patents,
copyrights or other proprietary rights of others, or that third parties will not
assert infringement claims in the future. If any such claims are asserted and
upheld, the costs of defense could be substantial and any resulting liability to
the Company could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Proprietary
Rights."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this offering, the Company's directors and executive
officers and their respective affiliates will beneficially own over 45% of the
outstanding Common Stock. As a result, these stockholders, if they act together,
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and will have power to influence any
stockholder action or approval requiring a majority vote. Such concentration of
ownership may also have the effect of delaying, deferring or preventing a change
of control of the Company. See "Principal Stockholders" and "Description of
Capital Stock."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiation among the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of the market price of the Company's Common Stock following this
offering. The market price of the Company's Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new services by the Company or its competitors, market conditions in the
information services industry, quarterly fluctuations in the Company's operating
results, changes in financial estimates by securities analysts or other events
or factors, many of which are beyond the Company's control. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
and services companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In the past, following
periods of volatility in the marketplace for a company's securities, securities
class action litigation often has been instituted. Such litigation could result
in substantial costs and a diversion of management attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
This offering will provide substantial benefits to current stockholders of
the Company. Consummation of this offering is expected to create a public market
for the Common Stock held by the Company's current stockholders, including
directors and executive officers of the Company. Current stockholders paid
approximately $23.4 million for an aggregate of approximately 8,147,301 shares
of Common Stock. This offering will result in a gross unrealized gain to such
stockholders in the aggregate amount of approximately $66.2 million, assuming an
initial public offering price of $11.00 per share. In addition, the Company will
use a portion of the net proceeds from the sale of Common Stock offered by the
Company in this offering to repay a substantial portion of the Company's
outstanding indebtedness, which consists of (i) approximately $4.0 million of
subordinated debt due to certain
12
<PAGE> 14
stockholders of the Company, (ii) $250,000 of indebtedness incurred in
connection with the acquisition of Dimension Solutions, Inc. and (iii)
approximately $1.9 million under the Company's line of credit. The Company also
may use a portion of the remainder of the net proceeds of this offering to pay
up to $4.5 million of the BeneSphere contingent purchase price, to the extent
certain financial conditions are met by BeneSphere. See "-- No Prior Public
Market for Common Stock; Possible Volatility of Stock Price," "Use of Proceeds"
and "Dilution."
SUBSTANTIAL DILUTION
The assumed initial public offering price is substantially higher than the
pro forma net tangible book value per share of the outstanding Common Stock. As
a result, purchasers of the Common Stock offered hereby will incur immediate,
substantial dilution in the amount of $9.19 per share. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there will be further dilution. The Company has in the past granted a
substantial number of options to purchase Common Stock to employees as part of
compensation packages, and the Company expects that it will continue to grant a
substantial number of options in the future. In addition, the Company has
adopted an employee stock purchase plan that will provide employees an
opportunity to purchase shares below prevailing market value. The Company also
may issue shares of its Common Stock in connection with strategic acquisitions
or alliances, which could also result in dilution to stockholders. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding an
aggregate of 10,147,301 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1997. Of these shares, all of the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless such
shares are purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Affiliates"). The remaining 8,147,301 shares
of Common Stock held by existing stockholders (the "Restricted Shares") are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 promulgated under the Securities Act. As a result of contractual
restrictions and the provisions of Rule 144 and Rule 701, additional shares will
be available for sale in the public market as follows: (i) 2,000 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus; (ii)
1,000 Restricted Shares will be eligible for sale 90 days after the date of this
Prospectus; (iii) 8,144,301 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus.
In addition, certain of the Restricted Shares are subject to vesting.
As of June 30, 1997, options to purchase 875,776 shares of Common Stock
were outstanding, of which options to purchase 186,301 shares were then
exercisable. The Company intends to file a Form S-8 registration statement under
the Securities Act immediately after the date of this Prospectus to register
2,206,971 shares of Common Stock reserved for issuance under the Company's 1996
Stock Option Plan and 500,000 shares of Common Stock reserved for issuance under
the Company's 1996 Employee Stock Purchase Plan. In addition, as of June 30,
1997, warrants to purchase 171,892 shares of Common Stock were outstanding, all
of which will be eligible for sale 180 days after the date of this Prospectus.
Pursuant to agreements between the Company and certain stockholders and
warrantholders (or their permitted transferees), approximately 6,349,026 shares
of Common Stock and 121,892 shares issuable upon exercise of warrants are
entitled to certain registration rights under the Securities Act. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
13
<PAGE> 15
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock, and, as a result, the issuance thereof could have a material adverse
effect on the market value of the Common Stock. The Company has no present plans
to issue shares of Preferred Stock.
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company. Further, certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving the Company. These provisions
include a classified board, advance notice procedures for stockholders to
nominate candidates for election as directors of the Company, authorization of
the Board of Directors to alter the number of directors without stockholder
approval, limitations on persons who can call stockholder meetings, lack of
cumulative voting and prohibition of stockholder actions by written consent. See
"Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and
Certain Charter and Bylaw Provisions."
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds from the sale of the 2,000,000 shares of Common Stock in
this offering are estimated to be approximately $18.9 million ($21.9 million if
the Underwriters' over-allotment option is exercised in full) at an assumed
initial public offering price of $11.00 per share and after deducting the
estimated underwriters' discounts and commissions and offering expenses payable
by the Company. The Company intends to use approximately $6.2 million of the net
proceeds to repay a substantial portion of the Company's outstanding
indebtedness, which consists of (i) approximately $4.0 million of subordinated
debt due in 1998 or 30 days after the completion of this offering, which bears
interest at 8.0% per annum, (ii) $250,000 of indebtedness incurred in connection
with the acquisition of Dimension Solutions, Inc. ("Dimension Solutions"), which
is due in 1999 and bears interest at the prime rate plus 2.5%, and (iii) $1.9
million of the $3.1 million of indebtedness outstanding at August 14, 1997 under
the Company's line of credit, which expires April 1998 and bears interest at the
prime rate plus 1%. See "Certain Transactions" and Note 3 of Notes to the
Consolidated Financial Statements -- ProBusiness Services, Inc.
The remainder of the net proceeds to the Company of this offering,
approximately $12.7 million, will be used for general corporate purposes,
including capital expenditures and working capital. The Company also may use a
portion of the net proceeds to pay up to $4.5 million of the BeneSphere
contingent purchase price, to the extent certain financial conditions are met by
BeneSphere. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 10 of Notes to the Consolidated Financial
Statements -- ProBusiness Services, Inc. The Company also may use a portion of
the net proceeds for the acquisition of companies, technology or services that
complement the business of the Company, however, no such transactions currently
are planned or being negotiated. The amounts actually expended may vary
depending upon numerous factors. Pending the foregoing uses, the Company intends
to invest the net proceeds from this offering in investment-grade, short-term,
interest-bearing securities, money market funds or similar short-term
investments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's working capital line of credit
agreement prohibits the payment of cash dividends without the lender's prior
approval.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 on an actual basis and on a pro forma as adjusted basis to give effect
to (i) the conversion of all outstanding shares of Preferred Stock into Common
Stock automatically upon the completion of this offering and (ii) the sale and
issuance of the shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company) and receipt and application of the estimated net proceeds therefrom.
See "Use of Proceeds." This table should be reviewed in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and notes payable to stockholders, less current
portion(1)........................................................ $ 8,917 $ 2,858
Capital lease obligations, less current portion(1).................. 1,898 1,898
Stockholders' equity:
Preferred Stock, $.01 par value; 6,000,000 shares authorized,
3,228,034 shares issued and outstanding, actual; $.001 par
value; 5,000,000 shares authorized, no shares issued and
outstanding, pro forma as adjusted............................. 33 --
Common Stock, $.01 par value; 20,000,000 shares authorized,
1,530,277 shares issued and outstanding, actual; $.001 par
value; 60,000,000 shares authorized, 10,147,301 shares issued
and outstanding, pro forma as adjusted(2)...................... 15 10
Additional paid-in capital.......................................... 23,861 42,774
Accumulated deficit................................................. (18,952) (19,043)
Notes receivable from stockholders.................................. (1,088) (1,088)
-------- --------
Total stockholders' equity.............................. 3,869 22,653
-------- --------
Total capitalization............................... $ 14,684 $ 27,409
======== ========
</TABLE>
- ---------------
(1) See Notes 3 and 4 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.
(2) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to
outstanding options; (ii) 171,892 shares of Common Stock issuable upon
exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan and;
(iv) 500,000 shares of Common Stock reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan. Also excludes a warrant issued
after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock
and 249,250 shares of Common Stock issuable upon exercise of options granted
after June 30, 1997 with an exercise price of $9.00 per share. See
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.
16
<PAGE> 18
DILUTION
The pro forma net tangible book value (deficit) the Company as of June 30,
1997 was approximately $(540,000) or $(0.07) per share of Common Stock. Pro
forma net tangible book value per share represents the amount of the Company's
total net tangible assets less total liabilities, divided by the pro forma
number of shares of Common Stock issued and outstanding at that date, after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock automatically upon the completion of this offering. Net
tangible book value dilution per share to new stockholders represents the
difference between the amount paid by purchasers of shares of Common Stock in
the offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after the completion of this offering. After giving
effect to the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share and after deduction of the
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company as
of June 30, 1997, would have been approximately $18.3 million or $1.81 per
share. This represents an immediate increase in net tangible book value of $1.88
per share to existing stockholders and an immediate dilution of $9.19 per share
to new stockholders purchasing Common Stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $11.00
Pro forma net tangible book value (deficit) per share at June 30,
1997............................................................ $(0.07)
Increase in pro forma net tangible book value per share
attributable to new stockholders................................ 1.88
------
Pro forma net tangible book value per share after the offering..... 1.81
------
Dilution per share to new stockholders............................... $ 9.19
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by purchasers of the shares offered hereby, before deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, at an assumed initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 8,147,301 80.3% $23,388,000 51.5% $ 2.87
New stockholders............................ 2,000,000 19.7 22,000,000 48.5 11.00
---------- ------ -----------
Total............................. 10,147,301 100.0% $45,388,000 100.0%
========== ====== =========== ======
</TABLE>
The foregoing assumes no exercise of options to purchase Common Stock after
June 30, 1997. Excludes, as of June 30, 1997 (i) 875,776 shares of Common Stock
subject to outstanding options; (ii) 171,892 shares of Common Stock issuable
upon exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan; and (iv)
500,000 shares of Common Stock reserved for issuance under the Company's 1996
Employee Stock Purchase Plan. Also excludes a warrant issued after June 30, 1997
to purchase 20,000 shares of the Company's Common Stock and 249,250 shares of
Common Stock issuable upon exercise of options granted after June 30, 1997 with
an exercise price of $9.00 per share. See "Management -- Stock Plans,"
"Description of Capital Stock -- Warrants" and Notes 3, 4, 6, 7 and 10 of Notes
to Consolidated Financial Statements -- ProBusiness Services, Inc.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected statements of operations data for the years ended
June 30, 1995, 1996, and 1997 and the balance sheet data at June 30, 1996 and
1997 are derived from the consolidated financial statements of the Company,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus. The statement of operations data for the
year ended June 30, 1994 and the balance sheet data at June 30, 1994 and 1995
are derived from consolidated financial statements of the Company that have been
audited by Ernst & Young LLP that are not included in this Prospectus. The
statement of operations data for the year ended June 30, 1993 and the balance
sheet data at June 30, 1993 are derived from unaudited consolidated financial
statements not included in this Prospectus. The pro forma statement of
operations data for the year ended June 30, 1997 has been derived from selected
unaudited pro forma condensed consolidated financial information which is
included elsewhere in this Prospectus. The following selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(1)
------- ------- ------ ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................ $ 1,864 $ 4,069 $7,095 $13,863 $27,374 $29,030
Operating expenses:
Cost of providing services....................... 1,117 1,629 2,703 6,435 13,659 14,541
General and administrative expenses.............. 1,023 1,202 1,304 2,054 4,282 5,719
Research and development expenses................ 787 1,202 1,038 1,257 2,841 2,841
Client acquisition costs......................... 701 1,467 2,943 5,388 11,706 12,514
Acquisition of in-process technology............. -- -- -- 711 -- --
------- ------- ------- ------ ------- -------
Total operating expenses....................... 3,628 5,500 7,988 15,845 32,488 35,615
------- ------- ------- ------ ------- -------
Loss from operations............................... (1,764) (1,431) (893) (1,982) (5,114) (6,585)
Interest expense................................... -- (46) (86) (473) (1,190) (1,212)
Other income....................................... 4 -- -- 69 59 59
------- ------- ------- ------ ------- -------
Net loss........................................... $(1,760) $(1,477) $ (979) $(2,386) $(6,245) $(7,738)
======= ======= ======= ====== ======= =======
Pro forma net loss per share(2).................... $ (0.74) $ (0.92)
======= =======
Shares used in computing pro forma net loss per
share(2)......................................... 8,451 8,451
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 277 $ 114 $ 852 $ 4,041 $ 5,047
Payroll tax funds invested.......................... -- -- -- 106,339 177,626
Working capital (deficiency)........................ 255 (119) 69 3,022 534
Total assets........................................ 1,213 2,019 4,134 117,228 200,435
Payroll tax funds collected but unremitted.......... -- -- -- 106,339 177,626
Long-term debt and note payable to stockholder, less
current portion................................... 22 394 1,016 8,072 8,917
Capital lease obligations, less current portion..... 83 174 168 253 1,898
Total stockholders' equity (deficit)................ 832 705 1,366 (136) 3,869
<CAPTION>
PRO FORMA
AS ADJUSTED 1997(1)(3)
----------------------
<S> <C<C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 17,772
Payroll tax funds invested.......................... 177,626
Working capital (deficiency)........................ 13,259
Total assets........................................ 213,160
Payroll tax funds collected but unremitted.......... 177,626
Long-term debt and note payable to stockholder, less
current portion................................... 2,858
Capital lease obligations, less current portion..... 1,898
Total stockholders' equity (deficit)................ 22,653
</TABLE>
- ---------------
(1) The pro forma statement of operations for the year ended June 30, 1997 has
been prepared as if the acquisition of BeneSphere had occurred as of July 1,
1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial
Information.
(2) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness
Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed
Consolidated Financial Information for explanations of the determination of
the pro forma shares used in computing pro forma net loss per share.
(3) Adjusted to reflect the sale of the shares of Common Stock offered hereby at
an assumed initial public offering price of $11.00 per share and application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion also should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
ProBusiness Services, Inc. is a leading provider of employee administrative
services for large employers. The Company's primary service offerings are
payroll processing, payroll tax filing, human resources software and benefits
administration, including the enrollment and processing of flexible benefit
plans and COBRA programs. The Company's proprietary PC-based payroll system
offers the cost-effective benefits of outsourcing and high levels of client
service, while providing the flexibility, control, customization and integration
of an in-house system.
Since 1994, the Company has experienced significant growth of its revenue,
client base and average client size. Revenue increased from $4.1 million in
fiscal 1994 to $27.4 million in fiscal 1997. From June 30, 1994 to June 30,
1997, the client base for payroll processing services increased from 200 to 425
clients, while the average size of the Company's payroll clients increased from
approximately 400 employees to approximately 900 employees. The number of checks
that the Company processed for its payroll clients increased from 566,000 to 2.9
million for the quarters ended June 30, 1996 and 1997, respectively. As of June
30, 1997, the Company serviced approximately 1,100 clients. The Company's
revenue growth is primarily due to continued growth in its client base, the
introduction of its payroll tax service in fiscal 1996, an increase in the
average size of its clients, the introduction of new features and other services
and a high retention rate of existing clients (approximately 92% for fiscal year
1997). The Company does not anticipate it will sustain this rate of growth in
the future.
The establishment of new client relationships involves lengthy and
extensive sales and implementation processes. The sales process generally takes
three to nine months or longer, and the implementation process generally takes
three to six months or longer. In connection with the acquisition of each new
client, the Company incurs substantial client acquisition costs, which consist
primarily of sales and implementation expenses and, to a lesser extent,
marketing expenses. In addition, the Company's revenue is subject to significant
seasonal fluctuations, with the largest percentage of annual revenue being
realized in the third and fourth fiscal quarters primarily due to new clients
beginning services in January (the beginning of the tax year and the Company's
third fiscal quarter) and higher interest income earned on tax funds. Further,
the Company's operating expenses are typically higher as a percentage of revenue
in the first and second fiscal quarters as the Company increases personnel to
acquire new clients and to implement and provide services to such new clients, a
large percentage of which begin services in January. The Company expects this
pattern to continue. The Company has experienced significant operating losses
since its inception and expects to incur significant operating losses in the
future due to continued client acquisition costs, investments in research and
development and costs associated with expanding its sales efforts and operations
to new geographic regions. As of June 30, 1997, the Company had an accumulated
deficit of approximately $19.0 million. There can be no assurance that the
Company will achieve or sustain profitability in the future.
The Company has made acquisitions of businesses in the past and intends to
pursue acquisitions in the future. In connection with acquisitions, the Company
has in the past incurred and will likely incur in the future costs associated
with adding personnel, integrating technology, increasing overhead to support
the acquired businesses, acquiring in-process technology and amortizing expenses
related to intangible assets. As a result, such acquisitions have had and any
future acquisition could have an adverse effect on the Company's results of
operations.
19
<PAGE> 21
In January 1997, the Company acquired all of the outstanding capital stock
of BeneSphere for an initial purchase price of $3.1 million, with up to an
additional $4.5 million to be paid in quarterly installments, beginning April
1998 through January 2000, if certain financial conditions are met. In
connection with the acquisition of BeneSphere, the Company recorded $2.3 million
of goodwill, which will be amortized ratably over 20 years and could be
increased by up to an additional $4.5 million if the purchase price increases.
In May 1996, the Company acquired substantially all of the business and assets
of Dimension Solutions for a purchase price of $1.3 million. In connection with
the acquisition of Dimension Solutions, the Company recorded a one-time charge
of $711,000 in fiscal 1996 relating to the purchase of in-process technology.
The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. The Company typically
invests payroll tax funds collected from clients and their employees in
federally insured or investment-grade securities, which are subject to credit
risks and interest rate fluctuations. See "Risk Factors -- Investment Risks."
The Company generally recognizes revenue from services when such services are
performed and recognizes income from investments when earned. Payroll and
payroll tax clients generally are subject to contracts with an initial term of
36 months. Interest income earned on collected, but unremitted payroll tax funds
amounted to $5.9 million, $1.9 million and none, for fiscal years 1997, 1996 and
1995, respectively. Benefits administration and human resources software clients
generally are subject to contracts with an initial term of 12 months. The
Company's contracts generally do not have significant penalties for
cancellation. In fiscal 1997, no client accounted for more than 4% of the
Company's revenue.
The Company's cost of providing services consists primarily of ongoing
account management, tax and benefits administration operations and production
costs and, to a lesser extent, amortization of capitalized software development
costs. The Company capitalizes software development costs after technological
feasibility of the software relating to a service has been established and
amortizes such costs using the greater of (i) the straight-line basis over the
estimated useful life of the software, which is generally 36 months, or (ii) the
ratio of current revenue to the total of current revenue and anticipated future
revenue over the life of the related product. General and administrative
expenses consist primarily of personnel costs, professional fees and other
overhead costs for finance and corporate services. Research and development
expenses consist primarily of personnel costs. Client acquisition costs consist
of all sales and implementation expenses and, to a lesser extent marketing
expenses.
As of June 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $14.0 million and $3.9 million, respectively. The
net operating loss carryforwards will expire at various dates beginning in the
tax year 1998 through 2012, if not utilized. The Company's utilization of the
net operating loss carryforwards may be subject to annual limitations under the
Internal Revenue Code as a result of changes in the Company's ownership, which
limitations could significantly restrict or partially eliminate their
utilization. No income tax expense has been recorded since the Company's
inception.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Cost of providing services.................................... 38.1 46.4 49.9
General and administrative expenses........................... 18.4 14.8 15.6
Research and development expenses............................. 14.6 9.1 10.4
Client acquisition costs...................................... 41.5 38.9 42.8
Acquisition of in-process technology.......................... -- 5.1 0.0
----- ----- -----
Total operating expenses................................... 112.6 114.3 118.7
----- ----- -----
Loss from operations............................................ (12.6) (14.3) (18.7)
Interest expense................................................ (1.2) (3.4) (4.3)
Other income.................................................... -- 0.5 0.2
----- ----- -----
Net loss........................................................ (13.8)% (17.2)% (22.8)%
===== ===== =====
</TABLE>
YEARS ENDED JUNE 30, 1997 AND 1996
Revenue. Revenue increased 97.5% to $27.4 million in fiscal 1997 from
$13.9 million in fiscal 1996, primarily due to an increase in the number and
average size of the Company's payroll clients, the introduction of the Company's
payroll tax service in January 1996 and, to a lesser extent, the introduction of
the Company's benefits administration services in January 1997. Interest income
earned on payroll tax funds invested was $5.9 million and $1.9 million for
fiscal 1997 and 1996, respectively.
Cost of Providing Services. Cost of providing services increased 112.3% to
$13.7 million in fiscal 1997 from $6.4 million in fiscal 1996 and increased as a
percentage of revenue to 49.9% from 46.4%. The increases were primarily due to
hiring additional managers for payroll account management, operations expense
related to the Company's benefits administration services and, to a lesser
extent, production expenses related to an increase in the number of payroll
clients and increased personnel expenses related to the Company's payroll tax
service, which was introduced in January 1996.
General and Administrative Expenses. General and administrative expenses
increased 108.5% to $4.3 million in fiscal 1997 from $2.1 million in fiscal 1996
and increased as a percentage of revenue to 15.6% from 14.8%. The increases were
primarily a result of the hiring of additional management and administrative
personnel to support the Company's growth.
Research and Development Expenses. Research and development expenses
increased 126.0% to $2.8 million in fiscal 1997 from $1.3 million in fiscal 1996
and increased as a percentage of revenue to 10.4% from 9.1%. The increases were
primarily a result of additional personnel and equipment to develop enhancements
and new features to the Company's existing services. Capitalized software
development costs were $1.4 million in fiscal 1997 and $645,000 in fiscal 1996.
Client Acquisition Costs. Client acquisition costs increased 117.3% to
$11.7 million in fiscal 1997 from $5.4 million in fiscal 1996 and increased as a
percentage of revenue to 42.8% from 38.9%. The increases were primarily due to
expenses resulting from the establishment of a separate sales force to market
the Company's payroll tax service on a stand-alone basis, increased expenses
resulting from the expansion of the Company's payroll sales force and, to a
lesser extent, implementation expenses related to an increased number of new
clients that started services in January 1997.
21
<PAGE> 23
Interest Expense. Interest expense increased 151.6% to $1.2 million in
fiscal 1997 from $473,000 in fiscal 1996, primarily due to increased borrowing
under the Company's line of credit, the issuance of promissory notes to certain
investors in October and December 1995 and an increased amount of capitalized
equipment leases.
YEARS ENDED JUNE 30, 1996 AND 1995
Revenue. Revenue increased 95.4% to $13.9 million in fiscal 1996 from $7.1
million in fiscal 1995, primarily due to an increase in the number and average
size of the Company's payroll clients and the introduction of the Company's
payroll tax service in January 1996. Interest income earned on payroll tax funds
invested amounted to $1.9 million in fiscal 1996. No interest income was earned
in fiscal 1995.
Cost of Providing Services. Cost of providing services increased 138.1% to
$6.4 million in fiscal 1996 from $2.7 million in fiscal 1995 and increased as a
percentage of revenue to 46.4% from 38.1%. The increases were primarily due to
hiring personnel for the introduction of the Company's payroll tax service in
January 1996, hiring additional managers for payroll account management and, to
a lesser extent, hiring account management personnel for the Company's human
resources software.
General and Administrative Expenses. General and administrative expenses
increased 57.5% to $2.1 million in fiscal 1996 from $1.3 million in fiscal 1995,
but decreased as a percentage of revenue to 14.8% from 18.4%. The increase in
absolute dollars resulted primarily from the hiring of additional management and
administrative personnel to support the Company's growth.
Research and Development Expenses. Research and development expenses
increased 21.1% to $1.3 million in fiscal 1996 from $1.0 million in fiscal 1995,
but decreased as a percentage of revenue to 9.1% from 14.6%. Research and
development expenses decreased as a percentage of revenue due in part to higher
revenue and an increase in the amount of expenses that were capitalized in
fiscal 1996. Capitalized software development costs were $645,000 in fiscal 1996
and $137,000 in fiscal 1995.
Client Acquisition Costs. Client acquisition costs increased 83.1% to $5.4
million in fiscal 1996 from $2.9 million in fiscal 1995 but decreased as a
percentage of revenue to 38.9% from 41.5%. The increase in absolute dollars was
primarily due to increased expenses resulting from the expansion of the
Company's payroll sales force and, to a lesser extent, implementation expenses
relating to an increased number of new clients.
Acquisition of In-Process Technology. In fiscal 1996, the Company recorded
a one-time charge of $711,000 relating to the purchase of in-process technology
in connection with the Company's acquisition of Dimension Solutions in May 1996.
Interest Expense. Interest expense increased to $473,000 in fiscal 1996
from $86,000 in fiscal 1995, primarily due to increased borrowings under the
Company's line of credit and the issuance of promissory notes to certain
investors in October and December 1995.
22
<PAGE> 24
QUARTERLY RESULTS
The following table sets forth selected unaudited quarterly financial
information for each of the seven quarters in the period ended June 30, 1997, as
well as such data expressed as a percentage of the Company's revenue for the
periods presented. This information has been derived from unaudited statements
of operations data that, in the opinion of management, are stated on a basis
consistent with the audited financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The Company's results of operations for any quarter are
not necessarily indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
1995 1996 1997
------- --------------------------------------- ------------------
DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
------- -------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $2,676 $4,056 $ 4,701 $ 4,675 $ 5,524 $ 8,427 $ 8,748
Operating expenses:
Cost of providing
services................. 1,253 1,955 2,202 2,288 2,950 3,907 4,514
General and administrative
expenses................. 409 533 720 622 869 1,441 1,350
Research and development
expenses................. 174 421 538 625 683 732 801
Client acquisition costs.... 1,100 1,488 1,832 2,215 2,413 3,664 3,414
Acquisition of in-process
technology............... -- -- 711 -- -- -- --
------ ------ ------- ------- ------- ------- -------
Total operating expenses...... 2,936 4,397 6,003 5,750 6,915 9,744 10,079
------ ------ ------- ------- ------- ------- -------
Loss from operations.......... (260) (341) (1,302) (1,075) (1,391) (1,317) (1,331)
Interest expense.............. (88) (159) (175) (215) (305) (380) (290)
Other income.................. 22 38 9 11 1 2 45
------ ------ ------- ------- ------- ------- -------
Net loss...................... $ (326) $ (462) $(1,468) $ (1,279) $(1,695) $(1,695) $(1,576)
====== ====== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
1995 1996 1997
------- --------------------------------------- ------------------
DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services... 46.8 48.2 46.8 48.9 53.4 46.4 51.6
General and administrative
expenses.................. 15.3 13.1 15.3 13.3 15.7 17.1 15.4
Research and development
expenses.................. 6.5 10.4 11.5 13.4 12.4 8.6 9.2
Client acquisition costs..... 41.1 36.7 39.0 47.4 43.7 43.5 39.0
Acquisition of in-process
technology................ -- -- 15.1 -- -- -- --
----- ----- ----- ----- ----- ----- -----
Total operating expenses....... 109.7 108.4 127.7 123.0 125.2 115.6 115.2
----- ----- ----- ----- ----- ----- -----
Loss from operations........... (9.7) (8.4) (27.7) (23.0) (25.2) (15.6) (15.2)
Interest expense............... (3.3) (3.9) (3.7) (4.6) (5.5) (4.5) (3.3)
Other income................... 0.8 0.9 0.2 0.2 0.0 0.0 0.5
----- ----- ----- ----- ----- ----- -----
Net loss....................... (12.2)% (11.4)% (31.2)% (27.4)% (30.7)% (20.1)% (18.0)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 25
Revenue has increased during the last seven quarters primarily as a result
of the increase in the Company's payroll clients, the introduction of the
Company's payroll tax service in January 1996 and, to a lesser extent, the
introduction of the Company's human resources software in May 1996. The increase
in the Company's revenue for the third fiscal quarter in 1997 also was partially
attributable to the introduction of the Company's benefits administration
services in January 1997. The Company's revenue is subject to significant
seasonal fluctuations, with the largest percentage of annual revenue being
realized in the third and fourth fiscal quarters primarily due to new clients
beginning services at the beginning of the tax year in January and higher
interest income earned on tax funds.
The Company's operating expenses typically are higher as a percentage of
revenue in the first and second fiscal quarters as the Company increases
personnel to acquire new clients and to implement and provide services to such
new clients, a large percentage of which begin services in January. The Company
expects this pattern to continue. Cost of providing services increased in the
second and fourth quarters of fiscal 1997 primarily due to increases in account
management personnel and production costs related to the Company's expanded
client base. In the third fiscal quarter of 1997, the increase in general and
administrative expenses was partially due to the addition of management
infrastructure related to the acquisition of BeneSphere in January 1997, and the
increase in client acquisition costs in absolute dollars was primarily
attributable to higher sales commissions and the introduction of the Company's
benefits administration services.
The Company's quarterly operating results have in the past and will in the
future vary significantly depending on a variety of factors, including the
number and size of new clients starting services, the decision of one or more
clients to delay or cancel implementation or ongoing services, interest rates,
seasonality, the ability of the Company to design, develop and introduce new
services and features for existing services on a timely basis, transition costs
to new technologies, expenses incurred for geographic expansion, risks
associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of its clients, and general
economic factors. Revenue from new clients represents a significant portion of
quarterly revenue in the third and fourth fiscal quarters. A substantial
majority of the Company's operating expenses, particularly personnel and related
costs, depreciation and rent, is relatively fixed in advance of any particular
quarter. The Company's agreements with its clients generally do not have
significant penalties for cancellation. As a result, any decision by a client to
delay or cancel implementation of the Company's services or the Company's
underutilization of personnel may cause significant variations in operating
results in a particular quarter and could result in losses for such quarter. As
the Company secures larger clients, the time required for implementing the
Company's services increases, which could contribute to larger fluctuations in
revenue. Interest income earned from investing payroll tax funds, which is a
significant portion of the Company's revenue, is vulnerable to fluctuations in
interest rates. In addition, the Company's business may be affected by shifts in
the general health of the economy, client staff reductions, strikes,
acquisitions of its client by other companies and other downturns. There can be
no assurance that the Company's future revenue and results of operations will
not vary substantially.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
a combination of private sales of equity securities, private debt and bank
borrowings, and to a lesser extent, capital equipment leases. As of June 30,
1997, the Company had raised approximately $23.4 million in private sales of
equity securities. In October and December 1995, the Company issued an aggregate
principal amount of $4.0 million in subordinated promissory notes with an
interest rate of 8% per annum due on the earlier of three years from the date of
issuance of the note or 30 days after completion of this offering. In March
1997, General Atlantic purchased $10.0 million of Preferred Stock of the
Company. In August 1997, the Company entered into an interest rate swap
agreement which has a two-year term and provides for a fixed rate of 5.9%. See
"Risk Factors -- Investment Risks."
At June 30, 1997, the Company had approximately $5.0 million of cash and
cash equivalents and a $10.0 million secured revolving line of credit, which
expires April 1998. At June 30, 1997, the Company
24
<PAGE> 26
had outstanding borrowings of approximately $4.8 million, leaving an
availability of $5.2 million under the line of credit, based on borrowing
restrictions, and had borrowed $1.9 million under a secured equipment lease. See
Note 3 of Notes to Consolidated Financial Statements -- ProBusiness Services,
Inc. The Company intends to repay a substantial portion of such outstanding debt
from the net proceeds of this offering.
Net cash used in operating activities for fiscal 1997, 1996 and 1995 was
$4.1 million, $202,000 and $444,000, respectively. The increase in cash used in
operating activities in fiscal 1997 compared to fiscal 1996 was primarily the
result of net losses and, to a lesser extent, increases in accounts receivable
and other assets, partially offset by depreciation and amortization and an
increase in accrued liabilities.
Net cash used in investing activities was $4.7 million, $3.3 million and
$1.4 million for fiscal 1997, 1996 and 1995, respectively. The increases in net
cash used in investing activities during these periods resulted primarily from
capital expenditures for equipment, furniture and fixtures to support the
Company's increased personnel. In addition, the Company capitalized software
development costs of $1.4 million, $645,000 and $137,000 in fiscal 1997, 1996
and 1995, respectively. The Company expects to make additional capital
expenditures for furniture, equipment and fixtures in connection with the move
of its corporate headquarters and the recent establishment of an additional
processing center, both planned to occur in late 1997. In addition, the Company
anticipates that it will continue to expend funds for software development in
the future.
Net cash provided by financing activities was $9.8 million, $6.7 million
and $2.6 million for the fiscal years ended 1997, 1996 and 1995, respectively.
Net cash provided by financing activities for fiscal 1997 related primarily to
$9.9 million of net proceeds from the issuance of preferred stock in March 1997.
Net cash provided by financing activities for fiscal 1996 related primarily to
borrowings under the Company's credit facilities and the issuance of $4.0
million of subordinated debt in October and December 1995. Financing activities
provided cash for fiscal 1995 primarily from the issuance of equity securities
and borrowings under credit agreements.
The Company believes that the net proceeds from this offering, together
with existing cash balances and anticipated cash flows from operations, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 12 months. The Company may also utilize cash to acquire or
invest in complementary businesses or to obtain the right to use complementary
technologies, although the Company does not have any pending plans to do so. The
Company may sell additional equity or debt securities or obtain additional
credit facilities.
25
<PAGE> 27
BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
ProBusiness is a leading provider of employee administrative services for
large employers, typically with over 250 employees. The Company's primary
service offerings are payroll processing, payroll tax filing, human resources
software and benefits administration, including the enrollment and processing of
flexible benefit plans and COBRA programs. The Company's proprietary PC-based
payroll system offers the cost-effective benefits of outsourcing and high levels
of client service, while providing the flexibility, control, customization and
integration of an in-house system. As of June 30, 1997, the Company provided
services to approximately 1,100 clients and provided payroll processing services
to 425 clients with an aggregate of approximately 380,000 active employees and
an average of approximately 900 employees. For the quarter ended June 30, 1997,
the Company processed 2.9 million checks for the Company's payroll clients.
The Company differentiates itself from its competitors through its
proprietary technology, high quality, responsive and professional client service
and focus on the needs of large employers. ProBusiness develops a business
partnership with each client by assessing each client's payroll processing
needs, reengineering and designing the client's payroll systems and processes
and implementing a cost-effective solution. The Company maintains an ongoing
relationship with each client using a strategic team of specialists led by a
personal account manager who proactively manages each client's account and
marshals the resources of the team to meet the client's specific needs.
ProBusiness maintains a low client-to-account manager ratio to offer clients
accessible and responsive account management. The Company believes that its low
client-to-account manager ratio and its focus on client service are key factors
in enabling the Company to achieve a high payroll client retention rate, which
was approximately 92% for fiscal year 1997.
INDUSTRY BACKGROUND
Many large businesses have found that outsourcing non-core functions
reduces costs, improves service, quality and efficiency, allows personnel to
focus on core competencies and enhances productivity through access to advanced
technologies. As a result, the demand for outsourcing employee administrative
services has grown significantly and is expected to continue to grow over the
next several years. According to a third-party industry study, it is estimated
that third-party payroll and payroll tax services alone generated approximately
$3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in
revenue in 2000.
Payroll processing and benefits administration lend themselves to
outsourcing because both are complex and costly for employers to conduct
internally. Payroll processing involves tracking employee data, calculating
payroll data and producing paychecks and direct deposits, remitting and filing
payroll taxes and generating management reports. Benefits administration
consists of many human resources functions, such as the enrollment and
processing of flexible benefits plans and the administration and management of
COBRA programs. In recent years, payroll processing and benefits administration
have increased in complexity due to continual changes in regulations and
increasingly sophisticated employee benefit plans. For example, large employers
must have the ability to calculate taxes for multiple federal, state and local
government agencies, collect garnishments based on different state laws and make
numerous agency filings. In addition, payroll and benefits administration
systems must keep pace with rapidly evolving business operations as companies
increase in size, expand geographically or add new operations. Finally, these
systems must be flexible and scalable to integrate with increasingly advanced
computer systems as companies adopt new technologies.
26
<PAGE> 28
Despite the complexities of payroll processing and the advantages provided
by outsourcing, most large employers continue to process payroll in-house
because they believe their unique business needs require the control and
integration of an in-house system. These in-house payroll systems generally run
on expensive mainframe or minicomputer systems and require customization and
significant ongoing technical support. In addition, such systems typically are
operated and maintained by large payroll departments, which are supported by
dedicated programmers, systems analysts and production personnel. As their
payroll needs change, employers that process their payroll in-house must
continue to make significant investments in personnel, hardware and software to
maintain and upgrade their payroll systems.
Large employers that have outsourced their payroll processing needs have
looked primarily to traditional payroll service providers, which process payroll
data received from clients utilizing mainframe computers located at multiple
regional data centers. This approach utilizes two systems, the client's and the
service provider's, which have different hardware, operating systems, software
applications and data configurations. Maintaining and synchronizing two separate
systems makes it difficult for these service providers to update code, add
features and functionality and provide clients with customization and
integration with their other systems. In addition, the complexities presented by
operating two separate systems often impede the timely identification and
resolution of client payroll processing problems.
