<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1998
REGISTRATION NO. 333-60745
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7374 94-2976066
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation) Classification Code Number) Identification Number)
</TABLE>
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(925) 737-3500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
THOMAS H. SINTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(925) 737-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN K. AUSTIN KENNETH L. GUERNSEY
ELIZABETH R. FLINT KARYN R. SMITH
BRIAN C. ERB MICHAEL W. HAUPTMAN
JOHN L. WHITTLE COOLEY GODWARD LLP
MARY ELIZABETH SHANNON ONE MARITIME PLAZA
WILSON SONSINI GOODRICH & ROSATI 20TH FLOOR
PROFESSIONAL CORPORATION SAN FRANCISCO, CA 94111
650 PAGE MILL ROAD (415) 693-2000
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
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 registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1998
PROSPECTUS
2,475,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,475,000 shares of Common Stock offered hereby are being sold by
ProBusiness Services, Inc. ("ProBusiness" or the "Company").
The Company has effected a 3-for-2 stock split in the form of a stock
dividend paid on August 7, 1998. All share and per share information in this
Prospectus has been adjusted to reflect this stock split.
The Common Stock offered hereby is quoted on the Nasdaq National Market
under the symbol "PRBZ." On September 21, 1998, the last reported sale price of
the Common Stock was $28.0625. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $670,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 371,250 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively.
The Common Stock is offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to their right to reject orders in
whole or in part. It is expected that delivery of the certificates for the
Common Stock will be made on or about , 1998.
WILLIAM BLAIR & COMPANY
BANCBOSTON ROBERTSON STEPHENS
SG COWEN
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
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.
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 added value to large employers with its high quality and
cost-effective employee administrative services."
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 rectangular containing the logos of the following eight companies:
CCH Incorporated, Advanced Micro Devices, Inc., 3Com Corporation, AST Research,
Inc., Yahoo Inc., Oracle Corporation, Boise Cascade Corporation, First Allmerica
Financial Life Insurance Company and First Data Corporation.
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 corner 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 proprietary PC-based, distributed
architecture is reliable, flexible and scalable. This technology enables the
Company to provide high levels of client service and customized solutions 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.
Description #8: Description of the right section of the middle tier of the
gatefold: Rectangular photographs of an account manager assisting a client,
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, and human
resources software." This caption appears below the photograph in Description 8.
------------------------
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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
PROBUSINESS-REGISTERED TRADEMARK- AND THE PROBUSINESS LOGO ARE REGISTERED
TRADEMARKS OF THE COMPANY. BENESPHERE ADMINISTRATORS-TM- AND ENROLLNET-TM- ARE
TRADEMARKS OF THE COMPANY.
<PAGE>
PROSPECTUS 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 THE THREE-FOR-TWO SPLIT OF THE
COMPANY'S COMMON STOCK (THE "STOCK SPLIT") EFFECTED IN THE FORM OF A STOCK
DIVIDEND PAID ON AUGUST 7, 1998. 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. The Company's primary service offerings are payroll processing,
payroll tax filing, benefits administration, including the enrollment and
processing of flexible benefits plans and COBRA programs, and human resources
software. 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, 1998, the Company provided services to approximately
1,400 clients and provided payroll processing services to approximately 510
clients with an aggregate of approximately 575,000 employees and an average of
approximately 1,100 employees. In addition to providing tax filing services for
its payroll clients, as of June 30, 1998 the Company provided national tax
filing services to 72 clients with an aggregate of approximately 1.1 million
employees and an average of approximately 15,200 employees. For the quarter
ended June 30, 1998, the Company processed 4.3 million checks for the Company's
payroll clients. The Company's clients include: 3Com Corporation, Abbott
Laboratories, Airtouch Communications Inc., Amoco Corporation, Inc., Ascend
Communications, Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell
Computer Corporation, E*TRADE Group, Inc., First Data Corporation, The Gap,
Inc., The Gillette Company, J.C. Penney Company, Inc., Kellogg USA Inc., LSI
Logic Corporation, Michaels Stores, Inc., Netscape Communications Corp., Oracle
Corporation, Sunglass Hut International, Inc., Toyota Motor Corporation, U.S.
Bancorp, Watkins-Johnson Company and Williams-Sonoma, Inc.
The demand for outsourcing employee administrative services has grown
significantly and is expected to continue to grow over the next several years.
According to G-2 Research, Inc., third-party payroll processing, payroll tax
filing and benefits administration are expected to generate approximately $3.9
billion in revenue in 1998 and approximately $9.3 billion in revenue in 2003.
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.
The Company differentiates itself from its competitors through its
proprietary PC-based 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 value-added and 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 focus on client
service are key factors in enabling it to achieve a high payroll client
retention rate, which was approximately 92% for fiscal 1998.
The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy to
accomplish this objective includes expanding its client base by increasing its
direct sales force, developing a comprehensive and fully integrated suite of
employee administrative services, offering additional services to existing
clients, pursuing strategic acquisitions, investments and alliances and
extending its technology leadership. 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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................... 2,475,000 shares
Common Stock to be Outstanding after this Offering.... 19,589,855 shares(1)
For general corporate purposes, including
capital expenditures and working capital, as
well as for potential acquisitions. See "Use
of Proceeds."
Use of Proceeds.......................................
Nasdaq National Market Symbol......................... PRBZ
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................................................. $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services........................................................ 6,435 13,659 23,859
General and administrative expenses............................................... 2,054 4,282 6,727
Research and development expenses................................................. 1,257 2,841 4,585
Client acquisition costs.......................................................... 5,388 11,706 17,858
Acquisition of in-process technology.............................................. 711 -- --
--------- --------- ---------
Total operating expenses............................................................ 15,845 32,488 53,029
--------- --------- ---------
Loss from operations................................................................ (1,982) (5,114) (6,712)
Interest expense.................................................................... (473) (1,190) (557)
Other income........................................................................ 69 59 752
--------- --------- ---------
Net loss............................................................................ $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Historical basic and diluted net loss per share(2).................................. $ (4.91)
---------
---------
Shares used in computing historical basic and diluted net loss per share(2)......... 486
Pro forma basic and diluted net loss per share(2)................................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net loss per share(2).......... 10,533 15,722
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 13,771 $ 79,083
Payroll tax funds invested............................................................. 332,667 332,667
Working capital........................................................................ 3,323 68,635
Total assets........................................................................... 376,009 441,321
Payroll tax funds collected but unremitted............................................. 332,667 332,667
Capital lease obligations, less current portion........................................ 1,414 1,414
Total stockholders' equity............................................................. 26,746 92,058
</TABLE>
- ------------------------------
(1) As of June 30, 1998 (after giving effect to the Stock Split). Excludes (i)
1,800,416 shares of Common Stock subject to outstanding options; (ii)
229,500 shares of Common Stock issuable upon exercise of outstanding
warrants; (iii) 1,277,510 shares of Common Stock reserved for future grant
under the Company's 1996 Stock Option Plan; and (iv) 579,886 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan. See "Management -- Stock Plans," "Description of Capital
Stock -- Warrants" and Notes 6 and 7 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing historical and pro forma basic
and diluted net loss per share.
(3) Adjusted to reflect the sale of the 2,475,000 shares of Common Stock offered
hereby at an assumed public offering price of $28.0625 per share, after
deducting the estimated underwriting discount and estimated offering
expenses payable by the Company, and application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
The Company was incorporated in California in October 1984 and
reincorporated in Delaware in September 1997. The Company's executive offices
are located at 4125 Hopyard Road, Pleasanton, California 94588, and its
telephone number is (925) 737-3500. The Company maintains a World Wide Web site
at www.probusiness.com. The information contained on the Company's Web site
shall not be deemed to be a part of this Prospectus.
4
<PAGE>
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 REVENUE
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, 1998, the Company had an accumulated deficit of
approximately $25.5 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process generally takes three to twelve months or longer, and the implementation
process generally takes an additional three to nine 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 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 likely will incur in the future, costs associated with adding personnel,
integrating technology, increasing overhead to support the acquired businesses,
acquiring in-process technology and amortization expenses related to intangible
assets. Any future acquisitions 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."
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 the beginning of the tax year (the Company's third fiscal quarter)
and higher interest income earned on payroll tax funds invested. 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 the third quarter.
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, costs associated
with strategic acquisitions and alliances or investments in technology, the
success of any such strategic acquisition, alliance or investment, costs to
transition 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 typically 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
5
<PAGE>
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 condition of the
economy, client staff reductions, strikes and acquisitions of its clients by
other companies. 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 STRATEGIC ACQUISITIONS AND INVESTMENTS
While the Company has no current agreements or negotiations underway with
respect to any acquisition of, or investment in, businesses that provide
complementary services or technologies to those of the Company, the Company is
engaged in ongoing discussions and intends to make additional acquisitions of,
and investments in, such 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. Furthermore,
there can be no assurance that any strategic investment will succeed. The
initial cost of such an investment or the failure of such an investment to
succeed could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Seasonality; Fluctuations
in Quarterly Results," "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Strategy."
RISKS ASSOCIATED WITH PAYROLL TAX FILING SERVICE AND BENEFITS ADMINISTRATION
SERVICES
The Company's payroll tax filing 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
transfer to the Company contributed employer and employee tax funds. The Company
processes the data received from the clients 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 and 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 filing service is also dependent upon government
regulations, which are subject to continual 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 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
6
<PAGE>
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 an
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 revenues. As a result, the Company's business,
financial condition and results of operations are significantly impacted by
interest rate fluctuations. The Company enters into interest rate swap
agreements to minimize the impact of interest rate fluctuations. There can be no
assurance, however, that the Company's swap arrangements will protect the
Company from all interest rate risks. Under certain circumstances if interest
rates rise, the Company would have payment obligations under its interest rate
swap agreements which may not be offset by interest earned by the Company on
deposited funds. A payment obligation under the Company's swap arrangements
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, 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 its swap agreements 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 four years. The Company's number of employees has increased from 360 at
the end of fiscal 1997 to 500 at the end of fiscal 1998. This growth has placed,
and is expected to continue to place, 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 attract clients in
7
<PAGE>
new geographic regions, increase expenditures on research and development, and
invest in new equipment and 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 could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to open a satellite
sales and implementation center in New Jersey by the end of calendar 1998 and
may open additional sales offices in the future. In addition, the Company
intends to move its benefits administration center from its current location in
Bellevue, Washington to another location there, and the Company has leased
additional office space to be built adjacent to its Pleasanton headquarters.
There can be no assurance that the Company will be able to establish such
facilities on a timely basis. The Company's growth may depend to some extent on
its ability to successfully complete strategic acquisitions or investments to
expand or complement its existing business. There can be no assurance that
suitable acquisitions or investments 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 and 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,
certain 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, the failure of the Company to compete
successfully, pricing pressures, loss of market share and loss of clients could
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 or acquire 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 or acquire new
technologies in a timely manner, it may incur substantial costs in developing or
acquiring such technologies and in deploying new services and features to its
clients, including costs associated with acquiring in-process technology,
amortization expenses related to intangible assets and
8
<PAGE>
costs of additional personnel. If the Company is unable to develop or acquire
and successfully 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."
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 could damage the Company's
reputation and have a material adverse effect on the Company's business,
financial condition and results of operations.
DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA
The Company currently conducts substantially all of its payroll and payroll
tax processing at the Company's headquarters in Pleasanton, California and
divides the payroll printing and finishing between its Pleasanton and Irvine,
California facilities. The Irvine facility serves both as an alternative
processing center and a back-up payroll center. The Company's benefits
administration services are conducted solely in Bellevue, Washington, and no
benefits administration back-up facility exists. The Company establishes for
each payroll client a complete set of payroll data at the Pleasanton processing
center, as well as at the client's site. In the event of a disaster in
Pleasanton, clients would have the ability 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 payroll 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 has in the past and
may in the future experience difficulty in recruiting sufficient numbers of
qualified personnel. In particular, the Company's ability to find and train
implementation employees is critical to the Company's ability to
9
<PAGE>
achieve its growth objectives. 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."
RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION
A substantial majority of the Company's revenue historically 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. By the end of calendar
1998, the Company intends to open a satellite sales and implementation center in
New Jersey to service the eastern United States. The Company may open additional
sales offices in the future. Due to the time required to sell and implement the
Company's services and the fixed costs associated with opening a new center, any
revenue associated with a new center will be significantly lower than the costs
associated with it, potentially for a significant period of time. Growth and
geographic expansion have resulted in new and increased responsibilities for
management and have placed and continue 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 DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES
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, integrate 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 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."
10
<PAGE>
IMPACT OF YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in 2000, these
date code fields will need to accept four digit entries in order to distinguish
21st century dates from 20th century dates. As a result, computer systems and/or
software used by many companies will need to be upgraded to comply with "Year
2000" requirements by the end of 1999. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance issues.
The Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to make its systems Year 2000 compliant. Based on this
preliminary review, the Company has discovered certain failures to comply with
Year 2000 requirements. The Company is taking action to correct the
non-complying features of its systems, and the Company believes that its
internal software systems will be Year 2000 compliant by 2000. There can be no
assurance, however, that the Company's systems will be fully Year 2000 compliant
in a timely manner, and a failure by the Company to make its internal systems
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has not
determined an estimate of the costs required to correct the non-complying
features, and such costs could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
currently have a contingency plan in the event that it is unable to make its
systems Year 2000 compliant.