Many large employers that choose to outsource their employee administration
functions require a payroll provider that offers a high level of flexibility and
client service. In addition, these employers prefer to have a single service
provider of comprehensive and integrated services for their payroll and other
employee administrative needs. Given the inherent limitations of the technology
used by traditional payroll processing providers, such providers are unable to
deliver a highly responsive and flexible solution. As a result, the Company
believes a significant opportunity exists for service providers that can furnish
large employers with high quality client service and a payroll system that
offers the cost-effective benefits of outsourcing, while providing the same
level of control, customization and integration as an in-house system.
THE PROBUSINESS SOLUTION
The Company's solution provides large employers with the cost-effective
benefits of outsourcing and high levels of client service, while providing the
flexibility, system control, customization and integration of an in-house
system. The Company combines its PC-based technology and personalized client
service to provide a broad range of service offerings, including payroll
processing, payroll tax filing, human resources software and benefits
administration.
Technology. The Company's proprietary PC-based technology for its payroll
services provides a platform for delivering high levels of service together with
the flexibility and control of an in-house system. The Company creates a
mirrored version of each client's system, which allows the Company's account
managers to access client information using the same data, programs and screens
as the client uses on its PC network. This enables the Company to quickly and
easily identify client problems or modify application programs in response to
client requests. The client maintains control by having direct access to all
calculation programs and all historical and transactional data, which also
provides the client with flexibility to respond quickly to employee and
third-party inquiries, to fully analyze payroll data and to generate management
reports.
The Company's system architecture is designed to distribute payroll
processing tasks to multiple low cost, high performance PCs, which enables the
Company to scale its system continually to handle increasing transaction
volumes. The Company's PC-based application software supports the development of
customized solutions for each client that can be easily upgraded and integrated
with a client's other systems. In addition, multiple networked PCs facilitate
exception processing and rapid response that large employers require.
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Client Service. The Company delivers high quality, responsive and
professional service by establishing a business partnership with each client.
The Company assigns each client a personal account manager, who proactively
manages the account and marshals the resources of a strategic team of
specialists to meet the client's specific needs. The Company maintains a low
client-to-account manager ratio to offer clients accessible and responsive
account management. The Company supports each client with functional and
regulatory expertise in payroll, payroll tax and employee benefits, as well as
specialists in pay data interfaces, general ledger interfaces, paid-time-off,
report writing and systems integration. The Company uses its systems integration
expertise to facilitate the integration of its payroll processing system with
the client's existing hardware and software. To support and provide high quality
service, the Company focuses on hiring experienced accounting and technical
professionals from the payroll, accounting, human resources and financial
services industries. The Company promotes its client service culture by
instilling a sense of ownership in each employee through incentive compensation
and recognition of achievements based on providing high quality service to
clients.
Cost Effectiveness. The Company believes that it provides its clients with
a more cost-effective payroll solution than most other third-party providers.
During the implementation process, the Company reengineers the client's payroll
processes and designs a payroll system that integrates with the client's other
systems. Once implementation is completed, integration between payroll and other
systems is improved, eliminating manual tasks and allowing a client to redeploy
specialized personnel to other functions within the organization.
STRATEGY
The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy is to
continue providing clients with high levels of personal service and developing a
comprehensive and fully integrated suite of employee administrative services.
The Company also intends to expand its client base and provide additional
services to its existing clients. The Company's ongoing strategy includes the
following key factors:
- PROVIDE PREMIER SERVICE. The Company is committed to providing high
levels of personal service and proactive account management,
including maintaining a low client-to-account manager ratio. The
Company believes that its ability to consistently deliver high
quality service is a competitive advantage in the large employer
market and is a key factor in enabling the Company to achieve a high
payroll client retention rate, which was approximately 92% for
fiscal year 1997.
- EXPAND CLIENT BASE. The Company intends to continue adding to its
client base by expanding its direct sales force and locating sales
representatives in major metropolitan areas throughout the United
States, as well as increasing its penetration in existing markets
and pursuing strategic alliances and acquisitions.
- PROVIDE A COMPREHENSIVE AND INTEGRATED SOLUTION. The Company
intends to continue investing substantial resources to further
develop a comprehensive and fully integrated suite of employee
administrative services and extend the functionality of its existing
proprietary technology. The Company's goal is to create a single
data processing system that it can use as a platform to offer a full
range of services to clients, thereby strengthening client
relationships and improving efficiencies for both the Company and
its clients.
- INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that
there is a significant opportunity for it to cross-market its
services to its existing client base, as few of its current clients
use all of the Company's services. In addition, the Company intends
to leverage its relationships with existing clients to market new
services and features.
- PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. The Company intends to
pursue acquisitions and alliances to increase the range of services
and service features it offers, add industry and technical
expertise, and acquire complementary technology. For example, during
fiscal 1996, the Company introduced its human resources software and
during fiscal 1997, its
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benefits administration services through the acquisitions of Dimension
Solutions and BeneSphere, respectively.
- ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES. The Company seeks to
continue providing its clients with a high level of service by hiring
professionals who are experienced in their fields. Service personnel
are recruited from payroll, accounting, human resources and financial
services industries, and many have professional experience as
accounting managers or hold Certified Public Accountant or Certified
Payroll Professional accreditations. The Company's employees receive
incentive compensation and recognition of achievements based on
providing high quality service to clients.
The Company's strategy involves substantial risks and uncertainties. There
can be no assurance that the Company will be successful in implementing its
strategy or that its strategy, even if implemented, will lead to successful
achievement of the Company's objectives. If the Company is unable to implement
its strategy effectively, the Company's business, financial condition and
results of operations will be materially adversely affected. See "Risk Factors."
SERVICE OFFERINGS
The Company provides a broad range of employee administrative services,
including payroll processing, payroll tax filing, benefits administration and
human resources software. The Company intends to expand its service offerings
through future acquisitions and to develop enhancements to its existing services
internally.
Payroll Processing. The Company processes time and attendance data to
calculate and produce employee paychecks, direct deposits and reports for its
clients. The Company delivers the paychecks and reports to clients within 24 to
48 hours of the Company's receipt of the data electronically submitted from the
client. The Company's system is highly configurable to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing. The system integrates easily with the client's general ledger, human
resources and time and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollment and tracking of paid
time off, proration of compensation for new hires and integrated garnishment
processing.
Payroll Tax Filing. The Company collects contributed employer and employee
tax funds from clients, deposits such funds with tax authorities when due, files
all tax returns and reconciles the client's account. The Company will also
represent the client before tax authorities in any dispute or inquiry. The
Company introduced its payroll tax service in January 1996 to existing payroll
clients and to corporations who process their payroll in-house.
Benefits Administration. In January 1997, the Company introduced its
benefits administration services through the acquisition of BeneSphere. Such
services include flexible benefits enrollment and processing, COBRA
administration, consolidated billing and eligibility tracking and premium
payment services. Employees can enroll in and choose their flexible spending
benefits through traditional paper-based forms or through World Wide
Web-accessible enrollment sites using the Company's recently introduced
Enrollnet(TM) service.
Human Resources Software. In May 1996, the Company introduced its human
resources software through the acquisition of Dimension Solutions. The Company's
human resources software tracks and reports general employee information,
including compensation, benefits, skills, performance, training, job titles and
medical history. For clients that also use the Company's payroll service, the
human resources data can be transferred to the payroll services system, thus
eliminating the need for duplicate data entry.
CLIENT SERVICE
The Company believes that its focus and dedication to providing high levels
of client service is a competitive advantage in the large employer market.
ProBusiness develops a business partnership with each client by assessing each
client's payroll processing needs, reengineering and designing the client's
payroll system and process and implementing a cost-effective solution. The
Company maintains an
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ongoing relationship with each client using a strategic team that includes a
sales representative, a sales analyst, an implementation manager, an account
manager and numerous functional, regulatory and technical support specialists.
Sales. The Company believes that client service begins with the sales
process. A sales representative and a sales analyst work together to assess a
potential client's payroll processing needs. Based on this assessment, the sales
team then identifies opportunities to reengineer the prospective client's
payroll processes and to design a payroll solution that integrates effectively
with its other systems. The payroll sales cycle typically ranges from three to
nine months or longer.
Implementation. Upon engagement by a client, the Company assigns a team of
technical support specialists, headed by an implementation manager who leads the
transition from the client's former payroll system to the Company's system. The
implementation manager works with the client, the sales analyst and technical
support specialists to integrate the Company's payroll system with the client's
other systems and to customize the system to improve the client's payroll
processes. The Company uses its systems integration expertise to facilitate the
integration of its payroll processing system with the client's existing hardware
and software. The implementation process generally takes three to six months or
longer, depending on the complexity of the client's payroll processes and
systems and the size of the client.
Account Management. An account manager is assigned to each client during
the implementation process and serves as the client's day-to-day contact at the
Company. The account manager coordinates the efforts of the Company's
functional, regulatory and technical support specialists as necessary. The
account manager visits each client regularly and establishes an annual business
plan with the client that details scheduled payroll events such as open
enrollment periods for employee benefits plans or software system changes. This
annual business plan allows the Company to provide clients with uninterrupted
payroll services during these periods. Account managers use the Company's
proprietary CallLog system to record and track all client calls, record client
feedback and help ensure that the client's needs are addressed promptly and
thoroughly. The Company maintains a low client-to-account manager ratio to offer
clients accessible and responsive account management.
Support Specialists. The Company supports each client with functional and
regulatory specialists in payroll, payroll tax and employee benefits, as well as
pay data interfaces, general ledger interfaces, paid-time-off, report writing
and system integration. Each of these specialists is available to speak directly
with clients as needed, meet with clients onsite or support clients indirectly
through the account manager.
The Company is committed to continually monitoring the quality of its
service through client feedback mechanisms. The Company obtains valuable
insights into the needs of its clients through its partnership with each client
and from client responses to surveys, which are conducted semi-annually. The
Company uses this information to develop new technologies, identify new service
offerings, optimize the services provided to existing clients and improve the
level of service provided to clients. The Company also uses client feedback as a
basis for incentive compensation and recognition of achievements.
TECHNOLOGY
The Company's proprietary PC-based technology for its payroll services
provides a platform for delivering high levels of service together with the
flexibility and control of an in-house system. The Company creates a mirrored
version of each client's system, which allows the Company's account managers to
access client information using the same data, programs and screens as the
client uses on its PC network. This enables the Company to quickly and easily
identify client problems or modify application programs in response to client
requests. The client maintains control by having direct access to all
calculation programs and all historical and transactional data, which also
provides the client with flexibility to respond quickly to employee and
third-party inquiries, to fully analyze payroll data and to generate management
reports.
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The Company's system architecture is designed to distribute payroll
processing tasks to multiple low cost, high performance PCs, which enables the
Company to scale its system continually to handle increasing transaction
volumes. The Company's PC-based application software supports the development of
customized solutions for each client that can be easily upgraded and integrated
with a client's other systems. In addition, multiple networked PCs facilitate
exception processing and rapid response that large employers require.
CLIENTS
The Company targets large companies, typically with over 250 employees,
with complex and changing business needs in diverse industries. As of June 30,
1997, the Company provided services to approximately 1,100 clients. Of these
clients, 425 were payroll processing clients, with an aggregate of approximately
380,000 active employees and an average of approximately 900 employees. For the
quarter ended June 30, 1997, the Company processed 2.9 million payroll checks
for the Company's payroll clients. Although the Company is extending its
national presence, most of the Company's revenue historically has been derived
from clients located in the western United States. For fiscal 1997, no client
accounted for more than 4% of the Company's revenue. The Company's agreements
with its clients generally do not have significant penalties for cancellation.
Set forth below is a representative list of the Company's clients as of July 31,
1997, each of which has over 1,000 employees and from which the Company expects
revenue of at least $25,000 in fiscal 1998.
TECHNOLOGY
3Com Corporation
Advanced Micro Devices, Inc.
Airtouch Communications, Inc.
Ascend Communications Inc.
AST Research, Inc.
Atmel Corporation
Bay Networks Inc.
Cadence Design Systems Inc.
Cisco Systems Inc.
Dell Computer Corporation
Fujitsu, Ltd.
Hitachi America Ltd
Informix Corporation
Integrated Device
Technology, Inc.
Intuit Inc.
KLA Instruments Corporation
LSI Logic Corporation
Netscape Communications
Corp.
Novell, Inc.
Pacific Scientific Company
Quantum Corporation
Read-Rite Corporation
Siemens Business
Communication Systems, Inc.
Silicon Graphics, Inc.
Silicon Systems, Inc.
Solectron Corporation
Storage Technology
Corporation
Sybase, Inc.
TCI Cablevision
VeriFone, Inc.
RETAIL
Childrens Discovery Centers
of America, Inc.
Coach Leatherwear Co., Inc.
Dollar General Corporation
Esprit de Corp.
Michaels Stores, Inc.
Natural Wonders, Inc.
St. John Knits Inc.
Sunglass Hut International, Inc.
Williams-Sonoma, Inc.
SERVICES/PUBLISHING
California Casualty Group
CCH Incorporated
Clubcorp International
First Allmerica Life Insurance
Koll Management Services, Inc.
North American Title
Insurance Company
U.S. Computer Services
Ziff Davis Publishing Company
FOOD PRODUCTS AND SERVICES
Bon Appetit Management
Company
Fleming Companies, Inc.
Fresh Choice, Inc.
Kellogg USA Inc.
OreIda Foods Inc.
Pacific Coast Producers
Specialty Restaurants Corp.
OTHER
Abbott Laboratories
Allergan, Inc.
The Gillette Company
Pharmacia & Upjohn, Inc.
Raychem Corporation
Toyota Motor Corporation
Watkins-Johnson Company
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SALES AND MARKETING
The Company employs a direct sales force to gain new payroll and payroll
tax clients and increase the number of services provided to existing clients.
The Company currently targets large employers through direct marketing,
seminars, trade shows and active participation in local chapters of the American
Payroll Association. The Company uses a team selling approach, whereby sales
analysts and sales representatives collaborate to assess a potential client's
needs and develop a cost-effective solution. The payroll sales cycle typically
ranges from three to nine months or longer. The Company primarily utilizes
insurance brokers to attract new benefits administration clients.
The Company believes that its long-term competitiveness depends on
increasing its national presence. The Company believes that locating direct
sales representatives in major metropolitan areas throughout the United States
is the most effective means of increasing its national client base. The Company
seeks to attract and retain experienced industry sales representatives.
The Company's marketing department provides support materials and marketing
communications to sales representatives and promotes public relations, performs
direct mailings and participates in seminars and trade shows.
COMPETITION
The market for the Company's services is intensely competitive, subject to
rapid change and significantly affected by new service introductions and other
market activities of industry participants. The Company primarily competes with
several public and private payroll service providers such as Automatic Data
Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller,
regional competitors. Many of these companies have longer operating histories,
greater financial, technical, marketing and other resources, greater name
recognition and a larger number of clients than the Company. In addition, many
of these companies offer more services or features than the Company and have
processing facilities located throughout the United States. The Company also
competes with in-house employee services departments and, to a lesser extent,
banks and local payroll companies. With respect to benefits administration
services, the Company competes with insurance companies, benefits consultants
and other local benefits outsourcing companies. The Company may also compete
with marketers of related products and services that may offer payroll or
benefits administration services in the future. The Company has experienced, and
expects to continue to experience, competition from new entrants into its
markets. Increased competition could result in pricing pressures, loss of market
share and loss of clients, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company believes that the principal competitive factors affecting its
market include client service, system functionality and performance, system
scalability, reputation, system cost and geographic location. The failure of the
Company to compete successfully would have a material adverse effect on the
Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company intends to continue investing substantial resources to further
develop a comprehensive and fully integrated suite of employee administrative
services and extend the functionality of its proprietary payroll processing
systems. The Company has committed resources to the following development
initiatives:
- WINDOWS VERSION PAYROLL. The Company expects to introduce a new version
of its payroll system that will run under Windows 95 and Windows NT.
- ON-LINE SERVICES. The Company intends to provide secure on-line employee
access to its payroll and benefits systems through the World Wide Web
that will provide services such as benefits enrollment, W-4 changes and
time and attendance tracking.
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- INTEGRATED PAYROLL AND HUMAN RESOURCES SYSTEM. The Company expects to
introduce an integrated payroll and human resources system utilizing
client/server technology that will run under Windows 95 and Windows NT.
- JAVA-BASED OBJECT ORIENTED SYSTEM. As a long-term initiative, the
Company is developing a second generation integrated payroll and human
resources system based on object and Inter/intranet technology.
The information discussed above in "Research and Development" contains
forward-looking statements that involve risks and uncertainties. Actual events
could differ materially from those anticipated in these forward-looking
statements, as a result of certain factors including those discussed in the
paragraph below.
The technologies in which the Company has invested to date are rapidly
evolving and have short life cycles, which requires the Company to anticipate
and rapidly adapt to technological changes. In addition, the Company's industry
is characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The Company's future success will depend, in part, on its ability to develop
advanced technologies, enhance its existing services with new features, add new
services that address the changing needs of its clients, and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. If the Company is unable to develop and introduce new
services and new features of existing services in a timely or cost-effective
manner, the Company's business, financial condition and results of operations
could be materially adversely affected. In addition, application software used
by the Company may contain defects or failures when introduced or when new
versions or enhancements are released. The Company has in the past discovered
software defects in certain of its applications, in some cases, only after its
systems have been used by clients. There can be no assurance that future defects
will not be discovered in existing or new applications or releases. Any such
occurrence could have a material adverse effect upon the Company's business,
financial condition and results of operations.
PROPRIETARY RIGHTS
The Company's success is dependent in part upon its proprietary software
technology. The Company has no patents, patent applications or registered
copyrights. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company
distributes its services under software license agreements that grant clients
licenses to use the Company's services and contain various provisions protecting
the Company's ownership and the confidentiality of the underlying technology.
The Company generally enters into confidentiality and/or license agreements with
its employees and existing and potential clients, and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation or independent third-party
development of the Company's technology.
There can be no assurance that the Company's services and technology do not
infringe any existing patents, copyrights or other proprietary rights of others,
or that third parties will not assert infringement claims in the future. If any
such claims are asserted and upheld, the costs of defense could be substantial
and any resulting liability to the Company could have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 377 full-time employees. The Company
believes that its relations with its employees are good.
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FACILITIES
The Company's headquarters are located in Pleasanton, California and
consist of approximately 52,000 square feet of office space leased pursuant to
multiple leases which terminate between March 1999 and February 2001. In
September 1996, the Company entered into a build-to-suit lease, whereby the
Company will lease approximately 130,000 square feet of office space located in
Pleasanton, California. Upon completion of the facility, estimated to be in late
1997, the Company will relocate its headquarters to the new facility. The term
of the build-to-suit lease expires approximately 11 years from completion of the
facility.
The Company also has a sales, implementation and production office in
Irvine, California, where it leases approximately 14,000 square feet under a
lease which terminates May 2002. The Company is in the process of establishing
back-up facilities at its Irvine location.
BeneSphere's processing operations are located in Bellevue, Washington,
where BeneSphere leases approximately 6,587 square feet under a lease that will
terminate on June 1, 2003.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 14, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Thomas H. Sinton.............. 49 Chairman of the Board, President, Chief Executive
Officer, Director
Jeffrey M. Bizzack............ 37 Senior Vice President, Sales
Mitchell W. Everton........... 40 Senior Vice President, Tax & Operations
Leslie A. Johnson............. 48 Senior Vice President, Client Services
Steven E. Klei................ 37 Senior Vice President, Finance, Chief Financial Officer
and Secretary
Robert E. Schneider........... 39 Senior Vice President, Research & Development
William T. Clifford(2)........ 51 Director
David C. Hodgson(1)........... 40 Director
Ronald W. Readmond(1)(2)...... 54 Director
Thomas P. Roddy(2)............ 62 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Sinton, founder of the Company, has served as a Director of the Company
since the Company's incorporation in October 1984, and from March 1993 to
present, Mr. Sinton has served as the President and Chief Executive Officer of
the Company. Since December 1996 and for a period between September 1989 and
February 1993, Mr. Sinton served as Chairman of the Board. Mr. Sinton holds a
B.A. degree in English Literature, magna cum laude, from Harvard University, an
M.S. degree in Food Science from the University of California at Davis and an
M.B.A. degree from Stanford University. Mr. Sinton received a Fulbright
Fellowship to study at the University of Vienna in Vienna, Austria.
Mr. Bizzack has served as Senior Vice President, Sales of the Company since
July 1993. From October 1992 to July 1993, Mr. Bizzack served as Vice President,
Sales of the Company. From October 1988 to October 1992, Mr. Bizzack served as a
District Sales Manager of the Company. Mr. Bizzack attended Saint Mary's
College.
Mr. Everton has served as Senior Vice President, Tax & Operations of the
Company since August 1995, and from July 1993 to July 1995, he served as
Executive Vice President, Operations of the Company. From July 1992 to July
1993, Mr. Everton served as Vice President, Operations of the Company. From June
1986 to July 1992, Mr. Everton held various management positions with Systems
Tax Service, a payroll tax filing company that was acquired by Ceridian
Corporation in 1993. Mr. Everton holds a B.A. degree in Business Economics from
the University of California, Santa Barbara and an M.B.A. degree from the
University of California, Berkeley.
Ms. Johnson has served as Senior Vice President, Client Services of the
Company since August 1997 and served as Vice President, Client Services of the
Company from September 1993 to August 1997. From May 1992 to September 1993, Ms.
Johnson was Director, National Accounts for Automatic Data Processing. From
January 1976 until her division was acquired by Automatic Data Processing in May
1992, Ms. Johnson held several positions at BankAmerica Corporation, most
recently as Vice President, Northern California National Accounts. Ms. Johnson
holds a B.A. degree in Communications from the University of Colorado.
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Mr. Klei has served as Senior Vice President, Finance of the Company since
August 1997, as Chief Financial Officer of the Company since July 1995 and as
Secretary of the Company since August 1996. Mr. Klei served as Vice President,
Finance from July 1995 to August 1997. From April 1993 to July 1995, Mr. Klei
was Corporate Controller for Esprit de Corp, an apparel company. From December
1990 to April 1993, Mr. Klei provided consulting services to financially
troubled companies based on his experience at New Home Interiors ("New Home"), a
regional operator of showrooms for home products and services. In such capacity,
Mr. Klei joined Rainbow Records ("Rainbow"), a retailer of records and videos,
as a consultant in December 1990 at which time Rainbow was contemplating a
liquidation. Mr. Klei presided over the orderly liquidation of Rainbow as Chief
Financial Officer from April 1991 to February 1992. Subsequently, Rainbow
entered into involuntary bankruptcy and received final approval from the
bankruptcy court in the Northern District of California in Oakland. Mr. Klei
joined Comfort Zone, a retailer of bedroom furnishings in February 1992 as a
consultant and subsequently served as Vice President and Chief Financial Officer
until April 1993. From May 1988 to December 1990, Mr. Klei was a minority owner
and served as Chief Financial Officer of New Home. In connection with his
position at New Home, Mr. Klei personally guaranteed certain obligations of New
Home, which became due upon New Home's liquidation in 1991. As a result of such
obligations, in September 1993, Mr. Klei applied for and was granted a full
discharge of all debts under Chapter 7 of the federal Bankruptcy Code. Mr. Klei
holds a B.S. degree in Accounting from Central Michigan University and is a
Certified Public Accountant.
Mr. Schneider has served as Senior Vice President, Research & Development
of the Company since August 1997 and served as Vice President, Research &
Development of the Company from November 1996 to August 1997. From April 1995 to
July 1996, Mr. Schneider served as Senior Vice President of Product Development
at Premenos Technology Corporation, an electronic commerce software company.
From February 1989 to March 1995, Mr. Schneider held several positions at Sybase
Inc., most recently as Vice President and Business Unit Manager of the Server
Products Group. Mr. Schneider holds a B.S. degree in Computer Science from the
University of San Francisco.
Mr. Clifford has served as a Director of the Company since August 1997. Mr.
Clifford has been the President of Gartner Group Research and the Chief
Operating Officer of Gartner Group, Inc. since April 1995 and Executive Vice
President, Operations of Gartner Group, Inc. since October 1993. From December
1988 to October 1993 Mr. Clifford held various positions at Automatic Data
Processing, Inc., including President of National Accounts and Corporate Vice
President, Information Services. Mr. Clifford holds a B.A. degree in Economics
from the University of Connecticut.
Mr. Hodgson has served as a Director of the Company since March 1997. Mr.
Hodgson is a Managing Member of General Atlantic Partners LLC ("GAP LLC") and
has been with GAP LLC since 1982. Mr. Hodgson is also a director of Baan
Company, N.V., a publicly-traded software company, Walker Interactive, a
publicly-traded software company, and several other privately-held software
companies, in which GAP LLC or one of its affiliates is an investor. Mr. Hodgson
holds an A.B. degree in Mathematics from Dartmouth College and an M.B.A. degree
from Stanford University.
Mr. Readmond has served as a Director of the Company since February 1997.
Since January 1997, Mr. Readmond has been an advisor of Barbour Griffith &
Rogers, a lobbying firm, and Chairman of International Equity Partners, L.P., a
private equity and project development company. From August 1989 to December
1996, Mr. Readmond held various positions at Charles Schwab & Co. Inc., most
recently serving as Vice Chairman. Mr. Readmond holds a B.A. degree in Economics
from Western Maryland College.
Mr. Roddy has served as a Director of the Company since 1992. Since 1988,
Mr. Roddy has served as President and Chief Executive Officer of Lafayette
Investments Inc., an investment banking and investment advisory company. Mr.
Roddy holds a B.S. degree in Biochemistry from Villanova University.
Mr. Hodgson was nominated and elected as a Director of the Company pursuant
to an agreement entered into between the Company, General Atlantic and Thomas H.
Sinton and his affiliates, in
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connection with the sale of Preferred Stock by the Company to General Atlantic.
Under such agreement, General Atlantic and Mr. Sinton and his affiliates agreed
to vote their shares to elect one director to the Board of Directors designated
by General Atlantic until the third annual meeting of stockholders after this
offering.
The Board of Directors presently consists of five members who hold office
until the annual meeting of stockholders or until a successor is duly elected
and qualified. Effective upon the Company's reincorporation into Delaware, the
Board of Directors will be divided into three classes. One class of directors
will be elected annually and its members will hold office for a three-year term
or until their successors are duly elected and qualified, or until their earlier
removal or resignation. The number of directors will initially be five and may
be changed by a resolution of the Board of Directors. Executive officers are
elected by the Board of Directors. There are no family relationships among any
of the directors and executive officers of the Company.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, reviews and evaluates the Company's control
functions and reviews the Company's investment policy. The Compensation
Committee was established in November 1996 and will make recommendations to the
Board of Directors concerning salaries and incentive compensation for employees
and consultants of the Company. The Compensation Committee will also administer
the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan.
Prior to November 1996, the Board of Directors made recommendations regarding
compensation for employees and consultants of the Company. See "-- Stock Plans."
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. Certain directors have been granted options to
purchase Common Stock in the past, and options may be granted to Directors of
the Company in the future. Mr. Clifford, Mr. Hodgson, Mr. Roddy and Mr. Readmond
have received options to purchase 15,000, 15,000, 62,500, and 15,000 shares,
respectively, of the Company's Common Stock, at exercise prices ranging from
$0.19 to $9.00 per share.
37
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to (i) the Chief
Executive Officer and (ii) the Company's four other most highly compensated
executive officers (collectively with the Chief Executive Officer, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the fiscal year ended June 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
------------------------ NO. OF SECURITIES
NAME AND PRINCIPAL POSITION SALARY COMMISSIONS UNDERLYING OPTIONS
- --------------------------------------------- -------- ----------- ------------------
<S> <C> <C> <C>
Thomas H. Sinton............................. $150,000 $ 0 0
President and Chief Executive Officer
Jeffrey M. Bizzack........................... 131,250 52,000 0
Senior Vice President, Sales
Mitchell W. Everton.......................... 131,250 0 0
Senior Vice President, Tax & Operations
Leslie A. Johnson............................ 131,250 0 13,000
Senior Vice President, Client Services
Steven E. Klei............................... 127,100 0 0
Senior Vice President, Finance and Chief
Financial Officer
</TABLE>
The following table sets forth information regarding stock options granted
during the fiscal year ended June 30, 1997 to each of the Named Executive
Officers.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE TERM($)(4)
OPTIONS EMPLOYEES IN PER EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL 1997(%)(2) SHARE($)(3) DATE 5% 10%
- -------------------- ------------- ----------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton.... -- -- -- -- -- --
Jeffrey M.
Bizzack........... -- -- -- -- -- --
Mitchell W.
Everton........... -- -- -- -- -- --
Leslie A. Johnson... 13,000 2.0% 4.75 9/24/2006 171,182 309,155
Steven E. Klei...... -- -- -- -- -- --
</TABLE>
- ---------------
(1) These options were granted under either the Company's Executive Stock Option
Plan. The options granted are immediately exercisable, but are subject to
repurchase in the event the optionee's employment with the Company ceases
for any reason. The options generally vest over four years, as to 25% of the
shares one year from the grant date and as to 1/48th of the shares in each
successive month thereafter, with full vesting occurring on the fourth
anniversary date. The options have a term of ten years, subject to earlier
termination in certain situations related to termination of employment. See
"Stock Plans."
(2) Based on a total of 662,670 options granted to all employees, consultants
and directors during fiscal 1997.
(3) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
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<PAGE> 40
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years) and the assumed initial public offering
price of $11.00. Stock price appreciation of 5% and 10% is assumed pursuant
to rules promulgated by the Securities and Exchange Commission and does not
represent the Company's prediction of its stock price performance. The
potential realizable value at 5% and 10% appreciation is calculated by
assuming that the initial public offering price appreciates at the indicated
rate for the entire term of the option and that the option is exercised at
the exercise price and sold on the last day of its term at the appreciated
price.
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended June 30, 1997 and the number and value of securities underlying
unexercised options held by the Named Executive Officers at June 30, 1997:
FISCAL YEAR AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS
ON VALUE --------------------------- AT FISCAL YEAR END($)(1)
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ---------------------------
NAME (#) ($) (#) (#) EXERCISABLE UNEXERCISABLE
- ------------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton........ -- -- -- -- -- --
Jeffrey M. Bizzack...... -- -- -- -- -- --
Mitchell W. Everton..... -- -- 22,625 27,128 189,032 226,654
Leslie A. Johnson....... -- -- -- 13,000 -- 52,000
Steven E. Klei.......... 7,000 60,235 2,167 20,833 18,105 174,060
</TABLE>
- ---------------
(1) The amount set forth represents the difference between the estimated fair
market value of $8.75 per share of Common Stock on June 30, 1997, as
determined by the Company's Board of Directors, multiplied by the applicable
number of options.
STOCK PLANS
1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Plan") provides for the granting to employees (including officers and employee
directors) of "incentive stock options" within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code") and for the granting to employees,
directors and consultants of nonstatutory stock options. As of June 30, 1997,
options to purchase an aggregate of 775,023 shares of Common Stock were
outstanding under the 1989 Plan. In February 1997, the Board of Directors of the
Company increased the shares available for future grants under the 1989 Plan by
1,375,766, for a total of 1,293,615 shares available for future grants under the
1989 Plan. Options granted under the 1989 Plan before the effective date of the
1996 Plan described below will remain outstanding in accordance with their
terms, but no further options will be granted under the 1989 Plan after this
offering.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors in February 1996 under the name
"Executive Stock Option Plan." The 1996 Plan provides for the granting to
employees (including officers and employee directors) of incentive stock options
and for the granting to employees, directors and consultants of nonstatutory
stock options. In November 1996 and February 1997, the Board of Directors of the
Company approved, effective upon the offering and subject to stockholder
approval, an amendment and restatement of the 1996 Plan to (i) rename the
Executive Stock Option Plan as the "1996 Stock Option Plan" and (ii) authorize
an increase in the number of shares reserved for issuance under the plan of any
unused or canceled shares under the 1989 Plan plus annual increases equal to the
lesser of (a) 250,000 shares, (b) two percent (2%) of the number of outstanding
shares of Common Stock on such date or (c) a
39
<PAGE> 41
lesser amount determined by the Board. As of June 30, 1997, options to purchase
an aggregate of 100,753 shares of Common Stock were outstanding under the 1996
Plan and 1,331,195 (including the number of shares available for future grants
under the 1989 Plan) shares remained available for future grants under the 1996
Plan. The 1996 Plan is administered by the Board of Directors or a committee
appointed by the Board (the "Administrator") and has a term of ten years.
Subject to the provisions of the 1996 Plan, the Administrator has the
authority to determine the individuals to whom stock options are to be granted,
the number of shares to be covered by each option, the exercise price, the fair
market value of the Common Stock, the type of option, the term of the option,
the restrictions, if any, on the exercise of the option, the terms for the
payment of the option price and other terms and conditions. Incentive stock
options granted under the 1996 Plan must have an exercise price of (i) at least
110% of fair market value of the Common Stock on the date of grant if granted to
an employee who owns stock representing more than 10% of the voting power of all
classes of stock of the Company, any parent or any subsidiary or (ii) at least
100% of fair market value of the Common Stock on the date of grant if granted to
any other employee. In the case of a nonstatutory stock option, the per share
exercise price is determined by the Administrator. No participant may be granted
in any fiscal year of the Company an option to purchase more than 125,000
shares, and over the remaining term of the 1996 Plan such participant may not be
granted options to purchase more than 250,000 additional shares. Payments by
optionholders upon exercise of an option may be made (as determined by the
Administrator) in cash or such other form of payment as permitted under the 1996
Plan, including without limitation, by promissory note or by surrender of
certain shares of Common Stock. In addition, an optionee may pay the exercise
price by means of a so-called "cashless exercise." In the event of a proposed
merger of the Company with or into another corporation, outstanding options may
be assumed or equivalent options may be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. In the
event that such successor corporation does not agree to assume options or
substitute equivalent options, optionees will have the right to exercise their
options as to all shares subject to such options, including shares as to which
options would not otherwise be exercisable.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
November 1996, subject to stockholder approval. The Company has reserved a total
of 500,000 shares of Common Stock for issuance under the Purchase Plan, with the
number of shares to be increased annually on each anniversary date of the
adoption of the Purchase Plan by a number of shares equal to the lesser of (i)
150,000 shares, (ii) one and one-half percent (1.5%) of the outstanding number
of shares on such date or (iii) a lesser number determined by the Board. The
Purchase Plan, which is intended to qualify under Section 423 of the Code,
permits eligible employees of the Company to purchase Common Stock through
payroll deductions of up to 10% of their base straight time gross earnings and
commissions, including payments for overtime, shift premiums, incentive
compensation, incentive payments, bonuses or other payments. An eligible
employee's right to purchase stock under the Purchase Plan may not accrue at a
rate that exceeds $25,000 worth of stock in any calendar year. The price of
Common Stock purchased under the Purchase Plan will be 85% of the lower of the
fair market value of the Common Stock on the first day of an offering period or
last day of the applicable purchase period. Employees may end their
participation in the Purchase Plan at any time during an offering period, and
they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with the Company. Rights granted
under the Purchase Plan are not transferable by a participant other than by
will, the laws of descent and distribution, or as otherwise provided under the
plan. The Purchase Plan will be implemented by an initial offering period of up
to 24 months commencing on the first trading day on or after the effective date
of the offering and ending on the last trading day on or before October 31,
1999. Subsequent offering periods will last 24 months and will commence on the
first trading day on or after November 1 and May 1 of each year during which the
Purchase Plan is in effect, and will terminate on the last trading day in the
periods ending 24 months later. Each 24-month offering period will consist of
four purchase periods of approximately six months duration. The Purchase Plan
will be administered by the Board of Directors or by a committee appointed by
the
40
<PAGE> 42
Board. Employees are eligible to participate if they are customarily employed by
the Company or any designated subsidiary for at least 20 hours per week and for
more than five months in any calendar year.
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
The 401(k) Plan provides that each participant may contribute up to 18% of his
or her pre-tax gross compensation (up to a statutorily prescribed annual limit
of $9,500 in 1997). The percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed by employee
participants and earnings on these contributions are fully vested at all times.
Employee participants may elect to invest their contributions in various
established funds.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their 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) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which a director derives an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and agents to the fullest extent
permitted by law.
The Company intends to enter into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Amended and Restated Certificate of Incorporation and Bylaws. These agreements,
among other things, indemnify the Company's directors and officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of the Company, arising out of such person's services as a
director or officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in November 1996 and is composed of
Messrs. Hodgson and Readmond. No interlocking relationship exists between any
member of the Company's Board of Directors and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
41
<PAGE> 43
CERTAIN TRANSACTIONS
Between May 1994 and September 1995, Thomas H. Sinton, a director and
officer of the Company, and his immediate family loaned an aggregate of
$1,040,000 to the Company at an interest rate of 10.0% per annum. The Company
has paid all such loans in full.
On December 5, 1996, the Company loaned $544,000 under a full recourse note
agreement at an interest rate of 6.31% per year to Robert E. Schneider, an
officer of the Company, to permit Mr. Schneider to exercise options to purchase
Common Stock of the Company. All principal and interest is due December 5, 2000.
As of June 30, 1997, Mr. Schneider had not paid any amount on the note.
On January 31, 1997, the Company loaned $250,000 under a full recourse note
agreement at an interest rate of 6.1% per year to Jeffrey M. Bizzack, an officer
of the Company, to permit Mr. Bizzack to purchase a residence. Accrued interest
must be paid on a monthly basis beginning two years from the date of the note.
All principal and accrued but unpaid interest is due January 31, 2001 unless Mr.
Bizzack's employment with the Company terminates, in which case, the note may
become due earlier. As of June 30, 1997, Mr. Bizzack had not paid any amount on
the note.
Information with respect to compensation to directors and executive
officers is set forth under "Management -- Directors Compensation" and
"-- Executive Compensation."
42
<PAGE> 44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of August 14, 1997 (assuming the automatic
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock effective upon the completion of this offering), and as adjusted to
reflect the sale of the shares of Common Stock offered hereby by (a) each person
or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (b) each director of the Company, (c) each
of the Named Executive Officers, and (d) all directors and executive officers of
the Company as a group. Unless otherwise noted in the footnotes to the table,
(i) the Company believes that the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock indicated as
being beneficially owned by them and (ii) officers and directors can be
contacted at the principal offices of the Company.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(1)
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNERS OWNED OFFERING OFFERING
- ------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Thomas H. Sinton(2)(3)....................................... 2,840,068 34.9% 28.0
General Atlantic Partners, LLC(4)............................ 1,149,466 14.1 11.3
Jeffrey M. Bizzack(5)........................................ 125,400 1.5 1.2
Mitchell W. Everton (6)...................................... 76,492 * *
Leslie A. Johnson(7)......................................... 62,000 * *
Steven E. Klei(8)............................................ 56,001 * *
William T. Clifford.......................................... -- * *
David C. Hodgson(4).......................................... 1,149,466 14.1 11.3
Ronald W. Readmond(9)........................................ 2,012 * *
Thomas P. Roddy(10).......................................... 209,821 2.6 2.1
All directors and executive officers as a group (10
persons)(11)............................................... 4,596,260 56.2 45.2
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) Based on 8,147,843 shares of Common Stock outstanding prior to the offering
and 10,147,843 outstanding upon completion of the offering. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days of August 14, 1997 upon the exercise of warrants
or vested options. Calculations of percentage of beneficial ownership
assume the exercise by only the respective named stockholder of all options
and warrants for the purchase of Common Stock held by such stockholder
which are exercisable within 60 days of August 14, 1997.
(2) Includes shares held by the Silas D. Sinton Trust Estate, the Silas Jack
Sinton Family Trust and as a custodian for minor children.
(3) The address of Mr. Sinton is c/o ProBusiness, Inc., 5934 Gibraltar Dr.,
Pleasanton, CA 94588.
(4) Includes 978,368 shares held by General Atlantic Partners 39, L.P. ("GAP
39") and 171,098 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment"). The general partner of GAP 39 is GAP LLC. The managing
members of GAP LLC are Steven A. Denning, Stephen P. Reynolds, David C.
Hodgson, J. Michael Cline, William O. Grabe and William E. Ford. The same
managing members of GAP LLC are the general partners of GAP Coinvestment.
Mr. Hodgson is a director of the Company. Mr. Hodgson disclaims beneficial
ownership of shares owned by GAP 39 and GAP Coinvestment, except to the
extent of his pecuniary interests therein. The address for GAP 39, GAP
Coinvestment, GAP LLC and Mr. Hodgson is c/o General Atlantic Service
Corporation, Three Pickwick Plaza, Greenwich, CT 06830.
(5) Includes 21,000 shares subject to the Company's repurchase rights.
(6) Includes 26,045 shares issuable upon exercise of vested options.
(7) Includes 8,542 shares subject to the Company's repurchase rights.
(8) Includes 4,667 shares issuable upon exercise of vested options and 18,958
shares subject to the Company's repurchase rights.
(9) Includes 2,012 shares issuable upon exercise of warrants.
(10) Includes 26,230 shares held by the Lafayette Investments Inc. of which Mr.
Roddy is President and Chief Executive Officer and 18,400 shares held by
the Lafayette Investments Inc. 401(k) Plan and Trust.
(11) Includes 30,712 shares issuable upon exercise of vested options, 2,012
shares issuable upon exercise of warrants and 48,500 shares subject to the
Company's repurchase rights.
43
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, par value $0.001 per
share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$0.001 per share ("Preferred Stock").
COMMON STOCK
As of June 30, 1997, there were 8,147,301 shares of Common Stock (including
Preferred Stock that will be converted and the issuance of Common Stock upon the
net exercise of warrants upon the closing of this offering) outstanding held of
record by 278 stockholders. The holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. The holders of Common Stock are not entitled to cumulative voting
rights with respect to the election of directors, and as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any then outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefore. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors will have the authority, without further action by
the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
In connection with a loan agreement, which terminated in April 1996,
between Silicon Valley Bank ("SVB") and the Company, the Company issued SVB a
warrant to purchase 9,446 shares of the Company's Series E Preferred Stock at an
exercise price of $7.94 per share, exercisable at any time through January 13,
2000. In connection with an equipment lease, the Company issued LINC Capital
Management ("LINC") a warrant to purchase 10,000 shares of the Company's Series
E Preferred Stock at an exercise price of $7.94 per share, exercisable at any
time through July 31, 2001. In connection with a loan agreement, the Company
issued Coast Business Credit ("Coast") a warrant to purchase 9,500 shares of the
Company's Series E Preferred Stock at an exercise price of $7.94 per share,
exercisable at any time through April 30, 2001. In connection with an amendment
to the loan agreement between Coast and the Company to extend the line of
credit, the Company issued a warrant to Coast to purchase an additional 9,500
shares of the Company's Series E Preferred Stock at an exercise price of $7.94
per share, exercisable through October 25, 2001. In connection with a built-to-
suit lease, the Company issued Britannia Hacienda V Limited Partnership
("Britannia Hacienda") and its partners warrants to purchase an aggregate of
22,500 shares of Series E Preferred Stock at an exercise price of $7.94 per
share, exercisable from the date that part of the construction to be performed
under the lease is substantially complete until the earlier of either five years
from the date
44
<PAGE> 46
of the consummation of a public offering or November 14, 2004. The warrants to
purchase Series E Preferred Stock shall represent the right to purchase shares
of Common Stock upon completion of this offering, at a conversion rate of two
shares of Common Stock for each share of Series E Preferred Stock. In connection
with its acquisition of BeneSphere, the Company issued warrants to purchase an
aggregate of 50,000 shares of Common Stock to two former shareholders of
BeneSphere at an exercise price of $9.00 per share, exercisable at any time
through January 7, 2002. After June 30, 1997, the Company issued a warrant to
purchase an aggregate of 20,000 shares of Common Stock at a purchase price of
$9.00 per share.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon completion of this offering, the holders (or their permitted
transferees) of approximately 6,349,026 shares of Common Stock and 121,892
shares issuable upon exercise of warrants (collectively the "Holders") are
entitled to certain rights with respect to the registration of such shares under
the Securities act of 1933, as amended (the "Securities Act"). If the Company
proposes to register its Common Stock, subject to certain exceptions, under the
Securities Act, the Holders are entitled to notice of the registration and are
entitled to include, at the Company's expense, such shares therein, provided
that the managing underwriter has the right to limit a certain number of such
shares included in the registration. These rights do not apply to this offering.
In addition, certain of the Holders may require the Company at its expense on no
more than two occasions to file a registration statement under the Securities
Act with respect to their shares of Common Stock. Such rights may not be
exercised until 180 days after the completion of this offering. In addition,
General Atlantic may request the Company to file a registration statement under
the Securities Act with respect to 1,149,466 shares of Common Stock on one
occasion as long as certain conditions are met. If the Holders, by exercising
their demand registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. Moreover, if the
Company were to include in a Company initiated registration shares held by the
Holders pursuant to exercise of their piggyback registration rights, such sales
may have an adverse effect on the Company's ability to raise additional capital.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") provides for the division of the Board of Directors into three
classes with staggered three-year terms. See "Management -- Executive Officers
and Directors." Under the Charter, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Charter also provides that after the completion of this offering, any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. The Charter further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive
45
<PAGE> 47
Officer, the President of the Company, the Board of Directors or the holders of
shares entitled to cast not less than forty percent (40%) of the votes at that
meeting. Under the Bylaws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
the Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. The Charter requires the affirmative vote of the
holders of at least 66 2/3% of the shares of capital stock of the Company issued
and outstanding and entitled to vote to amend or repeal any of the foregoing
Charter provisions. The 66 2/3% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders. The Bylaws also may be amended or
repealed by a majority vote of the Board of Directors subject to any limitations
set forth in the Bylaws.
TRANSFER AGENT AND REGISTRAR
Norwest Financial Services, Inc. has been appointed as the transfer agent
and registrar for the Company's Common Stock.
46
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding an
aggregate of 10,147,301 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1997. Of these shares, all of the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless such shares are purchased by "affiliates"
("Affiliates") of the Company, as that term is defined in Rule 144 under the
Securities Act as amended on April 29, 1997. The remaining 8,147,301 shares of
Common Stock held by existing stockholders (the "Restricted Shares") are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 promulgated under the Securities Act. As a result of contractual
restrictions and the provisions of Rule 144 and Rule 701, additional shares will
be available for sale in the public market as follows: (i) 2,000 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus; (ii)
1,000 Restricted Shares will be eligible for sale 90 days after the date of this
Prospectus; and (iii) 8,144,301 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements, 180 days after the date of this
Prospectus. In addition, certain of the Restricted Shares are subject to the
Company's repurchase right.
As of June 30, 1997, options to purchase 875,776 shares of Common Stock
were outstanding, of which options to purchase 186,301 shares were then
exercisable. The Company intends to file a Form S-8 registration statement
immediately after the date of this Prospectus of this offering under the
Securities Act to register 2,206,971 shares of Common Stock reserved for
issuance under the Company's 1989 Plan and 1996 Plan and 500,000 shares of
Common Stock reserved for issuance under the Company's Purchase Plan thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing. In addition, as of June 30, 1997,
warrants to purchase 171,892 shares of Common Stock were outstanding, all of
which will be eligible for sale 180 days after the date of this Prospectus.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year but less than two years, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of the Common Stock
(approximately 101,473 shares immediately after the offering) or (ii) the
average weekly trading volume during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above. In
general, under Rule 701 under the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other written
agreement related to compensation is eligible to resell such shares 90 days
after the effective date of the offering in reliance on Rule 144, but without
compliance with certain restrictions contained in Rule 144.
Prior to this offering, there has been no public market for the Common
Stock of the Company and no predictions can be made as to the effect, if any,
that market sales of shares of Common Stock prevailing from time to time may
have on the market price of the Common Stock. Nevertheless, sales of significant
numbers of shares of the Common Stock in the public market may adversely affect
the market price of the Common Stock offered hereby and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
47
<PAGE> 49
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and William Blair & Company, L.L.C. (the
"Representatives"), have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement, to purchase the numbers of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC...............................
William Blair & Company, L.L.C. ................................
----------
Total................................................. 2,000,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer shares of the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock, at the same price per share as will be paid
for the 2,000,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 2,000,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,000,000 shares are being
sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Robertson, Stephens & Company
LLC. However, Robertson, Stephens & Company LLC may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to lock-up agreements. There are no agreements between the Representatives and
any of the Company's stockholders providing consent by the Representatives to
the sale of shares prior to the expiration of the Lock-Up Period. The Company
has agreed that during the Lock-Up Period, the Company will not, subject to
certain exceptions, without the prior written consent of Robertson, Stephens &
Company LLC, (i) consent to the disposition of any shares held by stockholders
prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to
sell or otherwise dispose of, any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock, other
48
<PAGE> 50
than the Company's sale of shares in this offering, the issuance of Common Stock
upon the exercise of outstanding options and warrants and the Company's issuance
of options and stock under the existing stock option and stock purchase plans.
See "Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby will be determined through negotiations between the
Company and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
Certain persons participating in this offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
49
<PAGE> 51
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. As of June 30, 1997, certain members and investment partnerships of
Wilson Sonsini Goodrich & Rosati, P.C., beneficially owned an aggregate of
12,881 shares of the Company's Common Stock. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Cooley Godward
LLP, San Francisco, California.
EXPERTS
The financial statements of (i) ProBusiness Services, Inc. as of June 30,
1996 and 1997 and for each of the three years in the period ended June 30, 1997
(ii) BeneSphere Administrators, Inc. as of June 30, 1996 and for the year then
ended and (iii) Dimension Solutions, Inc. as of April 30, 1996 and for the year
then ended appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Effective June 1996, the Company engaged Ernst & Young LLP as its principal
independent auditors to replace Coopers & Lybrand LLP ("Coopers & Lybrand"), who
were dismissed as auditors of the Company effective January 1996. The decision
to change independent auditors was approved by the Company's Audit Committee and
Board of Directors. In connection with audits of the two fiscal years ended June
30, 1995, and in the subsequent interim period, there were no disagreements with
Coopers & Lybrand on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of Coopers & Lybrand, would have caused them to make reference
to the matter in their report. The reports of Coopers & Lybrand on the financial
statements of the Company for the past two years did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Certain items are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.
50
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROBUSINESS SERVICES, INC.
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)............................. F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-8
BENESPHERE ADMINISTRATORS, INC.
Report of Independent Auditors........................................................ F-23
Balance Sheets........................................................................ F-24
Statements of Operations.............................................................. F-25
Statements of Shareholders' Deficit................................................... F-26
Statements of Cash Flows.............................................................. F-27
Notes to Financial Statements......................................................... F-28
DIMENSION SOLUTIONS, INC.
Report of Independent Auditors........................................................ F-32
Balance Sheet......................................................................... F-33
Statement of Operations............................................................... F-34
Statement of Shareholders' Deficit.................................................... F-35
Statement of Cash Flows............................................................... F-36
Notes to Financial Statements......................................................... F-37
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction.......................................................................... F-39
Consolidated Statement of Operations for the year ended June 30, 1997................. F-40
Notes to Consolidated Financial Statements............................................ F-41
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ProBusiness Services, Inc.
We have audited the accompanying consolidated balance sheets of ProBusiness
Services, Inc. as of June 30, 1996 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 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 consolidated financial position of ProBusiness
Services, Inc. at June 30, 1996 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Walnut Creek, California
August 1, 1997,
except for Note 11, as to which the date is
August 11, 1997
F-2
<PAGE> 54
PROBUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY
--------------------- JUNE 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 4,041 $ 5,047
Accounts receivable, net of allowance of none and $365,000 at
June 30, 1996 and 1997....................................... 1,354 2,969
Prepaid expenses................................................ 327 643
------- --------
5,722 8,659
Payroll tax funds invested...................................... 106,339 177,626
------- --------
Total current assets.............................................. 112,061 186,285
Equipment, furniture and fixtures, net............................ 3,992 7,623
Other assets...................................................... 1,175 6,527
------- --------
Total assets............................................ $117,228 $200,435
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 623 $ 788
Accrued liabilities............................................. 1,458 5,285
Deferred revenue................................................ 224 1,279
Notes payable to stockholder.................................... 284 --
Current portion of capital lease obligations.................... 111 773
------- --------
2,700 8,125
Payroll tax funds collected but unremitted...................... 106,339 177,626
------- --------
Total current liabilities............................... 109,039 185,751
Note payable to stockholder, non-current.......................... 250 250
Long-term debt, less current portion.............................. 7,822 8,667
Capital lease obligations, less current portion................... 253 1,898
Commitments
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized: 6,000,000 shares;
issued outstanding: 2,653,301 shares at June 30, 1996 and
3,228,034 shares at June 30, 1997 (aggregate liquidation
preference: $12,078 at June 30, 1996 and $22,078 at June 30,
1997); pro forma: $.001 par value; authorized: 5,000,000
shares; no shares issued and outstanding..................... 27 33 $ --
Common stock, $.01 par value; authorized: 20,000,000 shares;
issued and outstanding: 1,214,984 shares at June 30, 1996 and
1,530,277 shares at June 30, 1997; pro forma: $.001 par
value; authorized: 60,000,000 shares; issued and outstanding:
7,986,345 shares............................................. 12 15 8
Additional paid-in capital...................................... 12,532 23,861 23,901
Accumulated deficit............................................. (12,707) (18,952) (18,952)
Notes receivable from stockholders.............................. -- (1,088) (1,088)
------- -------- --------
Total stockholders' equity (deficit).................... (136) 3,869 $ 3,869
------- -------- ========
Total liabilities and stockholders' equity (deficit).... $117,228 $200,435
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 55
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenue.................................................................. $7,095 $13,863 $27,374
Operating expenses:
Cost of providing services............................................. 2,703 6,435 13,659
General and administrative expenses.................................... 1,304 2,054 4,282
Research and development expenses...................................... 1,038 1,257 2,841
Client acquisition costs............................................... 2,943 5,388 11,706
Acquisition of in-process technology................................... -- 711 --
------ ------- -------
Total operating expenses............................................ 7,988 15,845 32,488
------ ------- -------
Loss from operations..................................................... (893) (1,982) (5,114)
Interest expense......................................................... (86) (473) (1,190)
Other income............................................................. -- 69 59
------ ------- -------
Net loss................................................................. $ (979) $(2,386) $(6,245)
====== ======= =======
Pro forma net loss per share (Note 1).................................... $ (0.74)
=======
Shares used in computing pro forma
net loss per share (Note 1)............................................ 8,451
=======
</TABLE>
See accompanying notes.
F-4
<PAGE> 56
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- ------------------------------- NOTES TOTAL
ADDITIONAL ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN PAID-IN ACCUMULATED FROM EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS (DEFICIT)
--------- ------ ---------- --------- ------ ---------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June
30, 1993.... 2,163,189 $ 22 $ 8,675 700 $ -- $ -- $ (7,865) $ -- $ 832
Issuance of
Series D
preferred
stock at
$5.94 per
share, net
of
issuance
costs..... 236,996 2 1,347 -- -- -- -- -- 1,349
Exercise of
stock
options... -- -- -- 2,920 -- 1 -- -- 1
Net loss.... -- -- -- -- -- -- (1,477) -- (1,477)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1994.... 2,400,185 24 10,022 3,620 -- 1 (9,342) -- 705
Issuance of
Series E
preferred
stock at
$7.94 per
share, net
of
issuance
costs..... 213,116 3 1,635 -- -- -- -- -- 1,638
Exercise of
stock
options... -- -- -- 9,808 -- 2 -- -- 2
Net loss.... -- -- -- -- -- -- (979) -- (979)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1995.... 2,613,301 27 11,657 13,428 -- 3 (10,321) -- 1,366
Issuance of
Series E
preferred
stock at
$7.94 per
share, net
of
issuance
costs..... 40,000 -- 317 -- -- -- -- -- 317
Exercise of
stock
options... -- -- -- 1,201,556 12 355 -- -- 367
Issuance of
preferred
stock
warrants... -- -- 200 -- -- -- -- -- 200
Net loss.... -- -- -- -- -- -- (2,386) -- (2,386)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1996.... 2,653,301 27 12,174 1,214,984 12 358 (12,707) -- (136)
Issuance of
Series F
preferred
stock at
$17.40 per
share, net
of
issuance
of
costs..... 574,733 6 9,845 -- -- -- -- -- 9,851
Exercise of
stock
options... -- -- -- 315,293 3 1,163 -- (1,088) 78
Issuance of
preferred
stock
warrants... -- -- 321 -- -- -- -- -- 321
Net loss.... -- -- -- -- -- -- (6,245) -- (6,245)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1997.... 3,228,034 $ 33 $ 22,340 1,530,277 $ 15 $1,521 $ (18,952) $(1,088) $ 3,869
========= === ======= ========= === ==== ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 57
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................... $ (979) $(2,386) $(6,245)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 517 1,146 2,574
Acquisition of in-process technology...................................... -- 711 --
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (210) (521) (1,495)
Prepaid expenses....................................................... (77) (214) (254)
Other assets........................................................... (22) 201 (1,289)
Accounts payable....................................................... (1) 360 137
Accrued liabilities.................................................... 273 650 2,291
Deferred revenue....................................................... 55 (149) 174
------- ------- -------
Net cash used in operating activities....................................... (444) (202) (4,107)
INVESTING ACTIVITIES
Acquisition of Benesphere Administrators, Inc., net of cash acquired........ -- -- (245)
Purchases of equipment, furniture and fixtures.............................. (1,281) (2,685) (2,775)
Capitalization of software development costs................................ (137) (645) (1,409)
Notes receivable from stockholders.......................................... -- -- (295)
Other....................................................................... -- 3 --
------- ------- -------
Net cash used in investing activities....................................... (1,418) (3,327) (4,724)
FINANCING ACTIVITIES
Net decrease in restricted cash............................................. (41) -- --
Borrowings under line of credit agreements.................................. 1,402 5,934 24,727
Repayments of borrowings under line of credit agreements.................... (157) (3,478) (23,831)
Proceeds from note payable.................................................. -- 4,000 --
Repayments under note payable............................................... (75) -- (534)
Proceeds from notes payable to stockholders................................. 500 250 275
Repayments under notes payable to stockholders.............................. (566) (227) (275)
Principal payments on capital lease obligations............................. (103) (128) (454)
Proceeds from issuance of preferred stock................................... 1,638 -- 9,851
Proceeds from issuance of common stock...................................... 2 367 78
------- ------- -------
Net cash provided by financing activities................................... 2,600 6,718 9,837
------- ------- -------
Net increase in cash and cash equivalents................................... 738 3,189 1,006
Cash and cash equivalents, beginning of year................................ 114 852 4,041
------- ------- -------
Cash and cash equivalents, end of year...................................... $ 852 $ 4,041 $ 5,047
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 58
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................. $ 136 $ 377 $ 1,507
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment, furniture and fixtures under capital leases........ $ 126 $ 210 $ 2,644
======= ======= =======
Issuance of warrants in connection with debt.............................. $ -- $ 200 $ 161
======= ======= =======
Notes receivable from stockholders issued in connection with stock option
exercise............................................................... $ -- $ -- $ 1,088
======= ======= =======
ACQUISITION OF DIMENSION SOLUTIONS, INC.:
Issuance of Series E preferred stock...................................... $ -- $ 317 $ --
Liabilities assumed....................................................... -- 947 --
------- ------- -------
$ -- $ 1,264 $ --
======= ======= =======
Acquisition of BeneSphere Administrators, Inc.:
Issuance of warrants...................................................... $ -- $ -- $ 160
Net liabilities assumed................................................... -- -- 2,445
Note payable to BeneSphere Administrators, Inc. .......................... -- -- 250
------- ------- -------
$ -- $ -- $ 2,855
======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 59
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
ProBusiness Services, Inc. provides employee administrative services for
large employers. The Company's primary service offerings are payroll processing,
payroll tax filing, human resources software and benefits administration,
including the enrollment and processing of flexible benefit plans and COBRA
programs.
On May 23, 1996, the Company acquired substantially all of the business and
assets of Dimension Solutions, Inc. ("Dimension Solutions"), a California
corporation, for $1,264,000. The transaction was recorded under the purchase
method of accounting, and the results of operations of Dimension Solutions have
been included in the consolidated financial statements of the Company beginning
May 24, 1996 (Note 10).
On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. ("BeneSphere"), a Washington Corporation, for
$3,105,000, plus contingent payments, should certain financial conditions be
met, of up to $4,500,000. The transaction was recorded under the purchase method
of accounting, and the results of operations of BeneSphere have been included in
the consolidated financial statements of the Company beginning January 2, 1997
(Note 10).
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.
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 and the reported amounts of
revenues and expenses during the period. Such complex estimates include
provisions for doubtful accounts and penalties and interest relating to payroll
tax processing and estimates regarding the recoverability of capitalized
software. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. Cash and
cash equivalents have a carrying amount which approximates fair value. The
Company's cash, cash equivalents and payroll tax funds invested are held
primarily with two financial institutions.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," ("SFAS No. 121"), which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount of the assets. The Company
adopted SFAS No. 121 in fiscal year 1997, and such adoption has not had a
material impact.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost, net of accumulated
depreciation and amortization. Depreciation of equipment, furniture and fixtures
is computed using the straight-line method over the estimated
F-8
<PAGE> 60
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
useful lives of the assets which range from three to seven years. Leasehold
improvements and assets under capital leases are amortized over the shorter of
the life of the asset or the term of the lease.
PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES
In connection with its payroll processing and payroll tax filing services,
the Company collects funds from clients for payment of payroll taxes, holds such
funds with a financial institution which are segregated from the Company's other
accounts until payment is due, remits the funds to the appropriate taxing
authority and files federal, state and local tax returns. For such services, the
Company derives its payroll tax filing revenue from fees charged and from
interest income it receives on tax filing deposits temporarily held pending
remittance on behalf of its clients to taxing authorities. These collected but
unremitted funds and the related liability to clients for such funds are
included in the accompanying consolidated balance sheets as current assets and
current liabilities. The amount of funds held under these arrangements with
customers may vary significantly during the year. The Company invests collected
but unremitted funds in various financial instruments which consisted of
overnight U.S. government direct and agency obligations repurchase agreements
($101,824,000) and cash and cash equivalents ($4,515,000) at June 30, 1996, and
of overnight U.S. government direct and agency obligations repurchase agreements
($40,965,000), commercial paper rated A-1 and/or P-1 and money market funds with
underlying credit quality of AA or better ($134,520,000) and cash and cash
equivalents ($2,141,000) at June 30, 1997. The Company's investments are subject
to interest rate fluctuations. As a result, the Company's results of operations
may be impacted by interest rate fluctuations. Due to the types of financial
instruments in which the Company invests, money market funds, overnight
repurchase agreements and cash and cash equivalents, the carrying amount of such
investments approximates fair value. The Company's payroll tax fund investments
are held primarily with one financial institution. Interest income earned on
collected but unremitted funds, which is classified as revenue, amounted to
approximately none, $1,896,000 and $5,925,000, for fiscal years 1995, 1996 and
1997 respectively.
The Company's payroll tax service is subject to various risks resulting
from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
calculate and transfer to the Company contributed employer and employee tax
funds. The Company processes the data received from the client and remits the
funds along with a tax return to the appropriate tax authorities when due.
Tracking, processing and paying such tax liabilities is complex. Errors and
omissions have occurred in the past and may occur in the future in connection
with such service. The Company is subject to large cash penalties imposed by tax
authorities for late filings or underpayment of taxes. To date, such penalties
have not been significant. However, there can be no assurance that any
liabilities associated with such penalties will not have a material adverse
effect on the Company's business, financial condition or results of operations.
At June 30, 1997, the Company had accrued $586,000 for potential tax penalties.
There can be no assurance that the Company's reserves or insurance for such
penalties will be adequate. In addition, failure by the Company to make timely
or accurate tax return filings and pay tax liabilities when due on behalf of
clients may damage the Company's reputation and adversely affect its
relationships with existing clients and its ability to gain new clients.
The Company's payroll tax service is also dependent upon government
regulations, which are subject to continuous changes. Failure by the Company to
implement these changes into its services and technology in a timely manner
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, since a significant portion of
the Company's revenue is derived from interest earned from investing payroll tax
funds, changes in policies relating to withholding federal or state income taxes
or reduction in the time allowed for taxpayers to remit payment for taxes owed
to government authorities would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has access to confidential information and to client funds. As
a result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions
F-9
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PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
insurance will be adequate to cover any such claims. Such claims could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. The Company currently conducts
substantially all of its payroll and payroll tax processing and production at
the Company's headquarters in Pleasanton, California. No assurance can be given
that the precautions that the Company has taken to protect itself from or
minimize the impact of such events will be adequate. Any damage to the Company's
data centers, failure of telecommunications links or breach of the security of
the Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
REVENUE RECOGNITION
Revenue from payroll processing and payroll tax filing services under
client contracts is recognized as the services are performed. Interest income
earned on unremitted payroll tax funds invested is recognized as earned.
The Company's sales are primarily to customers in the western United
States. Credit evaluations are performed as necessary and the Company does not
require collateral from customers.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed."
The Company capitalizes software development costs incurred after
establishing technological feasibility of the product prior to the general
release of the service using the product. Costs incurred in connection with the
enhancement of the Company's existing products or after the general release of
the service using the product are expensed in the current period and included in
the research and development costs within the statement of operations. The
Company amortizes the capitalized software development costs using the greater
of the straight-line basis over the estimated product life, which is generally a
36 month period, or the ratio of current revenue to the total of current revenue
and anticipated future revenue over the life of the related product. Such
amortization is included in cost of providing services within the statement of
operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the "disclosure only" alternative
described in Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS No. 128"), which is required to be adopted
on December 31, 1997. At that time the Company will be required to change the
method currently used to compute earnings (loss) per share and to restate
earnings (loss) per share for all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of common stock
equivalents will be excluded. The Company has determined that the impact of SFAS
No. 128 will not be significant to the calculation of primary or fully diluted
earnings loss per share.
F-10
<PAGE> 62
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET LOSS AND PRO FORMA NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to applicable Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
warrants and preferred stock) issued during the period commencing 12 months
prior to the initial filing of a proposed public offering at prices below the
assumed public offering price have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method for
stock options and warrants and the as if-converted method for preferred stock at
the estimated initial public offering price). Per share information calculated
on this basis is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss per share.............................................. $ (0.32) $ (0.76) $ (1.94)
====== ====== ======
Shares used in calculating net loss per share................... 3,019 3,141 3,224
====== ====== ======
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from convertible preferred stock issued
more than 12 months prior to the proposed initial public offering that will
automatically convert upon completion of the Company's initial public offering
(using the as if-converted method) from the original date of issuance.
2. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Equipment and leasehold improvements...................................... $ 5,145 $ 9,403
Furniture and fixtures.................................................... 1,060 1,973
Construction in progress.................................................. -- 578
------- -------
6,205 11,954
Less accumulated depreciation and amortization............................ (2,213) (4,331)
------- -------
$ 3,992 $ 7,623
======= =======
</TABLE>
Equipment, furniture and fixtures include amounts for assets acquired under
capital leases, principally production, office and computer equipment, of
$644,000 and $3,515,000 at June 30, 1996 and 1997, respectively. Accumulated
amortization of these assets was $313,000 and $854,000 at June 30, 1996 and
1997, respectively.
F-11
<PAGE> 63
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT
The carrying amounts of the Company's long-term debt instruments
approximate their fair value. The fair value of the Company's debt instruments
are estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Borrowings under line of credit agreements................................ $ 3,984 $ 4,758
Subordinated notes payable................................................ 3,838 3,909
------- -------
7,822 8,667
Less current portion...................................................... -- --
------- -------
$ 7,822 $ 8,667
======= =======
</TABLE>
LINE OF CREDIT AGREEMENT
The Company has a line of credit agreement (the "Agreement") with a
financial institution which provides for borrowings that are limited to the
lesser of $10,000,000, of which $1,000,000 is designated as an equipment
acquisition loan, or four times the Company's average monthly cash collections,
as defined, (decreased by a factor of one month for each 30% decrease in the
Company's revenue, measured on a quarterly basis) over the four month period
prior to the borrowing date, less $150,000. The amount available for borrowing
under the line of credit agreement was approximately $10,000,000 at June 30,
1997. Borrowings outstanding under the Agreement bear interest at the bank's
prime rate plus 1% (9.5% at June 30, 1997) and interest is payable monthly. The
Company is required to pay a minimum of $30,000 in interest quarterly plus other
renewal fees under the Agreement. Borrowings outstanding under the Agreement are
collateralized by substantially all of the Company's assets not otherwise
encumbered. The financial covenants of the Agreement require the Company to
maintain a minimum cash balance. The cash balance requirement at June 30, 1997
was not material. The Agreement expires in April 1998, but is subject to
automatic renewal for an additional year at the option of the Company. The
Company has classified the $3,984,000 and $4,758,000 of borrowings under the
Agreement as non-current liabilities at June 30, 1996 and 1997, respectively, as
management expects to maintain adequate cash collections during the next 12
months to support at least such level of borrowings.
Equipment acquisition loans bear interest at the bank's prime rate plus 1%.
Borrowings are to be repaid over a 36 month period following a six month period
of payments for interest only. There were no borrowings under the equipment
acquisition loans during fiscal years 1996 or 1997.
In connection with line of credit agreements, the Company issued warrants
in 1995 and 1996 to purchase 9,446 and 9,500 shares, respectively, of the
Company's Series E preferred stock with an exercise price of $7.94 per share
which expire in January 2000 through April 2001. The Company deemed the fair
value of these warrants to be immaterial at the date of issuance. In October
1996, in connection with an amendment of a line of credit agreement, the Company
issued warrants to purchase 9,500 shares of the Company's Series E preferred
stock with an exercise price of $7.94 per share which expire in October 2001.
The Company deemed the fair value of the warrants to be $36,000.
SUBORDINATED NOTES PAYABLE
In October 1995 and December 1995, the Company issued $1,100,000 and
$2,900,000, respectively of subordinated notes payable to investors
("Subordinated Notes"). The Subordinated Notes and interest accrued thereon are
due and payable on demand upon the earlier of three years from the date of the
notes or, at the option of the Company or the Subordinated Notes holders, within
30 days after the completion of a public offering of the Company's common stock
which triggers the automatic conversion of the Company's outstanding
F-12
<PAGE> 64
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
preferred stock into common stock. The Subordinated Notes accrue interest at the
rate of 8% per annum, and such interest is payable on a quarterly basis.
In connection with the issuance of the Subordinated Notes, the Company
issued warrants to purchase 125,926 shares of the Company's Series E Preferred
Stock at $7.94 per share. The warrants, to the extent not previously exercised,
shall expire on the earlier of (i) the date the underlying Subordinated Notes
are repaid in full, (ii) immediately prior to the completion of a public
offering of the Company's common stock which triggers the automatic conversion
of the Company's outstanding preferred stock into common stock, or (iii) any
sale, consolidation or merger of the Company in which the holders of the
Company's securities before the transaction beneficially own less than 50% of
the outstanding voting securities of the surviving entity after the transaction.
The Company deemed the fair value of warrants to be $200,000, which amount has
been recorded as a reduction of the carrying amount of the Subordinated Notes
and is being amortized using the effective interest method over the term of the
Subordinated Notes.
NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholder at June 30, 1996 and June 30, 1997, includes
notes due to a director and stockholder of the Company. The notes are due on
demand and bear interest at the rate of 10%. The amounts due under these notes
were $284,000 and none at June 30, 1996 and 1997, respectively.
Note payable to stockholder, non-current at June 30, 1996 and June 30, 1997
includes a $250,000 subordinated note payable, which is payable to a
stockholder, assumed in the acquisition of Dimension Solutions, Inc. The note is
due in fiscal 1999 and bears interest at the prime rate plus 2.5% per annum
(Note 10).
EQUIPMENT LEASE LINE
In July 1996, the Company entered into an equipment lease line agreement
under which the Company could have acquired up to $2,000,000 of equipment
through June 1997. In connection with the equipment lease line, the Company
issued a warrant to purchase 10,000 shares of the Company's Series E Preferred
Stock at an exercise price of $7.94 per share. The warrant is exercisable for
five years from the date of the final equipment purchase. The Company deemed the
fair value of this warrant to be immaterial at the date of issuance. As of June
30, 1997, the Company had used approximately $1,870,000 of the equipment lease
line. Amounts outstanding under the agreement are classified as capital lease
obligations in the balance sheet and are secured by the related equipment.
F-13
<PAGE> 65
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LEASE OBLIGATIONS
The Company leases its facilities and various equipment under
non-cancellable operating leases which expire at various dates through 2002. The
Company is also obligated under a number of capital equipment leases expiring at
various dates through 2001. The future minimum lease payments under capital and
operating leases subsequent to June 30, 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
------------------------------------------------------------------------- ------- ---------
<S> <C> <C>
1998..................................................................... $1,139 $ 2,588
1999..................................................................... 1,114 2,966
2000..................................................................... 1,127 2,646
2001..................................................................... 16 2,429
2002..................................................................... -- 2,254
----- ------
Total minimum lease payments............................................. 3,396 $12,883
======
Less amounts representing interest....................................... 725
-----
Present value of net minimum capital lease obligations................... 2,671
Less current portion..................................................... 773
-----
$1,898
=====
</TABLE>
In September 1996, the Company entered into a lease arrangement under which
the lessor will build a facility into which the Company will move its corporate
headquarters. This operating lease will expire approximately eleven years from
completion of the facility and will require the Company to pay a minimum average
monthly lease payment of approximately $167,000 over the life of the lease. Such
lease payments are not included in the above table as the completion date is not
known. As part of the build to suit lease agreement, the Company issued a
warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise
price of $7.94 per share. The warrant is exercisable for the lesser of eight
years from the date of completion or five years from the date of an initial
public offering which triggers conversion of Series E Preferred Stock. The
Company valued the warrants at $125,000.
Rent expense was $407,000, $707,000 and $1.5 million for fiscal years 1995,
1996 and 1997, respectively.