The Company believes that its current products are, and future products will
be, fully Year 2000 compliant. There can be no assurance, however, that Year
2000 errors or defects will not be discovered in the Company's current and
future products. The Company's past software products, many of which are
currently used by clients, are not Year 2000 compliant. The Company has begun
the process of transitioning existing clients to its Year 2000 compliant
products; however, there can be no assurance that the Company will be successful
in providing all of its clients with Year 2000 compliant products by 2000. Any
failure by the Company to transition its clients to Year 2000 compliant products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is not assessing the Year 2000 compliance of its clients'
systems or the possible effects on its operations of the Year 2000 compliance of
its clients' systems. Due to the substantial integration between the Company's
computer systems and its clients' systems, the failure by the Company's clients
to have Year 2000 compliant systems could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is assessing the possible effects on its operations of the Year 2000 readiness
of key suppliers and subcontractors. The Company's reliance on suppliers and
subcontractors, and, therefore, on the proper functioning of their information
systems and software, means that failure by such suppliers and subcontractors to
address Year 2000 issues 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 -- Year
2000 Compliance."
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
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
11
<PAGE>
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. See "Business -- Proprietary
Rights."
UNALLOCATED NET PROCEEDS
The Company has not designated any specific use for the net proceeds of the
Offering. The Company currently expects to use the net proceeds for general
corporate purposes, including capital expenditures and working capital. 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 or
for strategic alliances with, or investments in, companies that provide
complementary products and services. Accordingly, management will have
significant discretion in applying the net proceeds of the Offering. See "Use of
Proceeds."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, the Company's directors and executive
officers and their respective affiliates will beneficially own 36.7% (36.0% if
the Underwriters' over-allotment option is exercised in full) 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."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is likely to be highly
volatile following this Offering 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, 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.
SUBSTANTIAL DILUTION
The assumed public offering price is substantially higher than the 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 $23.86 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 at exercise prices per share lower than the price per share of Common
Stock offered hereby, and the Company expects that it will continue to grant a
substantial number of options in the future at the fair market value of the
Common Stock at such time, which possibly could be a price per share lower than
the price per share of Common Stock offered hereby. In addition, the Company's
employee stock purchase plan provides employees an opportunity to purchase
shares below
12
<PAGE>
prevailing market value. The Company also may issue shares of its Common Stock
in connection with strategic acquisitions or alliances. Any of the foregoing
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 19,589,855 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1998. Of these shares, all of the shares sold in this
Offering and the 4,312,500 shares sold in the Company's initial public offering
will be freely tradeable without restriction or further registration under the
Securities Act. There are currently outstanding 2,539,100 shares of Common Stock
issued pursuant to exercise of options granted under equity incentive plans of
the Company, all of which shares are freely tradeable pursuant to Rule 701 of
the Securities Act or have been registered for resale under the Securities Act.
The remaining 10,263,255 shares of Common Stock were issued and sold by the
Company in private transactions exempt from registration requirements of the
Securities Act and will be available for immediate sale in the public market in
accordance with Rule 144, in some cases subject to the volume and other resale
limitations of Rule 144, other than the one-year holding period. Approximately
7,127,890 of such shares are subject to lock-up agreements under which the
holders of such shares have agreed with William Blair & Company, L.L.C. not to
sell or otherwise dispose of any of such shares for a period of 90 days
following the date of this Prospectus, subject to certain limited exceptions.
See "Shares Eligible for Future Sale."
As of June 30, 1998, options to purchase 1,800,416 shares of Common Stock
were outstanding, of which options to purchase 414,884 shares were then
exercisable. As of June 30, 1998, options to purchase 1,277,510 shares of Common
Stock were available for grant pursuant to the Company's 1996 Stock Option Plan
and 579,886 shares of Common Stock were available for issuance pursuant to the
Company's 1997 Employee Stock Purchase Plan. In addition, as of June 30, 1998,
warrants to purchase 229,500 shares of Common Stock were outstanding, all of the
underlying shares of which will be eligible for sale in the public market upon
exercise of the warrants.
Pursuant to agreements between the Company and certain stockholders and
warrantholders (or their permitted transferees), approximately 9,571,976 shares
of Common Stock and 124,500 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."
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.
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<PAGE>
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."
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Forward-looking statements contained in this Prospectus are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward-looking
statements. When used in this document and documents referenced herein, the
words "intend," "anticipate," "believe," "estimate," and "expect" and similar
expressions as they relate to the Company are included to identify such
forward-looking statements. These forward-looking statements include statements
regarding the demand for outsourcing employee administrative services; the
Company's expansion of its client base; the Company's intention to increase its
direct sales force; the development of a comprehensive and fully integrated
suite of employee administrative services; the Company's ability to offer
additional services; the initiation or completion of any strategic acquisition,
investment or alliance; the Company's ability to extend its technology
leadership; the Company's ability to attract and retain new clients; market
acceptance of any new services offered by the Company; the Company's ability to
minimize the impact of interest rate fluctuations; the Company's ability to
develop its financial and managerial controls and systems; the opening of
additional facilities; the sufficiency of the Company's back-up facilities and
disaster recovery procedures; the Company's ability to develop or acquire new
technologies; the Company's ability to attract and retain experienced employees;
the ability of the Company to make its internal system Year 2000 compliant and
to transition its clients to Year 2000 compliant systems; the Company's ability
to maintain a high payroll client retention rate, and the Company's ability to
increase its national presence. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, those identified under
"Risk Factors" and elsewhere in this Prospectus and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially from
these forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business or growth strategy or an inability to
execute its strategy due to changes in its industry or the economy generally,
the emergence of new or growing competitors and various other competitive
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Prospectus will in fact
occur.
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 2,475,000 shares of Common Stock
offered hereby are estimated to be approximately $65.3 million ($75.2 million if
the Underwriters' over-allotment option is exercised in full) at an assumed
public offering price of $28.0625 per share and after deducting the estimated
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds of this Offering for general
corporate purposes, including capital expenditures and working capital. The
Company also may use a portion of the net proceeds for acquisitions of, or
investments in, companies, technology or services that complement the business
of the Company or for strategic alliances with, or investments in, companies
that provide complementary products and services. No such transactions,
alliances or investments are currently planned. 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.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "PRBZ." The following table sets forth, for the fiscal periods indicated,
the high and low sales prices of the Common Stock as reported by the Nasdaq
National Market since the Company's initial public offering of Common Stock at
$7.33 per share on September 19, 1997 (after giving effect to the Stock Split).
Prior to September 19, 1997, there was no public trading market for the Common
Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998:
First Quarter (from September 19, 1997).................................. $ 12.92 $ 7.67
Second Quarter........................................................... 15.33 12.08
Third Quarter............................................................ 20.00 14.00
Fourth Quarter........................................................... 32.58 17.33
FISCAL 1999:
First Quarter (through September 21, 1998)............................... $ 43.13 $ 27.00
</TABLE>
On July 31, 1998, there were 372 holders of record of the Company's Common
Stock. The Company believes that the number of beneficial owners of the Common
Stock is substantially greater than the number of record owners because a large
portion of the Common Stock is held of record in broker "street names." The last
reported sale price per share of the Common Stock on September 21, 1998 on the
Nasdaq National Market was $28.0625.
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term indebtedness and total
capitalization of the Company as of June 30, 1998 on an actual basis and on an
as adjusted basis to give effect to the sale and issuance of the shares of
Common Stock offered hereby at an assumed public offering price of $28.0625 per
share (after deducting the estimated underwriting discount 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 Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations............................................. $ 890 $ 890
---------- -----------
---------- -----------
Capital lease obligations, less current portion (1)...................................... 1,414 1,414
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized, no shares issued and
outstanding........................................................................... -- --
Common Stock, $.001 par value; 60,000,000 shares authorized, 17,114,855 shares issued
and outstanding, actual; 19,589,855 shares issued and outstanding, as adjusted (2).... 17 20
Additional paid-in capital............................................................... 53,286 118,595
Accumulated deficit...................................................................... (25,469) (25,469)
Notes receivable from stockholders....................................................... (1,088) (1,088)
---------- -----------
Total stockholders' equity........................................................... 26,746 92,058
---------- -----------
Total capitalization............................................................... $ 28,160 $ 93,472
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Financial Statements.
(2) As of June 30, 1998 (after giving effect to the Stock Split). Excludes (i)
1,800,416 shares of Common Stock subject to outstanding options; (ii)
229,500 shares of Common Stock issuable upon exercise of outstanding
warrants; (iii) 1,277,510 shares of Common Stock reserved for future grant
under the Company's 1996 Stock Option Plan; and (iv) 579,886 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan. See "Management -- Stock Plans," "Description of Capital
Stock -- Warrants" and Notes 6 and 7 of Notes to Financial Statements.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1998 was
approximately $17.0 million or $0.99 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total net tangible
assets less total liabilities, divided by the number of shares of Common Stock
issued and outstanding at that date. 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 as adjusted 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 public offering price of $28.06 per share and after
deduction of the estimated underwriting discount and estimated offering expenses
payable by the Company, the net tangible book value of the Company as of June
30, 1998, would have been approximately $82.3 million or $4.20 per share. This
represents an immediate increase in net tangible book value of $3.21 per share
to existing stockholders and an immediate dilution of $23.86 per share to new
stockholders purchasing Common Stock in this Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $ 28.06
---------
Net tangible book value per share at June 30, 1998.............. $ 0.99
---------
Increase in net tangible book value per share attributable to
new stockholders.............................................. 3.21
---------
As adjusted net tangible book value per share after the
Offering......................................................... 4.20
---------
Dilution per share to new stockholders............................ $ 23.86
---------
---------
</TABLE>
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected statements of operations data for the years ended
June 30, 1996, 1997 and 1998 and the balance sheet data at June 30, 1997 and
1998 are derived from the financial statements of the Company, which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Prospectus. The statements of operations data for the years ended June
30, 1994 and 1995 and the balance sheet data at June 30, 1994, 1995 and 1996 are
derived from financial statements of the Company that have been audited by Ernst
& Young LLP that are not included 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 Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.................................................. $ 4,069 $ 7,095 $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services............................. 1,629 2,703 6,435 13,659 23,859
General and administrative expenses.................... 1,202 1,304 2,054 4,282 6,727
Research and development expenses...................... 1,202 1,038 1,257 2,841 4,585
Client acquisition costs............................... 1,467 2,943 5,388 11,706 17,858
Acquisition of in-process technology................... -- -- 711 -- --
---------- ---------- --------- --------- ---------
Total operating expenses................................. 5,500 7,988 15,845 32,488 53,029
---------- ---------- --------- --------- ---------
Loss from operations..................................... (1,431) (893) (1,982) (5,114) (6,712)
Interest expense......................................... (46) (86) (473) (1,190) (557)
Other income............................................. -- -- 69 59 752
---------- ---------- --------- --------- ---------
Net loss................................................. $ (1,477) $ (979) $ (2,386) $ (6,245) $ (6,517)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Historical basic and diluted net loss per share(1)....... $ (738.50) $ (139.86) $ (4.91)
---------- ---------- ---------
---------- ---------- ---------
Shares used in computing historical basic and diluted net
loss per share(1)....................................... 2 7 486
Pro forma basic and diluted net loss per share(1)........ $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net
loss per share(1)....................................... 10,533 15,722
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 114 $ 852 $ 4,041 $ 5,047 $ 13,771
Payroll tax funds invested........................... -- -- 106,339 177,626 332,667
Working capital (deficiency)......................... (119) 69 3,022 41 3,323
Total assets......................................... 2,019 4,134 117,228 200,435 376,009
Payroll tax funds collected but unremitted........... -- -- 106,339 177,626 332,667
Long-term debt and note payable to stockholder, less
current portion..................................... 394 1,016 8,072 8,917 --
Capital lease obligations, less current portion...... 174 168 253 1,898 1,414
Total stockholders' equity (deficit)................. 705 1,366 (136) 3,869 26,746
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing historical and pro forma basic
and diluted net loss per share.
18
<PAGE>
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, benefits administration, including the
enrollment and processing of flexible benefit plans and COBRA programs, and
human resources software. 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 $46.3 million in fiscal 1998. From June 30, 1994 to June 30,
1998, the client base for payroll processing services increased from 200 to
approximately 510 clients, while the average size of the Company's payroll
clients increased from approximately 400 employees to approximately 1,100
employees. The number of checks that the Company processed for its payroll
clients increased from 2.9 million to 4.3 million for the quarters ended June
30, 1997 and 1998, respectively. As of June 30, 1998, the Company provided
services to approximately 1,400 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 payroll clients (approximately 92% for fiscal 1998).
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
twelve months or longer, and the implementation process generally takes an
additional three to nine 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 the beginning of the tax year (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 the third quarter. 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, 1998, the Company had an
accumulated deficit of approximately $25.5 million. There can be no assurance
that the Company will achieve or sustain profitability in the future.
The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. The Company generally
recognizes revenue from services when such services are performed and recognizes
income from investments when earned. The Company typically invests these funds
in short-term financial instruments such as overnight U.S. government direct and
agency obligations
19
<PAGE>
repurchase agreements, commercial paper rated A-1 and/or P-1 and money market
funds with an underlying credit quality of AA or better, which are subject to
credit risks and interest rate fluctuations. See "Risk Factors -- Investment
Risks." Interest income earned on collected, but unremitted payroll tax funds
amounted to $1.9 million, $5.9 million and $11.5 million for fiscal 1996, 1997
and 1998, respectively. Payroll and payroll tax clients generally are subject to
contracts with an initial term of 36 months. 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.
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 sales and implementation expenses and, to a lesser extent, marketing
expenses.
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 likely will 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.
In January 1997, the Company acquired all of the outstanding capital stock
of BeneSphere Administrators, Inc. ("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
performance conditions are met. As of June 30, 1998, and in connection with the
financial performance conditions, $2.2 million of the $4.5 million additional
purchase price had been earned. In connection with the acquisition of
BeneSphere, the Company has recorded $4.5 million of goodwill, which is being
amortized ratably over 20 years and could be increased by up to an additional
$2.3 million if additional financial performance conditions are met. In May
1996, the Company acquired substantially all of the business and assets of
Dimension Solutions, Inc. ("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.
As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $17.2 million and $1.2 million, respectively. The
net operating loss carryforwards will expire at various dates beginning with
fiscal 1999 through 2013, 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 amended, 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>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
reflected in the statements of operations expressed as a percentage of revenue.
There can be no assurance that the indicated trends in revenue growth or
operating results will continue in the future.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................................................. 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services............................................................. 46.4 49.9 51.5
General and administrative expenses.................................................... 14.8 15.6 14.5
Research and development expenses...................................................... 9.1 10.4 9.9
Client acquisition costs............................................................... 38.9 42.8 38.6
Acquisition of in-process technology................................................... 5.1 -- --
--------- --------- ---------
Total operating expenses............................................................. 114.3 118.7 114.5
--------- --------- ---------
Loss from operations..................................................................... (14.3) (18.7) (14.5)
Interest expense......................................................................... (3.4) (4.3) (1.2)
Other income............................................................................. 0.5 0.2 1.6
--------- --------- ---------
Net loss................................................................................. (17.2)% (22.8)% (14.1)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997
REVENUE. Revenue increased 69.2% to $46.3 million in fiscal 1998 from $27.4
million in fiscal 1997, primarily due to an increase in the number and average
size of the Company's payroll and tax clients and, to a lesser extent, the
inclusion of a full year's results of the Company's benefits administration
services which were introduced January 1997. Interest income earned on payroll
tax funds invested was $11.5 million and $5.9 million for fiscal 1998 and 1997,
respectively. This increase was primarily the result of higher average daily tax
balances in fiscal 1998.
COST OF PROVIDING SERVICES. Cost of providing services increased 74.7% to
$23.9 million in fiscal 1998 from $13.7 million in fiscal 1997 and increased as
a percentage of revenue to 51.5% from 49.9%. The increase in absolute dollars
was primarily due to the increase year-over-year in clients serviced. The
increase as a percentage of revenue was primarily due to building management
infrastructure in the Company's benefits operations and the opening of the
Company's production facility in Irvine, California in fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 57.1% to $6.7 million in fiscal 1998 from $4.3 million in fiscal 1997
and decreased as a percentage of revenue to 14.5% from 15.6%. The increase in
absolute dollars was primarily due to the hiring of additional management and
administrative personnel to support the Company's growth and, to a lesser
extent, to costs associated with the Company's benefits administration services
which were introduced in January 1997 and included in general and administrative
expenses for the full year of fiscal 1998. The decrease as a percentage of
revenue was due primarily to the allocation of certain fixed costs over higher
revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 61.4% to $4.6 million in fiscal 1998 from $2.8 million in fiscal 1997
and decreased as a percentage of revenue to 9.9% from 10.4%. The increase in
absolute dollars was primarily a result of additional personnel and equipment to
develop enhancements and new features to the Company's existing services.
Research and development expenses decreased as a percentage of revenue due in
part to higher revenue and an increase in the amount of expenses capitalized in
fiscal 1998. Capitalized software development costs were $3.9 million and $1.4
million for fiscal 1998 and 1997, respectively.
21
<PAGE>
CLIENT ACQUISITION COSTS. Client acquisition costs increased 52.6% to $17.9
million in fiscal 1998 from $11.7 million in fiscal 1997 and decreased as a
percentage of revenue to 38.6% from 42.8%. The increase in absolute dollars was
primarily due to the expanded sales and implementation force for payroll and
national tax services, and inclusion of a full year's expenses related to the
Company's benefits administration services introduced in January 1997.
INTEREST EXPENSE. Interest expense decreased 53.2% to $557,000 in fiscal
1998 from $1.2 million in fiscal 1997. The decrease in interest expense was
primarily due to the repayment of subordinated debt and repayment of borrowings
under the Company's secured revolving line of credit with proceeds from the
Company's initial public offering in September 1997.
OTHER INCOME. Other income increased as a percentage of revenue to 1.6% in
fiscal 1998 from 0.2% in fiscal 1997. The increase as a percentage of revenue
was due to higher cash and investment balances resulting from the Company's
initial public offering in September 1997 when compared to the same period the
prior year.
YEARS ENDED JUNE 30, 1997 AND JUNE 30, 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, 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.
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.
22
<PAGE>
QUARTERLY RESULTS
The following table sets forth selected unaudited quarterly financial
information for each of the eight quarters in the period ended June 30, 1998, 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
----------------------------------------------------------------------------
1996 1997
------------------------ --------------------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue...................................... $ 4,675 $ 5,524 $ 8,427 $ 8,748 $ 9,227 $ 10,325
Operating Expenses:
Cost of providing services................. 2,288 2,950 3,907 4,514 5,019 5,772
General and administrative expenses........ 622 869 1,441 1,350 1,768 1,600
Research and development expenses.......... 625 683 732 801 1,110 1,020
Client acquisition costs................... 2,215 2,413 3,664 3,414 3,978 4,092
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 5,750 6,915 9,744 10,079 11,875 12,484
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations......................... (1,075) (1,391) (1,317) (1,331) (2,648) (2,159)
Interest expense............................. (215) (305) (380) (290) (255) (119)
Other income................................. 11 1 2 45 26 234
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (1,279) $ (1,695) $ (1,695) $ (1,576) $ (2,877) $ (2,044)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------------
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Cost of providing services................. 48.9 53.4 46.4 51.6 54.4 55.9
General and administrative expenses........ 13.3 15.7 17.1 15.4 19.2 15.5
Research and development expenses.......... 13.4 12.4 8.7 9.2 12.0 9.9
Client acquisition costs................... 47.4 43.7 43.4 39.0 43.1 39.6
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 123.0 125.2 115.6 115.2 128.7 120.9
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations......................... (23.0) (25.2) (15.6) (15.2) (28.7) (20.9)
Interest expense............................. (4.6) (5.5) (4.5) (3.3) (2.8) (1.2)
Other income................................. 0.2 0.0 0.0 0.5 0.3 2.3
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... (27.4)% (30.7 )% (20.1 )% (18.0 )% (31.2 )% (19.8)%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
1998
------------------------
MARCH 31 JUNE 30
----------- -----------
<S> <C> <C>
Revenue...................................... $ 13,611 $ 13,154
Operating Expenses:
Cost of providing services................. 6,424 6,644
General and administrative expenses........ 1,693 1,666
Research and development expenses.......... 1,213 1,242
Client acquisition costs................... 5,569 4,219
----------- -----------
Total operating expenses..................... 14,899 13,771
----------- -----------
Loss from operations......................... (1,288) (617)
Interest expense............................. (87) (96)
Other income................................. 242 250
----------- -----------
Net loss..................................... $ (1,133) $ (463)
----------- -----------
----------- -----------
Revenue...................................... 100.0% 100.0%
Operating Expenses:
Cost of providing services................. 47.2 50.5
General and administrative expenses........ 12.4 12.7
Research and development expenses.......... 9.0 9.4
Client acquisition costs................... 40.9 32.1
----------- -----------
Total operating expenses..................... 109.5 104.7
----------- -----------
Loss from operations......................... (9.5) (4.7)
Interest expense............................. (0.6) (0.7)
Other income................................. 1.8 1.9
----------- -----------
Net loss..................................... (8.3 )% (3.5 )%
----------- -----------
----------- -----------
</TABLE>
Revenue has increased over the last eight quarters primarily as a result of
the increase in the number and average size of the Company's payroll and tax
clients and the introduction of the Company's benefits administration services
in the third fiscal quarter in 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 fiscal quarters of 1998 primarily due to increases in account
management personnel and production costs related to the Company's expanded
client base.
23
<PAGE>
The Company's client acquisition costs typically fluctuate from quarter to
quarter in relation to the addition of new clients. Sales, marketing and
implementation costs incurred to provide services to new clients are expensed as
incurred over the implementation period which typically lasts three to nine
months or longer. A significant portion of these costs (including sales
commissions) are expensed at the time clients begin services. In the third
fiscal quarter of 1998, the increase in client acquisition costs in absolute
dollars was primarily due to commission costs and costs for payroll and national
tax services associated with clients beginning 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 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 sales of equity securities, private debt and bank borrowings, and
to a lesser extent, equipment leases. Prior to the initial public offering, the
Company raised approximately $23.4 million in private sales of equity securities
and raised approximately $27.0 million from its initial public offering in
September 1997.
At June 30, 1998, the Company had approximately $13.8 million of cash and
cash equivalents and a $20.0 million secured revolving line of credit, which
expires in December 2000. At June 30, 1998, the Company had no outstanding
borrowings under the line of credit. See Note 3 of Notes to Financial
Statements.
Net cash provided by operating activities for fiscal 1998 was $3.6 million
and net cash used in operating activities for fiscal 1997 and 1996 was $4.1
million and $202,000, respectively. Net cash provided by operating activities in
fiscal 1998 compared to net cash used in operating activities in fiscal 1997 was
primarily the result of increases in accrued liabilities, depreciation and
deferred revenue, and decreases in other assets in fiscal 1998, partially offset
by an increase in prepaid expenses and other current assets. 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 $14.3 million, $4.7 million and
$3.3 million for fiscal 1998, 1997 and 1996, respectively. The increase in net
cash used in investing activities in fiscal 1998 resulted primarily from (i)
capital expenditures for equipment, furniture and fixtures to support the
Company's
24
<PAGE>
increased personnel, (ii) the move of the Company's corporate headquarters in
early fiscal 1998 and (iii) the establishment of the Company's Irvine production
facility in early fiscal 1998. In addition, the Company capitalized software
development costs of $3.9 million, $1.4 million and $645,000 in fiscal 1998,
1997 and 1996 respectively. The Company expects to make additional capital
expenditures for furniture, equipment and fixtures to support the continued
growth of its operations. 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 $19.5 million, $9.8 million
and $6.7 million for fiscal 1998, 1997 and 1996, respectively. Net cash provided
by financing activities for fiscal 1998 related primarily to $27.0 million of
net proceeds from the Company's initial public offering of common stock and
$959,000 from the exercise of warrants. The increase was partially offset by the
payment of $3.9 million of outstanding subordinated debt and the net repayment
of $4.8 million of borrowings under the Company's secured revolving line of
credit. Net cash provided by financing activities for fiscal 1997 was primarily
a result of $9.9 million of net proceeds from the issuance of preferred stock in
March 1997. Net cash provided by financing activities for fiscal 1996 was
primarily the result of $4.0 million from subordinated debt and net proceeds of
$2.5 million from borrowings under line of credit agreements.
The Company believes that the net proceeds from this Offering, together with
existing cash balances, amounts available under its current credit facility 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.
YEAR 2000 COMPLIANCE
The Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to make its systems Year 2000 compliant. Based on this
preliminary review, the Company has discovered certain failures to comply with
Year 2000 requirements. The Company is taking action to correct the noncomplying
features of its systems, and the Company believes that its internal software
systems will be Year 2000 compliant by 2000. There can be no assurance, however,
that the Company's systems will be fully Year 2000 compliant in a timely manner,
and a failure by the Company to make its internal systems Year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has not determined an estimate
of the costs required to correct the noncomplying features, and such costs could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company does not currently have a contingency
plan in the event that it is unable to make its systems Year 2000 compliant.
The Company believes that its current products are, and future products will
be, fully Year 2000 compliant. There can be no assurance, however, that Year
2000 errors or defects will not be discovered in the Company's current and
future products. The Company's past software products, many of which are
currently used by clients, are not Year 2000 compliant. The Company has begun
the process of transitioning existing clients to its Year 2000 compliant
products; however, there can be no assurance that the Company will be successful
in providing all of its clients with Year 2000 compliant products by 2000. Any
failure by the Company to transition its clients to Year 2000 compliant products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is not assessing the Year 2000 compliance of its clients'
systems or the possible effects on its operations of the Year 2000 compliance of
its clients' systems. Due to the substantial integration between the Company's
computer systems and its clients' systems, the failure by the Company's clients
to have Year 2000 compliant systems in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is assessing the possible
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effects on its operations of the Year 2000 readiness of key suppliers and
subcontractors. The Company's reliance on suppliers and subcontractors, and,
therefore, on the proper functioning of their information systems and software,
means that failure by such suppliers and subcontractors to address Year 2000
issues could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Impact of Year 2000
Compliance."