5. INCOME TAXES
As of June 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $13,913,000 and $3,850,000, respectively. The
Company also had federal and state research and development tax credit
carryforwards of approximately $451,000 and $199,000, respectively. The federal
net operating loss and credit carryforwards will expire at various dates
beginning with the fiscal year ending 1999 through 2012, if not utilized. The
state net operating loss carryforwards and credit carryforwards will expire at
various dates beginning with the fiscal year ending 1998 through 2012, if not
utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-14
<PAGE> 66
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 3,279 $ 4,965
Research and development credit carryforwards................................... 397 650
Fixed assets.................................................................... 109 428
Accruals and reserves........................................................... 53 330
------- -------
Gross deferred tax assets......................................................... 3,838 6,373
Less valuation allowance.......................................................... (3,597) (5,988)
------- -------
Deferred tax assets............................................................... 241 385
Deferred tax liabilities:
Capitalized software development costs.......................................... (130) (313)
Other........................................................................... (111) (72)
------- -------
Gross deferred tax liabilities.................................................... (241) (385)
------- -------
Net deferred taxes................................................................ $ -- $ --
======= =======
</TABLE>
A valuation allowance has been established and, accordingly, no benefit has
been recognized for the Company's net operating losses and other deferred tax
assets. The net valuation allowance increased by $2,391,000 during the year
ended June 30, 1997. The Company believes that, based on a number of factors,
the available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception and expected near-term future losses. The Company will
continue to assess the realizability of the deferred tax assets based on actual
and forecasted operating results.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of June 30, 1997, the Company has authorized 6,000,000 shares of
preferred stock, of which 1,500,000 shares have been designated as Series A, B
and C shares, 500,000 shares have been designated as Series D and E shares and
500,000 shares are undesignated.
F-15
<PAGE> 67
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred stock consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
SHARES LIQUIDATION
OUTSTANDING PREFERENCE
----------- -----------
<S> <C> <C>
Series
A:.......................................................... 920,000 $ 3,501
B........................................................... 919,400 3,497
C........................................................... 260,785 1,288
D........................................................... 300,000 1,782
E........................................................... 253,116 2,010
F........................................................... 574,733 10,000
--------- -------
Total.................................................. 3,228,034 $22,078
========= =======
</TABLE>
Holders of the Company's Series A, B, C, D and E preferred stock are
entitled to receive non-cumulative dividends in the amount of $.02 per share per
annum in preference to holders of the Company's common stock at the discretion
of the Board of Directors. No dividends were declared during fiscal years 1995,
1996 and 1997.
Each holder of preferred stock may, at any time, convert such holder's
preferred stock to shares of common stock. Holders of preferred stock generally
have the same voting rights as holders of common stock. Preferred stock is
initially convertible at the ratio of one share of preferred stock to two shares
of common stock, subject to adjustment to prevent dilution in the event that the
Company issues additional shares. Additionally, conversion is automatic upon the
completion of an underwritten public offering of common stock in which the price
per share is not less than $3.50 per share with aggregate gross proceeds to the
Company of at least $7,000,000.
In the event of the liquidation of the Company, holders of Series A, B, C,
D and E preferred stock are entitled to receive an amount per share equal to
$3.805, $3.804, $4.94, $5.94 and $7.94, respectively, prior and in preference to
any distribution of Company assets to holders of common stock, plus all declared
and unpaid dividends.
In March 1997, the Company issued 574,733 shares of $.01 par value Series F
preferred stock to entities affiliated with General Atlantic Partners LLC at
$17.40 per share resulting in gross proceeds of approximately $10 million.
Holders of Series F preferred stock are entitled to receive non-cumulative
dividends in the amount of $.02 per share per annum in preference to holders of
the Company's common stock at the discretion of the Board of Directors. In the
event dividends are paid on any share of common stock, an additional dividend
shall be paid with respect to all outstanding shares of Series F preferred in an
amount equal per share of Series F preferred (on an as-if-converted to common
stock basis) to the amount paid or set aside for each share of common stock.
Each holder of Series F preferred stock, may, at any time, convert such
holder's preferred stock to shares of common stock. Holders of Series F
preferred stock generally have the same voting rights as holders of common
stock. Series F preferred stock is initially convertible at the ratio of one
share of preferred stock to two shares of common stock, subject to adjustment to
prevent dilution in the event that the Company issues additional shares.
Additionally, conversion of Series F preferred stock is automatic upon the
completion of an underwritten public offering of common stock in which the price
per share is not less than $8.70 per share with aggregate gross proceeds to the
Company of at least $10,000,000.
In the event of liquidation of the Company, holders of Series F preferred
stock are entitled to receive an amount per share equal to $17.40 prior and in
preference to any distribution of the Company assets to holders of common stock,
plus all declared and unpaid dividends.
F-16
<PAGE> 68
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK SPLIT
In November 1994, the Company's stockholders authorized a two-for-one split
of its common stock. All references in the accompanying financial statements to
the number of shares of common have been restated to reflect the stock split.
PROPOSED PUBLIC OFFERING OF COMMON STOCK
On November 15, 1996, the Board of Directors authorized the Company to
proceed with an initial public offering of the Company's common stock. If the
offering is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will automatically convert into 6,456,068
shares of common stock. Prior to the offering, the Company plans to
reincorporate in Delaware and authorize 5,000,000 shares of undesignated
preferred stock, increase the number of authorized shares of common stock to
60,000,000 and adopt a par value of $.001 per share for common and preferred
shares. In addition, the Company will change its name from ProBusiness, Inc. to
ProBusiness Services, Inc. The unaudited pro forma stockholders' equity
(deficit) at June 30, 1997 gives effect to the conversion of all outstanding
shares of convertible preferred stock into 6,456,068 shares of common stock upon
the completion of the Company's initial public offering of shares.
NOTES RECEIVABLE
In December 1996, the Company advanced $544,000 in the form of a note
receivable from a stockholder, who is also an executive officer, in connection
with the exercise of options to purchase common stock. The note is due on
December 2000, bears interest at 6.31% and is full recourse.
In January 1997, the Company advanced $544,000 in the form of a note
receivable from a stockholder in connection with the exercise of options to
purchase common stock. The note is due on January 2001, bears interest at 6.10%
and is full recourse.
In January 1997, the Company advanced $250,000 in the form of a note
receivable from a stockholder who is also an executive officer. The note is due
in January 2001, bears interest at 6.10% and is full recourse.
7. STOCK OPTION AND STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the
granting to employees (including officers and employee directors) of "incentive
stock options" within the meaning of the Internal Revenue Code of 1986, as
amended (the "Code") and for the granting to employees, directors and
consultants of nonstatutory stock options. The Company has reserved 2,987,248
shares of common stock for the exercise of stock options under the 1989 Plan.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the plan unless the option's price is at least 110% of the fair
market value of the common stock at the date of grant. Options issued to
employees owning less than 10% of the Company's stock may be granted at prices
of at least 100% (85% for nonemployees) of the fair market value of the stock at
the grant date. Under the terms of the plan, options generally vest at the rate
of 25% on the first anniversary of the vesting commencement date as defined by
the option agreement and ratably on a monthly basis for the remaining shares
thereafter until fully vested at the end of the fourth year. The options expire
at the earlier of ten years from date of grant or six months after termination
of employment with the Company and are not transferable.
In 1996, the Company established the 1996 Executive Stock Option Plan
("Executive Plan") which provides for stock options to employees and
consultants. Under the Executive Plan, the Board of Directors may grant
nonstatutory stock options to employees and consultants and incentive stock
options to employees only. The Company has reserved 750,000 shares of common
stock for exercise of stock options under the 1996 Plan. The grant of incentive
stock option to an employee who owns stock representing more than 10% of the
voting power of all classes of stock of the Company must be no less than 110% of
the fair market value per share on the
F-17
<PAGE> 69
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
date of grant. Fair market value is determined by the Board of Directors. For
all other employees the options must be no less than 100% of the fair market
value per share on the date of grant. All nonstatutory stock options granted are
at a price that is determined by the Board of Directors. The options generally
expire ten years from the date of grant and are exercisable as determined by the
Board of Directors.
In November 1996, the Board of Directors approved, effective upon the
offering and subject to stockholder approval, an amendment and restatement of
the Executive Plan to rename 1996 Executive Stock Option Plan to the 1996 Stock
Option Plan (the "1996 Plan") and authorized for issuance under the 1996 Plan a
total of 750,000 shares plus any unused or cancelled shares under the 1989 Plan,
and an annual increase to be added on each anniversary date of the adoption of
the 1996 Plan equal to the lesser of (a) 250,000 shares, (b) 2% of the
outstanding shares of common stock on such date or (c) a lesser amount
determined by the Board. The 1996 Plan provides for grants to employees
(including officers and employee directors) of incentive stock options and for
the granting to employees, directors and consultants of nonqualified stock
options.
A summary of the activity under the 1989 and 1996 Plans is set forth below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE PER NUMBER EXERCISE
SHARE OF SHARES PRICE
------------------ ----------- --------
<S> <C> <C> <C>
Outstanding at June 30, 1994.............. 0.190 - 0.395 882,446 0.23
Granted................................. 0.295 - 0.395 164,436 0.39
Exercised............................... 0.190 - 0.395 (9,808) 0.27
Canceled................................ 0.190 - 0.395 (18,178) 0.28
--------------- ---------- ------
Outstanding at June 30, 1995.............. 0.190 - 0.395 1,018,896 0.26
Granted................................. 0.395 - 1.25 1,055,930 0.43
Exercised............................... 0.190 - 0.435 (1,201,556) 0.33
Canceled................................ 0.190 - 0.395 (230,469) 0.33
--------------- ---------- ------
Outstanding at June 30, 1996.............. 0.190 - 4.35 642,801 0.41
Granted................................. 4.75 - 8.75 662,670 7.25
Exercised............................... 0.190 - 7.25 (315,293) 3.59
Canceled................................ 0.247 - 8.75 (114,402) 3.77
--------------- ---------- ------
Outstanding at June 30, 1997.............. $0.190 - $ 8.75 875,776 $ 4.00
=============== ========== ======
</TABLE>
As of June 30, 1997, options to purchase 198,422 shares of common stock
were vested and exercisable at an average exercise price of $0.43 per share and
options to purchase 1,331,195 shares were available for future grant. At June
30, 1997, options to purchase 380,316 shares of Common Stock had been exercised
which are subject to repurchase.
The weighted-average fair value of options granted during 1996 and 1997 was
$0.09 and $1.51 per share, respectively.
F-18
<PAGE> 70
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------ EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE AND VESTED PRICE
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.19 - $0.297 70,563 5.65 0.261 66,441 $0.258
$0.395 - $1.25 370,093 8.44 0.515 131.460 0.505
$4.75 - $4.75 51,000 9.21 4.75 521 4.75
$7.25 - $8.75 384,120 9.63 7.81 -- --
----------- --------
875,776 198,422
=========== ========
</TABLE>
STOCK-BASED COMPENSATION
As permitted under SFAS 123, the Company has elected to continue to follow
APB 25 in accounting for stock-based awards to employees. Under APB 25, the
Company has not recognized any compensation expense with respect to such awards,
since the exercise price of the stock options awarded are equal to the fair
market value of the underlying security on the grant date.
Disclosure of information regarding net loss and net loss per share is
required by SFAS 123 for the Company's awards granted after June 30, 1995 as if
the Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated as of the date of the grant using a Black-Scholes option
pricing model. Limitations on the effectiveness of the Black-Scholes option
valuation model are that it was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable
and that the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The Company has plans which award employees
stock options. These plans are discussed in the note above. The fair value of
the Company's stock-based awards to employees was estimated using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------
YEAR ENDED JUNE 30,
-------------------
1996 1997
----- -----
<S> <C> <C>
Expected life (in years).......................................... 3.00 2.00
Expected volatility............................................... 0.001 0.001
Risk free interest rate........................................... 6.18% 6.18%
Expected dividend yield........................................... 0.00% 0.00%
</TABLE>
F-19
<PAGE> 71
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period for
options. The Company's adjusted information follows (in thousands, except for
per share information):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1997
------- -------
<S> <C> <C>
Net income (loss), as reported.................................. $(2,386) $(6,245)
======= =======
Net income (loss), as adjusted.................................. $(2,403) $(6,355)
======= =======
Historical net income (loss) per share, as reported............. $ (0.76) $ (1.94)
======= =======
Historical net income (loss) per share, as adjusted............. $ (0.77) $ (1.97)
======= =======
Pro forma net income (loss) per share, as reported.............. $ (0.29) $ (0.74)
======= =======
Pro forma net income (loss) per share, as adjusted.............. $ (0.29) $ (0.75)
======= =======
</TABLE>
Because SFAS 123 is applicable only to the Company's stock-based awards
granted subsequent to June 30, 1995, its effect will not be fully reflected
until approximately fiscal year 1999.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1996, effective upon the offering
and subject to stockholder approval. The Company has reserved a total of 500,000
shares of common stock for issuance under the Purchase Plan, with an annual
increase to be added on each anniversary date of the adoption of the Purchase
Plan equal to the lesser of (a) 150,000 shares, (b) 1.5% of the outstanding
shares on such date or (c) a lesser amount determined by the Board. The price of
common stock purchased under the Purchase Plan will be 85% of the lower of the
fair market value of the common stock on the first or last day of each purchase
period. The Purchase Plan will be implemented by an initial offering period of
approximately 24 months commencing on the first trading day on or after the
effective date of the offering and ending on the last trading day on or before
October 31, 1999. Subsequent offering periods will last 24 months and will
commence on the first trading day on or after November 1 and May 1 of each year
during which the Purchase Plan is in effect, and will terminate on the last
trading day in the periods ending 24 months later. Each 24-month offering period
will consist of 4 purchase periods of approximately 6 months duration. The
Purchase Plan will be administered by the Board of Directors or by a committee
appointed by the Board. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least 20
hours per week and for more than 5 months in any calendar year.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the
benefit of certain qualified employees. Employees may elect to contribute to the
Plan, through payroll deductions of up to 18% of their compensation, subject to
certain limitations. The Company, at its discretion, may make additional
contributions. The Company did not make any contributions to the Plan in fiscal
years 1995, 1996 or 1997.
F-20
<PAGE> 72
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BALANCE SHEET DETAIL
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------ ------
<S> <C> <C>
Capitalized software development costs, net......................... $ 835 $1,859
Deferred financing costs............................................ -- 1,043
Prepaid lease expense............................................... -- 161
Notes receivable from employees..................................... 83 81
Notes receivable from stockholders.................................. -- 295
Goodwill and other intangible assets................................ 41 2,484
Deposits and other.................................................. 216 604
------ ------
$1,175 $6,527
====== ======
</TABLE>
Accumulated amortization for capitalized software development costs was
approximately $172,000 and $475,000 at June 30, 1996 and 1997, respectively.
Accumulated amortization for goodwill and other intangible assets was
approximately $8,000 and $80,000 at June 30, 1996 and 1997, respectively.
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------ ------
<S> <C> <C>
Accrued expenses.................................................... $ 552 3,074
Accrued tax penalties............................................... -- 586
Accrued payroll and related expenses................................ 486 1,361
Accrued acquisition costs........................................... 172 144
Other............................................................... 248 120
------ ------
$1,458 $5,285
====== ======
</TABLE>
10. BUSINESS ACQUISITIONS
On May 23, 1996, the Company acquired substantially all of the business and
assets of Dimension Solutions, Inc. The total purchase price of $1,264,000
consisted of the issuance of 40,000 shares of Series E convertible preferred
stock with a fair value of $317,000 and the assumption of $947,000 of Dimension
Solutions, Inc. liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets...................................................... $ 318
In-process technology (charged to operations)................................. 711
Developed software............................................................ 175
Covenant-not-to-compete....................................................... 60
------
Total purchase price allocation............................................... $1,264
======
</TABLE>
On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. The purchase price consisted of $500,000 in
cash, of which $250,000 was paid upon closing and $250,000 was paid in April
1997, warrants to purchase 50,000 shares of common stock at a price of $9.00 per
share with an estimated fair value of $160,000 and are exercisable for five
years from the date of grant, the assumption of $2,445,000 of BeneSphere's
liabilities (including acquisition costs) plus contingent payments based on
BeneSphere's revenues in excess of certain base amounts, as defined in the
agreement, over the next two calendar years following the
F-21
<PAGE> 73
PROBUSINESS SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
acquisition which cannot exceed $4,500,000. The contingent payments are payable
in cash in four quarterly payments beginning April 1, 1998 for the calendar year
1997 payment and April 1, 1999 for the calendar year 1998 payment. Interest
shall accrue at a rate of 9% per annum on all earned but unpaid balances.
Included in the liabilities assumed from BeneSphere was a promissory note for
$275,000 issued by BeneSphere on December 31, 1996 to an officer of the Company.
The note bears interest at a rate of 9% per annum and was paid in full in April
1997.
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets...................................................... $ 517
Goodwill...................................................................... 2,278
Customer list................................................................. 310
------
Total purchase price allocation............................................... $3,105
======
</TABLE>
Goodwill arising from the acquisition will be amortized on a straight-line
basis over 20 years.
The following unaudited pro forma information represents the combined
results of operations as if the acquisitions of Dimension Solutions and
BeneSphere had occurred as of the beginning of the periods presented and does
not purport to be indicative of what would have occurred had the acquisitions
been made as of that date or the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net revenues................................. $ 8,642 $ 17,341 $ 29,030
Pro forma net loss..................................... (1,498) (2,149) (7,738)
Pro forma net loss per share........................... $ (0.18) $ (0.26) $ (0.92)
</TABLE>
The pro forma results include the historical operations of the Company and
the historical operations of the acquired businesses adjusted to reflect certain
pro forma adjustments including the amortization of intangible assets,
capitalized software development costs and interest expense related to a
$250,000 short term note payable, resulting from the acquisitions totaling
$254,000 for both the years ended June 30, 1995 and 1996 and $86,000 for the
year ended June 30, 1997, respectively. The pro forma results do not include the
write off of in-process technology of $711,000 for the year ended June 30, 1996
since it is a non-recurring charge. The pro forma results do not include any
adjustments for the Company's proposed initial public offering.
11. SUBSEQUENT EVENTS
Warrant
After June 30, 1997, the Company issued a warrant to purchase an aggregate
of 20,000 shares of its Common Stock at a purchase price of $9.00 per share.
Interest Rate Swap
In August 1997, the Company entered into an interest rate swap agreement
with a financial institution with a fixed interest rate of 5.905% for a two year
period. Although the actual notional amounts vary on a monthly basis due to
fluctuations in projected investments, the average monthly notional amount of
funds subject to the fixed interest rate is $62,288,000. In the event the dollar
amount of the Company's invested funds falls below the required monthly notional
amount, the Company will have payment obligations, which could have a material
adverse effect on the Company's results of operations and financial condition.
The interest rate swap agreement also requires the Company to make a $350,000
deposit, which is being held by the financial institution as collateral for
obligations under the agreement.
F-22
<PAGE> 74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
BeneSphere Administrators, Inc.
We have audited the accompanying balance sheet of BeneSphere
Administrators, Inc. as of June 30, 1996 and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 BeneSphere Administrators,
Inc. at June 30, 1996 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Seattle, Washington
December 20, 1996
F-23
<PAGE> 75
BENESPHERE ADMINISTRATORS, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2 $ 5
Accounts receivable, net of allowance of none at June 30, 1996 and
December 31, 1996.......................................................... 116 120
Prepaid sales commissions.................................................. 200 155
Prepaids and deposits...................................................... 22 63
----- -------
Total current assets......................................................... 340 343
Furniture, equipment, and improvements, at cost less accumulated depreciation
of $195 and $254 at June 30, 1996 and December 31, 1996, respectively...... 259 330
----- -------
Total assets....................................................... $ 599 $ 673
===== =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit............................................ $ 111 $ 188
Accounts payable........................................................... 125 243
Accrued liabilities........................................................ 68 507
Customer deposits.......................................................... 724 1,032
Bonus payable to shareholder............................................... -- 275
----- -------
Total current liabilities.......................................... 1,028 2,245
Commitments and contingencies
Shareholders' deficit:
Common stock, no par value:
50,000 shares authorized; 20,000 and 27,156 shares issued and
outstanding at June 30, 1996 and December 31, 1996, respectively....... 68 332
Accumulated deficit........................................................ (497) (1,904)
----- -------
Total shareholders' deficit........................................ (429) (1,572)
----- -------
Total liabilities and shareholders' deficit........................ $ 599 $ 673
===== =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 76
BENESPHERE ADMINISTRATORS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, ------------------
1996 1995 1996
---------- ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.............................................................. $2,424 $1,046 $ 1,656
Costs and expenses:
Operating costs..................................................... 873 364 882
Selling, general, and administrative................................ 1,614 776 2,170
------ ------ ------
Total costs and expenses.............................................. 2,487 1,140 3,052
------ ------ ------
Loss from operations.................................................. (63) (94) (1,396)
Other expense, net.................................................... 8 3 11
------ ------ ------
Net loss.............................................................. $ (71) $ (97) $(1,407)
====== ====== ======
Net loss per common share............................................. $(3.55) $(4.85) $(70.21)
====== ====== ======
Number of shares used in calculation of net loss per common share..... 20,000 20,000 20,039
====== ====== ======
</TABLE>
See accompanying notes.
F-25
<PAGE> 77
BENESPHERE ADMINISTRATORS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES CAPITAL DEFICIT TOTAL
------ ------- ----------- -------
<S> <C> <C> <C> <C>
Balances at June 30, 1995.................................. 20,000 $ 68 $ (375) $ (307)
Distributions paid to shareholders....................... -- -- (51) (51)
Net loss................................................. -- -- (71) (71)
------ ---- ------- -------
Balances at June 30, 1996.................................. 20,000 68 (497) (429)
Issuance of common stock to shareholder in lieu of cash
compensation (unaudited).............................. 7,156 264 -- 264
Net loss (unaudited)..................................... -- -- (1,407) (1,407)
------ ---- ------- -------
Balances at December 31, 1996 (unaudited).................. 27,156 $ 332 $(1,904) $(1,572)
====== ==== ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE> 78
BENESPHERE ADMINISTRATORS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------
1996 1995 1996
---------- ----- -------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $ (71) $ (97) $(1,407)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Noncash items:
Depreciation and amortization.................................... 90 44 59
Loss on disposal of furniture and equipment...................... 8 -- --
Issuance of common stock to shareholder in lieu of cash
compensation.................................................... -- -- 264
Changes in operating assets and liabilities:
Accounts receivable.............................................. (86) (21) (4)
Prepaid sales commissions........................................ (98) (147) 45
Prepaids and deposits............................................ (11) (2) (41)
Accounts payable................................................. 90 9 118
Accrued liabilities.............................................. (96) (44) 439
Customer deposits................................................ 348 454 308
Bonus payable to shareholder..................................... -- -- 275
----- ----- -----
Net cash provided by operating activities............................. 174 196 56
INVESTING ACTIVITY -- purchases of furniture and equipment............ (234) (100) (130)
FINANCING ACTIVITIES
Proceeds from line of credit borrowings............................... 439 60 651
Repayments of line of credit borrowings............................... (339) (71) (574)
Distributions paid to shareholders.................................... (51) -- --
----- ----- -----
Net cash provided by (used in) financing activities................... 49 (11) 77
----- ----- -----
Net (decrease) increase in cash and cash equivalents.................. (11) 85 3
Cash and cash equivalents, beginning of period........................ 13 13 2
----- ----- -----
Cash and cash equivalents, end of period.............................. $ 2 $ 98 $ 5
===== ===== =====
Supplemental disclosure of cash flow information:
Interest paid on line of credit borrowings.......................... $ 3 $ -- $ 11
===== ===== =====
</TABLE>
See accompanying notes.
F-27
<PAGE> 79
BENESPHERE ADMINISTRATORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE SIX-MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
1. REPORTING ENTITY
BeneSphere Administrators, Inc. is the successor corporation to A-Plus
Administrators, Inc. d.b.a. Benefits-Plus Administrators (APA), a Washington
Corporation, and Baransky Reppond, Inc. d.b.a. Benefits-Plus Administrators
(BRI), a California Corporation. In December 1995, BRI was merged into APA (see
Note 3). Subsequent to June 30, 1996, APA's name was changed to BeneSphere
Administrators, Inc. (BAI).
BAI provides benefits administration services which include flexible
benefits enrollment and processing, COBRA administration, and consolidated
billing and eligibility tracking and premium payment services for small and
medium-sized companies located in the Pacific Northwest and northern California.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED FINANCIAL INFORMATION
The financial statements as of December 31, 1996 and for the six-months
ended December 31, 1996 and 1995 are unaudited. The unaudited financial
statements include all normal recurring adjustments which BAI's management
considers necessary for a fair presentation. Operating results for the six
months ended December 31, 1996 are not necessarily indicative of the results
that may be expected for any future periods.
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 amounts reported in the financial statements and
accompanying notes. Such estimates include provisions for doubtful accounts and
estimates of accrued liabilities to be paid. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.
FURNITURE, EQUIPMENT, AND IMPROVEMENTS
Furniture, equipment, and improvements are recorded at cost. Depreciation
is computed utilizing accelerated depreciation methods over the estimated useful
lives of the assets, which range from five to seven years.
CUSTOMER DEPOSITS AND PREPAID SALES COMMISSIONS
Customer deposits for set-up and administrative services and related
revenues are deferred and amortized ratably on a monthly basis over a period
that does not exceed the initial term of the contract. Sales commissions
associated with set-up and administrative services are prepaid and recognized
ratably on a monthly basis over the same contract period.
FINANCIAL INSTRUMENTS
BAI's financial instruments consist of cash and cash equivalents, accounts
receivable and payable, and short-term borrowings. The fair values of these
instruments approximate their recorded values.
F-28
<PAGE> 80
BENESPHERE ADMINISTRATORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
BAI's cash balances are maintained in checking accounts with one financial
institution and, as such, are subject to federal deposit insurance limitations.
Credit evaluations of BAI's customers are performed as necessary, and BAI
does not require collateral from its customers. No individual customer or
industry comprises a significant concentration of business for BAI.
PER SHARE DATA
Net loss per common share is computed based on the weighted average number
of common shares outstanding during the period.
3. BUSINESS COMBINATIONS
APA and BRI were members of a controlled group of corporations. Effective
December 31, 1995, BRI was merged into APA through the issuance of 10,000 shares
of APA's common stock for all of BRI's outstanding common stock. The merger has
been accounted for in a manner similar to pooling of interests and, accordingly,
the accompanying financial statements include the accounts of BRI on a
historical cost basis and its operations for all periods prior to the merger.
Details of the results of operations of the previously separate companies for
the six-month period ended December 31, 1995 follow:
<TABLE>
<CAPTION>
REVENUES NET LOSS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
APA.............................................. $335 $(72)
BRI.............................................. 711 (25)
------ ----
Combined......................................... $1,046 $(97)
====== ====
</TABLE>
The shareholders believe that the merger of BRI and APA was a tax-free
transaction. However, should the Internal Revenue Service successfully challenge
BAI on this matter, BAI's shareholders have agreed to reimburse BAI and its
successors for any required tax payments. As a result, no amounts have been
accrued in the accompanying financial statements related to the potential
payment and reimbursement of taxes from the merger.
Under a stock acquisition agreement (the Agreement), BAI's shareholders
agreed to sell all of their outstanding common stock shares to ProBusiness
Services, Inc. (PBI) for cash and additional future consideration as of January
1, 1997. Since the acquisition occurred subsequent to December 31, 1996, no
adjustments to recorded amounts have been included in the historical balance
sheet or results of operations. PBI, a privately held California corporation
which provides payroll processing services, has committed to fund the operations
of BAI through at least January 1, 1998.
4. LINE OF CREDIT
BAI has a line of credit with a bank on which it could borrow up to a
maximum of $275,000 at June 30, 1996 (increased to $425,000 in October 1996).
Outstanding borrowings on the line of credit bear interest at the bank's prime
rate plus 1%, (9.25% at June 30, 1996), are collateralized by substantially all
assets of BAI, and are guaranteed by certain shareholders. Interest on the
outstanding borrowings is payable monthly. All outstanding principal borrowings
are due upon demand or, if no demand is made, on January 31, 1997. The line of
credit agreement also provides, among other matters, restrictions on additional
financing, mergers, and acquisitions.
5. INCOME TAXES
BRI was a C Corporation under the Internal Revenue Code (IRC) and was,
therefore, subject to corporate income tax. Amounts related to income taxes
payable and temporary differences between the carrying amounts of
F-29
<PAGE> 81
BENESPHERE ADMINISTRATORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assets and liabilities for financial reporting and income tax purposes prior to
and at the date of merger were immaterial.
APA, with the consent of its shareholders, elected to be taxed as an S
Corporation under the IRC. As a result, BAI, as APA's successor, is generally
not subject to corporate income tax, and the shareholders separately report
their respective pro rata shares of BAI's income, deductions, losses, and
credits on their personal income tax returns. It is BAI's practice to accrue and
pay cash distributions to shareholders in amounts sufficient for them to meet
their personal income tax obligations resulting from the S Corporation status.
Retained earnings (accumulated deficit) are charged at the time the estimated
distributions are accrued.
6. RELATED-PARTY TRANSACTIONS
BAI is charged and allocated certain administrative and overhead costs
incurred and paid by various controlled group members on BAI's behalf. These
costs totaled $206,000 for the year ended June 30, 1996, and $62,000 and
$177,000 for the six months ended December 31, 1995 and 1996, respectively, and
are included in selling, general, and administrative expenses.
Effective December 31, 1996, BAI issued 7,156 shares of common stock to an
existing shareholder for past services rendered. A value of $264,000 was
assigned to the common stock by BAI, which was derived by an independent third
party utilizing a discounted cash flows analysis, less a marketability discount.
Payroll withholding taxes in the amount of $240,000 have been accrued by BAI at
December 31, 1996 and will be paid by BAI on behalf of the shareholder. BAI also
agreed to pay a one-time $275,000 cash bonus to the shareholder. Compensation
expense in the amount of $779,000 was recorded in selling, general, and
administrative expenses for the six months ended December 31, 1996 related to
the stock and bonus transactions.
7. 401(k) PLAN
BAI participates in a 401(k) plan sponsored by a controlled group member.
The plan is available to all employees meeting certain eligibility requirements.
Contributions by BAI are based on a matching formula as defined in the plan.
Contribution expense related to the plan totaled $4,000 for the year ended
June 30, 1996.
8. LEASE COMMITMENTS
BAI leases office space under noncancelable operating leases which contain
rent escalation clauses and renewal options. In addition to base rent, BAI is
required to pay a pro rata portion of the building's monthly taxes and operating
costs as additional rent. Future minimum base lease payments under noncancelable
operating leases at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
JUNE 30 (IN THOUSANDS)
-----------------------------------------------
<S> <C>
1997........................................... $115
1998........................................... 115
1999........................................... 87
2000........................................... 88
2001........................................... 100
Thereafter..................................... 194
----
$699
====
</TABLE>
Rent expense totaled $97,000 for the year ended June 30, 1996, and $41,000
and $55,000 for the six months ended December 31, 1995 and 1996, respectively.
F-30
<PAGE> 82
BENESPHERE ADMINISTRATORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued taxes payable on shareholder stock compensation...... $ -- $240
Other accrued liabilities.................................... 68 267
--- ----
$ 68 $507
=== ====
</TABLE>
F-31
<PAGE> 83
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Dimension Solutions, Inc.
We have audited the accompanying balance sheet of Dimension Solutions, Inc.
as of April 30, 1996 and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Dimension Solutions, Inc. at
April 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
November 20, 1996
F-32
<PAGE> 84
DIMENSION SOLUTIONS, INC.
BALANCE SHEET
APRIL 30, 1996
(In thousands, except share amounts)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash........................................................................................ $ 4
Accounts receivable......................................................................... 99
Prepaid expenses............................................................................ 3
-----
Total current assets.......................................................................... 106
Equipment, furniture and fixtures (less accumulated depreciation of $50)...................... 69
Other assets.................................................................................. 5
-----
Total assets........................................................................ $ 180
=====
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................................ $ 59
Accrued expenses............................................................................ 88
Customer deposits........................................................................... 320
Note payable to shareholder................................................................. 25
-----
Total current liabilities........................................................... 492
Note payable to shareholder................................................................... 250
Commitments
Shareholders' equity:
Common stock, no par value, authorized: 100,000 shares; issued and outstanding: 10,000
shares................................................................................... 30
Accumulated deficit......................................................................... (592)
-----
Total shareholders' deficit......................................................... (562)
-----
Total liabilities and shareholders' deficit......................................... $ 180
=====
</TABLE>
See accompanying notes.
F-33
<PAGE> 85
DIMENSION SOLUTIONS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1996
(In thousands, except share and per share amounts)
<TABLE>
<S> <C>
Revenues..................................................................................... $ 1,054
Cost of revenues............................................................................. 492
-------
Gross profit................................................................................. 562
Operating expenses
Research and development................................................................... 225
Selling, general and administrative expenses............................................... 458
-------
Total operating expenses..................................................................... 683
-------
Loss from operations......................................................................... (121)
Interest expense, net........................................................................ 28
-------
Net loss..................................................................................... $ (149)
=======
Net loss per share........................................................................... $(14.90)
=======
Number of shares used in calculation of the net loss per share............................... 10,000
=======
</TABLE>
See accompanying notes.
F-34
<PAGE> 86
DIMENSION SOLUTIONS, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
YEAR ENDED APRIL 30, 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------- ------- ------------ --------------
<S> <C> <C> <C> <C>
Balances, April 30, 1995.................................. 10,000 $30 $ (443) $ (413)
Net loss................................................ -- -- (149) (149)
------ --- ------- -----
Balances, April 30, 1996.................................. 10,000 $30 $ (592) $ (562)
====== === ======= =====
</TABLE>
See accompanying notes.
F-35
<PAGE> 87
DIMENSION SOLUTIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 1996
(In thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss...................................................................................... $(149)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................................ 25
Changes in operating assets and liabilities:
Accounts receivable...................................................................... 12
Prepaid expenses......................................................................... (3)
Other assets............................................................................. 1
Accounts payable......................................................................... (23)
Accrued expenses......................................................................... 2
Customer deposits........................................................................ (133)
-----
Net cash used in operating activities......................................................... (268)
INVESTING ACTIVITIES
Additions to equipment, furniture and fixtures................................................ (32)
-----
Net cash used in investing activities......................................................... (32)
FINANCING ACTIVITIES
Borrowings under line of credit agreement..................................................... 185
Proceeds from note payable to shareholder..................................................... 25
-----
Net cash provided by financing activities..................................................... 210
-----
Net change in cash and cash equivalents....................................................... (90)
Cash, beginning of year....................................................................... 94
-----
Cash, end of year............................................................................. $ 4
=====
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................................... $ 25
=====
Supplemental disclosure of noncash financing activities:
Obligation under line-of-credit agreement exchanged for note payable to a shareholder....... $ 250
=====
</TABLE>
See accompanying notes.
F-36
<PAGE> 88
DIMENSION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Dimension Solutions, Inc. (the "Company") is a California corporation which
sells personal computer-based human resource management software and maintenance
support to small to medium sized employers throughout the United States.
On May 23, 1996, substantially all of the Company's business and assets
were acquired by ProBusiness, Inc. (the "Purchaser" or "ProBusiness"). No
adjustments to recorded amounts of assets or liabilities resulting from the
acquisition have been included in the accompanying financial statements.
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 the
reported amounts of revenues and expenses during any reported period. Actual
results could differ from these estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation of property and equipment is computed using the
double declining balance method over the estimated useful lives of the assets
which range from three to seven years.
REVENUE RECOGNITION AND DEFERRED IMPLEMENTATION COSTS
The Company recognizes revenue from the sale of human resource management
software when a noncancellable license agreement has been signed, the product
has shipped and all significant contractual obligations have been satisfied. The
Company's revenue recognition policy is in compliance with the provisions of the
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition."
Human resource software maintenance revenue is billed annually, in advance.
Customer deposits for software maintenance are deferred and recognized ratably
over the term of the maintenance agreement.
INCOME TAXES
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
PER SHARE DATA
Net loss per common share is computed based on the weighted average number
of common shares outstanding during the year.
2. NOTES PAYABLE TO SHAREHOLDER
On October 15, 1995, the Company received $25,000 in cash in exchange for a
note payable to a shareholder which is due on January 31, 1997. Interest is
payable monthly at a rate equal to the lesser of the prime rate plus 2 1/2
percent or the maximum allowable rate under California law. The entire principal
amount is payable on the due date.
F-37
<PAGE> 89
DIMENSION SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended April 30, 1996, the Company had a balance of $250,000
outstanding under a line of credit agreement. This liability was assumed by a
shareholder of the Company. In exchange, the Company signed a note payable with
the shareholder for $250,000. Interest on the note is payable by the Company
from time to time at a rate equal to the lesser of prime plus 2 1/2 percent or
the maximum allowed rate based on California law. The total outstanding
principal is due on the earlier of the closing of an initial public offering by
ProBusiness or December 31, 1999.
3. LEASE OBLIGATIONS
The Company leases its facilities and various equipment under
noncancellable operating leases which expire at various dates through September
1999. The future minimum lease payments under operating leases subsequent to
April 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, (IN THOUSANDS)
------------------------------------------------------- --------------
<S> <C>
1997................................................... $ 60
1998................................................... 57
1999................................................... 57
2000................................................... 24
----
Total minimum lease payments........................... $198
====
</TABLE>
Rent expense for the year ended April 30, 1996 was $67,000.
4. INCOME TAXES
Effective June 16, 1994, the Company's stockholders elected to have the
Company taxed as an S Corporation for federal and state income tax purposes,
whereby taxable income is allocated to the individual stockholders. The Company
is subject to a state franchise tax of 1.5% of taxable income.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). Under Statement No. 109, the liability method is used to
account for income taxes. Temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes are immaterial.