INTEREST RATE SWAP AGREEMENTS
During fiscal 1998, the Company entered into various interest rate swap
agreements with a financial institution. The purpose of these agreements is to
convert a portion of the interest the Company earns from collected but
unremitted payroll tax funds from a floating to a fixed rate basis. The Company
considers these agreements to be for "other than trading purposes" and has
accounted for these agreements on an accrual basis, with each net payment or
receipt due or owed under each agreement recognized in earnings during the
period to which the payment or receipt relates, with no recognition on the
balance sheet of the fair value of the agreements. At June 30, 1998, the
aggregate fair value of these agreements was $432,000.
These agreements, with fixed interest rates between 5.736% and 5.905%, each
have a term of two years, one of which has a cancellation option after one year,
and expire at various dates through April 2000. Interest is paid or received
based upon the product of the contractual notional balance multiplied by the
difference in the fixed interest rate and the contractual floating rate option.
The contractual notional balance varies on a monthly basis due to fluctuations
in projected holdings of collected but unremitted payroll tax funds. At June 30,
1998, the notional balance was $204.7 million and the average monthly notional
balance for the remaining term of the agreements was $242.0 million. The
agreements require collateral if interest rates increase and certain other
conditions are met as defined in the agreements. At June 30, 1998, no collateral
was required.
The primary market risk to which the Company is exposed related to these
agreements is interest rate risk. The Company has performed a sensitivity
analysis related to these agreements assuming both positive and negative
parallel shifts in interest rates of 50, 100 and 150 basis points. As a result
of this analysis, the Company has determined that due to its current use of
interest rate swap agreements, the Company would not experience a material
adverse affect in its business, financial condition and results of operations,
related to such hypothetical changes in interest rates during fiscal 1999. See
"Risk Factors -- Investment Risks."
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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. The Company's primary service offerings are payroll processing,
payroll tax filing, benefits administration, including the enrollment and
processing of flexible benefits plans and COBRA programs, and human resources
software. 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, 1998, the Company provided services to approximately
1,400 clients. As of June 30, 1998, the Company provided payroll processing
services to approximately 510 clients with an aggregate of approximately 575,000
active employees and an average of approximately 1,100 employees. For the
quarter ended June 30, 1998, the Company processed 4.3 million checks for the
Company's payroll clients. In addition to providing tax filing services for its
payroll clients, as of June 30, 1998 the Company provided national tax filing
services to 72 clients with an aggregate of approximately 1.1 million employees
and an average of approximately 15,200 employees.
The Company differentiates itself from its competitors through its
proprietary PC-based 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 1998.
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 G-2 Research, Inc., third-party payroll
processing, payroll tax filing and benefits administration is expected to
generate approximately $3.9 billion in revenue in 1998 and approximately $9.3
billion in revenue in 2003.
Payroll processing, payroll tax filing and benefits administration lend
themselves to outsourcing because they 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 benefits 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
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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.
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 make 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, benefits
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, benefits administration and human resources
software.
PC-BASED 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
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systems. In addition, multiple networked PCs facilitate exception processing and
rapid response that large employers require.
CLIENT SERVICE FOCUS. 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.
VALUE-ADDED SERVICES. The Company believes that it provides its clients
higher value-added and more cost-effective payroll services 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 1998.
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'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. 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.
INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that there is a
significant opportunity for it to cross-sell its services to its existing client
base, as few of its current clients use all of the Company's
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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 broaden its range of services and service
features, enhance 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 benefits administration services
through the acquisitions of Dimension Solutions and BeneSphere, respectively.
During 1998, the Company formed alliances with SAP AG, a leading provider of
enterprise business solutions, and Sheakly UniService, a leading provider of
unemployment cost control services. See "-- Sales and Marketing."
EXTEND TECHNOLOGY LEADERSHIP. The Company is committed to investing
resources to enhance its industry-leading employee administrative services
technology. The Company is developing a client/server version of its system and
is broadening its administrative services offerings by developing Internet-based
applications. The Company believes that the introduction of such administrative
services offerings will enable it to address the growing demand for the
extension of its applications throughout the enterprise.
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, alliances and investments 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. Clients receive paychecks and reports 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 disputes or inquiries.
Substantially all existing payroll clients utilize the Company's payroll tax
service. In addition, as of June 30, 1998, the Company provided national tax
services to 72 clients with an aggregate of approximately 1.1 million employees
and an average of approximately 15,200 employees.
BENEFITS ADMINISTRATION. The Company's benefits administration services
include flexible benefits enrollment and processing, COBRA administration and
consolidated billing and eligibility tracking. Employees can enroll in and
choose their flexible spending benefits through traditional paper-based forms or
through Internet-accessible enrollment sites using the Company's Enrollnet-TM-
service.
HUMAN RESOURCES SOFTWARE. The Company's human resources software tracks and
reports general employee information, including compensation, benefits, skills,
performance, training, job titles and
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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.
The Company continually evaluates the addition of add-on service offerings
to expand the breadth of its solution through alliances, acquisitions or
internal development. Such additional services include administrative services
related to time and attendance, travel and entertainment, unemployment insurance
and 401(k) plans.
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 value-added solution. The Company
maintains an 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. The Company intends to continue providing its clients with a high
level of service by hiring professionals who are experienced in their fields.
Most service personnel have experience in payroll, accounting, human resources
or financial services industries, and many hold Certified Public Accountant or
Certified Payroll Professional accreditations.
The Company continually monitors 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
help develop, identify and optimize new service offerings 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.
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
twelve 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 nine 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.
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<PAGE>
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.
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 intuitive Windows-based interface makes navigation simple
and allows new users to be trained quickly. The Company is developing a new
suite of online self-service administrative services applications accessible
through the Internet that enable clients' employees to view paychecks and other
compensation and benefits data.
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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<PAGE>
CLIENTS
The Company targets large companies with complex and changing business needs
in diverse industries. As of June 30, 1998, the Company provided services to
approximately 1,400 clients. Of these clients, approximately 510 were payroll
processing clients, with an aggregate of approximately 575,000 active employees
and an average of approximately 1,100 employees. For the quarter ended June 30,
1998, the Company processed 4.3 million payroll checks for the Company's payroll
clients. The Company began providing national tax filing services to clients in
1996 and, as of June 30, 1998, provided these services to 72 clients with an
aggregate of approximately 1.1 million employees and an average of approximately
15,200 employees. Substantially all existing payroll clients utilize the
Company's payroll tax filing service. For fiscal 1998, no client accounted for
more than 4% of the Company's revenue. Set forth below is a representative list
of the Company's clients, from each of which the Company recognized revenue of
at least $25,000 in fiscal 1998.
<TABLE>
<CAPTION>
TECHNOLOGY CONSUMER AND RETAIL FINANCIAL SERVICES
- -------------------------------- ----------------------------- ---------------------------
<S> <C> <C>
3Com Corporation Airtouch Communications, Inc. California Casualty Group
Advanced Micro Devices, Inc. Amoco Corporation E*TRADE Group, Inc.
Ascend Communications, Inc. Childrens Discovery Centers First Allmerica Financial
AST Research, Inc. of Life
Atmel Corporation America, Inc. Insurance Company
Bay Networks Inc. Coach Leatherwear Co., Inc. North American Title
Cadence Design Systems Inc. Dollar General Corporation Insurance Company
Cisco Systems Inc. Esprit de Corp. U.S. Bancorp
Dell Computer Corporation The Gap, Inc. OTHER
First Data Corporation The Gillette Company Abbott Laboratories
Fujitsu, Ltd. J. C. Penney Company, Inc. Allergan, Inc.
Hitachi America Ltd Koll Management Services, CCH Incorporated
Informix Corporation Inc. Clubcorp International
Integrated Device Technology, Michaels Stores, Inc. Federal Express Corporation
Inc. Natural Wonders, Inc. Pharmacia & Upjohn, Inc.
Intuit Inc. St. John Knits Inc. Raychem Corporation
KLA/Tencor Corporation Sunglass Hut Watkins-Johnson Company
LSI Logic Corporation International, Inc.
Netscape Communications Corp. Toyota Motor Corporation
Newbridge Networks, Inc. U.S. Computer Services
Novell, Inc. Williams-Sonoma, Inc.
Oracle Corporation Ziff Davis Publishing Company
Pacific Scientific Company FOOD PRODUCTS AND SERVICES
Quantum Corporation BonAppetit Management
Read-Rite Corporation Company
Siemens Business Communication Fresh Choice, Inc.
Systems, Inc. Kellogg USA Inc.
Silicon Graphics, Inc. OreIda Foods Inc.
Silicon Systems, Inc. Pacific Coast Producers
Solectron Corporation Specialty Restaurants Corp.
Storage Technology Corporation
Sybase, Inc.
VeriFone, Inc.
</TABLE>
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 1998.
Historically, the Company's client retention rates have been negatively
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<PAGE>
impacted primarily due to clients ceasing to use the Company's services
following a merger or sale of the client. The Company does not have long-term
contracts with its clients, and the Company's existing contracts do not have
significant penalties for cancellation.
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, 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
twelve months or longer. The Company primarily utilizes insurance brokers to
attract new benefits administration clients.
The Company seeks to attract and retain experienced industry sales
representatives. The Company believes that its long-term competitiveness depends
on increasing further its national presence. The Company believes that
continuing to add direct sales representatives in major metropolitan areas
throughout the United States is the most effective means of increasing its
national client base. Over the past two years, the Company has added sales and
implementation representatives covering major metropolitan areas, including
Atlanta, Chicago, Dallas, New York and Seattle. To support its sales growth in
the eastern United States, the Company intends to open a satellite sales and
implementation center in New Jersey during the fourth quarter of calendar 1998.
The Company's marketing department provides support materials and marketing
communications to sales representatives, promotes public relations, conducts
direct mail campaigns, manages trade show participation, and develops and
manages corporate Web sites.
As part of its strategy to provide a comprehensive suite of employee
administrative services, the Company has recently entered into strategic
alliances with two industry leaders. The Company has formed an alliance with SAP
AG, a leading provider of enterprise business solutions, to offer customers high
levels of flexibility in managing payroll and payroll tax processes by linking
the Company's payroll and tax solution to SAP's HR System. The Company has also
formed an alliance to provide services to clients jointly with Sheakly
UniService, a leading provider of unemployment cost control services.
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. For example, the Company is developing a new suite of online
self-service administrative services applications accessible through the
Internet that enable clients' employees to view paychecks as well as other
compensation and benefits data. In addition, the Company expects to introduce an
integrated payroll and human resources system utilizing client/server technology
that will run on Windows 95 and Windows NT.
The foregoing information 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. See "Risk Factors -- Reliance
on Rapidly Changing Technology; Risks of Software Defects."
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
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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,
certain 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.
PROPRIETARY RIGHTS
The Company's success is dependent in part upon its proprietary software
technology. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company has
no patents, patent applications or registered copyrights. 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 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. See "Risk
Factors -- Reliance on Rapidly Changing Technology; Risks of Software Defects."
EMPLOYEES
As of June 30, 1998, the Company had 500 full-time employees. The Company
believes that its relations with its employees are good.
FACILITIES
The Company's headquarters are located in Pleasanton, California and consist
of approximately 130,000 square feet of office space leased through September
2008. The Company has signed a lease for a building to be built adjacent to its
headquarters which will consist of approximately 70,000 square feet, of which
approximately 35,000 square feet is expected to be available in mid-1999, and
the remainder is expected to be available in mid-2000.
The Company also has a sales, implementation and production facility and a
back-up payroll facility in Irvine, California, where it leases approximately
14,000 square feet under a lease which terminates May 2002. In addition, the
Company has a sales office in Kettering, Ohio pursuant to a lease which
35
<PAGE>
terminates in July, 1999. The Company is currently negotiating a lease for a
satellite sales and implementation center in New Jersey.
The Company's benefits administration processing operations are located in
Bellevue, Washington, where the Company leases approximately 6,500 square feet
under a lease that will terminate in June 2003. The Company is currently
negotiating a lease for a new building in Bellevue to house the Company's
benefits administration processing operations. Such lease is expected to
commence in early 1999.
The Company believes that its existing facilities are adequate for its
current needs and that additional facilities can be leased to meet future needs.
36
<PAGE>
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 1, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Thomas H. Sinton...................................... 50 Chairman of the Board, President, Chief
Executive Officer, Director
Jeffrey M. Bizzack.................................... 38 Senior Vice President, Sales
Leslie A. Johnson..................................... 49 Senior Vice President, Client Services and Chief
Service Officer
Steven E. Klei........................................ 38 Senior Vice President, Finance, Chief Financial
Officer and Secretary
Robert E. Schneider................................... 40 Senior Vice President, Product Development and
Chief Technical Officer
William T. Clifford(1)................................ 52 Director
David C. Hodgson(2)................................... 41 Director
Ronald W. Readmond(1)(2).............................. 55 Director
Thomas P. Roddy(1).................................... 63 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation 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.
MS. JOHNSON has served as Senior Vice President, Client Services and Chief
Service Officer 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.