5. SHAREHOLDERS' EQUITY
The Company was originally capitalized on June 16, 1994 with $30,000 in
consideration paid by investors who received a total of 10,000 shares of common
stock. No additional capital transactions occurred through April 30, 1996.
6. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the
benefit of certain qualified employees. Employees may elect to contribute to the
Plan, through payroll deductions subject to certain limitations. The Company may
make contributions in accordance with the Plan. The Company did not make any
contributions to the Plan in 1996.
F-38
<PAGE> 90
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The selected unaudited pro forma condensed consolidated financial
information for the Company set forth below gives effect to the acquisition of
certain assets and liabilities of BeneSphere Administrators, Inc. (BeneSphere).
The historical financial information set forth below has been derived from, and
is qualified by reference to, the financial statements of the Company and
BeneSphere and should be read in conjunction with those financial statements and
the notes thereto included elsewhere herein. The selected unaudited pro forma
condensed consolidated statement of operations data for the year ended June 30,
1997 set forth below gives effect to the acquisition as if it occurred on July
1, 1996. The selected unaudited pro forma condensed consolidated financial
information set forth below reflects certain adjustments, including, among
others, adjustments to reflect the amortization of the excess purchase prices
and the inclusion of interest expense for debt issued in connection with the
acquisition of BeneSphere. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements -- the Company and
BeneSphere Administrators, Inc." The selected unaudited pro forma condensed
consolidated financial information set forth below does not purport to represent
what the consolidated results of operations or financial condition of the
Company would actually have been if the BeneSphere acquisition and related
transactions had in fact occurred on such date or to project the future
consolidated results of operations or financial condition of the Company.
F-39
<PAGE> 91
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
BENESPHERE (1)(2)
COMPANY FOR THE SIX PRO FORMA PRO FORMA
FOR THE MONTHS ENDED BUSINESS FOR THE
YEAR ENDED DECEMBER 31, COMBINATION YEAR ENDED
JUNE 30, 1997 1996 COMBINED ADJUSTMENTS JUNE 30, 1997
------------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue................................. $27,374 $ 1,656 $29,030 -- $29,030
Operating expenses:
Cost of providing services............ 13,659 882 14,541 -- 14,541
General and administrative expenses... 4,282 1,362 5,644 75 5,719
Research and development expenses..... 2,841 -- 2,841 -- 2,841
Client acquisition costs.............. 11,706 808 12,514 -- 12,514
------- ------- ------- ---- ----------
Total operating expenses........... 32,488 3,052 35,540 75 35,615
------- ------- ------- ---- ----------
Loss from operations.................... (5,114) (1,396) (6,510) (75) (6,585)
Interest expense........................ (1,190) (11) (1,201) (11) (1,212)
Other income............................ 59 -- 59 -- 59
------- ------- ------- ---- ----------
Net loss................................ $(6,245) $(1,407) $(7,652) $ (86) $(7,738)
======= ======= ======= ==== ==========
Pro forma net loss per common
share(3).............................. $ (0.92)
==========
Number of shares used to compute pro
forma net loss per common share(4).... 8,451
==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 92
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
Pro forma and offering adjustments for statement of operations for the year
ended June 30, 1997 are as follows:
(1) Reflects the amortization of the cost over the fair value of net assets
acquired for the BeneSphere acquisition as follows:
<TABLE>
<CAPTION>
COST OVER
THE FAIR VALUE
OF NET AMORTIZATION
ASSETS ACQUIRED PERIOD
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
BeneSphere:
Goodwill.............................................. 2,278 20 yrs
Customer list......................................... 310 8 yrs
</TABLE>
(2) Reflects interest expense of $11,000 for the year ended June 30, 1997
related to a $250,000 short term note payable which represents part of the
payment for the purchase of all of the outstanding stock of BeneSphere
Administrators, Inc. See Note 10 of the ProBusiness Services, Inc. Consolidated
Financial Statements.
(3) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding. Such pro forma net loss reflects
the impact of the adjustments above.
(4) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding plus common equivalent shares from
convertible preferred stock, that will be converted upon the closing of the
Company's proposed initial public offering (using the if-converted method), have
been included in the computation whether dilutive or anti-dilutive. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at proceeds below the assumed
public offering price for the twelve-month period prior to the offering have
been included in the computation as if they were outstanding for all periods
presented (using the treasury stock method at the estimated initial public
offering price) whether dilutive or anti-dilutive.
See Note 10 of the ProBusiness Services, Inc. Consolidated Financial
Statements regarding contingent payments related to the BeneSphere acquisition.
F-41
<PAGE> 93
APPENDIX -- DESCRIPTION OF GRAPHICS
COVER:
The Front Cover of the Prospectus includes the ProBusiness logo at the
top of the page.
Description of LOGO: The ProBusiness logo consists of the word
"ProBusiness," all in black letters and all in lower case letters except the
"P" and the "B," with a red triangle to the left of a triangular space in the
side of the "P."
INSIDE FRONT COVER:
The Inside Front Cover of the Prospectus includes text stating,
"ProBusiness is a leading provider of outsourced payroll processing, payroll
tax filing and benefits administration services to large employers." Below the
text is an arrow pointing to the ProBusiness logo at the bottom right side of
the page. The background photo behind the text depicts ProBusiness service
personnel assisting a client.
At the bottom of the page is the following:
"CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
'UNDERWRITING.'"
GATEFOLD:
The Gatefold consists of three horizontal tiers, the top and the middle
containing text and photographs and the bottom containing text related to the
text and photographs in the middle tier. The top tier consists of captions
accompanying the following: the ProBusiness logo, a rectangular collage of
photographs and a rectangle containing client logos. In the background of the
top tier is a photograph of ProBusiness service personnel assisting a client.
The middle tier consists of the words "Business Partnership" at the far left in
italics, then three equal-size rectangular photographs and, at the far right, a
collage of four overlapping rectangular photographs. The middle tier
photographs are connected by downward arrows to corresponding captions, which
are in the bottom tier of the gatefold.
Description #1: Description of the left section of the upper tier of
the gatefold: The ProBusiness logo with text below it stating, "ProBusiness
focuses on providing high quality and cost-effective employee administrative
services to large employers."
Description #2: Description of the center section of the upper tier of
the gatefold: A collage of photographs depicting various documents and items
related to the services provided by ProBusiness.
Description #3: Description of the right section of the upper tier of
the gatefold: A rectangle containing the logos of the following eight
companies: CCH Incorporated, Sunglass Hut
<PAGE> 94
International, Inc., Fujitsu, Ltd., Informix Corporation, Advanced Micro
Devices, Inc., 3Com Corporation, AST Research, Inc., and AllAmerica.
Caption: "ProBusiness's clients include many large employers in diverse
industries." This caption appears below the rectangle containing the clients'
logos in Description #3.
Description #4: Description of the left section of the middle tier of
the gatefold: "Business Partnership."
Caption: "ProBusiness differentiates itself from its competitors by
establishing a business partnership with each client. The Company develops
relationships with each client by assessing payroll processing needs,
reengineering and designing payroll systems and processes and implementing a
cost-effective solution. The Company maintains an ongoing relationship by
providing proactive account management and technical support." This caption
appears below the text described in Description #4.
Description #5: Description of the left center section of the middle
tier of the gatefold: A rectangular photograph of an account manager of
ProBusiness assisting a client.
Caption: "Client Service - Delivering high quality, responsive and
professional client service is a key competitive advantage of the Company.
Each client works with a personal account manager who serves as the client's
day-to-day contact and is responsible for meeting the client's needs. The
Company believes that its low client-to-account manager ratio is a key factor
in enabling the Company to achieve a high payroll client retention rate." This
caption appears below the photograph in Description #5.
Description #6: Description of the center section of the middle tier of
the gatefold: A rectangular photograph of two employees of the Company using
personal computers in the Company's production facility.
Caption: "Technology - ProBusiness's PC-based, distributed architecture
is reliable, flexible and scalable. This technology enables the Company to
provide high levels of client service and customized solutions for each client
that can be easily upgraded and integrated with the client's other systems."
This caption appears below the photograph in Description #6.
Description #7: Description of the right center section of the middle
tier of the gatefold: A rectangular photograph of a ProBusiness specialist
diagramming a client's payroll system on a white board.
Caption: "Expertise - ProBusiness delivers technical expertise through
specialists in design, process, implementation and systems integration.
The Company delivers functional and regulatory expertise in payroll, payroll tax
and employee benefits." This caption appears below the photograph in
Description #7.
<PAGE> 95
Description #8: Description of the right section of the middle tier of
the gatefold: Rectangular photographs of documents and a computer screen, all
of which relate to the service offerings provided by ProBusiness.
Caption: "Comprehensive Solutions - ProBusiness provides employers with
a broad range of employee administrative services: payroll processing; payroll
tax filing, human resources software and employee benefits administration,
including flexible benefits enrollment and processing and COBRA administration."
This caption appears below the photograph in Description 8.
BACK COVER:
The Back Cover of the Prospectus includes the ProBusiness logo in the
center of the page.
<PAGE> 96
LOGO
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale and distribution of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration fee................................................. $ 8,364
NASD filing fee.................................................. 3,260
Printing expenses................................................ 300,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 800,000
Blue sky fees and expenses....................................... 5,000
Transfer agent and registrar fees and expenses................... 15,000
Nasdaq National Market application and listing fees.............. 43,394
Miscellaneous.................................................... 9,982
----------
Total.................................................. $1,585,000
==========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Article Ninth of the Amended and Restated Certificate
of Incorporation of the Company, and to Article Ninth of the form of the Amended
and Restated Certificate of Incorporation to be effective upon the completion of
this offering filed herewith as Exhibits 3.1 and 3.2; Article VI of the By laws
of the Company, filed herewith as Exhibit 3.3; Section 145 of the Delaware
General Corporation Law; and the form of indemnification agreement filed
herewith as Exhibit 10.11 which, among other things, and subject to certain
conditions, authorize the Company to indemnify, or indemnify by their terms, as
the case may be, the directors and officers of the Company against certain
liabilities and expenses incurred by such persons in connection with claims made
by reason of their being such a director or officer.
Section 8 of the form of the Underwriting Agreement filed as Exhibit 1.1 to
this Registration Statement provides for indemnification by the Underwriters and
their controlling persons, on the one hand, and of the Company and its
controlling persons on the other hand, for certain liabilities arising under the
Securities Act of 1933, as amended (the "Act"), the Exchange Act of 1934, as
amended or otherwise.
The Company intends to obtain directors and officers insurance providing
indemnification for certain of the Company's directors, officers, affiliates,
partners or employees for certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1994, the Company has sold unregistered securities in the
amounts, on the dates and for the aggregate amounts of consideration set forth
below. The shares of Preferred Stock issued or issuable are convertible into
shares of Common Stock at the rate of 2 shares of Common Stock for each share of
Series E Preferred Stock.
(a) In September 1994, the Company issued 197,468 shares of Series E
Preferred Stock to 53 purchasers at $7.94 per share for an aggregate purchase
price of $1,567,896.
II-1
<PAGE> 98
(b) In October 1994, the Company issued an additional 15,648 shares of
Series E Preferred Stock to 4 purchasers at $7.94 per share for an aggregate
purchase price of $124,245.
(c) In January 1995, the Company issued a warrant to purchase 9,446 shares
of its Series E Preferred Stock at an exercise price of $7.94 per share to
Silicon Valley Bank in connection with a line of credit.
(d) In October 1995, the Company issued warrants to purchase 34,630 shares
of Series E Preferred Stock of the Company at an exercise price of $7.94 per
share to 9 stockholders under a loan agreement whereby the Company issued
promissory notes to such stockholders with an aggregate principal amount of
$1,100,000.
(e) In December 1995, the Company issued warrants to purchase 91,296 shares
of Series E Preferred Stock of the Company at an exercise price of $7.94 per
share to 37 stockholders under a loan agreement whereby the Company issued
promissory notes to such stockholders with an aggregate principal amount of
$2,900,000.
(f) In April 1996, the Company issued a warrant to purchase 9,500 shares of
its Series E Preferred Stock at an exercise price of $7.94 per share to Coast
Business Credit ("Coast") in connection with a line of credit.
(g) In May 1996, in connection with its acquisition of Dimension Solutions,
Inc. ("Dimension Solutions") the Company issued 40,000 shares of Series E
Preferred Stock to Dimension Solutions.
(h) In July 1996, the Company issued a warrant to purchase 10,000 shares of
its Series E Preferred Stock at an exercise price of $7.94 per share to LINC
Capital Management in connection with an equipment lease.
(i) In October 1996, the Company issued a warrant to purchase 9,500 shares
of its Series E Preferred Stock at an exercise price of $7.94 per share to Coast
in connection with an amendment to the line of credit.
(j) In November 1996, the Company issued a warrant to purchase 22,500
shares of its Series E Preferred Stock at an exercise price of $7.94 per share
to Britannia Hacienda V Limited Partnership and its partners in connection with
a facilities lease.
(k) In January 1997, the Company issued warrants to purchase an aggregate
of 50,000 shares of its Common Stock at an exercise price of $9.00 per share to
two of the former shareholders of BeneSphere in connection with the Company's
acquisition of BeneSphere.
(l) In March 1997, the Company issued 574,733 shares of Series F Preferred
Stock to two purchasers at $17.40 per share for an aggregate purchase price of
$10,000,354.
(m) After June 30, 1997, the Company issued a warrant to purchase 20,000
shares of its Common Stock at an exercise price of $9.00 per share.
(n) Since 1989 and through June 30, 1997, the Company has granted stock
options to purchase 2,862,422 shares of the Company's Common Stock at a weighted
average exercise price of $2.07 per share to employees, consultants and
directors pursuant to its 1996 Stock Option Plan, or predecessor plans. Of these
options, 451,962 have been canceled without being exercised, 1,534,684 have been
exercised and 875,776 remain outstanding.
The sales and issuances of securities described in paragraphs (a) through
(m) were deemed to be exempt from registration under the Securities Act by
virtue of Rule 4(2) of the Securities Act as transactions by an issuer not
involving a public offering. The sales and issuances of securities described in
paragraph (n) were deemed to be exempt from registration from the Securities Act
by virtue of either Rule 701 of the Securities Act as they were offered and sold
pursuant to written compensatory benefit plans as provided by Rule 701 or Rule
4(2) of the Securities Act as transaction by an issuer not involving a public
offering.
II-2
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and
Dimension Solutions.
2.2* Stock Acquisition Agreement, dated January 1, 1997, between Registrant and
BeneSphere Administrators, Inc.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation, to be effective upon
completion of the offering.
3.3* Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate of Registrant.
4.2* Amended and Restated Registration Rights Agreement, dated March 12, 1997 between
Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P.
and certain stockholders of Registrant.
4.3* Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon
Valley Bank and related Antidilution and Registration Rights Agreements.
4.4(a)* Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
4.4(b)* Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
4.5* Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between
Registrant and LINC Capital Management.
4.6(a)* Warrant Purchase Agreement, dated November 14, 1996, between Registrant and
certain purchasers.
4.6(b)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and T.J. Bristow and Elizabeth S. Bristow.
4.6(c)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and SDK Incorporated.
4.6(d)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and Laurence Shushan and Magdalena Shushan.
4.7(a)* Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Louis R. Baransky.
4.7(b)* Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Ben W. Reppond.
4.8* Form of Note issued by Registrant on October 20, 1995 and December 12, 1995 (see
also Exhibit 10.12).
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23,
1994, Second Amendment to Lease dated December 9, 1994, and Third Amendment to
Lease, dated March 16, 1995 between Registrant and Hacienda Park Associates.
10.2* Lease Agreement and Addendum Number One, dated August 26, 1993, and First
Amendment to Lease, dated March 23, 1994, between Registrant and Hacienda Park
Associates.
10.3* Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994 and
Second Amendment, dated October 5, 1994 between Registrant and Hacienda Park
Associates.
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
10.4* Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated
February 23, 1996, between Registrant and Hacienda Park Associates.
10.5* Built-to-Suit Lease, dated September 27, 1996, between Registrant and Britannia
Hacienda V Limited Partnership.
10.6* Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc.
and the Trustees under the Will and of the Estate of James Campbell, Deceased and
related Guaranty of Lease.
10.7* 1996 Stock Option Plan and related Form of Stock Option Agreement.
10.8 1996 Employee Stock Purchase Plan.
10.9* Employment and Non-competition Agreement, dated May 23, 1996 between Registrant
and Dwight L. Jackson.
10.10* Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and
LINC Capital Management and related Equipment Schedule.
10.11* Form of Indemnification Agreement between Registrant and executive officers and
directors.
10.12* Loan Agreement, dated October 20, 1995 between Registrant and certain investors,
and First Amendment to Loan Agreement, dated December 12, 1995, between
Registrant and certain investors.
10.13* Loan and Security Agreement, dated April 30, 1996, between Registrant and Coast
Business Credit, Amendment Number One, dated October 25, 1996 and Amendment
Number Two, dated January 6, 1997.
10.14* Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
10.15* Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
10.16* Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
10.17* Office Building Lease between Koll Center Irvine Number Two and Registrant dated
November 7, 1994, and Amendments Nos. 1 and 2, thereto.
10.18* Lease (Full Service Office Lease), as amended by and between Callahan Pentz
Properties and Registrant, assigned to Registrant on February 29, 1996.
10.19* Promissory Note, dated December 31, 1996 between BeneSphere Administrators, Inc.
and Alison Elder.
10.20* Series F Stock Purchase Agreement dated March 12, 1997, between Registrant,
General Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P.
10.21* Stockholders Agreement dated March 12, 1997 between Registrant, General Atlantic
Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined
therein).
10.22 Standard Office Lease -- Gross, dated March 27, 1997 between Registrant and
Westwood Holdings, Inc.
10.23 ISDA Master Agreement dated June 10, 1997 between Registrant and First Union
National Bank.
11.0* Statement regarding computation of Registrant's per share earnings.
16.1* Letter re Change in Certifying Accountant.
21.0* List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1).
24.1 Powers of attorney (See page II-6)
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
II-4
<PAGE> 101
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II VALUATION ALLOWANCE SCHEDULE
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 of 1933, 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.
II-5
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton,
State of California, on this 14 day of August, 1997.
PROBUSINESS SERVICES, INC.
By: /s/ Thomas H. Sinton
------------------------------------
Thomas H. Sinton
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas H. Sinton and Steven E. Klei, and
each of them singly, as 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 to sign the Registration Statement filed
herewith and any or all amendments to said Registration Statement (including
post-effective amendments and registration statements filed pursuant to Rule 462
and otherwise), and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
or any regulatory authority granting unto said attorneys-in-fact and agents the
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, 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, 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
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ Thomas H. Sinton President, Chief Executive August 14, 1997
- ------------------------------------------ Officer and Director (Principal
Thomas H. Sinton Executive Officer
* Senior Vice President, Finance, August 14, 1997
- ------------------------------------------ Chief Financial Officer and
Steven E. Klei Secretary (Principal Financial
and Accounting Officer
/s/ William T. Clifford Director August 14, 1997
- ------------------------------------------
William T. Clifford
* Director August 14, 1997
- ------------------------------------------
David C. Hodgson
* Director August 14, 1997
- ------------------------------------------
Ronald W. Readmond
* Director August 14, 1997
- ------------------------------------------
Thomas P. Roddy
*By: /s/ Thomas H. Sinton
- ------------------------------------------
Power of Attorney
</TABLE>
<PAGE> 103
SCHEDULE II
PROBUSINESS, INC.
(DOLLARS IN THOUSANDS)
VALUATION ALLOWANCE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
DEFERRED TAX ASSETS 1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year..................................... $2,529 $2,988 $3,597
Additions........................................................ 459 609 2,308
Reductions....................................................... -- -- --
Balance at end of year........................................... $2,988 $3,597 5,905
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS 1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year..................................... $ -- $ -- $ --
Additions........................................................ -- -- 365
Reductions....................................................... -- -- $ --
Balance at end of year........................................... $ -- $ -- $ 365
</TABLE>
S-1
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and
Dimension Solutions.
2.2* Stock Acquisition Agreement, dated January 1, 1997, between Registrant and
BeneSphere Administrators, Inc.
3.1* Amended and Restated Certificate of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation, to be effective upon
completion of the offering.
3.3* Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate of Registrant.
4.2* Amended and Restated Registration Rights Agreement, dated March 12, 1997, between
Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P.
and certain stockholders of Registrant.
4.3* Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon
Valley Bank and related Antidilution and Registration Rights Agreements.
4.4(a)* Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
4.4(b)* Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast
Business Credit and related Antidilution and Registration Rights Agreement.
4.5* Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between
Registrant and LINC Capital Management.
4.6(a)* Warrant Purchase Agreement, dated November 14, 1996, between Registrant and
certain purchasers.
4.6(b)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and T.J. Bristow and Elizabeth S. Bristow.
4.6(c)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and SDK Incorporated.
4.6(d)* Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between
Registrant and Laurence Shushan and Magdalena Shushan.
4.7(a)* Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Louis R. Baransky.
4.7(b)* Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and
Ben W. Reppond.
4.8* Form of Note issued by Registrant on October 20, 1995 and December 12, 1995 (see
also Exhibit 10.12).
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23,
1994, Second Amendment to Lease, dated December 9, 1994, and Third Amendment to
Lease, dated March 16, 1995, between Registrant and Hacienda Park Associates.
10.2* Lease Agreement and Addendum Number One, dated August 26, 1993, and First
Amendment to Lease, dated March 23, 1994, between Registrant and Hacienda Park
Associates.
10.3* Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994, and
Second Amendment, dated October 5, 1994, between Registrant and Hacienda Park
Associates.
10.4* Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated
February 23, 1996, between Registrant and Hacienda Park Associates.
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
10.5* Built-to-Suit Lease, dated September 27, 1996, between Registrant and Britannia
Hacienda V Limited Partnership.
10.6* Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc.
and the Trustees under the Will and of the Estate of James Campbell, Deceased and
related Guaranty of Lease.
10.7* 1996 Stock Option Plan and related Form of Stock Option Agreement.
10.8 1996 Employee Stock Purchase Plan.
10.9* Employment and Non-competition Agreement, dated May 23, 1996, between Registrant
and Dwight L. Jackson.
10.10* Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and
LINC Capital Management and related Equipment Schedule.
10.11* Form of Indemnification Agreement between Registrant and executive officers and
directors.
10.12* Loan Agreement, dated October 20, 1995, between Registrant and certain investors
and First Amendment to Loan Agreement, dated December 12, 1995, between
Registrant and certain investors.
10.13* Loan and Security Agreement, dated April 30, 1996, between Registrant and Coast
Business Credit, Amendment Number One, dated October 25, 1996, and Amendment
Number Two, dated January 6, 1997.
10.14* Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
10.15* Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
10.16* Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
10.17* Office Building Lease between Koll Center Irvine Number Two and Registrant, dated
November 7, 1994, and Amendments No. 1 and 2 thereto.
10.18* Lease (Full Service Office Lease), as amended by and between Callahan Pentz
Properties and Registrant, assigned to Registrant on February 29, 1996.
10.19* Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc.
and Alison Elder.
10.20* Series F Preferred Stock Purchase Agreement, dated March 12, 1997, between
Registrant, General Atlantic Partners 39, L.P. and GAP Coinvestment Partners,
L.P.
10.21* Stockholders Agreement, dated March 12, 1997, between Registrant, General
Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as
defined therein).
10.22 Standard Office Lease -- Gross, dated March 27, 1997 between Registrant and
Westwood Holdings, Inc.
10.23 ISDA Master Agreement dated June 10, 1997 between Registrant and First Union
National Bank
11.0* Statement regarding computation of Registrant's per share earnings.
16.1* Letter re Change in Certifying Accountant.
21.0* List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1).
24.1 Powers of attorney (See page II-6).
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
[PROBUSINESS LOGO]
PRBZ
PROBUSINESS SERVICES, INC.
PAR VALUE $.001 SEE REVERSE FOR CERTAIN DEFINITIONS AND
A STATEMENT OF RESTRICTIONS ON SHARES
CUSIP 742674 10 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.001 PAR VALUE PER SHARE OF
PROBUSINESS SERVICES, INC.
transferable on the bank of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[PROBUSINESS SERVICES, INC. SEAL]
/s/ Steven Klei /s/ Thomas H.Sinton
VICE PRESIDENT, CHIEF FINANCIAL OFFICER PRESIDENT AND
AND SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
- ------------------------------------------------------
AMERICAN BANK NOTE COMPANY APRIL 4, 1997 dw
3604 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 049068fc
(562) 989-2333
(FAX) (562) 426-7450 270-19X proof [initialed] REV 2
------------
- -------------------------------------------------------
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .......... Custodian .............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act ...............................
(State)
UNIF TRF MIN ACT -- ........... Custodian (until age ....)
(Cust)
........... under Uniform Transfers
(Minor)
to Minors Act ........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________________
X __________________________________________________________
X __________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17 AG-16.
- ---------------------------------------------------
AMERICAN BANK NOTE COMPANY APRIL 4, 1997 dw
3504 ATLANTIC AVENUE
049068bk
SUITE 12
LONG BEACH, CA 90807
(562) 959-2333
(FAX) (562) 426-7450 proof [initialed] REV 1
---------
- ---------------------------------------------------
<PAGE> 1
EXHIBIT 10.8
PROBUSINESS SERVICES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock
Purchase Plan of ProBusiness Services, Inc., a Delaware corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean ProBusiness Services, Inc. and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, and shall include payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation; provided, however, that pursuant to Section 20 the Board may
modify the definition of "Compensation" before any Offering Period without
shareholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period for which the modification
shall have effect.
(f) "Designated Subsidiary" shall mean any Subsidiary which
has been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each
Offering Period.
<PAGE> 2
(i) "Exercise Date" shall mean the last day of each Purchase
Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board, or;
(4) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and shall end on the last Trading Day on or before October
31, 1999. The duration and timing of Offering Periods may be changed pursuant
to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first
-2-
<PAGE> 3
Purchase Period of any Offering Period shall commence on the Enrollment Date and
end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
October 31, 1999. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
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<PAGE> 4
\ 5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
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<PAGE> 5
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but shall not be obligated to, withhold
from the participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 2,500
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall expire
on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall
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<PAGE> 6
be made for such Offering Period. If a participant withdraws from an Offering
Period, payroll deductions shallnot resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise the option shall be returned to
such participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be Five Hundred
Thousand (500,000) shares, subject to adjustment upon changes in capitalization
of the Company as provided in Section 19 hereof, plus an annual increase to be
added on each anniversary date of the adoption of the Plan equal to the lesser
of (i) 150,000 Shares, (ii) one and one-half percent (1.5%) of the outstanding
Shares on such date or (iii) a lesser number determined by the Board. If, on a
given Exercise Date, the number of shares with respect to which options are to
be exercised exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
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<PAGE> 7
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
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<PAGE> 8
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves, the maximum number of shares
each participant may purchase each Purchase Period (pursuant to Section 7), as
well as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Periods shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, any Purchase Periods then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date") and
any Offering Periods then in progress shall end on the New Exercise Date. The
New Exercise Date shall be before the date of the Company's proposed sale or
merger. The Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any
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<PAGE> 9
successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period
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<PAGE> 10
shall be automatically withdrawn from such Offering Period immediately after the
exercise of their option on such Exercise Date and automatically re-enrolled in
the immediately following Offering Period as of the first day thereof.
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<PAGE> 11
EXHIBIT A
PROBUSINESS SERVICES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ________________________ hereby elects to participate in the
ProBusiness Services, Inc. 1996 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and sub scribes to purchase shares of
the Company's Common Stock in accordance with this Sub scription
Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to _____%) during
the Offering Period in accordance with the Employee Stock Purchase
Plan. (Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse
only):________________________ .
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at
the time such shares were purchased by me
<PAGE> 12
over the price which I paid for the shares. I hereby agree to notify
the Company in writing within 30 days after the date of any disposition
of my shares and I will make adequate provision for Federal, state or
other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of the
2-year and 1-year holding periods, I understand that I will be treated
for federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares,
or (2) 15% of the fair market value of the shares on the first day of
the Offering Period. The remainder of the gain, if any, recognized on
such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) ______________________________________________
(First) (Middle) (Last)
_______________________________ Address:
Relationship
___________________________________
___________________________________
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<PAGE> 13
Employee's Social
Security Number: ___________________________________
Employee's Address: ___________________________________
___________________________________
___________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ _________________________________________
Signature of Employee
_________________________________________
Spouse's Signature (If beneficiary other
than spouse)
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<PAGE> 14
EXHIBIT B
PROBUSINESS SERVICES, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the ProBusiness
Services, Inc. 1996 Employee Stock Purchase Plan that began on
_________________, 19____ hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned under stands that no
further payroll deductions will be made for the purchase of shares in the
current Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:__________________________
<PAGE> 1
Exhibit 10.22
STANDARD OFFICE LEASE--GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[AIR LOGO]
1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")
1.1 PARTIES: This Lease, dated, for reference purposes only,
March 27, 1997 is made by and between Westwood Holdings, Inc. (herein called
"Lessor") and PROBUSINESS Services, Inc. doing business under the name of
_____________________________________________ (herein called "Lessee").
1.2 PREMISES: Suite Number(s) 140, 1st floor, consisting of 14,414
rentable feet, more or less, as defined in paragraph 2 and as shown on Exhibit
"A" hereto (the "Premises").
1.3 BUILDING: Commonly described as being located at 2355 Main
Street Center in the City of Irvine, County of Orange, State of California, as
more particularly described in Exhibit A hereto, and as defined in
paragraph 2.
1.4 USE: General Office, subject to paragraph 6.
1.5 TERM: 5 Years commencing May 15, 1997 ("Commencement Date") and
ending May 15, 2002, as defined in paragraph 3.
1.6 BASE RENT: $20,468.00 per month, payable on the 1st day of each
month per paragraph 4.1.
1.7 BASE RENT INCREASE: On NA the monthly Base Rent payable under
paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below.
1.8 RENT PAID UPON EXECUTION: $20,468.00 for ______________________
1.9 SECURITY DEPOSIT: $-0- due upon execution
1.10 LESSEE 'S SHARE OF OPERATING EXPENSE INCREASE: 18.04% as
defined in paragraph 4.2.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building, herein
sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic
Lease Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas and the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2, as
the "Premises," including rights to the Common Area as hereinafter specified.
2.2 VEHICLE PARKING: So long as Lessee is not in default, and
subject to the rules and regulations attached hereto, and as established by
lessor from time to time, Lessee shall be entitled to rent and use 56 parking
spaces in the Office Building Project at the monthly rate applicable from time
to time for monthly parking as set by Lessor and/or its licensee.
2.2.1. If Lessee commits, permits or allows any of the
prohibited activities described in the Lease or the rules then in effect, then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove or tow away the vehicle involved and
change the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
2.2.2 The monthly parking rate per parking space will be $-0-
per month.
2.2.3 The lessee shall be entitled to ten reserved spaces
located in a mutually agreeable location. Such spaces are included in the 56
spaces allocated to the lessee.
2.3 COMMON AREAS-DEFINITION. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Office Building Project that are provided and designated by the
Lessor from time to time for the general non-exclusive use of Lessor, Lessee and
of other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 COMMON AREAS-RULES AND REGULATIONS. Lessee agrees to abide by
and conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers, and invitees to so abide and
conform. Lessor or such other person(s) as Lessor may appoint shall have the
exclusive control and management of the Common Areas and shall have the right,
from time to time, to modify, amend and enforce said rules and regulations.
Lessor shall not be responsible to Lessee for the non-compliance with said
rules and regulations by other lessees, their agents, employees and invitees of
the Office Building Project.
2.5 COMMON AREAS-CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Building interior and exterior and
Common Areas, including, without limitation, changes in the location, size,
shape, number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available.
(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Office Building Project
as Lessor may, in the exercise of sound business judgment deem to be
appropriate.
3. TERM.
3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease or
the obligations of Lessee hereunder or extend the term hereof; but, in such
case, Lessee shall not be obligated to pay rent or perform any other obligation
of Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's
Initials: ________
________
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 1 of 10 PAGES
<PAGE> 2
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder; provided, however, that, as to Lessee's obligations, Lessee first
reimburses Lessor for all costs incurred for Non-Standard Improvements and, as
to Lessor's obligations, Lessor shall return any money previously deposited by
Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided
further, that if such written notice by Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3.2.1 POSSESSION TENDERED-DEFINED. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Lessee has reasonable access to the Premises, and (4) ten (10) days shall have
expired following advance written notice to Lessee of the occurrence of the
matters described in (1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of
rent, and the sixty (60) day period following the Commencement Date before
which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be
deemed extended to the extent of any delays caused by acts or omissions of
Lessee, Lessee's agents, employees and contractors.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease
term is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of
Possession (as defined in paragraph 3.2.1) or the actual taking of possession
by Lessee, whichever first occurs, as the Commencement Date.
4. RENT.
4.1 BASE RENT. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this Lease.
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of
the Basic Lease Provisions. Rent for any period during the term hereof which is
for less than one month shall be prorated based upon the actual number of days
of the calendar month involved. Rent shall be payable in lawful money of the
United states to Lessor at the address stated herein or to such other persons or
at such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter
defined, of the amount by which all Operating Expenses, as hereinafter defined,
for each Comparison Year exceeds the amount of all Operating Expenses for the
Base Year, such excess being hereinafter referred to as the "Operating Expense
Increase," in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease,
as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square footage
of the Premises by the total approximate square footage of the rentable space
contained in the Office Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Office Building
Project.
(b) "Base Year" is defined as the calendar year in which the
Lease term commences.
(c) "Comparison Year" is defined as each calendar year
during the term of this Lease subsequent to the Base Year; provided, however,
Lessee shall have no obligation to pay a share of the Operating Expense Increase
applicable to the first twelve (12) months of the Lease Term (other than such as
are mandated by a governmental authority, as to which government mandated
expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the
first twelve (12) months). Lessee's Share of the Operating Expense Increase for
the first and last Comparison Years of the Lease Term shall be prorated
according to that portion of such Comparison Year as to which Lessee is
responsible for a share of such increase.
(d) "Operating Expenses" is defined, for purposes of this
Lease, to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion, for:
(i) The operation, repair, maintenance, and
replacement, in neat, clean, safe, good order and condition, of the Office
Building Project including but no limited to, the following:
(aa) The Common Areas, including their surfaces,
coverings, decorative items, carpets, drapes and window coverings, and including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, stairways, parkways, driveways, landscaped areas, striping bumpers,
irrigation systems, Common Area lighting facilities, building exteriors and
roofs, fences and gates;
(bb) All heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Office
Building Project, including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Lessor that
is elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and
property insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be
paid by Lessor under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and
other publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe benefits
and costs, materials, supplies and tools, used in maintaining and/or cleaning
the Office Building Project and accounting and a management fee attributable to
the operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated
by any governmental agency and any repairs or removals necessitated thereby
amortized over its useful life according to Federal income tax regulations or
guidelines for depreciation thereof (including interest on the unamortized
balance as is then reasonable in the judgment of Lessor's accountants);
(ix) Replacements of equipment or improvements that
have a useful life for depreciation purposes according to Federal income tax
guidelines of five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of
replacements of equipment or improvements that have a useful life for Federal
income tax purposes in excess of five (5) years unless it is of the type
described in paragraph 4.2(d)(viii), in which case their cost shall be included
as above provided.
(f) Operating Expenses shall not include any expenses paid by
any lessee directly to third parties, or as to which Lessor is otherwise
reimbursed by any third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time in advance of Lessee's
Share of the Operating Expense Increase for any Comparison Year, and the same
shall be payable monthly or quarterly, as Lessor shall designate, during each
Comparison Year of the Lease term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within
sixty (60) days after the expiration of each Comparison Year a reasonably
detailed statement showing Lessee's Share of the actual Operating Expense
Increase incurred during such year. If Lessee's payments under this paragraph
4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expense Increase next falling due. If
Lessee's payment under this paragraph during said Comparison Year were less than
Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the
amount of the deficiency within ten (10) days after delivery by Lessor to Lessee
of said statement. Lessor and Lessee shall forthwith adjust between them by cash
payment any balance determined to exist with respect to that portion of the last
Comparison Year for which Lessee is responsible as to Operating Expense
Increases, notwithstanding that the Lease term may have terminated before the
end of such Comparison Year.
4.3 RENT INCREASE.
Initials: ________
________
(C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS
PAGE 2 of 10 PAGES
<PAGE> 3
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the security deposit set forth in paragraph 1.9 of the Basic Lease
Provisions as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default for the payment of any other sum to which Lessor may
become obligated by reason of Lessee's default, or to compensate Lessor for any
loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all
or any portion of said deposit, Lessee shall within ten (10) days after written
demand therefor deposit cash with Lessor in an amount sufficient to restore said
deposit to the full amount then required of Lessee. If the monthly Base Rent
shall, from time to time, increase during the term of this Lease, Lessee shall,
at the time of such increase, deposit with Lessor additional money as a security
deposit so that the total amount of the security deposit held by Lessor shall at
all times bear the same proportion to the then current Base Rent as the initial
security deposit bears to the initial Base Rent set forth in paragraph 1.6 of
the Basic Lease provisions. Lessor shall not be required to keep said security
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the
purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other
use which is reasonably comparable to that use and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record or
any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any
such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at
Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in effect
or which may hereafter come into effect, whether or not they reflect a change
in policy from that now existing, during the term or any part of the term
hereof, relating in any manner to the Premises and the occupation and use by
Lessee of the Premises. Lessee shall conduct its business in a lawful manner and
shall not use or permit the use of the Premises or the Common Areas in any
manner that will tend to create waste or a nuisance or shall tend to disturb
other occupants of the Office Building Project.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Lessor, after receipt of written
notice from Lessee setting forth with specificity the nature of the violation,
to promptly, at Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and any easements, covenants or
restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that it has satisfied itself by its own independent investigation
that the Premises are suitable for its intended use, and that neither Lessor or
Lessor's agent or agents has made any representation or warranty as to the
present or future suitability of the Premises, Common Areas, or Office Building
Project for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building
Project, including the Premises, interior and exterior walls, roof, and common
areas and the equipment whether used exclusively for the Premises or in common
with other premises, in good condition and repair; provided, however, Lessor
shall not be obligated to paint, repair or replace wall coverings, or to repair
or replace any improvements that are not ordinarily a part of the Building or
are above then Building standards. Except as provided in paragraph 9.5, there
shall be no abatement of rent or liability of Lessee on account of any injury
or interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any
part thereof. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Notwithstanding Lessor's obligation to keep the Premises in
good condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that
are above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices by Lessee. Lessee shall repair any damage to the Premises
occasioned by the installation or removal of Lessee's trade fixtures,
alterations, furnishings and equipment. Except as otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical distribution
systems, lighting fixtures, air conditioning, window coverings, wall coverings,
carpets, wall panelling, ceilings and plumbing on the Premises and in good
operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, Utility Installations or repairs
in, on, or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and
wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication wiring
and equipment. At the expiration of the term, Lessor may require the removal of
any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's
sole cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, or use a contractor not
expressly approved by Lessor, Lessor may, at any time during the term of this
Lease, require that Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work, and compliance by Lessee with all conditions of
said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the Premises
or the Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy.
Initials: _______
________
(c) 1984 American Industrial Real Estate Association
FULL SERVICE--GROSS
PAGE 3 OF 10 PAGES
<PAGE> 4
any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien of claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorney's fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility
installations (whether or not such Utility installations constitute trade
fixtures of Lessee), which may be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound attenuation, and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises or the Building, and other than Utility installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
installations.
7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building
Project, including, but not by way of limitation, such utilities as plumbing,
electrical systems, communication systems, and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an insurance Services Office standard form
with Broad Form General Liability Endorsement (GL04), or equivalent, in an
amount of not less than $1,000,000 per occurrence of bodily injury and property
damage combined or in a greater amount as reasonably determined by Lessor and
shall insure Lessee with Lessor as an additional insured against liability
arising out of the use, occupancy, or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Lessee
hereunder.
8.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence.
8.3 PROPERTY INSURANCE--LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 PROPERTY INSURANCE--LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor, shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease if the increase is specified by Lessor's insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.
8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancellable
or subject to reduction of coverage or other modification except after thirty
(30) days prior written notice to Lessor. Lessee shall, at least thirty (30)
days prior to the expiration of such policies, furnish Lessor with renewals
thereof.
8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.
8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission by Lessee, or any of Lessee's agents,
contractors, employees, or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case of action or proceeding be brought against Lessor by reason
of any such matter, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid for such
claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or injury
or the means of repairing the same is inaccessible. Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to enforce
the provisions of any other lease of any other lessee of the Office Building
Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
paragraph 8 are adequate to cover Lessee's property or obligations under this
Lease.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the building.
(c) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is fifty percent (50%) or more of the then Replacement
Cost of the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall
mean if the Office Building Project Buildings are damaged or destroyed to the
extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
(c)1984 American Industrial FULL SERVICE--GROSS Initials: _____
Real Estate Association
PAGE 4 OF 10 PAGES
<PAGE> 5
9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage which an Insured
Loss and which falls into the classification of either Premises Damage or
Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage which is not an
Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may at Lessor's option either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not is an Insured
Loss, which falls into the classifications of either (i) Premise Building Total
Destruction, or (iii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last twelve
(12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which an option may be
exercised has not yet expired, Lessee shall exercise such option, if it is to be
exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise said option during said twenty (20) day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of said
twenty (20) day period, notwithstanding any term or provision in the grant of
option to the contrary.
9.5 ABATEMENT OF RENT: LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (including Lessee's Share of Operating Expense
Increase) for the period during which such damage, repair or restoration
continues shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent the
operation and profitability of Lessee's business as operating from the Premises
is adversely affected. Except for said abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage sufficient by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises or if
the Building under the provisions of this paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and the
execution of plans and specifications required.
9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree
that such event shall be governed by the terms of this lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvement placed upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general
special, ordinary or extraordinary and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a service or
right not charged prior to June 1, 1978, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a taxable service or
right not charged prior to June 1, 1978, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements of property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessors work sheets
or such other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES.
11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines,
water for reasonable and normal drinking and lavatory use, and replacement of
any bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 HOURS OF SERVICE. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours as
may hereafter be set forth. Utilities and services required at other times shall
be subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof. Hours of service shall be from 7:00 AM to 6:00 PM weekdays and 9:00 AM
to 12:00 NOON Saturdays.
(C) 1984 American Industrial Real Estate Association Initials:__________
__________
FULL SERVICE -- GROSS
PAGE 5 OF 10 PAGES
<PAGE> 6
11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to
the utilities except by or through existing outlets and shall not install or
use machinery or equipment in or about the Premises that uses excess water,
lighting or power, or suffer or permit any act that causes extra burden upon
the utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lessor shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion,
install at Lessee's expense supplemental equipment and/or separate metering
applicable to Lessee's excess usage or loading.
11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor
shall not be liable in any respect whatsoever for the inadequacy, stoppage or
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, no assignment or subletting
shall release Lessee of Lessee's obligations hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
of estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been
guaranteed by third parties, then an assignment or sublease, and Lessor's
consent thereto, shall not be effective unless said guarantors give their
written consent to such sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent
and such action shall not relieve such persons from liability under this Lease
or said sublease; however, such persons shall not be responsible to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or any one else responsible for
the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no default
then exists under this Lease of the obligations to be performed by Lessee nor
shall such consent be deemed a waiver of any then existing default, except as
may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement
relied upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's full consent null
and void.
12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
Regardless of Lessor's consent, the following terms and conditions shall apply
to any subletting by Lessee of all or any part of the Premises and shall be
deemed included in all subleases under this Lease whether or not expressly
incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease heretofore
or hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this Lease; provided, however, that
until a default shall occur in the performance of Lessee's obligations under
this Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective
unless and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublessee as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublease shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance of
its obligations under this Lease, Lessor at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease from
the time of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to Lessee or for any other prior defaults of
Lessee under such sublease.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has
consented, Lessor agrees to deliver a copy of any notice of default by Lessee to
the sublessee. Such sublessee shall have the right to cure a default of Lessee
with three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet
the Premises or request the consent of Lessor to any assignment or subletting
or if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition
any approval to assign or sublet upon Lessor's determination that (a) the
proposed assignee or sublessee shall conduct a business on the Premises of a
quality substantially equal to that of Lessee and consistent with the general
character of the other occupants of the Office Building Project and not in
violation of any exclusives or rights then held by other tenants, and (b) the
proposed assignee or sublessee be at least as financially responsible as Lessee
was expected to be at the time of the execution of this Lease or of such
assignment or subletting, whichever is greater.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following
events shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee.
Vacation of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions
or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency),
13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination),
33 (auctions), or 41.1 (easements), all of which are hereby deemed to be
material, non-curable defaults without the necessity of any notice by Lessor to
Lessee thereof.
(c) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
Initials: _________
FULL SERVICE - GROSS _________
PAGE 6 OF 10 PAGES
(C) 1984 American Industrial Real Estate Association
<PAGE> 7
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c), above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or
general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor"
as defined in 11 U.S.C. (Section)101 or any successor statute thereto (unless,
in the case of a petition filed against Lessee, the same is dismissed within
sixty (60) days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days. In the event that any provision of this paragraph 13.1(e) is
contrary to any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given
to Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligation hereunder, was materially false.
13.2 REMEDIES. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate,
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee all damages
incurred by Lessor by reason of Lessee's default including, but not limited to,
the cost of recovering possession of the Premises; expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and any real estate commission actually paid; the worth at the
time of award by the court having jurisdiction thereof of the amount by which
the unpaid rent for the balance of the term after the time of such award
exceeds the amount of such rental loss for the same period that Lessee proves
could be reasonably avoided; that portion of the leasing commission paid by
Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all
of Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently pursues the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or
other sums due hereunder will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charges,
and late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within (30) days after the condemning authority shall have taken
possession), to terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, the Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent and Lessee's Share of
Operating Expense Increase shall be reduced in the proportion that the floor
area of the Premises taken bears to the total floor area of the Premises. Common
Areas taken shall be excluded from the Common Areas usable by Lessee and no
reduction of rent shall occur with respect thereto or by reason thereof. Lessor
shall have the option in its sole discretion to terminate this Lease as of the
taking of possession by the condemning authority, by giving written notice to
Lessee of such election within thirty (30) days after receipt of notice of a
taking by condemnation of any part of the Premises or the Office Building
Project. Any award for the taking of all or any part of the Premises or the
Office Building Project under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, repair any damage to the
Premises caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) The brokers involved in this transaction are None
-----------------------
as "listing broker" and Voit Commercial Brokerage as "cooperating
---------------------------------------
broker" licensed real estate broker(s). A "cooperating broker" is defined as
any broker other than the listing broker entitled to a share of any commission
arising under this Lease. Lessor shall pay to said brokers jointly, or in such
separate shares as they may mutually designate in writing, a fee as set forth
in a separate agreement between Lessor and said broker(s), or in the event
there is no separate agreement between Lessor and said broker(s), the sum of
$ 4% of Gross Rents , for brokerage services rendered by a broker(s)
------------------------------
to Lessor in this transaction. *See Below
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or (ii) if Lessee acquires any
rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, or (v) if the
Base Rent is increased, whether by agreement or operation of an escalation
clause contained herein, then as to any of said transactions or rent increases,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease. Said fee shall be
paid at the time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also
on behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 15 to the
extent of their interest in any commission arising under this Lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker or finder (other
than the person(s), if any, whose names are set forth in paragraph 15(a),
above) in connection with the negotiation of this Lease and/or the consummation
of the transaction contemplated hereby, and no other broker or other person,
firm or entity is entitled to any commission or finder's fee in connection with
said transaction and Lessee and Lessor do each hereby indemnify and hold the
other harmless from and against any costs, expenses, attorneys' fees or
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying party.
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date
*(A) 50% upon execution of the lease
(B) 50% upon occupancy
Initials:__________
(Copyright) 1984 American Industrial Real Estate Association __________
FULL SERVICE--GROSS
PAGE 7 OF 10 PAGES
<PAGE> 8
to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to any
lender or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers than
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall,
subject as aforesaid, be binding on Lessor's successors and assigns, only
during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this lease as determined
by a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such parties at such addresses as lessor may from time to time hereafter
designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach to Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor consent to or
approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be two hundred percent (200%) of the rent payable immediately preceding
the termination date of this Lease, and all Options, if any, granted under the
terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION.
(a) This Lease, and any Option or right of first refusal granted hereby,
at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions of
this lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee, or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).
31. ATTORNEY'S FEES.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the
same or a separate suit, and whether or not such action is pursued to decision
or judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fees award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all attorneys'
fees reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notice of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.
32. LESSOR'S ACCESS.
32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, performing
any services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without abatement of rent, nor shall Lessor have any liability to Lessee for
the same.
(C) 1984 American Industrial Real Estate Association Initials:__________
__________
FULL SERVICE -- GROSS
PAGE 8 OF 10 PAGES
<PAGE> 9
32.3 Lessor shall have the right to retain keys to the Premises and
to unlock all doors in or upon the Premises other than to files, vaults and
safes, and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forceable or
unlawful entry or detainer of the Premises or an eviction. Lessee waives any
charges for damages or injuries or interference with Lessee's property or
business in connection therewith.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in
violation of this paragraph shall constitute a material default of this Lease.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease
is personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or involuntarily,
by or to any person or entity other than Lessee; provided, however, that an
Option may be exercised by or assigned to any Lessee Affiliate as defined in
paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are
not assignable separate and apart from this Lease, nor may any Option be
separated from this Lease in any manner, either by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised unless
the prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the
noncompliance alleged in said notice of default is cured, or (ii) during the
period of time commencing on the day after a monetary obligation to Lessor is
due from Lessee and unpaid (without any necessity for notice thereof to Lessee)
and continuing until the obligation is paid, or (iii) in the event that Lessor
has given to Lessee three or more notices of default under paragraph 13.1(c),
or paragraph 13.1(d), whether or not the defaults are cured, during the first
month period of time immediately prior to the time that Lessee attempts to
exercise the subject Option, (iv) if Lessee has committed any non-curable
breach, including without limitation those described in paragraph 13.1(b), or
is otherwise in default of any of the terms, covenants or conditions of this
Lease.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(d) within
thirty (30) days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, or (iii) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are
cured, or (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants and conditions of this Lease.
40. SECURITY MEASURES--LESSOR'S RESERVATIONS.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office
Building Project or building in which the Premises are located upon not less
than 90 days prior written notice;
(b) To, at Lessee's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein;
(d) To place such signs, notices or displays as Lessor
reasonably deems necessary or advisable upon the roof, exterior of the
buildings, the Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building of the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go
upon the roof of the Building.
41. EASEMENTS.
41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
Initials: ________
________
FULL SERVICES-GROSS
PAGE 9 of 10 PAGES
(C) 1984 American Industrial Real Estate Association
<PAGE> 10
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.
44. CONFLICT. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
48. WORK LETTER. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee, attached hereto as Exhibit C and
incorporated herein by this reference.
49. ATTACHMENTS. Attached hereto are the following documents which constitute
a part of this Lease:
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY THE EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL
RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE
LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
Westwood Holdings, Inc. PROBUSINESS Services, Inc.
- ----------------------------------- -------------------------------------
By ________________________________ By __________________________________
Its _______________________ Its ___________________________
By ________________________________ By __________________________________
Its _______________________ Its ___________________________
Executed at Executed at Pleasanton, CA 94588
------------------------ --------------------------
on on 3-28-87
-------------------------------- ----------------------------------
Address Address 5934 Gibraltar Drive
--------------------------- -----------------------------
FULL SERVICE - GROSS
PAGE 10 OF 10 PAGES
(C) 1984 American Industrial Real Estate Association
For these forms write or call the American Real Estate Association, 350 South
Figueroa Street, Suite 275, Los Angeles, CA 90071, (213) 687-8777.
(C) 1984 - By American Industrial Real Estate Association. All rights reserved.
No part of these words may be reproduced in any form without permission in
writing.
<PAGE> 11
STANDARD OFFICE LEASE
FLOOR PLAN
[LOGO]
EXHIBIT A
Initials: ____
FULL SERVICE--GROSS ____
(C)1984 American Industrial Real Estate Association
<PAGE> 12
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
[LOGO]
Dated: March 27, 1997
By and Between Westwood Holdings, Inc. and PROBUSINESS Services, Inc.
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property, the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks
or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of
the premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the
Premises or Building that causes excessive vibration or floor loading in any
part of the Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge and consent, and subject
to such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the building on
Saturdays, Sundays and legal holidays, and on other days between the hours of
6 P.M. and 7 A.M. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may have
opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the
Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of healing or air conditioning
other than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking
or food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to
keep its premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as
"Oversized Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses to comply
with the applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking
spaces from floor to floor, within one floor, and/or to reasonably adjacent off-
site location(s), and to reasonably allocate them between compact and standard
sizes spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only
in the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method
or methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws,
and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended to or shall be created hereby.
Initials: ____
FULL SERVICE--GROSS ____
EXHIBIT B
PAGE 1 OF 1 PAGES
(C)1984 American Industrial Real Estate Association
<PAGE> 13
EXHIBIT "C"
WORK LETTER AGREEMENT
Dated: March 27, 1997
By and between: Westwood Holdings, Inc., a Nevada Corporation ("Lessor") and
PROBUSINESS Services, Inc. ("Lessee"):
1. Landlord hereby agrees, at its expense, to cause Landlord's
contractor to perform at the Premises in Landlord's standard manner and using
Landlord's standard materials (unless otherwise specified below) the work as
depicted on, and in accordance with, that certain "Space Plan" dated 3-28-87
prepared by APTI Design and attached to this lease as Exhibit "A" and hereby
made a part hereof (hereinafter referred to as the "Landlord's Work"); however,
all non-standard cabling and wiring, furniture, built-ins, appliances and
equipment, including, without limitation, duplication machines, microwave ovens,
refrigerators, coffee machines and all similar machines, shall be excluded from
the Landlord's Work. All Working Drawings (as defined in Paragraph 4(b) below)
shall be included in the Landlord's Work and shall be prepared by space
designers, engineers chosen by Landlord. Notwithstanding any other provision of
this Lease, all construction to the Premises, including the Landlord's Work,
shall be performed by contractor selected by Landlord. All costs of any work in
excess of the Landlord's Work shall be the sole and exclusive obligation of the
Tenant under Paragraph 4 below. Electrical detail to be provided separately.
2. Tenant acknowledges and agrees that other than the Landlord's Work,
no additional work shall be required with respect to the Premises or the Project
as a result of this Lease, that it has been able to fully inspect the Premises
to its satisfaction as of the date hereof, that but for the Landlord's Work it
is fully satisfied with the physical condition thereof and that, subject only to
the due completion of the Landlord's Work, it hereby accepts possession of the
Premises as of the Commencement Date of the Term in its then current "as is"
condition; provided, however, that the foregoing shall not affect Landlord's
express obligations under this Lease, if any, to maintain and repair the
Premises.
3. Tenant shall advise Landlord of all selections or designations to be
made by Tenant hereunder within five (5) business days after its execution of
this Lease. Such selections and designations shall be subject to the approval
or disapproval of Landlord, which approval shall not be unreasonably withheld.
4. Tenant acknowledges and agrees that the Commencement Date shall not
occur and, accordingly, possession of the Premises shall not be made available
to it under Sections 2 and 6 of this Lease until Landlord's contractor shall
have substantially completed Landlord's Work. Notwithstanding such provisions
of this Lease to the contrary:
(a) In the event Tenant requests any material or installation other
than as provided within the Landlord's Work, any modification or delay therein
or any other work in addition thereto, all of which shall be subject to
Landlords's reasonable approval (collectively, "Tenant's Overstandard Work") or
otherwise directly or indirectly causes any delay in the performance of any of
the Landlord's Work which delay prevents Landlord from substantially completing
the Landlord's Work prior to May 15, 1997, then Tenant shall pay all costs and
expenses occasioned by such delays, including, without limitation, all costs and
expenses attributable to increases in labor or materials, and the Rent
Commencement Date shall be revised to occur on the Estimated Commencement Date
set forth in the Basic Lease Provisions.
(b) Tenant shall fully cooperate with and assist Landlord, and shall
devote such time as may be necessary in connection therewith, to complete and
obtain written approval by Tenant of all architectural, mechanical, electrical
and structural engineering drawings, plans and specifications required in
connection with the final layout and plans for the Landlord's Work (the "Working
Drawings") and written approval by all appropriate governmental authorities of
the Working Drawings (as so approved, the "Approved Plans") as soon as
practicable after the Execution Date. Without limiting the generality of
Paragraph 4(a) above, Tenant acknowledges and agrees that all work shown on the
Working Drawings or the Approved Plans which does not expressly qualify as
Landlord's Work under Paragraph I above shall constitute Tenant's Overstandard
Work. Landlord shall use commercially reasonable efforts to substantially
complete the Landlord's Work at the expiration of twelve (12) weeks after
Landlord's receipt of the Approved Plans.
(c) Within five (5) business days after its receipt of notice from
Landlord under Section 2.2 of the Lease regarding substantial completion of the
Landlord's Work, Tenant shall conduct a walk-through inspection of the Premises
under the supervision of Landlord's contractor and deliver to Landlord a written
punch list of all aspects of the Landlord's Work which are either defective or
incomplete. Tenant's failure to include items of the Landlord's Work in a
timely punch list shall be conclusively deemed to be Tenant's acceptance
thereof. At Landlord's option upon its receipt of such a punch list, subject to
Tenant's reasonable approval, either (a) Tenant shall not be granted possession
of the Premises (and the Commencement Date shall not occur) until Landlord
shall give Tenant a revised notice under Section 2.2 of the Lease, in which
event Tenant's walk-through inspection applicable thereto shall be limited only
to those items shown on the most recent punch list, or (b) provided no such
punch list item materially interferes with Tenant's occupancy of the Premises,
Tenant shall be granted possession of the Premises and Landlord shall use
commercially reasonable efforts to repair or complete all items of the
Landlord's Work duly set forth in Tenant's punch list as soon as practicable
thereafter.
5. All Tenant's Overstandard Work which Landlord agrees to allow under
Paragraph 4 above shall be performed by Landlord's contractor at its cost, plus
fifteen percent (15%) thereof as a fee. Such "cost" shall include, without
limitation, all of such contractor's so-called "General Conditions" (e.g., trash
clean-up and hauling, job lighting and power, insurance, safety protection,
security and hoists) in whole or in part apportionable to the Tenant's
Overstandard Work. The aggregate cost of all Tenant's Overstandard Work shall be
payable fifty percent (50%) upon Tenant's and Landlord's execution of the
agreement wherein Landlord agrees to perform such Tenant's Overstandard Work and
the balance in substantially equal progress payments promptly after Landlord's
billing Tenant therefor. Such payments shall be collectible as additional rental
obligation of Tenant pursuant to this Lease and, accordingly, upon any default
by Tenant in the payment thereof, Landlord shall have, in addition to all other
remedies available to it under this Lease, at law or in equity, the same rights
as in the event of Tenant's default in payment of Rent.
Initials:
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<PAGE> 14
6. Tenant agrees that neither it nor any of its agents, employees
or contractors shall enter the Premises for any purpose prior to the date
possession thereof is made available to it under Section 6 of this Lease, except
as Landlord may in its reasonable discretion approve otherwise in advance. Based
on the Space Plan and the current apparent condition of the Premises, Landlord
anticipates that it will be able to permit such entry by a qualified electrical
wiring contractor and equipment vendors of Tenant during the final two (2) weeks
prior to substantial completion of the Landlord's Work. In connection with any
such entry (whether or not in violation of this Paragraph 6), Tenant agrees to
(a) fully cooperate with Landlord's representatives and not delay in any way or
otherwise interfere with the performance of any work in progress or to be
performed by Landlord or Landlord's contractor, and (b) observe and be bound by
all of the terms, covenants, conditions, provisions and agreements of this Lease
other than Tenant's covenants for the payment of Rent; provided, however, that
in the event any such entry is made in violation of this Paragraph 6 or Tenant
commences to conduct any business in or from the Premises prior to the
commencement of the Term, then both the Commencement Date and the Rent
Commencement Date shall be revised to occur as of such date of entry or of the
commencement of such business activities, whichever is earlier.
7. If Tenant request to perform any alteration, addition or
improvement with respect to the premises at any time (the "Work"), and Landlord
consents to such request, the following terms and conditions shall apply to all
such Work:
(a) All costs and expenses in connection with or arising out of
the performance of the Work shall be borne by Tenant and all payments therefor
shall be made by Tenant promptly as they become due. At not time shall Tenant do
or permit anything to be done whereby any part of the Project may be subjected
to any mechanic's or other lien or encumbrance arising out of the Work. Tenant
shall notify Landlord in writing not less than ten (10) days prior to the
commencement of Work in order to afford Landlord an opportunity to post and
record appropriate notices of nonresponsibility with reference to the Work.
Prior to the commencement of any Work and from time to time whenever requested
by Landlord, Tenant will deliver to landlord waivers of mechanic's liens duly
executed by all contractors, laborers or material persons concerned with such
Work. At any time so requested by Landlord, Tenant will, at Tenant's expense,
provide and furnish to Landlord either (1) a surety company bond, (2) a court
order discharging lien, or (3) such other form of protection satisfactory to
Landlord against any lien or encumbrance which may be filed.
(b) All materials and processes used in the performance of the
Work shall conform to the standards and Rules and Regulations of the Project
and Tenant hereby assures Landlord that each of Tenant's contractors will be
entirely familiar with such requirements prior to commencement of any Work. No
Work shall proceed without the submission of detailed plans and specifications
for such Work for approval by Landlord. Once Tenant has commenced the Work,
Tenant will promptly, diligently and continuously pursue the same to successful
completion in full compliance with the approved plans and specifications.
(c) Tenant shall perform all Work in a safe and lawful manner
using only contractors approved by Landlord. All Work shall be done with union
labor in accordance with the Southern California Labor Agreement. Tenant shall
at its sole expense comply with all applicable laws, regulations and
requirements of all governmental bodies exercising authority over the Project
or the Work and timely obtain all required licenses or permits. Copies of all
permits, licenses and filed documents shall be provided to Landlord for
Landlord's approval. Any Work not acceptable to the Department of Building and
Safety or not reasonably satisfactory to Landlord shall be promptly replaced at
Tenant's expense. Notwithstanding any failure by Landlord to object to any such
Work, Landlord shall have no responsibility therefor. Tenant shall notify
Landlord in writing not less than ten (10) days prior to the commencement of
any Work as to name, telephone and responsible party for each contractor and
subcontractor who is about to commence such Work.
(d) Tenant hereby indemnifies and agrees to defend and hold
Landlord harmless for and against any and all suits, claims, actions, losses,
costs or expenses (including claims for Workers' Compensation) of any nature
whatsoever together with attorneys' fees for counsel of Landlord's choice,
arising out of or in connection with the Work of Tenant or the performance of
the Work by Tenant (including, without limitation, claims for breach of
warranty, personal injury or property damage). Landlord shall have the right,
in Landlord's sole and exclusive discretion, to settle, compromise or otherwise
dispose of any such suit, claim or action.
(e) No Work shall proceed without Workers' Compensation,
public liability and property damage insurance, all in amounts and with
companies and on forms satisfactory to Landlord and, if Landlord shall so
request, naming Landlord as an additional insured. Not less than thirty (30)
days before commencing the Work, certificates of such insurance shall be
furnished to Landlord or, if requested, be given to Landlord before termination
or cancellation. In addition, no work shall proceed without Tenant's contractor
providing payment and performance bonds satisfactory to Landlord.
(f) Landlord shall have no responsibility for the Work and
Tenant, will remedy at Tenant's own expense and be responsible for all defects
in all such Work that may appear during or after the completion thereof whether
the same shall affect the Premises in particular or any part of the Project in
general. Tenant shall reimburse Landlord for any extra expense incurred by
Landlord by reason of faulty work done by Tenant or Tenant's contractor, by
reason of delays caused by such Work or by reason of inadequate cleanup.
(g) If the performance of the Work shall require Landlord to
provide additional services or facilities (including, without limitation, extra
elevator service, hoisting, cleanup or other cleaning services, trash removal,
field supervision or ordering of materials), tenant shall pay Landlord its
actual costs thereof, together with a fee for Landlord's supervision and
overhead equal to either (1) fifteen percent (15%) of such costs if Landlord or
Landlord's contractor is performing any portion of the work or acting as the
sole general contractor with respect thereto, or (11) five percent (5%) if
otherwise. If Tenant employe landlord at Tenant's expense to perform any
portion of the Work and thereafter elects to itself (through a subcontractor
selected by Tenant but approved by Landlord) perform any component of such
portion (including, without limitation, finishes or overstandard items), then
Tenant shall pay Landlord ten percent (10%) of such subcontractor's total bill
as and for Landlord's supervision and overhead.
(h) All of Tenant's contractors, subcontractors, employees,
servants and agents shall work in harmony and not interfere with any labor
employed by Landlord or Landlord's contractors or by any other tenant or its
contractors.
(i) All work performed by Tenant or Tenant's contractors shall
be scheduled through Landlord and shall be performed during normal business
hours. Any work to be performed at other times or in adjacent tenants' areas
shall be pursued only after obtaining Landlord's express written permission and
shall be done only if an agent or employee of Landlord is present. Tenant shall
reimburse Landlord for the expense of any such employee or agent.
(j) All core drilling, concrete cutting, demolition of
partitions or removal of rubbish relating to or resulting from the Work shall
be done between the hours of 7:00 p.m. and 6:00 a.m.
(k) If any shutdown of plumbing, electrical or air conditioning
equipment becomes necessary, Tenant shall notify Landlord and Landlord will
determine when such shutdown may be made. Any such shutdown shall be done only
if any agent or employee of Landlord is present. Tenant shall reimburse Landlord
for the expense of any such employee or agent.
Initials: _________
_________
<PAGE> 15
(l) Any noise complaints by tenants of adjacent areas are to be
remedied immediately or all operations in connection with such Work are to
cease until such noise is abated.
(m) Tenant or Tenant's contractors shall in no event be allowed
to install any plumbing, mechanical or electrical wiring or fixture, or
acoustical or integrated ceiling unless prior written approval is obtained from
Landlord. In addition, all data processing and other special electrical
equipment shall be installed only under the supervision of Landlord or
Landlord's electrical contractor.
(n) Notwithstanding Paragraph 7(m) above, Tenant agrees to be
entirely responsible for the maintenance of any electrical or plumbing Work,
lighting fixture, partition, door, hardware or any other item installed by
Tenant. such maintenance shall be performed only by a contractor approved in
writing in advance by Landlord. Tenant shall not be deemed to have installed,
for purposes of this Paragraph 7(n), any part of the Landlord's Work.
(o) Any hardware, light fixture or heating, ventilation or air
conditioning installation in the Premises which Tenant permanently removes shall
be stored by Tenant where directed by Landlord. No such removal may be made
unless shown on the plans and specifications approved by Landlord. Tenant
agrees, at Tenant's expense, to reinstall any or all such installations at the
expiration of the Term should Landlord so require. Tenant shall not be deemed
to have removed, for purposes of this Paragraph 7(o), any item removed as part
of the Landlord's Work.
(p) Landlord expressly reserves the right upon notice to Tenant
in the event of a breach of any of the terms or conditions hereof, to require
Tenant to immediately cease all Work to the extent directed by Landlord in such
notice.
(q) Nothing herein contained shall be construed as (1)
constituting Tenant as Landlord's agent for any purpose whatsoever, or (2) a
waiver by Landlord of any of the terms or provisions of the Lease. Any default
by Tenant with respect to any portion of this Exhibit "C" shall, at Landlord's
option, be deemed a breach of the Lease as to which Landlord shall have all the
rights and remedies available in the case of a breach of the Lease.
[END OF EXHIBIT "C"]
Initials:
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<PAGE> 16
EXHIBIT "D"
OPTION TO EXTEND
Dated: March 27, 1997
By and between: Westwood Holdings, Inc., a Nevada Corporation ("Lessor") and
PROBUSINESS Services, Inc. ("Lessee")
OPTION TO EXTEND: Landlord hereby grants to Tenant the option (the
"Option") to extent the Term, which would otherwise terminate on the
Expiration Date set forth in the Basic Lease Provisions (the "Initial Term"),
to also include the immediately subsequent five (5) years (the "Option Term"),
but only in strict accordance with the terms and conditions set forth below:
(a) The Option must be exercised, if at all, by written notice received
by Landlord not less than six (6) and not more than nine (9) months prior to
the Expiration Date of the Initial Term. All of the terms and conditions of the
Lease applicable as of such Expiration Date shall continue to apply during the
Option Term, except that the Rent during the Option Term shall be the greater
of 95% of the Prevailing Market Rental as of the date of the Landlord's Notice
(both as defined below), or (ii) the Rent in effect immediately prior to the
Expiration Date of the Initial Term.
(b) The "Prevailing Market Rental" shall mean and include the effective
calculation of all rental and other monetary payments, together with escalations
at the rate of 3% per annum, which the landlord of a project comparable to and
in the vicinity of the Project could obtain from an unrelated third party
desiring to lease premises therein comparable to the Premises for a term
comparable to the Option Term, taking into account the age of the Project, the
size, location and floor level of the Premises, the quality of construction of
the Project and the Premises, the service provided under the terms of the
Lease, the rental then being obtained for new leases of space comparable to the
Premises in the locality of the Project; provided, however, that Prevailing
Market Rental shall be stated net of any free rent concessions included in such
market rental and no allowance of credit for the construction of tenant
improvements (or reduction in rental as a result of the absence of such
allowance or credits) shall be taken into account in determining Prevailing
Market Rental.
(c) In the event Tenant exercises the Option, Landlord shall use
commercially reasonable efforts to notify Tenant of its opinion of the
Prevailing Market Rental at lease one hundred twenty-five (125) days prior to
the Expiration Date of the Initial Term (the "Landlord's Notice"). At any time
within thirty (30) days following its receipt of the Landlord's Notice, Tenant
may dispute the Prevailing Market Rental set forth in the Landlord's Notice by
delivering written notice to the Landlord to that effect and setting forth
Tenant's opinion of the Prevailing Rental (the "Tenant's Notice"). Failure to
timely give the Tenant's Notice shall be conclusively deemed to be Tenant's
acceptance of the Prevailing Market Rental set forth in the Landlord's Notice.
(d) At any time within thirty (30) days following its receipt of the
Tenant's Notice, Landlord shall have the option to either (1) accept the
Prevailing Market Rental set forth in the Tenant's Notice, (2) in the event the
Prevailing Market Rental set forth in the Landlord's Notice exceeds one hundred
ten percent (110%) of the Prevailing Market Rental set forth in the Tenant's
Notice, terminate the Option and Tenant's exercise thereof, in which event the
Lease shall terminate on the Expiration Date of the Initial Term, or (3) submit
the dispute to arbitration in accordance with Section 2(e) below. Landlord's
failure to notify Tenant of its election under clause (1) or (2) above shall be
conclusively deemed to be Landlord's election to submit the determination of
Prevailing Market Rental to arbitration under clause (3) above.
(e) Any arbitration under this Section 2 shall be conducted in the City
of Irvine in accordance with the then prevailing rules of the American
Arbitration Association or its successor for arbitration of commercial
disputes, modified as follows, and any judgment or award rendered therein shall
be final and binding upon the parties and may be entered in any court of
competent jurisdiction:
(1) At any time concurrently with or after Landlord's election
under Section 2(d)(3) above, Landlord shall appoint a qualified real estate
appraiser familiar with the prevailing market rentals of first-class industrial
and research and development parks in Orange County who is a member of the
National Institute of Real Estate Appraisers (a "Qualified Appraiser") to act
as an arbitrator hereunder. Within ten (10) days after such appointment by
Landlord, Tenant may by written notice to Landlord appoint another Qualified
Appraiser to also act as an arbitrator hereunder. Tenant's failure to so
appoint a second arbitrator shall be conclusively deemed to be Tenant's
appointment of the arbitrator appointed by Landlord. (The date of such notice
by Tenant or, if none is given, the last date such notice could have been given
shall be hereinafter referred to as the "Selection Date"). In the event
Landlord has made, or been deemed to have made, an election under Section
2(d)(3) above but failed to appoint the first arbitrator within twenty (20)
business days thereafter, Tenant may, by written notice to Landlord at any time
after such twentieth business day and before Landlord makes such appointment,
so appoint such first arbitrator; whereupon Landlord shall have all of the
foregoing rights with respect to appointing a second arbitrator.
(2) Within ten (10) business days after the Selection Date, the
appointed arbitrators shall meet to determine (or the sole arbitrator shall
alone determine) the Prevailing Market Rental. In the event two (2) arbitrators
are appointed under clause (e)(1) above who are unable to agree upon a
determination of the Prevailing Market Rental within thirty (30) days after the
Selection Date, they shall appoint a Qualified Appraiser to act as an additional
arbitrator hereunder. In the event no such appointment is made within
thirty-five (35) days after the Selection Date, Landlord and Tenant shall
jointly appoint a Qualified Appraiser as such third arbitrator of, if they
cannot agree thereon, either party may petition the then Chief Judge of the
United States District Court having jurisdiction over the City of Irvine to
appoint a Qualified Appraiser as such third arbitrator.
(3) Within ten (10) business days after the appointment of the
third arbitrator, the appointed arbitrators shall meet to determine the
Prevailing Market Rental. In the event all three (3) appraisers do not agree on
the Prevailing Market Rental, the average of the determinations of the two (2)
appraisers which are closest in value shall be the Prevailing Market Rental.
(4) The arbitrators shall render their determination in writing
with counterpart copies to each party. Such determination shall be certified by
each arbitrator as his opinion of the Prevailing Market Rental or, where such
determination was arrived at through averaging under clause (e)(3) above, each
arbitrator's individual determination shall be set forth and certified by him.
In no event shall any arbitrator modify any provision of the Lease in arriving
at his determination.
Initials:__________
__________
<PAGE> 17
(5) In the event of any failure, refusal or inability of
an arbitrator to act, a successor shall be appointed in the same manner provided
above for such arbitrator's appointment. Each party shall bear all costs and
expenses of the arbitrator appointed (or deemed appointed) by it and both shall
equally share all costs and expenses of the third arbitrator, if any. All
attorneys' fees and expenses of witnesses shall be paid by the party engaging
such attorney or calling such witness.
(6) Each arbitrator shall have the right to consult
experts and competent authorities regarding factual information or evidence
pertaining to a determination of the Prevailing Market Rental; provided,
however, that any such consultation shall be made in the presence of Landlord,
Tenant and all other appointed arbitrators with full right on each of their part
to cross-examine.