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. 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, Product Development and
Chief Technical Officer of the Company since August 1997 and served as Vice
President, Research and Development and Chief
37
<PAGE>
Technical Officer 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, Atlantic Data Services, Inc.,
a publicly-traded information technology consulting 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 June 1998, Mr. Readmond has been President and Chief Operating Officer of
Wit Capital Group Incorporated and 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 since January, 1997. 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, GAP LLC and Thomas H. Sinton
and his affiliates, in connection with the sale of Preferred Stock by the
Company to GAP LLC. Under such agreement, GAP LLC and Mr. Sinton and his
affiliates agreed to vote their shares to elect one director to the Board of
Directors designated by GAP LLC until the third annual meeting of stockholders
after the Company's initial public 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. The Board of Directors is divided into three classes. One class
of directors is elected annually and its members 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 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 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 makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for employees
38
<PAGE>
and consultants of the Company. The Compensation Committee also administers the
Company's 1996 Stock Option Plan and 1997 Employee Stock Purchase Plan. 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 22,500, 22,500, 93,750, and 22,500 shares,
respectively, of the Company's Common Stock, at exercise prices ranging from
$0.16 to $6.00 per share.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to (i) the Chief
Executive Officer and (ii) the Company's four other most highly compensated
executive officers (collectively with the Chief Executive Officer, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the fiscal years ended June 30, 1997 and June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(1)
-------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Thomas H. Sinton ................................................. 1998 $ 181,250 $ 120,000 52,500
President and Chief Executive Officer 1997 150,000 -- --
Jeffrey M. Bizzack ............................................... 1998 150,000 115,000 30,000
Senior Vice President, Sales 1997 131,250 82,000 --
Leslie A. Johnson ................................................ 1998 150,000 90,000 30,000
Senior Vice President, Client Services and Chief Service Officer 1997 131,250 30,000 19,500
Robert E. Schneider .............................................. 1998 150,000 75,000 15,000
Senior Vice President, Product Development and Chief Technical 1997 82,980 25,000 --
Officer
Steven E. Klei ................................................... 1998 150,000 50,000 30,000
Senior Vice President, Finance and Chief Financial Officer 1997 127,100 30,000 --
</TABLE>
39
<PAGE>
The following table sets forth information regarding stock options granted
during the fiscal year ended June 30, 1998 to each of the Named Executive
Officers.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
---------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL EXERCISE PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO PRICE PER OPTION TERM ($)(4)
OPTIONS EMPLOYEES IN FISCAL SHARE ----------------------
NAME GRANTED(#)(1) 1998 (%)(2) ($)(3) EXPIRATION DATE 5% 10%
- -------------------------- ------------- ------------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton.......... 52,500 5.78 13.08 11/17/2007 1,902,075 3,321,675
Jeffrey M. Bizzack........ 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
Leslie A. Johnson......... 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
Robert E. Schneider....... 15,000 1.65 5.83 8/12/2007 641,400 1,025,550
Steven E. Klei............ 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
</TABLE>
- ------------------------
(1) 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 follows: 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 907,875 options granted to all employees, consultants
and directors during fiscal 1998.
(3) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
(4) The potential realizable value at 5% and 10% appreciation is calculated by
assuming that the last reported sales price of $31.17 per share on June 30,
1998 appreciates at the indicated rate for the remaining portion of the term
of the option and that the option is exercised at the exercise price and
sold on the last day of its term at the appreciated price. Stock price
appreciation of 5% and 10% is assumed pursuant to rules promulgated by the
Securities and Exchange Commission and does not represent the Company's
prediction of its stock price performance.
40
<PAGE>
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended June 30, 1998 and the number and value of securities underlying
unexercised options held by the Named Executive Officers at June 30, 1998.
FISCAL YEAR AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE- MONEY OPTIONS AT
END(#) FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton................ -- -- -- 52,500 -- 949,377
Jeffrey M. Bizzack.............. -- -- -- 30,000 -- 760,001
Leslie A. Johnson............... -- -- 8,531 40,969 238,868 1,067,133
Robert E. Schneider............. -- -- -- 15,000 -- 380,001
Steven E. Klei.................. -- -- 18,250 46,250 563,986 1,262,181
</TABLE>
- ------------------------
(1) The amount set forth represents the difference between the closing Common
Stock share price of $31.17 on June 30, 1998, as reported by the Nasdaq
National Market, and the applicable exercise price, multiplied by the
applicable number of options.
STOCK PLANS
1989 STOCK OPTION PLAN. The Company's 1989 Stock Option Plan (the "1989
Plan") provided 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. In February 1997, the
Board of Directors of the Company increased the shares available for future
grants under the 1989 Plan by 2,063,649 for a total of 4,480,872. Options
granted under the 1989 Plan before the effective date of the amendment and
restatement to the 1996 Plan in September, 1997, described below, remain
outstanding in accordance with their terms, but no further options were granted
under the 1989 Plan after the effective date of the amendment and restatement to
the 1996 Plan.
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 September 19, 1997, 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) 375,000 shares, (b) two percent
(2%) of the number of outstanding shares of Common Stock on such date or (c) a
lesser amount determined by the Board. 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. As of June 30, 1998, the Company had granted an
aggregate of 4,894,788 shares of Common Stock under the 1996 Plan and the 1989
Plan. As of June 30, 1998, options to purchase an aggregate of 1,800,416 shares
of Common Stock were outstanding under the 1996 Plan and the 1989 Plan and
1,277,510 shares remained available for future grants under the 1996 Plan.
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,
41
<PAGE>
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 187,500
shares, and over the remaining term of the 1996 Plan such participant may not be
granted options to purchase more than 375,000 additional shares. Payments by
option holders 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.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
November 1996 and amended in August 1997 and September 1997. The Company has
reserved a total of 750,000 shares of Common Stock for issuance under the
Purchase Plan, of which 170,114 have been issued, 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) 225,000 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 initial offering period under the
Purchase Plan is approximately 26 months and commenced on September 19, 1997 and
will end on the last trading day on or before November 15, 1999. A second
offering period commenced on May 18, 1998 and will end on the last trading day
on or before May 15, 2000. Subsequent offering periods will last 24 months and
will commence on the first trading day on or after November 16 and May 16 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 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
42
<PAGE>
statutorily prescribed annual limit of $10,000 in 1998). 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 has entered 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 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.
43
<PAGE>
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 interest rates of 10.0% per year. 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, 1998, 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, 1998, Mr. Bizzack had not paid any amount on
the note.
It is anticipated that Lafayette Investments, Inc., an affiliate of the
Company, will be an Underwriter in the Offering and will receive a portion of
the underwriting discount. Thomas P. Roddy, a Director of the Company, is
President and Chief Executive Officer of Lafayette Investments, Inc. See
"Underwriting."
Thomas H. Sinton and certain affiliates of GAP LLC are the sole stockholders
of InterPro Expense Systems, Inc., a Delaware corporation ("InterPro"), which in
April 1998 purchased rights to certain early-stage travel and entertainment
expense processing software. Mr. Sinton is the President, Chief Executive
Officer and Chairman of the Board of the Company. David C. Hodgson, a Director
of the Company, is a managing member of GAP LLC, affiliates of which hold more
than 5% of the Company's outstanding stock. Because Mr. Sinton and Mr. Hodgson
are officers and Directors of the Company, their investment in InterPro was
required to be, and was, approved by the disinterested directors of the Company.
Any future transaction or relationship between the Company and InterPro would be
entered into on an arms-length basis and would be approved by the Company's
disinterested directors.
Information with respect to compensation to directors and executive officers
is set forth under "Management -- Director Compensation" and "-- Executive
Compensation."
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of June 30, 1998, concerning (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).............................................................. 4,190,246 24.5% 21.4%
General Atlantic Partners, LLC(3)................................................ 2,174,199 12.7 11.1
Jeffrey M. Bizzack(4)............................................................ 180,061 1.1 *
Leslie A. Johnson(5)............................................................. 134,361 * *
Steven E. Klei(6)................................................................ 84,173 * *
Robert E. Schneider(7)........................................................... 118,081 * *
William T. Clifford(8)........................................................... 5,625 * *
David C. Hodgson(3).............................................................. 2,179,824 12.7 11.1
Ronald W. Readmond(9)............................................................ 17,881 * *
Thomas P. Roddy(10).............................................................. 314,731 1.8 1.6
All executive officers and directors as a group (9 persons)(11).................. 7,224,983 42.0 36.7
</TABLE>
- ------------------------
* Represents beneficial ownership of less than one percent.
(1) Based on 17,114,855 shares of Common Stock outstanding prior to the Offering
and 19,589,855 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 June 30, 1998 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 June 30, 1998.
(2) Includes 14,219 shares issuable upon exercise of vested options and 46,875
shares subject to the Company's repurchase rights. Also includes shares held
by the Silas D. Trust Estate, the Silas Jack Sinton Family Trust, the Thomas
H. Sinton & Jane Nibley Sinton 1989 Irrevocable Trust and Jane N. Sinton as
a custodian for minor children.
(3) Includes 1,851,009 shares held by General Atlantic Partners 39, L.P. ("GAP
39") and 323,190 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, William E. Ford, Peter L. Bloom
and Franchon M. Smithson. 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. Also includes with respect to Mr. Hodgson 5,625 shares issuable
upon exercise of vested options held personally by Mr. Hodgson. 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.
45
<PAGE>
(4) Includes 7,500 shares issuable upon exercise of vested options and 17,031
shares subject to the Company's repurchase rights.
(5) Includes 16,844 shares issuable upon exercise of vested options and 6,249
shares subject to the Company's repurchase rights. Also includes 15,894
shares held by Weir L. Johnson, of which 6,843 shares are issuable upon
exercise of vested options and 3,281 shares are subject to the Company's
repurchase rights.
(6) Includes 28,250 shares issuable upon exercise of vested options and 16,406
shares subject to the Company's repurchase rights.
(7) Includes 3,750 shares issuable upon exercise of vested options and 65,625
shares subject to the Company's repurchase rights.
(8) Represents 5,625 shares issuable upon exercise of vested options held by Mr.
Clifford.
(9) Includes 8,437 shares issuable upon exercise of vested options held by Mr.
Readmond.
(10) Includes (i) 39,345 shares held by the Lafayette Investments Inc. of which
Mr. Roddy is President and Chief Executive Officer, (ii) 27,600 shares held
by the Lafayette Investments Inc. 401(k) Plan and Trust, (iii) 51,207 shares
held by Delaware Charter Guarantee FBO Thomas P. Roddy R-IRA, (iv) 24,000
shares held by Guarantee and Trust Co. TTEE FBO Thomas P. Roddy IRA and (v)
13,302 by Mary W. Roddy.
(11) Includes 97,093 shares issuable upon exercise of vested options and 155,467
shares subject to the Company's repurchase rights.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists 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"). The
following summary is qualified in its entirety by reference of the Company's
Certificate of Incorporation, which is filed as an exhibit to the Registration
of which this Prospectus is a part.
COMMON STOCK
As of June 30, 1998, there were 17,114,855 shares of Common Stock
outstanding held of record by 376 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 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, the Company issued Coast Business
Credit ("Coast") a warrant to purchase 28,500 shares of the Company's Common
Stock at an exercise price of $2.65 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 28,500 shares of the Company's Common Stock
at an exercise price of $2.65 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 67,500 shares of Common Stock at an exercise price of
$2.65 per share, exercisable through September 24, 2002. In connection with its
acquisition of BeneSphere, the Company issued warrants to purchase an aggregate
of 75,000 shares of Common Stock to two former shareholders of BeneSphere at an
exercise price of $6.00 per share, exercisable at any time through January 7,
2002. On July 1, 1997, the Company issued a warrant to purchase an aggregate of
30,000 shares of Common Stock at a purchase price of $6.00 per share exercisable
through July 1, 2002.
47
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders (or their permitted transferees) of approximately 9,571,976
shares of Common Stock and 124,500 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. The
Holders have waived their registration right with respect 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, GAP
LLC may request the Company to file a registration statement under the
Securities Act with respect to 1,724,199 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 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 Officer, the President
of the Company, the Board of Directors or the holders of shares entitled to cast
not less than 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
48
<PAGE>
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 Bank Minnesota, National Association is the transfer agent and
registrar for the Company's Common Stock.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
following this Offering, or the perception that such sales could occur, could
adversely affect the market price for the Common Stock. Furthermore, sales of
substantial amounts of Common Stock in the public market after various resale
restrictions lapse could adversely affect the prevailing market price and the
ability of the Company to raise equity capital in the future.
Upon completion of this Offering, the Company will have outstanding an
aggregate of 19,589,855 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1998. Of these shares, all of the shares sold in this
Offering and the 4,312,500 shares sold in the Company's initial public offering
will be freely tradeable without restriction or further registration under the
Securities Act. There are currently outstanding 2,539,100 shares of Common Stock
issued pursuant to exercise of options granted under equity incentive plans of
the Company, all of which shares are freely tradeable pursuant to Rule 701 of
the Securities Act or registration on a previously filed Form S-8. The remaining
10,263,255 shares of Common Stock were issued and sold by the Company in private
transactions exempt from registration requirements of the Securities Act and
will be available for immediate sale in the public market in accordance with
Rule 144, in some cases subject to transfer restrictions in lock-up agreements
with William Blair & Company, L.L.C. described below and the volume and other
resale limitations of Rule 144, other than the one year holding period. In
addition, as of June 30, 1998, there were outstanding options to purchase
1,800,416 shares of Common Stock and warrants to purchase 229,500 shares of
Common Stock.
The Company and its directors, executive officers and certain stockholders
(together, holding an aggregate of 7,127,890 shares of the Company's Common
Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into shares of Common
Stock or register for sale under the Securities Act any shares of Common Stock
for a period of 90 days after the date of this Prospectus without the prior
written consent of William Blair & Company, L.L.C., other than the Company's
sale of shares in this Offering, the issuance of Common Stock upon the exercise
of outstanding options, and the Company's issuance of options and shares under
existing stock option and stock purchase plans.