(f) In the event the determination of the Prevailing Market
Rental has been submitted to arbitration but such arbitration has not been
concluded prior to the commencement of the Option Term, Tenant shall pay to
Landlord the amount determined under Section 2(a)(1) above based on the
Prevailing Market Rental set forth in the Landlord's Notice as Rent and
Additional Rent for the Option Term. In the event the Prevailing Market Rental
determined by arbitration results in any Rent or Additional Rent different from
such amount, Tenant shall immediately pay to Landlord any increase therein and
Landlord shall credit any reduction therein against the next Monthly
Installments due from Tenant to Landlord under the Lease.
(g) The Option shall not be assignable separate and apart from
the Lease, but only as a part of an assignment in accordance with the terms and
provisions of Section 16 thereof.
(h) Upon the occurrence of any of the following events,
Landlord shall have the option, exercisable at any time prior to the
commencement of the Option Term, to terminate all of the provisions of this
Exhibit D whereupon no prior or subsequent exercises of the Option shall be of
any force or effect:
(1) Tenant's failure to timely exercise the Option in
strict accordance with section (a) above.
(2) The existence at the time Tenant exercises the
Option or at the commencement of the Option Term of any monetary or material
non-monetary default on the part of Tenant under the Lease or of any state of
facts which with the passage of time or the giving of notice, or both, would
constitute such a default.
(3) Tenant's eighth (8th) monetary or material
non-monetary default under the Lease prior to the commencement of the Option
Term, notwithstanding that all such defaults may subsequently be cured.
[END OF EXHIBIT D]
<PAGE> 1
EXHIBIT 10.23
(LOCAL CURRENCY - SINGLE JURISDICTION)
[ISDA LOGO]
International Swap Dealers Association, Inc.
MASTER AGREEMENT
dated as of June 10, 1997
FIRST UNION NATIONAL BANK and PROBUSINESS, INC. have entered and/or anticipate
entering into one or more transactions (each a "Transaction") that are or will
be governed by this Master Agreement, which includes the schedule (the
"Schedule"), and the documents and other confirming evidence (each a
"Confirmation") exchanged between the parties confirming those Transactions.
Accordingly, the parties agree as follows:-
1. INTERPRETATION
(a) DEFINITIONS. The terms defined in Section 12 and in the Schedule will have
the meanings therein specified for the purpose of this Master Agreement.
(b) INCONSISTENCY. In the event of any inconsistency between the provisions of
the Schedule and the other provisions of this Master Agreement, the Schedule
will prevail. In the event of any inconsistency between the provisions of any
Confirmation and this Master Agreement (including the Schedule), such
Confirmation will prevail for the purpose of the relevant Transaction.
(c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact
that this Master Agreement and all Confirmations form a single agreement between
the parties (collectively referred to as this "Agreement"), and the parties
would not otherwise enter into any Transactions.
2. OBLIGATIONS
(a) GENERAL CONDITIONS.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for
value on that date in the place of the account specified in the
relevant Confirmation or otherwise pursuant to this Agreement, in
freely transferable funds and in the manner customary for payments in
the required currency. Where settlement is by delivery (that is, other
than by payment), such delivery will be made for receipt on the due
date in the manner customary for the relevant obligation unless
otherwise specified in the relevant Confirmation or elsewhere in this
Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject to
(1) the condition precedent that no Event of Default or Potential Event
of Default with respect to the other party has occurred and is
continuing, (2) the condition precedent that no Early Termination Date
in respect of the relevant Transaction has occurred or been effectively
designated and (3) each other applicable condition precedent specified
in this Agreement.
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(b) CHANGE OF ACCOUNT. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to which
such change applies unless such other party gives timely notice of a reasonable
objection to such change.
(c) NETTING. If on any date amounts would otherwise be payable:-
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and discharged and,
if the aggregate amount that would otherwise have been payable by one party
exceeds the aggregate amount that would otherwise have been payable by the other
party, replaced by an obligation upon the party by whom the larger aggregate
amount would have been payable to pay to the other party the excess of the
larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount
will be determined in respect of all amounts payable on the same date in the
same currency in respect of such Transactions, regardless of whether such
amounts are payable in respect of the same Transaction. The election may be made
in the Schedule or a Confirmation by specifying that subparagraph (ii) above
will not apply to the Transactions identified as being subject to the election,
together with the starting date (in which case subparagraph (ii) above will not,
or will cease to, apply to such Transactions from such date). This election may
be made separately for different groups of Transactions and will apply
separately to each pairing of branches or offices through which the parties make
and receive payments or deliveries.
(d) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. REPRESENTATIONS
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered
into) that:-
(a) BASIC REPRESENTATIONS.
(i) STATUS. It is duly organised and validly existing under the laws of
the jurisdiction of its organisation or incorporation and, if relevant
under such laws, in good standing;
(ii) POWERS. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to
deliver this Agreement and any other documentation relating to this
Agreement that it is required by this Agreement to deliver and to
perform its obligations under this Agreement and any obligations it has
under any Credit Support Document to which it is a party and has taken
all necessary action to authorise such execution, delivery and
performance;
(iii) NO VIOLATION OR CONFLICT. Such execution, delivery and
performance do not violate or conflict with any law applicable to it,
any provision of its constitutional documents, any order or judgment of
any court or other agency of government applicable to it or any of its
assets or any contractual restriction binding on or affecting it or any
of its assets;
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(iv) CONSENTS. All governmental and other consents that are required to
have been obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party have been obtained and are in
full force and effect and all conditions of any such consents have been
complied with; and
(v) OBLIGATIONS BINDING. Its obligations under this Agreement and any
Credit Support Document to which it is a party constitute its legal,
valid and binding obligations, enforceable in accordance with their
respective terms (subject to applicable bankruptcy, reorganisation,
insolvency, moratorium or similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in a
proceeding in equity or at law)).
(b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default
or, to its knowledge, Termination Event with respect to it has occurred and is
continuing and no such event or circumstance would occur as a result of its
entering into or performing its obligations under this Agreement or any Credit
Support Document to which it is a party.
(c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened
against it or any of its Affiliates any action, suit or proceeding at law or in
equity or before any court, tribunal, governmental body, agency or official or
any arbitrator that is likely to affect the legality, validity or enforceability
against it of this Agreement or any Credit Support Document to which it is a
party or its ability to perform its obligations under this Agreement or such
Credit Support Document.
(d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is
furnished in writing by or on behalf of it to the other party and is identified
for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material respect.
4. AGREEMENTS
Each party agrees with the other that, so long as either party has or may have
any obligation under this Agreement or under any Credit Support Document to
which it is a party:-
(a) FURNISH SPECIFIED INFORMATION. It will deliver to the other party any forms,
documents or certificates specified in the Schedule or any Confirmation by the
date specified in the Schedule or such Confirmation or, if none is specified, as
soon as reasonably practicable.
(b) MAINTAIN AUTHORISATIONS. It will use all reasonable efforts to maintain in
full force and effect all consents of any governmental or other authority that
are required to be obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party and will use all reasonable efforts to
obtain any that may become necessary in the future.
(c) COMPLY WITH LAWS. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement of any Credit Support Document to which it is a party.
5. EVENTS OF DEFAULT AND TERMINATION EVENTS
(a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if
applicable, any Credit Support Provider of such party or any Specified Entity of
such party of any of the following events constitutes an event of default (an
"Event of Default") with respect to such party:-
(i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due,
any payment under this Agreement or delivery under Section 2(a)(i) or
2(d) required to be made by it if such failure is not remedied on or
before the third Local Business Day after notice of such failure is
given to the party;
(ii) BREACH OF AGREEMENT. Failure by the party to comply with or
perform any agreement or obligation (other than an obligation to make
any payment under this Agreement or delivery under Section 2(a)(i) or
2(d) or to give notice of a Termination Event) to be complied with or
performed
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by the party in accordance with this Agreement if such failure is not remedied
on or before the thirtieth day after notice of such failure is given to the
party;
(iii) CREDIT SUPPORT DEFAULT.
(1) Failure by the party or any Credit Support Provider of such party to
comply with or perform any agreement or obligation to be complied with
or performed by it in accordance with any Credit Support Document if
such failure is continuing after any applicable grace period has
elapsed;
(2) the expiration or termination of such Credit Support Document or the
failing or ceasing of such Credit Support Document to be in full force
and effect for the purpose of this Agreement (in either case other than
in accordance with its terms) prior to the satisfaction of all
obligations of such party under each Transaction to which such Credit
Support Document relates without the written consent of the other party;
or
(3) the party or such Credit Support Provider disaffirms, disclaims,
repudiates or rejects, in whole or in part, or challenges the validity
of, such Credit Support Document;
(iv) MISREPRESENTATION. A representation made or repeated or deemed to have been
made or repeated by the party or any Credit Support Provider of such party in
this Agreement or any Credit Support Document proves to have been incorrect or
misleading in any material respect when made or repeated or deemed to have been
made or repeated;
(v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support Provider
of such party or any applicable Specified Entity of such party (1) defaults
under a Specified Transaction and, after giving effect to any applicable notice
requirement or grace period, there occurs a liquidation of, an acceleration of
obligations under, or an early termination of, that Specified Transaction, (2)
defaults, after giving effect to any applicable notice requirement or grace
period, in making any payment or delivery due on the last payment, delivery or
exchange date of, or any payment on early termination of, a Specified
Transaction (or such default continues for at least three Local Business Days if
there is no applicable notice requirement or grace period) or (3) disaffirms,
disclaims, repudiates or rejects, in whole or in part, a Specified Transaction
(or such action is taken by any person or entity appointed or empowered to
operate it or act on its behalf);
(vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying
to the party, the occurrence or existence of (1) a default, event of default or
other similar condition or event (however described) in respect of such party,
any Credit Support Provider of such party or any applicable Specified Entity of
such party under one or more agreements or instruments relating to Specified
Indebtedness of any of them (individually or collectively) in an aggregate
amount of not less than the applicable Threshold Amount (as specified in the
Schedule) which has resulted in such Specified Indebtedness becoming, or
becoming capable at such time of being declared, due and payable under such
agreements or instruments, before it would otherwise have been due and payable
or (2) a default by such party, such Credit Support Provider or such Specified
Entity (individually or collectively) in making one or more payments on the due
date thereof in an aggregate amount of not less than the applicable Threshold
Amount under such agreements or instruments (after giving effect to any
applicable notice requirement or grace period);
(vii) BANKRUPTCY. The party, any Credit Support Provider of such party or any
applicable Specified Entity of such party:-
(1) is dissolved (other than pursuant to a consolidation, amalgamation
or merger); (2) becomes insolvent or is unable to pay its debts or
fails or admits in writing its inability generally to pay its debts as
they become due; (3) makes a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) institutes or
has instituted against it a proceeding seeking a judgment of insolvency
or bankruptcy or any other relief under any bankruptcy or insolvency
law or other similar law affecting creditors' rights, or a petition is
presented for its
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winding-up of liquidation, and, in the case of any such proceeding or
petition instituted or presented against it, such proceeding or
petition (A) results in a judgment of insolvency or bankruptcy or the
entry of an order for relief or the making of an order for its
winding-up or liquidation or (B) is not dismissed, discharged, stayed
or restrained in each case within 30 days of the institution or
presentation thereof; (5) has a resolution passed for its winding-up,
official management or liquidation (other than pursuant to a
consolidation, amalgamation or merger); (6) seeks or becomes subject to
the appointment of an administrator, provisional liquidator,
conservator, receiver, trustee, custodian or other similar official for
it or for all or substantially all its assets; (7) has a secured party
take possession of all or substantially all its assets or has a
distress, execution, attachment, sequestration or other legal process
levied, enforced or sued on or against all or substantially all its
assets and such secured party maintains possession, or any such process
is not dismissed, discharged, stayed or restrained, in each case within
30 days thereafter; (8) causes or is subject to any event with respect
to it which, under the applicable laws of any jurisdiction, has an
analogous effect to any of the events specified in clauses (1) to (7)
(inclusive); or (9) takes any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the foregoing
acts; or
(viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider
of such party consolidates or amalgamates with, or merges with or into, or
transfers all or substantially all its assets to, another entity and, at the
time of such consolidation, amalgamation, merger or transfer:-
(1) the resulting, surviving or transferee entity fails to assume all
the obligations of such party or such Credit Support Provider under
this Agreement or any Credit Support Document to which it or its
predecessor was a party by operation of law or pursuant to an agreement
reasonably satisfactory to the other party to this Agreement; or
(2) the benefits of any Credit Support Document fail to extend (without
the consent of the other party) to the performance by such resulting,
surviving or transferee entity of its obligations under this Agreement.
(b) TERMINATION EVENTS. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified Entity
of such party of any event specified below constitutes an Illegality if the
event is specified in (i) below, and, if specified to be applicable, a Credit
Event Upon Merger if the event is specified pursuant to (ii) below or an
Additional Termination Event if the event is specified pursuant to (iii) below:-
(i) ILLEGALITY. Due to the adoption of, or any change in, any
applicable law after the date on which a Transaction is entered into,
or due to the promulgation of, or any change in, the interpretation by
any court, tribunal or regulatory authority with competent jurisdiction
of any applicable law after such date, it becomes unlawful (other than
as a result of a breach by the party of Section 4(b)) for such party
(which will be the Affected Party):-
(1) to perform any absolute or contingent obligation to make a
payment or delivery or to receive a payment or delivery in
respect of such Transaction or to comply with any other material
provision of this Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such party
to perform, any contingent or other obligation which the party
(or such Credit Support Provider) has under any Credit Support
Document relating to such Transaction;
(ii) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is
specified in the Schedule as applying to the party, such party ("X"),
any Credit Support Provider of X or any applicable Specified Entity of
X consolidates or amalgamates with, or merges with or into, or
transfers all or substantially all its assets to, another entity and
such action does not constitute an event described in Section
5(a)(viii) but the creditworthiness of the resulting, surviving or
transferee entity is materially weaker than that of X, such Credit
Support Provider or such Specified Entity, as the case may be,
immediately prior to such action (and, in such event, X or its
successor or transferee, as appropriate, will be the Affected Party);
or
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(iii) ADDITIONAL TERMINATION EVENT. If any "Additional Termination
Event" is specified in the Schedule or any Confirmation as applying,
the occurrence of such event (and, in such event, the Affected Party or
Affected Parties shall be as specified for such Additional Termination
Event in the Schedule or such Confirmation).
(c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would
otherwise constitute or give rise to an Event of Default also constitutes an
Illegality, it will be treated as an Illegality and will not constitute an Event
of Default.
6. EARLY TERMINATION
(a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of
Default with respect to a party (the "Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party") may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT.
(i) NOTICE. If a Termination Event occurs, an Affected Party will,
promptly upon becoming aware of it, notify the other party, specifying
the nature of that Termination Event and each Affected Transaction and
will also give such other information about that Termination Event as
the other party may reasonably require.
(ii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(1)
occurs and there are two Affected Parties, each party will use all
reasonable efforts to reach agreement within 30 days after notice
thereof is given under Section 6(b)(i) on action to avoid that
Termination Event.
(iii) RIGHT TO TERMINATE. IF:-
(1) an agreement under Section 6(b)(ii) has not been effected
with respect to all Affected Transactions within 30 days after an
Affected Party gives notice under Section 6(b)(i); or
(2) an Illegality other than that referred to in Section
6(b)(ii), a Credit Event Upon Merger or an Additional Termination
Event occurs,
either party in the case of an Illegality, any Affected Party in the
case of an Additional Termination Event if there is more than one
Affected Party, or the party which is not the Affected Party in the
case of a Credit Event Upon Merger or an Additional Termination Event
if there is only one Affected Party may, by not more than 20 days
notice to the other party and provided that the relevant Termination
Event is then continuing, designate a day not earlier than the day such
notice is effective as an Early Termination Date in respect of all
Affected Transactions.
(c) EFFECT OF DESIGNATION.
(i) If notice designating an Early Termination Date is given under
Section 6(a) or (b), the Early Termination Date will occur on the date
so designated, whether or not the relevant Event of Default or
Termination Event is then continuing.
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(ii) Upon the occurrence or effective designation of an Early
Termination Date, no further payments or deliveries under Section
2(a)(i) or 2(d) in respect of the Terminated Transactions will be
required to be made, but without prejudice to the other provisions of
this Agreement. The amount, if any, payable in respect of an Early
Termination Date shall be determined pursuant to Section 6(e).
(d) CALCULATIONS.
(i) STATEMENT. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable
detail, such calculations (including all relevant quotations and
specifying any amount payable under Section 6(e)) and (2) giving
details of the relevant account to which any amount payable to it is to
be paid. In the absence of written confirmation from the source of a
quotation obtained in determining a Market Quotation, the records of
the party obtaining such quotation will be conclusive evidence of the
existence and accuracy of such quotation.
(ii) PAYMENT DATE. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day
that notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event
of Default) and on the day which is two Local Business Days after the
day on which notice of the amount payable is effective (in the case of
an Early Termination Date which is designated as a result of a
Termination Event). Such amount will be paid together with (to the
extent permitted under applicable law) interest thereon (before as well
as after judgment), from (and including) the relevant Early Termination
Date to (but excluding) the date such amount is paid, at the Applicable
Rate. Such interest will be calculated on the basis of daily
compounding and the actual number of days elapsed.
(e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall
apply. The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) EVENTS OF DEFAULT. If the Early Termination Date results from an
Event of Default:-
(1) First Method and Market Quotation. If the First Method and
Market Quotation apply, the Defaulting Party will pay to the
Non-defaulting Party the excess, if a positive number, of (A) the
sum of the Settlement Amount (determined by the Non-defaulting
Party) in respect of the Terminated Transactions and the Unpaid
Amounts owing to the Non-defaulting Party over
(B) the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If the First Method and Loss apply,
the Defaulting Party will pay to the Non-defaulting Party, if a
positive number, the Non-defaulting Party's Loss in respect of
this Agreement.
(3) Second Method and Market Quotation. If the Second Method and
Market Quotation apply, an amount will be payable equal to (A)
the sum of the Settlement Amount (determined by the
Non-defaulting Party) in respect of the Terminated Transactions
and the Unpaid Amounts owing to the Non-defaulting Party less
(B) the Unpaid Amounts owing to the Defaulting Party. If that
amount is a positive number, the Defaulting Party will pay it to
the Non-defaulting Party; if it is a negative number, the
Non-defaulting Party will pay the absolute value of that amount
to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply,
an amount will be payable equal to the Non-defaulting Party's
Loss in respect of this Agreement. If that amount is a positive
number, the Defaulting Party will pay it to the Non-defaulting
Party; if it is a negative
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number, the Non-defaulting Party will pay the absolute value of
that amount to the Defaulting Party.
(ii) TERMINATION EVENTS. If the Early Termination Date results
from a Termination Event:-
(1) One Affected Party. If there is one Affected Party, the
amount payable will be determined in accordance with Section
6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4),
if Loss applies, except that, in either case, references to the
Defaulting Party and to the Non-defaulting Party will be deemed
to be references to the Affected Party and the party which is not
the Affected Party, respectively, and, if Loss applies and fewer
than all the Transactions are being terminated, Loss shall be
calculated in respect of all Terminated Transactions.
(2) Two Affected Parties. If there are two Affected Parties:-
(A) if Market Quotation applies, each party will
determine a Settlement Amount in respect of the
Terminated Transactions, and an amount will be payable
equal to (I) the sum of (a) one-half of the difference
between the Settlement Amount of the party with the
higher Settlement Amount ("X") and the Settlement
Amount of the party with the lower Settlement Amount
("Y") and (b) the Unpaid Amounts owing to X less (II)
the Unpaid Amounts owing to Y; and
(B) if Loss applies, each party will determine its Loss
in respect of this Agreement (or, if fewer than all the
Transactions are being terminated, in respect of all
Terminated Transactions) and an amount will be payable
equal to one-half of the difference between the Loss of
the party with the higher Loss ("X") and the Loss of
the party with the lower Loss ("Y").
If the amount payable is a positive number, Y will pay it to X;
if it is a negative number, X will pay the absolute value of that
amount to Y.
(iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early
Termination Date occurs because "Automatic Early Termination" applies
in respect of a party, the amount determined under this Section 6(e)
will be subject to such adjustments as are appropriate and permitted by
law to reflect any payments or deliveries made by one party to the
other under this Agreement (and retained by such other party) during
the period from the relevant Early Termination Date to the date for
payment determined under Section 6(d)(ii).
(iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies
an amount recoverable under this Section 6(e) is a reasonable
pre-estimate of loss and not a penalty. Such amount is payable for the
loss of bargain and the loss of protection against future risks and
except as otherwise provided in this Agreement neither party will be
entitled to recover any additional damages as a consequence of such
losses.
7. TRANSFER
Neither this Agreement nor any interest or obligation in or under this Agreement
may be transferred (whether by way of security or otherwise) by either party
without the prior written consent of the other party, except that:-
(a) a party may make such a transfer of this Agreement pursuant to a
consolidation or amalgamation with, or merger with or into, or transfer of all
or substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in any
amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be void.
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8. MISCELLANEOUS
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and supersedes
all oral communication and prior writings with respect thereto.
(b) AMENDMENTS. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced by
a facsimile transmission) and executed by each of the parties or confirmed by an
exchange of telexes or electronic messages on an electronic messaging system.
(c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive the
termination of any Transaction.
(d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) COUNTERPARTS AND CONFIRMATIONS.
(i) This Agreement (and each amendment, modification and waiver in
respect of it) may be executed and delivered in counterparts (including
by facsimile transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of
each Transaction from the moment they agree to those terms (whether
orally or otherwise). A Confirmation shall be entered into as soon as
practicable and may be executed and delivered in counterparts (including
by facsimile transmission) or be created by an exchange of telexes or by
an exchange of electronic messages on an electronic messaging system,
which in each case will be sufficient for all purposes to evidence a
binding supplement to this Agreement. The parties will specify therein
or through another effective means that any such counterpart, telex or
electronic message constitutes a Confirmation.
(f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power
or privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege will
not be presumed to preclude any subsequent or further exercise, of that right,
power or privilege or the exercise of any other right, power or privilege.
(g) HEADINGS. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
9. EXPENSES
A Defaulting Party will, on demand, indemnify and hold harmless the other party
for and against all reasonable out-of-pocket expenses, including legal fees,
incurred by such other party by reason of the enforcement and protection of its
rights under this Agreement or any Credit Support Document to which the
Defaulting Party is a party or by reason of the early termination of any
Transaction, including, but not limited to, costs of collection.
10. NOTICES
(a) EFFECTIVENESS. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicted:-
(i) if in writing and delivered in person or by courier, on the date
it is delivered;
(ii) if sent by telex, on the date the recipient's answerback is
received;
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(iii) if sent by facsimile transmission, on the date that transmission
is received by a responsible employee of the recipient in legible form
(it being agreed that the burden of proving receipt will be on the
sender and will not be met by a transmission report generated by the
sender's facsimile machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or
the equivalent (return receipt requested), on the date that mail is
delivered or its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered (or
attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication shall be deemed given and
effective on the first following day that is a Local Business Day.
(b) CHANGE OF ADDRESSES. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
11. GOVERNING LAW AND JURISDICTION
(a) GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) JURISDICTION. With respect to any suit, action or proceedings relating to
this Agreement ("Proceedings"), each party irrevocably:-
(i) submits to the jurisdiction of the English courts, if this
Agreement is expressed to be governed by English law, or to the
non-exclusive jurisdiction of the courts of the State of New York and
the United States District Court located in the Borough of Manhattan in
New York City, if this Agreement is expressed to be governed by the
laws of the State of New York; and
(ii) waives any objection which it may have at any time to the laying
of venue of any Proceedings brought in any such court, waives any claim
that such Proceedings have been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceedings,
that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be governed
by English law, the Contracting States, as defined in Section 1(3) of the Civil
Jurisdiction and Judgments Act 1982 or any modification, extension or
re-enactment thereof for the time being in force) nor will the bringing of
Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
(c) WAIVER OF IMMUNITIES. Each party irrevocably waives, to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
court, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.
12. DEFINITIONS
As used in this Agreement:-
"ADDITIONAL TERMINATION EVENT" has the meaning specified in Section
5(b).
"AFFECTED PARTY" has the meaning specified in Section 5(b).
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<PAGE> 11
"AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event
consisting of an Illegality, all Transactions affected by the occurrence of such
Termination Event and (b) with respect to any other Termination Event, all
Transactions.
"AFFILIATE" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control" of
any entity or person means ownership of a majority of the voting power of the
entity or person.
"APPLICABLE RATE" means:-
(a) in respect of obligations payable or deliverable (or which would have been
but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of either
party from and after the date (determined in accordance with Section 6(d)(ii))
on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which would
have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default
Rate; and
(d) in all other cases, the Termination Rate.
"CONSENT" includes a consent, approval, action, authorisation, exemption,
notice, filing, registration or exchange control consent.
"CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b).
"CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as
such in this Agreement.
"CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule.
"DEFAULT RATE" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it) if it
were to fund or of funding the relevant amount plus 1% per annum.
"DEFAULTING PARTY" has the meaning specified in Section 6(a).
"EARLY TERMINATION DATE" means the date determined in accordance with Section
6(a) or 6(b)(iii).
"EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable,
in the Schedule.
"ILLEGALITY" has the meaning specified in Section 5(b).
"LAW" includes any treaty, law, rule or regulation and "lawful" and "unlawful"
will be construed accordingly.
"LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which commercial
banks are open for business (including dealings in foreign exchange and foreign
currency deposits) (a) in relation to any obligation under Section 2(a)(i), in
the place(s) specified in the relevant Confirmation or, if not so specified, as
otherwise agreed by the parties in writing or determined pursuant to provisions
contained, or incorporated by reference, in this Agreement, (b) in relation to
any other payment, in the place where the relevant account is located, (c) in
relation to any notice or other communication, including notice contemplated
under Section 5(a)(i), in the city specified in the address for notice provided
by the recipient and, in the case of a notice contemplated by Section 2(b), in
the place where the relevant new account is to be located and (d) in relation to
Section 5(a)(v)(2), in the relevant locations for performance with respect to
such Specified Transaction.
"LOSS" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, an amount that party reasonably
determines in good faith to be its total losses and costs (or gain, in which
case expressed as a negative number) in connection with this Agreement or that
Terminated Transaction or group of Terminated Transactions, as the case may be,
including any loss of bargain, cost of funding or, at the election of such party
but without duplication, loss or cost incurred as a result of its terminating,
liquidating, obtaining or reestablishing any hedge or related trading position
(or any gain
11
<PAGE> 12
resulting from any of them). Loss includes losses and costs (or gains) in
respect of any payment or delivery required to have been made (assuming
satisfaction of each applicable condition precedent) on or before the relevant
Early Termination Date and not made, except, so as to avoid duplication, if
Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a
party's legal fees and out-of-pocket expenses referred to under Section 9. A
party will determine its Loss as of the relevant Early Termination Date, or, if
that is not reasonably practicable, as of the earliest date thereafter as is
reasonably practicable. A party may (but need not) determine its Loss by
reference to quotations of relevant rates or prices from one or more leading
dealers in the relevant markets.
"MARKET QUOTATION" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an amount,
if any, that would be paid to such party (expressed as a negative number) or by
such party (expressed as a positive number) in consideration of an agreement
between such party (taking into account any existing Credit Support Document
with respect to the obligations of such party) and the quoting Reference
Market-maker to enter into a transaction (the "Replacement Transaction") that
would have the effect of preserving for such party the economic equivalent of
any payment or delivery (whether the underlying obligation was absolute or
contingent and assuming the satisfaction of each applicable condition precedent)
by the parties under Section 2(a)(i) in respect of such Terminated Transaction
or group of Terminated Transactions that would, but for the occurrence of the
relevant Early Termination Date, have been required after that date. For this
purpose, Unpaid Amounts in respect of the Terminated Transaction or group of
Terminated Transactions are to be excluded but, without limitation, any payment
or delivery that would, but for the relevant Early Termination Date, have been
required (assuming satisfaction of each applicable condition precedent) after
that Early Termination Date is to be included. The Replacement Transaction would
be subject to such documentation as such party and the Reference Market-maker
may, in good faith, agree. The party making the determination (or its agent)
will request each Reference Market-maker to provide its quotation to the extent
reasonably practicable as of the same day and time (without regard to different
time zones) on or as soon as reasonably practicable after the relevant Early
Termination Date. The day and time as of which those quotations are to be
obtained will be selected in good faith by the party obliged to make a
determination under Section 6(e), and, if each party is so obliged, after
consultation with the other. If more than three quotations are provided, the
Market Quotation will be the arithmetic mean of the quotations, without regard
to the quotations having the highest and lowest values. If exactly three such
quotations are provided, the Market Quotation will be the quotation remaining
after disregarding the highest and lowest quotations. For this purpose, if more
than one quotation has the same highest value or lowest value, then one of such
quotations shall be disregarded. If fewer than three quotations are provided, it
will be deemed that the Market Quotation in respect of such Terminated
Transaction or group of Terminated Transactions cannot be determined.
"NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it) if
it were to fund the relevant amount.
"NON-DEFAULTING PARTY" has the meaning specified in Section 6(a).
"POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or
the lapse of time or both, would constitute an Event of Default.
"REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria that
such party applies generally at the time in deciding whether to offer or to make
an extension of credit and (b) to the extent practicable, from among such
dealers having an office in the same city.
"SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
"SET-OFF" means set-off, offset, combination of accounts, right of retention or
withholding or similar right or requirement to which the payer of an amount
under Section 6 is entitled or subject (whether arising under
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<PAGE> 13
this Agreement, another contract, applicable law or otherwise) that is exercised
by, or imposed on, such payer.
"SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination
Date, the sum of:-
(a) the Market Quotations (whether positive or negative) for each Terminated
Transaction or group of Terminated Transactions for which a Market Quotation is
determined; and
(b) such party's Loss (whether positive or negative and without reference to any
Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not (in
the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"SPECIFIED ENTITY" has the meaning specified in the Schedule.
"SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether
present or future, contingent or otherwise, as principal or surety or otherwise)
in respect of borrowed money.
"SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter entered
into between one party to this Agreement (or any Credit Support Provider of such
party or any applicable Specified Entity of such party) and the other party to
this Agreement (or any Credit Support Provider of such other party or any
applicable Specified Entity of such other party) which is a rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions), (b) any combination of
these transactions and (c) any other transaction identified as a Specified
Transaction in this Agreement or the relevant confirmation.
"TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a)
if resulting from a Termination Event, all Affected Transactions and (b) if
resulting from an Event of Default, all Transactions (in either case) in effect
immediately before the effectiveness of the notice designating that Early
Termination Date (or, if "Automatic Early Termination" applies, immediately
before that Early Termination Date).
"TERMINATION EVENT" means an Illegality or, if specified to be applicable, a
Credit Event Upon Merger or an Additional Termination Event.
"TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as certified
by such party) if it were to fund or of funding such amounts.
"UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination
Date, the aggregate of (a) in respect of all Terminated Transactions, the
amounts that became payable (or that would have become payable but for Section
2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date and
(b) in respect of each Terminated Transaction, for each obligation under Section
2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be
settled by delivery to such party on or prior to such Early Termination Date and
which has not been so settled as at such Early Termination Date, an amount equal
to the fair market value of that which was (or would have been) required to be
delivered as of the originally scheduled date for delivery, in each case
together with (to the extent permitted under applicable law) interest, in the
currency of such amounts, from (and including) the date such amounts or
obligations were or would have been required to have been paid or performed to
(but excluding) such Early Termination Date, at the Applicable Rate. Such
amounts of interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. The fair market value of any obligation referred
to in clause (b) above shall be reasonably determined
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<PAGE> 14
by the party obliged to make the determination under Section 6(e) or, if each
party is so obliged, it shall be the average of the fair market values
reasonably determined by both parties.
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page of
this document.
FIRST UNION NATIONAL BANK PROBUSINESS, INC.
- ----------------------------------- ----------------------------------------
(Name of Party) (Name of Party)
By: /s/ DELENE M. TRAVELLA By: /s/ THOMAS H. SINTON
-------------------------------- -------------------------------------
Name: Delene M. Travella Name: Thomas H. Sinton
Title: Vice President Title: President
Date: 8/7/97 Date: 8/5/97
14
<PAGE> 15
SCHEDULE
to the
MASTER AGREEMENT
dated as of June 10, 1997 between
FIRST UNION NATIONAL BANK ("Party A")
and PROBUSINESS, INC. ("Party B")
I. TERMINATION PROVISIONS
(a) "SPECIFIED ENTITY" for purposes of Section 5(a)(v) means each party's
Affiliates.
(b) "SPECIFIED TRANSACTION" has its meaning as defined in Section 12, provided
that "Default under Specified Transaction" excludes Force Majeure as
defined below.
(c) "CROSS DEFAULT" applies to both parties, but excludes Force Majeure.
"Force Majeure" means nonpayment resulting solely from a wire transfer or
operational problem or error (so long as sufficient funds are available),
or from the general unavailability of the relevant currency due to
exchange controls or other similar governmental action, but only if
payment is made within three Business Days after the problem has been
corrected, the error has been discovered or the currency becomes
available.
With respect to Party B, "Cross Default" is amended by inserting at the
end of Section 5(a)(vi): "or (3) any default, event of default or other
similar condition or event (however described) under any Financial
Agreement."
"SPECIFIED INDEBTEDNESS" means any obligation (whether present, future,
contingent or otherwise, as principal or surety or otherwise) in respect
of borrowed money or relating to the payment or delivery of funds,
securities or other property (including, without limitation, collateral).
"THRESHOLD AMOUNT" means, with respect Party A, an amount (including its
equivalent in another currency) equal to the higher of $ 10,000,000 or 2%
of its stockholders' equity as reflected on its most recent financial
statements or call reports, and with respect to Party B, any amount of
Specified Indebtedness.
(d) "CREDIT EVENT UPON MERGER" applies to both parties.
(e) "AUTOMATIC EARLY TERMINATION" does not apply to either party.
(f) PAYMENTS ON EARLY TERMINATION. "Market Quotation" and the "Second Method"
apply, subject to the following:
(i) "Market Quotation" for any Terminated Transaction that is, or is
subject to, any unexercised option shall be determined by taking into
account the economic equivalent of the option.
(ii) The Non-defaulting Party may, upon the occurrence of an Early
Termination Date, offset payments due by it under this Agreement (or under
any Specified Transaction) against, and apply such payments to the
satisfaction of, any obligations owing by the Defaulting Party (including
any Office of the Defaulting Party) to the Non-defaulting Party or any of
the Non-defaulting Party's Affiliates (including any Office of the
Non-defaulting Party or its Affiliates) whether matured or unmatured, and
it is a condition precedent to the Non-defaulting Party's obligation to
make any such payments that such obligations of the Defaulting Party have
been paid in full or satisfied by offset as contemplated hereunder. For
this purpose, the Non-defaulting Party may convert any such payments or
obligations into the currency of the other at a rate of exchange
(including premiums and costs of exchange) at which it could purchase the
relevant currency acting in good faith.
II. DOCUMENTS
(a) DELIVERY OF DOCUMENTS. When it delivers this Agreement, Party B shall also
deliver to Party A the Closing Documents in form and substance reasonably
satisfactory to Party A. For each Transaction, Party B shall deliver,
promptly upon request, a duly executed incumbency certificate for the
person(s) executing the Confirmation for Party B for that Transaction.
(b) "CLOSING DOCUMENTS" means:
(i) an opinion of counsel covering Party B's Basic Representations under
Section 3(a)(i), or in lieu thereof, Party B's Authorizing Documents for
this Agreement and the Transactions and a duly executed incumbency
certificate for the person(s) executing this Agreement for Party B;
(ii) a duly executed and delivered credit support annex in the form of
Exhibit A hereto, which shall be a Credit Support Document hereunder,
together with an opinion of counsel for that Credit Support Document
covering like matters as those covered by Party B's Basic Representations
under Section 3(a)(i), or in lieu of that opinion, Authorizing Documents
for that Credit Support Document and a duly executed incumbency
certificate for the person(s) executing that Credit Support Document.
(c) "AUTHORIZING DOCUMENTS" of a party or its Credit Support Provider means a
certified copy of the board of directors' resolutions of that party or
Credit Support Provider (or for a partnership, a copy of its partnership
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<PAGE> 16
agreement and a certified copy of the resolutions of the partnership or of
each general partner).
III. MISCELLANEOUS
(a) ADDRESSES FOR NOTICES.
TO PARTY A: TO PARTY B:
FIRST UNION NATIONAL BANK PROBUSINESS, INC.
301 South College 5934 Gibraltar Drive
Charlotte, NC 28288-0601 Pleasenton, CA 94588
Attention: Joseph Nenichka Attention:
Vice President, Capital Markets Support ----------------------
Fax: (704) 383-9139 Fax:
-------------------
Phone: (704) 383-0590 Phone:
-----------------
(b) "CALCULATION AGENT" means Party A.
(c) "CREDIT SUPPORT DOCUMENT" means each document which by its terms secures,
guarantees or otherwise supports Party B's obligations hereunder from time
to time, whether or not this Agreement, any Transaction, or any type of
Transaction entered into hereunder is specifically referenced or described
in any such document.
"CREDIT SUPPORT DEFAULT" is amended by adding at the end of Section
5(a)(iii)(1):
", any default, event of default or other similar condition or event
(however described) exists under any Credit Support Document, any action
is taken to realize upon any collateral provided to secure such party's
obligations hereunder or under any Transaction, or the other party fails
at any time to have a valid and perfected first priority security
interest; to the extent required, in any such collateral;"
(d) "CREDIT SUPPORT PROVIDER" means each party to a Credit Support Document
that provides or is obligated to provide security, a guaranty or other
credit support for Party B's obligations hereunder.
(e) "AFFILIATE" has its meaning as defined in Section 12, except for Party A
under Section 5(a)(v), "Affiliate" means First Union Corporation.
(f) GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the law (and not the law of conflicts) of the State of New
York.
(g) WAIVER OF JURY TRIAL. To the extent permitted by applicable law, each
party irrevocably waives any and all right to trial by jury in any legal
proceeding in connection with this Agreement, any Credit Support Document
to which it is a party, or any Transaction.
(h) NETTING OF PAYMENTS. If payments are due by each party on the same day
under two or more Transactions, then Section 2(c)(ii) will not apply to
those payments if a party gives notice to the relevant Office(s) of the
other party on or before the second New York Business Day before that
payment date stating that those payments will be netted or, if given by
the Calculation Agent, stating the net amount due.
(i) RECORDED CONVERSATIONS. Each party may electronically record all telephone
conversations between them in connection with this Agreement or any
Transaction, and any such recordings may be submitted in evidence in any
proceeding to establish any matters pertinent to this Agreement or any
Transaction.
(j) ADDITIONAL REPRESENTATIONS. Section 3 is amended by adding the following
Sections 3(e) and 3(f):
"(e) for any Relevant Agreement: (i) it acts as principal and not as
agent, (ii) it acknowledges that the other party acts only arm's length
and is not its agent, broker, advisor or fiduciary in any respect, and
any agency, brokerage, advisory or fiduciary services that the other
party (or any of its affiliates) may otherwise provide to the party (or
to any of its affiliates) excludes the Relevant Agreement, (iii) it is
relying solely upon its own evaluation of the Relevant Agreement
(including the present and future results, consequences, risks, and
benefits thereof, whether financial, accounting, tax, legal, or
otherwise) and upon advice from its own professional advisors, (iv) it
understands the Relevant Agreement and those risks, has determined they
are appropriate for it, and willingly assumes those risks, and (v) it has
not relied and will not be relying upon any evaluation or advice
(including any recommendation, opinion, or representation) from the other
party, its affiliates or the representatives or advisors of the other
party or its affiliates (except representations expressly made in the
Relevant Agreement or an opinion of counsel required thereunder).
"Relevant Agreement" means this Agreement, each Transaction, each
Confirmation, any Credit Support Document, and any agreement (including
any amendment, modification, transfer or early termination) between the
parties relating thereto or to any Transaction.
(f) it is an "eligible swap participant" within the meaning of 17 C.F.R.
Section 35.1."
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<PAGE> 17
IV. ISDA DEFINITIONS
(a) INCORPORATION. This Agreement and each Transaction are subject to the 1991
ISDA Definitions (as published by the International Swaps and Derivatives
Association, Inc.) and will be governed by the provisions of the ISDA
Definitions, without regard to any amendments to the ISDA Definitions
subsequent to the date hereof. The provisions of the ISDA Definitions are
incorporated by reference in, and shall be deemed to be part of, this
document and each Confirmation.
(b) INCONSISTENCY. In the event of any inconsistency between the provisions
of this document and the ISDA Definitions, this document will prevail.
V. ADDITIONAL TERMS
(a) COVENANTS OF FINANCIAL AGREEMENTS. (i) Party B shall provide Party A at
all times hereunder with the same covenant protection as Party A requires
of Party B under Financial Agreements. Therefore, in addition to the Cross
Default provisions of this Agreement, and notwithstanding the satisfaction
of any obligation or promise to pay money to Party A under any Financial
Agreement, or the termination or cancellation of any Financial Agreement,
Party B hereby agrees to perform, comply with and observe for the benefit
of Party A hereunder all affirmative and negative covenants contained in
each Financial Agreement applicable to Party B (excluding any obligation
or promise to pay money under any Financial Agreement, any exchange
obligations of Party B to Party A under any Financial Agreement, or to
deliver collateral security to Party A under any Financial Agreement) at
any time Party B has any obligation (whether absolute or contingent) under
this Agreement.
(ii) For purposes hereof: (A) the affirmative and negative covenants of
each Financial Agreement applicable to Party B (together with related
definitions and ancillary provisions, but in any event excluding any
obligation or promise to pay money under any Financial Agreement, any
exchange obligations of Party B to Party A under any Financial Agreement,
or to deliver collateral security to Party A under any Financial
Agreement) are incorporated (and upon execution of any future Financial
Agreement, shall automatically be incorporated) by reference herein
(mutatis mutandis); (B) if other lenders or creditors are parties to any
Financial Agreement, then with respect to the affirmative and negative
covenants contained therein, references therein to the lenders or
creditors shall be deemed references to Party A; and (C) for any such
covenant applying only when any loan, other extension of credit,
obligation or commitment under the Financial Agreement is outstanding,
that covenant shall be deemed to apply hereunder at any time Party B has
any obligation (whether absolute or contingent) under this Agreement.
(b) "FINANCIAL AGREEMENT" means each existing or future agreement or
instrument relating to any loan or extension of credit from Party A to
Party B (whether or not anyone else is a party thereto), as the same
exists when executed and without regard to any termination or cancellation
thereof, as the same may be amended or modified and in effect from time to
time.
IN WITNESS WHEREOF, the parties have executed this Schedule by their duly
authorized signatories as of the date hereof.
FIRST UNION NATIONAL BANK
By: /s/ Delene Travella
--------------------------------
Title: Vice President
------------------------------
PROBUSINESS, INC.
By: /s/ Thomas H. Sinton
--------------------------------
Title: President
-----------------------------
3
<PAGE> 18
CREDIT SUPPORT ANNEX dated as of June 10, 1997 ("Annex")
to the MASTER AGREEMENT dated as of June 10, 1997 ("Agreement") between
FIRST UNION NATIONAL BANK ("Secured Party") and
PROBUSINESS, INC. ("Pledgor")
This Annex supplements and forms part of the Schedule to the Agreement and is a
Credit Support Document under the Agreement with respect to Pledgor. Section
references herein are to Sections of this Annex unless another document is
specified: Time is New York City time unless otherwise indicated. Subject to the
terms and conditions of this Annex, the parties agree as follows:
1. SECURITY INTEREST
As security for Pledgor's Obligations, Pledgor pledges to Secured Party, and
grants to Secured Party a continuing security interest in and lien on and
control over, the Collateral. Pledgor agrees to take, and agrees that Secured
Party may take, such action as Secured Party may reasonably request to perfect
Secured Party's security interest in the Collateral.
2. TRANSFERS & RETURNS
(a) INITIAL PLEDGE. Pledgor agrees to transfer to Secured Party on demand
Collateral with a Support Value at least equal to $350,000 ("Initial Pledge
Amount"). In addition, if the terms of any Transaction require that the Initial
Pledge Amount be increased, Pledgor agrees to transfer to Secured Party on
demand Collateral with a Support Value at least equal to the amount by which the
Initial Pledge Amount has increased.
(b) ADDITIONAL PLEDGES. If, on any Business Day, the Pledge Amount exceeds the
Support Value of Collateral held by Secured Party by at least $200,000, then
Pledgor shall, on demand, transfer Collateral to Secured Party so that Secured
Party holds (after giving effect to that transfer) Collateral with a Support
Value at lease equal to the Pledge Amount. "Pledge Amount" means the sum of (i)
the Performance Amount plus (ii) the Initial Pledge Amount (as the same may be
increased from time to time). Any request for Additional Pledges will be
accompanied by a statement setting forth the calculation used in determining the
additional pledge.
(c) RETURNS. On each Return Valuation Date, Secured Party shall upon request
received no later than 11:00 a.m. on that date make the requisite computation
of the Performance Amount and notify Pledgor thereof by telephone (confirmed in
writing), and if Secured Party holds Collateral with a Support Value at least
equal to the Pledge Amount on that Return Valuation Date, then Secured Party
shall, on demand, return to Pledgor all other Collateral that is in excess of
the Pledge Amount, provided that the Collateral to be returned is separable from
the Collateral required to be maintained and has a Support Value at least equal
to $200,000.
(d) SAME DAY RETURNS. Notwithstanding any other provision hereof, for any day on
which Secured Party is required to return any Collateral to Pledgor and Pledgor
is required to make any payment under the Agreement (including this Annex) to
Secured Party, Secured Party may withhold that Collateral or any part thereof
until the Business Day after Pledgor has made the corresponding payment.
(e) FINAL RETURNS. Upon the occurrence of a Support Termination Date, Secured
Party shall, upon demand, return to Pledgor all outstanding Collateral held by
Secured Party.
3. DEMANDS & DELIVERY
(a) Any demand for the transfer or return of Collateral shall be made on a
Business Day and may be made orally by telephone (confirmed in writing) as
specified in Section 15. Any required transfer of Collateral and any required
return of Collateral shall be due by 4:00 p.m. on the Business Day on which the
demand is made if that demand is made at or before 11:00 a.m. on that Business
Day, and otherwise by 4:00 p.m. on the following Business Day.
1
<PAGE> 19
(b) Collateral shall be transferred or returned as follows:
(i) for instruments or securities transferable by book-entry, by
appropriate book entries made on the records of the bank, clearing
corporation, securities intermediary or other depository specified by
the party making the demand therefor;
(ii) for certificated instruments or securities not transferable by
book-entry, by delivery in appropriate physical form (accompanied by
such documents of transfer or assignment as Secured Party may reasonably
request, duly executed in blank if requested) to one or more accounts at
a bank, clearing corporation or other depository specified by the party
making the demand therefor;
(iii) Cash shall be transferred or returned as follows:
(A) for Cash to be held by Secured Party in its own name and not in
a Cash Deposit ("Independent Cash"), by wire transfer of
immediately available funds into one or more bank accounts
specified by Secured Party for any transfer of Independent Cash to
Secured Party or specified by Pledgor for any return of Independent
Cash by Secured Party; and
(B) for Cash to be held as a Cash Deposit, by execution and
delivery by Pledgor of a collateral assignment in the form of
Exhibit A hereto for the Cash Deposit or by wire transfer of
immediately available funds into one or more Cash Deposit accounts
subject to an existing collateral assignment, or for the return of
any Cash held in a Cash Deposit hereunder, balances in a Cash
Deposit shall be returned as follows: (1) if all balances therein
are required to be returned, by execution and delivery by Secured
Party of a written release of the collateral assignment of the Cash
Deposit; and (2) otherwise, by debiting the Cash Deposit by the
amount required to be returned and crediting that amount to another
account of Pledgor specified by it. For any Cash Deposit consisting
of a time deposit or certificate of deposit, Secured Party shall
have no obligation to return or release that Cash Deposit or
balances therein unless either all balances therein are required to
be returned or released, or if less than all balances therein are
required to be returned or released, Pledgor has transferred
substitute Collateral to Secured Party to cover the a remaining
difference.
(c) Secured Party shall have the right to acquire and return to Pledgor exactly
the same form (in all relevant respects) and quantity of Collateral required
to be returned by Secured Party in lieu of returning the actual Collateral
transferred by Pledgor to Secured Party.
4. INTEREST & EARLY WITHDRAWALS
(a) Cash held in Pledgor's Cash Deposits shall earn whatever interest is payable
thereon. For Independent Cash held by Secured Party, interest shall be payable
thereon by Secured Party on the first Business Day of each month (computed on a
360-day year basis for the actual number of days held) at a rate per annum equal
to the Federal Funds Rate minus .25% per annum. "Federal Funds Rate" means the
daily average of the Federal Funds (Effective) rates in effect for each day that
the Independent Cash is being held by Secured Party, as published in N.Y.
Federal Reserve Statistical Release H.15(519) for that day (or if not published
for a day, as published for the next preceding Business Day).
(b) Pledgor shall be responsible for any early withdrawal penalties applicable
to any Cash Deposits, including without limitation any such early withdrawal
penalties that would apply in the event that the balances in those Cash Deposits
are withdrawn or applied to satisfy any of the Obligations.
5. SUBSTITUTIONS
For any Collateral, Pledgor may transfer to Secured Party substitute Collateral
of equal or greater Support Value than the Collateral being replaced, and upon
demand by Pledgor after that transfer occurs, Secured Party shall return that
portion of the Collateral being replaced.
6. CUSTODY
2
<PAGE> 20
(a) Except for Independent Cash and except as otherwise provided herein,
Collateral shall be held by Secured Party or by one or more of its Custodians in
one or more accounts or depositories identifying the property therein as
collateral (each, a "Collateral Account"), which shall be properly segregated
and identified as belonging to Pledgor. Pledgor shall have no control over any
Collateral Account or any Collateral therein.
(b) Except as the context otherwise requires, a transfer to Secured Party's
Custodian is deemed to be a transfer to Secured Party, any Collateral held by
Secured Party's Custodian is deemed to be Collateral held by Secured Party, and
any obligation of Secured Party to return any Collateral is deemed to include an
obligation of Secured Party to cause the Collateral to be returned,
respectively.
(c) Any Collateral may be registered in the name of Secured Party or its
Custodian or deposited in securities accounts controlled by Secured Party or its
Custodian, and the issuer of or obligor on any of the Collateral may be notified
to make Distributions thereon directly to Secured Party or its Custodian.
Secured Party and each Custodian is authorized to receive, but is under no
obligation to collect, any Distributions.
7. DISPOSITIONS
(a) Notwithstanding the foregoing and subject to Secured Party's obligation to
return substitute Collateral in exactly the same form (in all relevant respects)
and quantity required to be returned hereunder, Secured Party shall have the
right at any time (free of any claim or fight on the part of Pledgor, including
any right or equity of redemption) to sell, repledge, hypothecate, assign,
invest, use, commingle or otherwise dispose of any Collateral other than Cash
Deposits (each, a "Disposition") provided that no Event of Default exists with
respect to Secured Party.
(b) Each Disposition shall be for the account and risk of Secured Party, and
notwithstanding any Disposition, Secured Party shall (i) remain liable to
account to Pledgor for the Collateral disposed of and all Distributions that
would have been made but for that Disposition, (ii) be deemed, for that purpose,
to hold that Collateral and to receive each such Distribution as and when that
Distribution would have been received but for that Disposition, and (iii) be
obligated to return any such Collateral or Distribution in accordance with the
terms of this Annex. Pledgor may continue substituting Collateral in accordance
with this Annex as though no such Disposition had been made.
8. REPRESENTATIONS & COVENANTS
(a) Pledgor continuously represents that: (i) it has the power under the laws of
the jurisdiction of its organization or incorporation, and is duly authorized,
to grant the security interest in Collateral herein granted by it, (ii) upon the
transfer of any Collateral, and at all times the Collateral is being held
hereunder (except as otherwise provided herein), it will have title to and will
be the sole owner of that Collateral, free and clear of any pledge, security
interest, lien, charge, hypothecation, encumbrance, right of offset,
counterclaim, option to purchase or other similar restriction, claim or right
("Encumbrance") except those granted or applying hereunder or contemplated
hereby, and Secured Party will have a valid and perfected security interest in
the Collateral, which is legally enforceable except as enforcement may be
limited by insolvency, bankruptcy, reorganization or other laws relating to the
enforcement of creditors' rights generally or by general principles of equity,
and (iii) it has not entered into any agreement or understanding that purports
to prohibit or restrict Pledgor from selling, assigning or otherwise disposing
of, or creating, granting or permitting to exist any Encumbrance on or in
respect of, the Collateral or any of its property or assets that would include
the Collateral.
(b) Pledgor shall not at any time sell, assign or otherwise dispose of, or
create, grant or otherwise permit to exist any Encumbrance on or over, any
Collateral held by Secured Party, and Pledgor shall not at any time enter into
any agreement or undertaking that purports to prohibit or restrict Pledgor from
selling, assigning or otherwise disposing of, or creating, granting or
permitting to exist any Encumbrance on or in respect of, such Collateral or any
of its property or assets that would include any such Collateral. Pledgor shall
defend, and indemnify Secured Party for defending, the Collateral and Secured
Party's rights and interests thereto and therein against the claims and demands
of any person or entity not a party to this Annex.
3
<PAGE> 21
9. DEFAULT
(a) The following rights and obligations are subject to the condition precedent
that no Default Condition exists with respect to Pledgor: (i) each right of
Pledgor to substitute Collateral under Section 5(a), and (ii) each obligation of
Secured Party to return any Collateral under Section 2(c) or to pay any interest
on any Independent Cash under Section 4(a).
(b) For purposes of Section 5(a)(iii)(1) of the Agreement, an Event of Default
shall exist with respect to the relevant party if:
(i) Pledgor fails to transfer in full any Collateral required to be
transferred hereunder on the date when due, and that failure continues for
one Business Day after Secured Party notifies it of that failure.
(ii) Secured Party fails to return any of the Collateral as required
hereunder and that failure continues for one Business Day after Pledgor
notifies it of that failure;
(iii) Pledgor fails to perform any obligation under Section 8(b); or
(iv) a party fails to perform any other obligation under this Annex and
that failure continues for 30 days after the other party notifies it of
that failure.
10. REMEDIES.
(a) Upon the occurrence of a Liquidation Event and to the extent permitted by
applicable law, Secured Party shall have the right at any time, without demand,
advertisement or notice of any kind (except that which applicable law requires
and cannot be waived), to take any one or more of the following actions with
respect to all or any part of the Collateral: (i) exercise the rights and
remedies of a secured party, or of a creditor, as provided by law; (ii) exercise
the rights and remedies to which Secured Party is entitled under the terms of
the Collateral or as provided by law with respect thereto; (iii) appropriate all
right, title and interest in and to the Collateral (of whatever form); (iv)
offset the Cash Equivalent of any payments due and owing by Pledgor under the
Agreement against any Collateral consisting of Cash (or Cash Deposits) or the
Cash Equivalent of any other Collateral; (v) liquidate the Collateral (other
than Cash or Cash Deposits) through one or more public or private sales or other
dispositions at such prices and on such terms as Secured Party may deem
reasonable (free of any liability on the part of Secured Party for any loss
arising in connection with any such sale or disposition and free of any claim or
right on the part of Pledgor, including any right or equity of redemption), with
Secured Party having the right to purchase the Collateral; and (vi) apply the
proceeds of the Collateral to Pledgor's Obligations (or the Cash Equivalent
thereof) in such order as Secured Party may elect. If Secured Party elects to
give any notice before taking any such action, one Business Day's prior written
notice shall be deemed reasonable.
(b) If the proceeds of the Collateral applied hereunder fail to satisfy all of
Pledgor's remaining Obligations, Pledgor shall continue to remain liable for the
deficiency, together with any additional amounts payable thereon or with respect
thereto in accordance with the terms of the Agreement. If all obligations of
Pledgor are satisfied and no amounts are or thereafter may become payable by
Pledgor under the Agreement, Secured Party shall, upon demand, return all
remaining proceeds, if any, to Pledgor.
(c) Secured Party shall have no obligation to return, and for purposes of this
Annex it shall not be deemed to hold, any Collateral upon which it has exercised
its rights pursuant to Section 10(a), and shall have no obligation or liability
to Pledgor with respect to that Collateral other than to account to Pledgor for
the remaining proceeds thereof, if any, as herein provided.
11. STANDARD OF CARE
Beyond the exercise of commercially reasonable care to assure the safe custody
of Collateral, and subject only to the duty to account for and return the
Collateral received as provided in this Annex, neither Secured Party nor a
Custodian shall have any duty or liability for any Collateral or to preserve or
exercise rights, powers or privileges in respect thereof.
4
<PAGE> 22
12. COSTS AND EXPENSES
Pledgor agrees to pay and indemnify Secured Party upon demand for (i) all
reasonable costs, expenses, taxes, assessments and other charges which may be
levied, assessed or imposed against or with respect to the Collateral, or for
transferring or returning the Collateral, or for holding or perfecting a
security interest in, the Collateral, and (ii) all costs and expenses incurred
by or on behalf of Secured Party in connection with enforcing, exercising, or
protecting Secured Party's rights under or in connection with this Annex
(including, without limitation, broker's fees, sales or other commissions, and
reasonable attorney's fees and expenses, incurred in connection with liquidating
the Collateral).
13. ENFORCEABILITY
The illegality, invalidity or unenforceability of any provision of this Annex
shall not impair the legality, validity or enforceability of any other provision
of this Annex.
14. POWER OF ATTORNEY
Secured Party is hereby appointed as Pledgor's attorney-in-fact, with full power
of substitution, for the purpose of taking such action and executing such
agreements, instruments and documents with respect to the Collateral, in the
name of Pledgor, as Secured Party may deem necessary or desirable for Secured
Party to exercise Secured Party's rights and remedies hereunder, or to enforce
Pledgor's obligations hereunder, with respect to that Collateral, or to perfect
Secured Party's security interest granted hereunder in the Collateral, which
appointment is coupled with an interest and is irrevocable.
15. NOTICES AND COMMUNICATIONS REGARDING COLLATERAL
Any notice under this Annex may be given in any manner provided in the notices
Section of the Agreement to the address or number provided below.
To Secured Party: To Pledgor:
FIRST UNION NATIONAL BANK PROBUSINESS, INC.
c/o First Union National Bank of 5934 Gibraltar Drive
North Carolina Pleasenton, CA 94588
301 South College Street
Charlotte, NC 28288-0601
Attention: Sarah Teves Attention:
----------------------------
Fax No.: (704) 383-9139 Fax No.:
------------------------------
Tel. No.: (704) 383-1184 Tel. No.:
-----------------------------
16. DEFINITIONS
(a) Capitalized terms used and not otherwise defined in this Annex are defined
elsewhere in the Agreement.
(b) The following terms used in this Annex are defined in the Sections
indicated: Collateral Account Section 6(a); Disposition Section 7(a);
Encumbrance Section 8(a); Independent Cash Section 3(b)(ii)(A); Initial Pledge
Amount Section 2(a); Pledge Amount Section 2(b).
(c) As used herein, the following terms have the following meanings:
"Business Day" means a day which is a New York Banking Day.
"Cash" means the lawful currency of the United States of America in depositary
account form.
"Cash Deposit" means any deposit account(s) of Pledgor held at, or deposit
instrument(s) or certificate(s) of deposit issued by, either Secured Party or
any bank affiliated with Secured Party.
"Cash Equivalent" means for any amount denominated in Cash, the amount of that
Cash, and if denominated in another currency, the U.S. dollar equivalent thereof
determined by Secured Party in good faith using a recognized foreign exchange
dealer's spot rate for purchasing that currency with U.S. dollars for two-day
settlement.
5
<PAGE> 23
"Collateral" means (i) each of the following items, and (ii) the Security:
Valuation % Collateral
100% Cash
100% Cash Deposits
100% Negotiable debt obligations issued by the U.S.
Treasury Department ("Treasurys") having an original
maturity at issuance of not more than one year
("Treasury Bills").
100% Treasurys having an original maturity at issuance of
more than one year but not more than 10 years
("Treasury Notes").
100% Treasurys having an original maturity at issuance of
more than 10 years ("Treasury Bonds").
"Custodian" means any agent holding any Collateral on behalf of Secured Party
selected by Secured Party, including, without limitation, any Affiliate of
Secured Party.
"Default Condition" means that an Event of Default or Potential Event of Default
exists with respect to Pledgor, or an Early Termination Event or Liquidation
Event has occurred with respect to Pledgor.
"Distribution" with respect to any Collateral means any payment or distribution
of, on or in respect of the Collateral (including, without limitation, any
interest payable by Secured Party or Custodian on the Collateral), and any right
or property of any kind as part of, in addition to, or in exchange for, the
Collateral.
"Early Termination Event" means the occurrence of an Early Termination Date in
respect of all Transactions in effect immediately prior to the designation or
occurrence of in Early Termination Date, which shall be deemed to occur with
respect to Pledgor if it results from an Event of Default with respect to
Pledgor.
"Liquidation Event" means that either of the following events occurs: (a) the
occurrence of an Early Termination Event and the failure by Pledgor to make,
when due, any payment of the Termination Amount required to be made by it; or
(b) an Event of Default under Section 5(a)(i) of the Agreement exists with
respect to Pledgor.
"Market Value" means, as of any date of determination, the estimated fair market
value thereof, as determined in good faith and in a commercially reasonable
manner by Secured Party. Market Value shall exclude accrued interest.
"Obligations" means all obligations, whether absolute or contingent, now or
hereafter becoming due or owing by Pledgor to Secured Party under or in
connection with the Agreement (including, without limitation, this Annex) or any
Transaction governed by the Agreement, whether or not evidenced by a
Confirmation, including, without limitation, any transfer or termination of any
such Transaction.
"Performance Amount" means an amount equal to the Cash Equivalent of the
estimated Termination Amount that would be payable by Pledgor under Section
6(e)(i) of the Agreement, assuming (i) an Early Termination Date were to occur
as of that date for an Event of Default with respect to Pledgor, and (ii) Unpaid
Amounts were to include all unpaid amounts that have become due and payable
under any provision of the Agreement, all as determined in good faith and in a
commercially reasonable manner by Secured Party.
"Return Valuation Date" means the first Business Day of each month.
"Security" means (a) any Distributions on or in respect of the Collateral, (b)
any proceeds of the Collateral or Distributions, and (c) any rights, powers,
privileges, claims, accounts, instruments or documents with respect to the
Collateral, Distributions or proceeds.
"Support Termination Date" means any Business Day on which (i) all Transactions
have matured or been terminated, (ii) no amounts are or thereafter may become
payable by Pledgor under the
6
<PAGE> 24
Agreement, and (iii) no other obligation of Pledgor secured by the Collateral
has become due and remains unsatisfied.
"Support Value" means, as of any date of determination, an amount equal to (1)
the valuation percentage specified for the relevant Collateral in the definition
thereof, times (2) the Market Value of that Collateral.
"Termination Amount" means an amount payable by a party under Section 6(e)(i) of
the Agreement in respect of an Early Termination Event.
IN WITNESS WHEREOF the parties have executed this Annex as of the date hereof.
FIRST UNION NATIONAL BANK PROBUSINESS, INC.
By: /s/ Delene Travella By: /s/ Thomas H. Sinton
----------------------------------- ---------------------------------
Title: Vice President Title: President
7
<PAGE> 25
EXHIBIT A to the CREDIT SUPPORT ANNEX dated as of _____________, 19 __
ASSIGNMENT OF SAVINGS ACCOUNTS/SAVINGS INSTRUMENTS
____________________________, 19__
For value received, PROBUSINESS, INC. ("Assignor") assigns all right, title and
interest to FIRST UNION NATIONAL BANK, its successors and assigns, (the "Secured
Party"), in the savings account(s), savings instrument(s) and/or certificate(s)
of deposit (each, a "Savings Account") identified below.
Account or Certificate No.(s): maintained in or
----------------------
issued by (the "Depository").
---------------------------------
The Assignment is given as security for the Assignor's Obligations as defined in
that certain Credit Support Annex dated as of June 10, 1997 (the "Annex") to the
Master Agreement dated as of June 10, 1997 between Assignor and Secured Party.
This Assignment supplements and forms part of the Annex.
This Assignment shall be a continuing one and shall remain effective until the
Support Termination Date (as defined in the "Annex"). This Assignment shall also
continue during subsequent renewals and replacements of any certificate of
deposit or other Savings Account hereby assigned. It further shall secure any
other obligations and/or liabilities of the Assignor to Secured Party (except
for any obligation in which the security is a principal dwelling or household
goods) due or to become due, whether now existing or hereafter arising, and
howsoever evidenced or acquired, whether direct, indirect, absolute or
contingent, and whether individual, several, or joint and several obligations or
liabilities of the Assignor.
The Assignor hereby irrevocably authorizes and empowers Secured Party, at any
time in its own name or in the name of the Assignor, to demand, apply for
withdrawal, withdraw, receive and give acquittance for any and all monies and
claims for monies hereby assigned and to exercise any and all rights and
privileges and receive all benefits of each Savings Account and to execute any
and all instruments required therefor. The Depository is hereby expressly
authorized and directed, on demand of Secured Party, to pay to Secured Party
moneys hereby assigned. Assignor will not withdraw any monies hereby assigned
from any Savings Account.
This Assignment includes all monies deposited now or in the future and all
interest earned in each Savings Account. The exercise of any right, option,
privilege, or power given herein to Secured Party shall be at the option of
Secured Party.
The Assignor agrees that all or any part of the funds of each Savings Account
may be applied to the payment of any and all of Assignor's Obligations as
defined in the Annex and to the payment of any other obligations of Assignor to
Secured Party, if such other obligations are in default, or upon maturity. The
Assignor authorizes Secured Party to withdraw any principal or interest and to
apply it in Secured Party's sole discretion to Assignor's Obligations as defined
in the Annex or any other of Assignor's obligations. Any partial withdrawal of
principal or interest shall not release this assignment.
The Assignor warrants and represents that each Savings Account is owned solely
by Assignor and is free and clear of all liens and encumbrances, and that
Assignor has full power, right and authority to execute and deliver this
assignment.
If any Savings Account is represented by a passbook, certificate or other
document evidencing ownership, such paper writing has been delivered and is
herewith assigned and pledged to Secured Party by Assignor.
PROBUSINESS, INC.
By: /s/ Thomas H. Sinton
--------------------------
Title: President
-----------------------
8
<PAGE> 26
SWAP TRANSACTION
[LOGO] CONFIRMATION
Date: August 6, 1997
To: PROBUSINESS, INC. ("Counterparty")
Address: 5934 Gibralter Ave.
Pleasanton, CA 94588
Fax: (510) 734-0139
Attention: Mitch Everton
From: FIRST UNION NATIONAL BANK ("First Union")
Ref. No. 56350/71291
Dear Mr. Everton:
This confirms the terms of the Transaction described below between Counterparty
and First Union. This Transaction is subject to the 1991 ISDA Definitions
published by the International Swaps and Derivatives Association, Inc. ("ISDA
Definitions"), which are incorporated herein by reference. Fixed Amounts and
Floating Amounts for each applicable Payment Date hereunder will be calculated
in accordance with the ISDA Definitions, and if any Fixed Amount and Floating
Amount are for the same Payment Date hereunder, then those amounts shall not be
payable and instead the Fixed Rate Payer shall pay the positive difference, if
any, between the Fixed Amount and the Floating Amount, and the Floating Rate
Payer shall pay the positive difference, if any, between the Floating Amount
and the Fixed Amount.
<TABLE>
<S> <C>
Transaction Type: Interest Rate Swap
- ----------------
Currency for Payments: U.S. Dollars
- ---------------------
Notional Amount: See Attachment I
- ---------------
Term:
- ----
Trade Date: August 6, 1997
Effective Date: August 6, 1997
Termination Date: August 2, 1999, subject to the Modified Following Business Day Convention
Fixed Amounts:
- -------------
Fixed Rate Payer: First Union
Payment Dates: Monthly on the 1st day of each month commencing September 1, 1997,
through and including the Termination Date.
Business Day Convention: Modified Following
Business Day: New York
Fixed Rate: 5.905%
Fixed Rate Day Count Fraction: Actual/365
Floating Amounts:
- ----------------
Floating Rate Payer: Counterparty
Payment Dates: Monthly on the 1st day of each month commencing September 1, 1997,
through and including the Termination Date.
Business Day Convention: Modified Following
Business Day: New York
Floating Rate Option: USD-CP-H.15
Designated Maturity: 1 Month
Spread: None
Floating Rate Date Count
Fraction: Actual/360
Reset Dates: Each New York Business Day in each Calculation Period,
Method of Averaging: Unweighted Average
Compounding: Inapplicable
Rounding convention: 5 decimal places per the ISDA Definitions
</TABLE>
<PAGE> 27
Calculation Agent: First Union
- -----------------
Payments to First Union: First Union Charlotte
- ----------------------- Capital Markets
Attention: Derivatives Desk
Fed. ABA No. 053000219
Ref. No. 56350/71291
First Union Contacts: Settlements and/or Rate Resets:
- -------------------- Tel: (800) 249-3865
Fax: (704) 383-9139
Documentation and/or Collateral:
Tel: (704) 383-5678
Fax: (704) 383-9139
Please quote transaction reference number.
First Union Address: One First Union Center
- ------------------- 301 South College Street DC-4
Charlotte, NC 28288-0601
Payments to Counterparty: Please forward payment instructions to First
- ------------------------ Union in Charlotte, NC.
Payments will not be made to Counterparty
without its written instructions.
Documentation
- -------------
This Confirmation is a binding and complete contract between the parties,
provided that if at any time there exists a master agreement (however
described) between the parties governing this Transaction ("Master Agreement"),
this Confirmation supplements, forms part of and will be governed by the Master
Agreement. Unless otherwise provided in the Master Agreement, this Confirmation
is governed by the law (and not the law of conflicts) of the State of New York.
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing a copy of this Confirmation and returning it to us.
Very truly yours,
FIRST UNION NATIONAL BANK
By: /s/ PETER J. LANCOS
---------------------------------
Name: Peter J. Lancos
Title: Vice President
By: /s/ DELENE M. TRAVELLA
---------------------------------
Name: Delene M. Travella
Title: Vice President
Accepted and confirmed as of the date first above written:
PROBUSINESS, INC.
By: /s/ MITCH EVERTON
----------------------------
Name: Mitch Everton
Title: EVP - Operations
2
<PAGE> 28
ATTACHMENT 1 - AMORTIZATION SCHEDULE FOR 56350/71291
(Dated subject to Modified Following Business Day Convention)
<TABLE>
<CAPTION>
DATE NOTIONAL OUTSTANDING NOTIONAL REDUCTION
---- -------------------- -----------------
<S> <C> <C>
06 Aug 97 44,100,000.00 0.00
02 Sep 97 48,600,000.00 (4,500,000.00)
01 Oct 97 48,150,000.00 450,000.00
03 Nov 97 45,900,000.00 2,250,000.00
01 Dec 97 46,350,000.00 (450,000.00)
02 Jan 98 63,450,000.00 (17,100,000.00)
02 Feb 98 87,300,000.00 (23,850,000.00)
02 Mar 98 91,800,000.00 (4,500,000.00)
01 Apr 98 100,800,000.00 (9,000,000.00)
01 May 98 58,950,000.00 41,850,000.00
01 Jun 98 53,550,000.00 5,400,000.00
01 Jul 98 58,500,000.00 (4,950,000.00)
03 Aug 98 44,100,000.00 14,400,000.00
01 Sep 98 48,600,000.00 (4,500,000.00)
01 Oct 98 48,150,000.00 450,000.00
02 Nov 98 45,900,000.00 2,250,000.00
01 Dec 98 46,350,000.00 (450,000.00)
04 Jan 99 63,450,000.00 (17,100,000.00)
01 Feb 99 87,300,000.00 (23,850,000.00)
01 Mar 99 91,800,000.00 (4,500,000.00)
01 Apr 99 100,800,000.00 (9,000,000.00)
03 May 99 58,950,000.00 41,850,000.00
01 Jun 99 53,550,000.00 5,400,000.00
01 Jul 99 58,500,000.00 (4,950,000.00)
02 Aug 1999 0.00 58,500,000.00
</TABLE>
<PAGE> 29
AMENDMENT
dated as of
June 13, 1997
1. Reference is hereby made to that certain Credit Support Annex dated as
of June 10, 1997 ("Annex") to the Schedule ("Schedule") to the Master Agreement
dated as of June 10, 1997 ("Master Agreement") between FIRST UNION NATIONAL
BANK ("First Union") and PROBUSINESS, INC. ("Counterparty"). First Union and
Counterparty hereby amend Section 16(c) of the Annex as follows:
(a) The definition of "Cash" is hereby amended in its entirety to read as
follows:
""Cash" means the lawful currency of the United States of America in
depositary account form which is transferred to the Secured Party as
Independent Cash under this Annex or which is held in a Cash Deposit
under this Annex."
(b) The definition of "Cash Deposit" is hereby amended in its entirety to
read as follows:
""Cash Deposit" means any deposit account(s) of Pledgor held at, or
deposit instrument(s) or certificate(s) of deposit issued by, either
Secured Party or any bank affiliated with Secured Party, which are
subject to a collateral assignment executed and delivered pursuant to
this Annex."
2. The parties hereby ratify and confirm the Master Agreement, the
Schedule and the Annex as amended.
IN WITNESS WHEREOF, the parties have executed this amendment as of the
date hereof.
PROBUSINESS, INC.
By: /s/ Steven Klei
----------------------
Name: Steven Klei
Title: SVP/CFO
FIRST UNION NATIONAL BANK
By: /s/ Delene M. Travella
----------------------
Name: Delene M. Travella
Title: Vice President
<PAGE> 1
EXHIBIT 23.1
CONSENT AND REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
We consent to the reference of our firm under the captions "Selected Financial
Data" and "Experts" and to use of our reports with respect to the consolidated
financial statements of ProBusiness Services, Inc., dated August 1, 1997, except
for Note 11, as to which the date is August 11, 1997, Dimension Solutions, Inc.,
dated November 20, 1996 and BeneSphere Administrators, Inc., dated December 20,
1996 in the Registration Statement (Form S-1) and related Prospectus of
ProBusiness, Inc. for the registration of 2,300,000 shares of its common stock.
Our audits also include the financial statement schedule of ProBusiness
Services, Inc. listed in Item 16(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------------
Walnut Creek, California
August 11, 1997