The holders of approximately 9,571,976 shares of Common Stock and 124,500
shares of Common Stock issuable upon exercise of warrants are parties to
registration rights agreements with the Company that provide "piggyback"
registration rights that allow such holders, under certain circumstances, to
include shares of Common Stock in registration statements initiated by the
Company or other stockholders. Such registration rights agreements also permit
demand registrations on Form S-3 registration statements, provided the Company
is eligible to register securities on such form. The number of shares sold in
the public market could increase if any holders exercise such rights. See
"Description of Capital Stock -- Registration Rights."
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, for at least one year but less than two years, securities subject to Rule
144, is 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 195,898 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 the shares proposed to be sold for at least two years (including the
holding period of any prior owner except an affiliate) is entitled to sell such
shares pursuant to Rule 144(k) without complying with the requirements relating
to manner of sale,
50
<PAGE>
notice and information availability described above. In general, under Rule 701
of 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 Company's initial public offering (which was completed September 19,
1997) in reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
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.
51
<PAGE>
UNDERWRITING
The several Underwriters named below (the "Underwriters"), for which William
Blair & Company, L.L.C., BancBoston Robertson Stephens Inc. and SG Cowen
Securities Corporation are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement by and among the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to each of the Underwriters, the respective number of shares of
Common Stock set forth opposite each Underwriter's name in the table below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
William Blair & Company, L.L.C...................................................
BancBoston Robertson Stephens Inc................................................
SG Cowen Securities Corporation..................................................
----------
Total...................................................................... 2,475,000
----------
----------
</TABLE>
The nature of the Underwriters' obligations under the Underwriting Agreement
is such that all shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, must be purchased if
any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to select dealers at such
price less a concession of not more than $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the public offering contemplated hereby,
the public offering price and other selling terms may be changed by the
Representatives.
The Company has granted to the Underwriters an option exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 371,250
shares of Common Stock to cover over-allotments, at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any such additional shares pursuant to this option, each
of the Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the shares
of Common Stock offered hereby.
The Company, its directors and executive officers and certain stockholders
of the Company have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into shares
of Common Stock or register for sale under the Securities Act any shares of
Common Stock for a period of 90 days after the date of this Prospectus without
the prior written consent of William Blair & Company, L.L.C., other than the
Company's sale of shares in this Offering, the issuance of Common Stock upon the
exercise of outstanding options, and the Company's issuance of options and
shares under existing stock option and stock purchase plans. See "Shares
Eligible for Future Sale."
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
certain persons participating in the Offering may engage in transactions that
may stabilize, maintain or otherwise affect the market price of the
52
<PAGE>
Common Stock, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids. 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 managing underwriter
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 Underwriters 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.
One or more of the Underwriters currently act as market makers for the
Common Stock and may engage in "passive market making" in such securities on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions,
underwriters participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market making
transactions during the period when Rule 103 would otherwise prohibit such
activity. Rule 103 prohibits underwriters engaged in passive market making
generally from entering a bid or effecting a purchase price that exceeds the
highest bid for those securities displayed on the Nasdaq National Market by a
market maker that is not participating in the distribution. Under Rule 103, each
underwriter engaged in passive market making is subject to a daily net purchase
limitation equal to the greater of (i) 30% of such entity's average daily
trading volume during the two full calendar months immediately preceding, or any
60 consecutive calendar days ending within the ten calendar days preceding, the
date of the filing of the registration statement under the Securities Act
pertaining to the security to be distributed or (ii) 200 shares of common stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
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, 1998, certain
members of Wilson Sonsini Goodrich & Rosati, P.C. beneficially owned an
aggregate of 27,603 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 ProBusiness Services, Inc. as of June 30, 1997
and 1998 and for each of the three years in the period ended June 30, 1998
appearing in this Prospectus and elsewhere in the Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 and exhibits and schedules
thereto under the Securities Act, with respect to the 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
53
<PAGE>
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 the Commission upon the payment of
the fees prescribed by the Commission.
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the Company
can be inspected and copied (at prescribed rates) at the locations listed above.
Quotations relating to the Company's Common Stock appear on the Nasdaq National
Market and such reports, proxy statements and other information concerning the
Company also can be inspected at the offices of the Nasdaq Stock Market, 1753 K
Street, N.W., Washington, D.C. 20006. 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.
54
<PAGE>
PROBUSINESS SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors............................................................................. F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity (Deficit)............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ProBusiness Services, Inc.
We have audited the accompanying balance sheets of ProBusiness Services, Inc. as
of June 30, 1997 and 1998 and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProBusiness Services, Inc. at
June 30, 1997 and 1998 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
July 23, 1998
F-2
<PAGE>
PROBUSINESS SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 5,047 $ 13,771
Accounts receivable, net of allowance of $365,000 at June 30, 1997 and $420,000 at June
30, 1998.............................................................................. 2,476 2,612
Prepaid expenses and other current assets............................................... 643 2,122
---------- ----------
8,166 18,505
Payroll tax funds invested................................................................ 177,626 332,667
---------- ----------
Total current assets...................................................................... 185,792 351,172
Equipment, furniture and fixtures, net.................................................... 7,623 13,958
Other assets.............................................................................. 7,020 10,879
---------- ----------
Total assets.............................................................................. $ 200,435 $ 376,009
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 1,089 $ 1,750
Accrued liabilities..................................................................... 4,984 10,403
Deferred revenue........................................................................ 1,279 2,139
Current portion of capital lease obligations............................................ 773 890
---------- ----------
8,125 15,182
Payroll tax funds collected but unremitted................................................ 177,626 332,667
---------- ----------
Total current liabilities................................................................. 185,751 347,849
Note payable to stockholder............................................................... 250 --
Long-term debt............................................................................ 8,667 --
Capital lease obligations, less current portion........................................... 1,898 1,414
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; authorized: 5,000,000 shares; issued and outstanding:
3,228,034 shares at June 30, 1997..................................................... 3 --
Common stock, $.001 par value; authorized: 60,000,000 shares; issued and outstanding:
2,295,416 shares at June 30, 1997 and 17,114,855 shares at June 30, 1998.............. 2 17
Additional paid-in capital.............................................................. 23,904 53,286
Accumulated deficit..................................................................... (18,952) (25,469)
Notes receivable from stockholders...................................................... (1,088) (1,088)
---------- ----------
Total stockholders' equity................................................................ 3,869 26,746
---------- ----------
Total liabilities and stockholders' equity................................................ $ 200,435 $ 376,009
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
PROBUSINESS SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................................... $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services..................................................... 6,435 13,659 23,859
General and administrative expenses............................................ 2,054 4,282 6,727
Research and development expenses.............................................. 1,257 2,841 4,585
Client acquisition costs....................................................... 5,388 11,706 17,858
Acquisition of in-process technology........................................... 711 -- --
--------- --------- ---------
Total operating expenses......................................................... 15,845 32,488 53,029
--------- --------- ---------
Loss from operations............................................................. (1,982) (5,114) (6,712)
Interest expense................................................................. (473) (1,190) (557)
Other income..................................................................... 69 59 752
--------- --------- ---------
Net loss......................................................................... $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Historical basic and diluted net loss per share (NOTE 1)......................... $ (4.91)
---------
---------
Shares used in computing historical basic and diluted net loss per share (NOTE
1).............................................................................. 486
Pro forma basic and diluted net loss per share (NOTE 1).......................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net loss per share (NOTE
1).............................................................................. 10,533 15,722
</TABLE>
See accompanying notes.
F-4
<PAGE>
PROBUSINESS SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------- -------------------------------------
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995........ 2,613,301 $ 2 $ 11,682 20,142 $ -- $ 3 $ (10,321)
Issuance of Series E preferred
stock at $7.94 per share, net
of issuance costs.............. 40,000 -- 317 -- -- -- --
Exercise of stock options....... -- -- -- 1,802,334 2 365 --
Issuance of preferred stock
warrants....................... -- -- 200 -- -- -- --
Net loss........................ -- -- -- -- -- -- (2,386)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1996........ 2,653,301 2 12,199 1,822,476 2 368 (12,707)
Issuance of Series F preferred
stock at $17.40 per share, net
of issuance costs.............. 574,733 1 9,850 -- -- -- --
Exercise of stock options....... -- -- -- 472,940 - 1,166 --
Issuance of preferred stock
warrants....................... -- -- 321 -- -- -- --
Net loss........................ -- -- -- -- -- -- (6,245)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1997........ 3,228,034 3 22,370 2,295,416 2 1,534 (18,952)
Issuance of common stock in
connection with initial public
offering, net of offering
costs.......................... -- -- -- 4,312,500 4 27,005 --
Conversion of preferred stock
into common stock.............. (3,288,034) (3) (22,370) 9,684,102 10 22,363 --
Exercise of warrants............ -- -- -- 415,725 1 958 --
Exercise of stock options....... -- -- -- 236,998 -- 317 --
Issuance of stock under employee
stock purchase plan............ -- -- -- 170,114 -- 1,060 --
Issuance of warrants............ -- -- -- -- -- 49 --
Net loss........................ -- -- -- -- -- -- (6,517)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1998........ -- $ -- $ -- 17,114,855 $ 17 $ 53,286 $ (25,469)
----------- --- ----------- ----------- ----- ----------- -------------
----------- --- ----------- ----------- ----- ----------- -------------
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCKHOLDERS'
FROM EQUITY
STOCKHOLDERS (DEFICIT)
------------- -------------
<S> <C> <C>
Balance at June 30, 1995........ $ -- $ 1,366
Issuance of Series E preferred
stock at $7.94 per share, net
of issuance costs.............. -- 317
Exercise of stock options....... -- 367
Issuance of preferred stock
warrants....................... -- 200
Net loss........................ -- (2,386)
------------- -------------
Balance at June 30, 1996........ -- (136)
Issuance of Series F preferred
stock at $17.40 per share, net
of issuance costs.............. -- 9,851
Exercise of stock options....... (1,088) 78
Issuance of preferred stock
warrants....................... -- 321
Net loss........................ -- (6,245)
------------- -------------
Balance at June 30, 1997........ (1,088) 3,869
Issuance of common stock in
connection with initial public
offering, net of offering
costs.......................... -- 27,009
Conversion of preferred stock
into common stock.............. -- --
Exercise of warrants............ -- 959
Exercise of stock options....... -- 317
Issuance of stock under employee
stock purchase plan............ -- 1,060
Issuance of warrants............ -- 49
Net loss........................ -- (6,517)
------------- -------------
Balance at June 30, 1998........ $ (1,088) $ 26,746
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PROBUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,386) $ (6,245) $ (6,517)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 1,146 2,574 4,285
Acquisition of in-process technology............................................ 711 -- --
Change in operating assets and liabilities:
Accounts receivable, net...................................................... (521) (1,002) (136)
Prepaid expenses and other current assets..................................... (214) (254) (1,479)
Other assets.................................................................. 201 (1,782) 1,577
Accounts payable.............................................................. 360 438 661
Accrued liabilities........................................................... 650 1,990 4,338
Deferred revenue.............................................................. (149) 174 860
--------- --------- ---------
Net cash provided by (used in) operating activities......................... (202) (4,107) 3,589
INVESTING ACTIVITIES
Acquisition of BeneSphere Administrators, Inc., net of cash acquired.............. -- (245) --
Additional consideration paid in connection with the acquisition of BeneSphere
Administrators, Inc.............................................................. -- -- (1,127)
Purchase of equipment, furniture and fixtures..................................... (2,682) (2,775) (9,353)
Capitalization of software development costs...................................... (645) (1,409) (3,858)
Notes receivable from stockholders................................................ -- (295) --
--------- --------- ---------
Net cash used in investing activities....................................... (3,327) (4,724) (14,338)
FINANCING ACTIVITIES
Borrowings under bank line-of-credit agreements................................... 5,934 24,727 6,874
Repayments of borrowings under line-of-credit agreements.......................... (3,478) (23,831) (11,632)
Repayments under long-term debt................................................... -- -- (3,909)
Proceeds from note payable........................................................ 4,000 -- --
Repayments under note payable..................................................... -- (534) --
Proceeds from notes payable to stockholders....................................... 250 275 --
Repayments under notes payable to stockholders.................................... (227) (275) (250)
Principal payments on capital lease obligations................................... (128) (454) (955)
Proceeds from issuance of preferred stock......................................... -- 9,851 --
Proceeds from issuance of common stock............................................ 367 78 29,345
--------- --------- ---------
Net cash provided by financing activities......................................... 6,718 9,837 19,473
--------- --------- ---------
Net increase in cash and cash equivalents......................................... 3,189 1,006 8,724
Cash and cash equivalents, at beginning of year................................... 852 4,041 5,047
--------- --------- ---------
Cash and cash equivalents, at end of year......................................... $ 4,041 $ 5,047 $ 13,771
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-6
<PAGE>
PROBUSINESS SERVICES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.......................................... $ 377 $ 1,507 $ 552
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment, furniture and fixtures under capital leases................ $ 210 $ 2,644 $ 588
--------- --------- ---------
--------- --------- ---------
Issuance of warrants.............................................................. $ 200 $ 161 $ 49
--------- --------- ---------
--------- --------- ---------
Notes receivable from stockholders issued in connection with stock option
exercises........................................................................ $ -- $ 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 $ --
Liabilities assumed............................................................. -- 2,445 --
Note payable to BeneSphere Administrators, Inc.................................. -- 250 --
--------- --------- ---------
$ -- $ 2,855 $ --
--------- --------- ---------
--------- --------- ---------
BeneSphere contingent consideration............................................... $ -- $ -- $ 2,208
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
ProBusiness Services, Inc. (the "Company") 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") for approximately
$1,300,000. The transaction was recorded under the purchase method of
accounting, and the results of operations of Dimension Solutions have been
included in the financial statements of the Company beginning May 24, 1996.
On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. ("BeneSphere"), a Washington corporation. The
transaction was recorded under the purchase method of accounting, and the
results of operations of BeneSphere have been included in the financial
statements of the Company beginning January 2, 1997 (Note 10).
PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES
In connection with its payroll tax filing services, the Company collects
funds from clients for payment of payroll taxes, holds such funds in financial
institution until payment is due (such funds being segregated from the Company's
other accounts), remits such funds to the appropriate taxing authorities, and
files related federal, state and local tax returns, coupons, or other required
payroll tax data ("payroll tax filings"). For such services, the Company derives
its payroll tax filing service revenue from fees charged and from interest
income it receives on payroll tax funds temporarily held pending remittance on
behalf of its clients to taxing authorities ("collected but unremitted payroll
tax funds"). These collected but unremitted payroll tax funds and the related
liability to clients for such funds are included in the accompanying 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 payroll tax funds in various financial
instruments which consisted of overnight U.S. government, agency and mortgage
backed repurchase agreements ($40,965,000), money market funds ($134,520,000)
and cash and cash equivalents ($2,141,000) at June 30, 1997, and of overnight
U.S. government, agency and mortgage backed repurchase agreements
($279,801,000), money market funds ($50,076,000) and cash and cash equivalents
($2,790,000) at June 30, 1998. As a result of the types of financial instruments
in which the Company invests, the carrying amount of such investments
approximates fair value. The Company's collected but unremitted payroll tax fund
investments are held primarily with one custodial financial institution.
Interest income earned on collected but unremitted payroll tax funds, which is
classified as revenue, amounted to approximately $1,896,000, $5,925,000, and
$11,521,000 for fiscal 1996, 1997 and 1998, respectively.
The Company's payroll tax filing service is subject to various risks
resulting from errors and omissions in the payment of payroll taxes and related
payroll tax filings. The Company processes data received from client's and
remits funds along with any required payroll tax filings 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 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
F-8
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will not have a material adverse effect on the Company's business, financial
condition or results of operations. At June 30, 1997 and 1998, the Company had
accrued approximately $586,000 and $971,000, respectively, for potential tax
penalties. There can be no assurance that the Company's accruals or insurance
for such penalties will be adequate. In addition, failure by the Company to make
timely or accurate payroll tax payments or filings when due 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
could 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 the investment of
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 of taxes owed to government authorities could 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 accruals 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.
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.
INTEREST RATE SWAP AGREEMENTS
During fiscal 1998, the Company entered into various interest rate swap
agreements with a financial institution. The purpose of these agreements is to
convert a portion of the interest the Company earns
F-9
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from collected but unremitted payroll tax funds from a floating to a fixed rate
basis. The Company considers these agreements to be for "other than trading
purposes" and has accounted for these agreements on an accrual basis, with each
net payment or receipt due or owed under each agreement recognized in earnings
during the period to which the payment or receipt relates, with no recognition
on the balance sheet of the fair value of the agreements. At June 30, 1998, the
aggregate fair value of these agreements was $432,000.
These agreements, with fixed interest rates between 5.736% and 5.905%, each
have a term of two years, one of which has a cancellation option after one year,
and expire at various dates through April 2000. Interest is paid or received
based upon the difference in the fixed interest rate and the contractual
floating rate option times the contractual notional balance. The actual notional
balance varies on a monthly basis due to fluctuations in projected holdings of
collected but unremitted payroll tax funds. At June 30, 1998, the notional
balance was $204,700,000 and the average monthly notional balance for the
remaining term of the agreements was $242,000,000. The agreements require
collateral if interest rates increase and certain other conditions are met as
defined in the agreements. At June 30, 1998, no collateral was required.
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 estimates include, but are not
limited to, 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.
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 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.
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 United States. Credit
evaluations are performed as necessary and the Company does not require
collateral from customers.
F-10
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as
described in FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
(Note 7).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 130, "Reporting Comprehensive Income" ("FAS 130"), and FAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal 1999. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. The Company has not reached a conclusion as to the appropriate
segments, if any, it will be required to report to comply with the provisions of
FAS 131. Adoption of these statements is not expected to have a significant
impact on the Company's financial position, results of operations or cash flows.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company is required to
adopt FAS 133 in fiscal 2000. FAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company has not yet
determined what the effect of FAS 133 will be on the operations and financial
position of the Company.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
BASIC AND DILUTED NET LOSS PER SHARE (HISTORICAL AND PRO FORMA)
Historical net loss per share is presented under the requirements of FAS No.
128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
F-11
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
excludes any dilutive effects of options, warrants, convertible securities and
shares subject to repurchase. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Common stock equivalent
shares from convertible preferred stock and from stock options and warrants are
not included in the calculation of diluted net loss per share as the effect is
anti-dilutive. All net loss per share amounts for all periods have been
presented to conform to the FAS 128 requirements.
In February 1998, Staff Accounting Bulletin No. 98 ("SAB 98") was issued and
amends the existing Securities and Exchange Commission ("SEC") staff guidance
primarily to give effect to FAS 128. Under SAB 98, certain shares of convertible
preferred stock, options and warrants to purchase shares of common stock, issued
at prices below the per share price of shares sold in the Company's initial
public offering in September 1997 and previously included in the computations of
shares used in computing net loss per share pursuant to previous staff
accounting bulletins have now been excluded from the computation.
Pro forma net loss per share has been computed as described above and also
gives effect, under SEC guidance, to the conversion of preferred stock to common
stock not included above that automatically converted upon completion of the
Company's initial public offering, using the if-converted method.
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share follows (in thousands except share
and per share information):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Historical:
Net loss........................................................................ $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Weighted average shares of common stock outstanding used in computing basic and
diluted net loss per share.................................................... 486 1,999 13,596
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share............................................ $ (4.91) $ (3.12) $ (0.48)
--------- --------- ---------
--------- --------- ---------
Pro forma:
Net loss........................................................................ $ (6,245) $ (6,517)
--------- ---------
--------- ---------
Shares used in computing basic and diluted net loss per share (from above)...... 1,999 13,596
Pro forma adjustment to reflect the effect of the conversion of preferred stock
from the date of issuance..................................................... 8,534 2,126
--------- ---------
Weighted average shares used in computing pro forma basic and diluted net loss
per share..................................................................... 10,533 15,722
--------- ---------
--------- ---------
Pro forma basic and diluted net loss per share.................................. $ (0.59) $ (0.41)
--------- ---------
--------- ---------
</TABLE>
If the Company had reported net income, the calculation of diluted earnings
per share (historical and pro forma) would have included the shares used in the
computation of historical and pro forma net loss per share as well as an
additional 356,000, 466,000 and 797,000 common equivalent shares related to the
outstanding options and warrants not included above (determined using the
treasury stock method) for fiscal 1996, 1997 and 1998, respectively.
F-12
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Equipment and leasehold improvements.................................. $ 9,981 $ 18,172
Furniture and fixtures................................................ 1,973 3,239
---------- ----------
11,954 21,411
Less accumulated depreciation and amortization........................ (4,331) (7,453)
---------- ----------
$ 7,623 $ 13,958
---------- ----------
---------- ----------
</TABLE>
Equipment, furniture and fixtures include amounts for assets acquired under
capital leases, principally production, office and computer equipment, of
$3,515,000 and $3,863,000 at June 30, 1997 and 1998, respectively. Accumulated
amortization of these assets was $854,000 and $1,712,000 at June 30, 1997 and
1998, respectively.
3. LONG-TERM DEBT
LINE-OF-CREDIT AGREEMENTS
On June 30, 1998, the Company executed an Amended and Restated Loan and
Security Agreement with a financial institution. The agreement provides for
borrowings that are limited to the lesser of $20,000,000, or the sum of five
times the Company's average monthly net collections, as defined in the
agreement, plus the lesser of five times the Company's average monthly
collections of the interest on tax investment funds as defined in the agreement
or $5,000,000, plus $1,500,000. The agreement superseded all previous
line-of-credit agreements and amendments thereto with the financial institution
that existed as of June 30, 1997.
At June 30, 1998, no borrowings were outstanding under the agreement and the
amount available for borrowing under the agreement was approximately
$20,000,000. Borrowings outstanding under the agreement bear interest at the
bank's prime rate plus 1% (9.5% at June 30, 1998) and are collateralized by
substantially all of the Company's assets not otherwise encumbered. The
financial covenants of the agreement require the Company to maintain minimum net
worth and earnings to debt service ratios. The agreement expires on December 31,
2000, and is subject to automatic and continuous renewal unless termination
notice is given by either party in accordance with the agreement. All borrowings
outstanding at June 30, 1997 totaling $4,758,000, under the previous agreements,
were paid in September 1997 with the proceeds from the Company's initial public
offering.
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. The
subordinated notes and interest accrued thereon were repaid in their entirety in
September 1997 with proceeds from the Company's initial public offering.
F-13
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
NOTE PAYABLE TO STOCKHOLDER
A $250,000 subordinated note payable to a stockholder was assumed in the
acquisition of Dimension Solutions. The note was repaid in fiscal 1998.
4. LEASE OBLIGATIONS
The Company leases its facilities and various equipment under non-cancelable
operating leases which expire at various dates through 2010. The Company is also
obligated under a number of capital equipment leases expiring at various dates
through 2003. The future minimum lease payments under capital and operating
leases subsequent to June 30, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Year ending June 30,
1999................................................................... $ 1,180 $ 3,476
2000................................................................... 1,029 4,067
2001................................................................... 297 4,434
2002................................................................... 158 4,402
2003................................................................... 158 4,186
Thereafter............................................................. -- 25,710
--------- -----------
Total minimum lease payments......................................... 2,822 $ 46,275
-----------
-----------
Less amounts representing interest....................................... 518
---------
Present value of net minimum capital lease obligations................... 2,304
Less current portion..................................................... 890
---------
$ 1,414
---------
---------
</TABLE>
Rent expense was approximately $707,000, $1,487,000 and $3,028,000 for
fiscal 1996, 1997 and 1998, respectively.
5. INCOME TAXES
As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $17,200,000 and $1,200,000, respectively. The
Company also had federal and state research and development tax credit
carryforwards of approximately $1,057,000 and $442,000, respectively. The
federal net operating loss and credit carryforwards will expire at various dates
beginning with the fiscal year ending 1999 through 2013, if not utilized. The
state net operating loss carryforwards will expire at various dates beginning
with the fiscal 1999 through 2003, if not utilized. The state credit
carryforwards do not expire.
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, as amended (the "Code"), and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
F-14
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 4,965 $ 5,951
Research and development credit carryforwards.......................... 650 1,499
Depreciation........................................................... 428 1,010
Accrued liabilities and allowances..................................... 330 2,147
--------- ---------
Gross deferred tax assets................................................ 6,373 10,607
Less valuation allowance................................................. (5,988) (9,224)
--------- ---------
Deferred tax assets...................................................... 385 1,383
Deferred tax liabilities:
Capitalized software development costs................................. (313) (1,338)
Other.................................................................. (72) (45)
--------- ---------
Gross deferred tax liabilities........................................... (385) (1,383)
--------- ---------
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 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. The net valuation allowance increased by $2,391,000 and
$3,236,000, respectively during fiscal 1997 and 1998.
6. STOCKHOLDERS' EQUITY
In September 1997, the Company completed its initial public offering of
common stock. The offering consisted of 3,750,000 shares of common stock issued
to the public at $7.33 per share. Upon the closing of the initial public
offering, all outstanding shares of preferred stock were converted into common
stock.
In October 1997, the underwriters exercised an option to purchase an
additional 562,500 shares of common stock at the initial public offering price
of $7.33 per share to cover over-allotments in connection with the initial
public offering.
F-15
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The following tables represents a summary of warrants outstanding as of June
30, 1998:
<TABLE>
<CAPTION>
NUMBER OF
EXERCISE PRICE SHARES JUNE
DATE ISSUED EXPIRATION PER SHARE 30, 1998
- ------------------ ------------------ --------------- -------------
<S> <C> <C> <C>
April 1996 April 2001 $ 2.65 28,500
October 1996 October 2001 2.65 28,500
November 1996 September 2002 2.65 67,500
January 1997 January 2002 6.00 75,000
July 1997 July 2002 6.00 30,000
-------------
229,500
-------------
-------------
</TABLE>
In connection with the Company's initial public offering, the Company issued
367,288 shares of common stock upon the exercise of warrants, a portion of which
were exercised pursuant to a net exercise provision, for total proceeds of
$923,000. In addition, during fiscal 1998, the Company issued 48,437 shares of
common stock upon exercise of warrants, a portion of which were exercised
pursuant to net exercise provisions, for a total of $36,000. All other warrants
noted as exercised above were exercised pursuant to net exercise provisions.
STOCK SPLIT
On July 23, 1998, the Board of Directors approved a three-for-two split of
its $.001 par value common stock in the form of a 50% distribution to
stockholders of record as of July 31, 1998. As a result of the stock split,
authorized and outstanding common shares increased 50% and capital in excess of
par was reduced by the par value of the additional common shares issued. The
rights of the holders of these securities were not otherwise modified. All
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of the Company's common stock have been
restated for the effect of the stock split.
7. STOCK OPTION AND STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company's 1989 Stock Option Plan (the "1989 Plan") provided for the
granting to employees (including officers and employee directors) of "incentive
stock options" within the meaning of the Code and for the granting to employees,
directors and consultants of nonstatutory stock options. In February 1997, the
Board of Directors of the Company increased the shares available for future
grants under the 1989 Plan by 2,063,649 for a total of 4,480,872. Options
granted under the 1989 Plan before the effective date of the amendment and
restatement to the 1996 Plan in September 1997, described below, remain
outstanding in accordance with their terms, but no further options were granted
under the 1989 Plan after the effective date of the amendment and restatement to
the 1996 Plan.
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
F-16
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
employees only. The Company has reserved 1,125,000 shares of common stock for
exercise of stock options under the Executive 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 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 and stockholders approved,
effective upon the initial public offering, an amendment and restatement of the
Executive Plan to rename the 1996 Executive Stock Option Plan to the 1996 Stock
Option Plan (the "1996 Plan") and authorized an increase in the number of shares
reserved for issuance under the 1996 Plan of any unused or canceled shares under
the 1989 Plan, and an annual increase equal to the lesser of (a) 375,000 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. Notes receivable for the purchase of common stock are included in
stockholders' equity (deficit).
A summary of the activity under the 1989 and 1996 Plans is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- ---------------
<S> <C> <C>
Outstanding at June 30, 1995.................................... 1,528,344 $ 0.17
Granted....................................................... 1,583,895 0.29
Exercised..................................................... (1,802,334) 0.22
Canceled...................................................... (345,703) 0.22
----------- ------
Outstanding at June 30, 1996.................................... 964,202 0.27
Granted....................................................... 994,005 4.83
Exercised..................................................... (472,940) 2.39
Canceled...................................................... (171,603) 2.51
----------- ------
Outstanding at June 30, 1997.................................... 1,313,664 2.67
Granted....................................................... 907,875 11.82
Exercised..................................................... (236,998) 1.34
Canceled...................................................... (184,125) 7.12
----------- ------
Outstanding at June 30, 1998.................................... 1,800,416 $ 6.97
----------- ------
----------- ------
</TABLE>
F-17
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
As of June 30, 1998, options to purchase 414,884 shares of common stock were
vested and exercisable at an average exercise price of $2.03 per share and
options to purchase 1,277,510 shares were available for future grant. As of June
30, 1998, options to purchase approximately 317,000 shares of common stock had
been exercised which are subject to repurchase.
The weighted-average fair value of options granted during fiscal 1996, 1997
and 1998 was $0.06, $1.01 and $6.98 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable options at June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- ----------------------------------- ---------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$0.13 - $0.26...................... 399,084 7.10 $ 0.26 231,235 $ 0.25
$0.83 - $4.83...................... 399,707 8.41 $ 4.02 141,932 $ 3.75
$5.83 - $6.00...................... 620,250 9.03 $ 5.91 40,967 $ 5.86
$12.08 - $31.17.................... 381,375 9.57 $ 18.84 750 $ 19.33
---------- --------- -----------
1,800,416 414,884
---------- ---------
---------- ---------
</TABLE>
STOCK-BASED COMPENSATION
As permitted under FAS 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 FAS 123, which also requires that the information be determined on
an "as adjusted" basis as if the Company had accounted for its stock-based
awards to employees granted subsequent to June 30, 1995, under the fair value
method of FAS 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
F-18
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life (in years)......................................... 3 2 2
Expected volatility.............................................. 0.001 0.001 0.746
Risk-free interest rate.......................................... 6.2% 6.2% 5.5%
Expected dividend yield.......................................... 0.0% 0.0% 0.0%
</TABLE>
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 1998
--------- --------- ---------
<S> <C> <C> <C>
Net loss, as reported......................................... $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Net loss, as adjusted......................................... $ (2,403) $ (6,355) $ (7,427)
--------- --------- ---------
--------- --------- ---------
Historical net loss per share, as reported.................... $ (4.91) $ (3.12) $ (0.48)
--------- --------- ---------
--------- --------- ---------
Historical net loss per share, as adjusted.................... $ (4.94) $ (3.18) $ (0.55)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per share, as reported..................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Pro forma net loss per share, as adjusted..................... $ (0.60) $ (0.47)
--------- ---------
--------- ---------
</TABLE>
Because FAS 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 1999.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1996 and amended in August 1997,
for which employees who work a minimum of 20 hours per week and for five months
in any calendar year are eligible. There were 750,000 shares of common stock
authorized 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) 225,000 shares, (b) 1.5% of the outstanding shares on such date or
(c) a lesser amount determined by the Board of Directors. As of June 30, 1998,
170,114 shares had been issued for the first purchase. Under the Purchase Plan,
the Company's employees, subject to certain restrictions, may purchase shares of
common stock at the lesser of 85% of the fair market value at either the
beginning of each two-year offering period or the end of each six-month purchase
period within the two-year offering period. Plan purchases are limited to 10% of
each employee's compensation.
F-19
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company maintains a tax deferred savings plan under section 401(k) of
the Code (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 1996, 1997 or 1998.
9. BALANCE SHEET DETAIL
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Capitalized software development costs................................... $ 1,716 $ 5,247
Deferred financing costs................................................. 1,043 --
Prepaid lease expense.................................................... 161 133
Notes receivable from employees.......................................... 376 422
Goodwill and other intangible assets..................................... 2,627 4,493
Deposits and other....................................................... 1,097 584
--------- ---------
$ 7,020 $ 10,879
--------- ---------
--------- ---------
</TABLE>
Accumulated amortization for capitalized software development costs was
approximately $475,000 and $802,000 at June 30, 1997 and 1998, respectively.
Accumulated amortization for goodwill and other intangible assets was
approximately $80,000 and $384,000 at June 30, 1997 and 1998, respectively.
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.
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued expenses......................................................... $ 2,773 $ 4,408
Accrued tax penalties.................................................... 586 971
Accrued payroll and related expenses..................................... 1,361 3,322
Accrued acquisition costs................................................ 144 --
Accrued BeneSphere contingent consideration (Note 10).................... -- 1,081
Other.................................................................... 120 621
--------- ---------
$ 4,984 $ 10,403
--------- ---------
--------- ---------
</TABLE>
10. BUSINESS ACQUISITIONS
In January 1997, the Company acquired all of the outstanding stock of
BeneSphere. 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
75,000 shares of the Company's common stock at a price of $6.00 per
F-20
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS ACQUISITIONS (CONTINUED)
share and with an estimated fair value of $160,000, the assumption of $2,445,000
of BeneSphere's liabilities (including acquisition costs) plus additional
contingent consideration based on BeneSphere's revenues in excess of certain
base amounts, as defined in the agreement, over the next two calendar years
following the acquisition which cannot exceed $4,500,000. The contingent
consideration is 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.
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
<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 is being amortized on a straight-line
basis over 20 years.
In January 1998, the Company accrued an additional $2,208,000 of contingent
consideration and recorded goodwill in the same amount related to the BeneSphere
acquisition as described above. As of June 30, 1998, the Company had made two
quarterly payments relating to the contingent consideration and had a remaining
outstanding balance of $1,081,000 which is classified as accrued liabilities.
11. SUBSEQUENT EVENTS
PUBLIC OFFERING
On July 23, 1998, the Board of Directors authorized the Company to proceed
with a public offering of the Company's common stock.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON 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 OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Safe Harbor for Forward-Looking Statements................................ 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Price Range of Common Stock............................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 27
Management................................................................ 37
Certain Transactions...................................................... 44
Principal Stockholders.................................................... 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Index to Financial Statements............................................. F-1
</TABLE>
2,475,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
, 1998
--------------
WILLIAM BLAIR & COMPANY
BANCBOSTON
ROBERTSON STEPHENS
SG COWEN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.................................................................. $ 32,450
NASD filing fee................................................................... 11,500
Printing expenses................................................................. 120,000
Legal fees and expenses........................................................... 200,000
Accounting fees and expenses...................................................... 200,000
Blue sky fees and expenses........................................................ 5,000
Transfer agent and registrar fees and expenses.................................... 5,000
Nasdaq National Market application and listing fees............................... 17,500
Miscellaneous..................................................................... 78,550
----------
Total......................................................................... $ 670,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Article Ninth of the Amended and Restated Certificate
of Incorporation of the Company filed herewith as Exhibit 3.1; Article VI of the
Bylaws of the Company, filed herewith as Exhibit 3.2; Section 145 of the
Delaware General Corporation Law; and the form of indemnification agreement
filed herewith as Exhibit 10.14 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 10 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 has obtained 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
The following information does not give effect to (i) the one-for-two
automatic conversion of the Company's Preferred Stock into the Company's Common
Stock in connection with the Company's initial public offering or (ii) the
three-for-two split of the Company's Common Stock effected in the form of a
stock dividend payable to holders of record as of July 31, 1998.
(a) In February 1998, the Company issued 8,106 shares of its Series E
Preferred Stock pursuant to the net exercise of a warrant by Silicon Valley Bank
at an exercise price of $7.94 per share.
(b) 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
II-1
<PAGE>
$1,100,000. 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 an additional 37 stockholders under a separate loan agreement
whereby the Company issued promissory notes to such stockholders with an
aggregate principal amount of $2,900,000. In September and October 1997, the
stockholders exercised the warrants, a portion of which were exercised pursuant
to net exercise provisions, to purchase 122,430 shares of Series E Preferred
Stock for aggregate cash proceeds of $923,000.
(c) 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.
(d) 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.
(e) 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. In November 1997, LINC
Capital Management purchased 8,040 shares of Series E Preferred Stock, a portion
of which was exercised under a net exercise provision, for aggregate cash
proceeds of $36,000.
(f) In October 1996, the Company issued a warrant to purchase 9,500 shares
of its Common Stock at an exercise price of 7.94 per share to Coast in
connection with an amendment to the line of credit.
(g) In November 1996, the Company issued a warrant to purchase 22,500 shares
of its Common 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.
(h) 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.
(i) In March 1997, the Company issued 574,733 shares of Series F Preferred
Stock to two affiliates of GAP LLC at $17.40 per share for an aggregate purchase
price of $10,000,354.
(j) In July 1997, the Company issued a warrant to purchase 20,000 shares of
its Common Stock to a client of the Company at an exercise price of $9.00 per
share.
(k) Since 1989 and through June 30, 1998, the Company has granted stock
options to purchase 4,894,788 shares of the Company's Common Stock at a weighted
average exercise price of $3.30 per share to employees, consultants and
directors pursuant to its 1996 Stock Option Plan, or predecessor plans. Of these
options, 555,272 have been canceled without being exercised, 2,539,100 have been
exercised and 1,800,416 remain outstanding. A certain number of shares reserved
for issuance under the 1996 Stock Option Plan and the 1989 Stock Option Plan
have been registered pursuant to a registration statement on Form S-8 filed on
October 3, 1997.
The sales and issuances of securities described in paragraphs (a) through
(j) were deemed to be exempt from registration under the Securities Act by
virtue of Section 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 (k) 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
Section 4(2) of the Securities Act as transaction by an issuer not involving a
public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
(3) 1.1 Form of Underwriting Agreement.
(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension
Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere
Administrators, Inc.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of the Registrant.
(1) 4.1 Specimen Common Stock Certificate of Registrant.
(1) 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.
(1) 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon Valley
Bank and related Antidilution and Registration Rights Agreements.
(1) 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast Business
Credit and related Antidilution and Registration Rights Agreement.
(1) 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast Business
Credit and related Antidilution and Registration Rights Agreement.
(1) 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and
LINC Capital Management.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain
purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and T.J. Bristow and Elizabeth S. Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and Laurence Shushan and Magdalena Shushan.
(1) 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Louis R.
Baransky.
(1) 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Ben W.
Reppond.
(1) 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.
(1) 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 Sublease, dated April 14, 1998, between the Registrant and Documentum, Inc.
(1) 10.3 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
(1) 10.4 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.
(1) 10.5 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23,
1996, between Registrant and Hacienda Park Associates.
10.6 Built-to-Suit Lease, dated September 27, 1996, and First Amendment, dated January 27, 1998,
between Registrant and Britannia Hacienda V Limited Partnership.
(1) 10.7 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.
10.8 Sublease, dated October 10, 1997, between Registrant and Drake Mortgage Corporation.
10.9 Build-to-Suit lease, dated January 27, 1998, between Registrant and Britannia Hacienda V
Limited Partnership.
(1) 10.10 1996 Stock Option Plan and related Form of Stock Option Agreement.
(1) 10.11 1996 Employee Stock Purchase Plan.
(1) 10.12 Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight
L. Jackson.
(1) 10.13 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC
Capital Management and related Equipment Schedule.
(1) 10.14 Form of Indemnification Agreement between Registrant and executive officers and directors.
(1) 10.15 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.
10.16 Amended and Restated Loan and Security Agreement, dated June 30, 1998, between Registrant
and Coast Business Credit.
(1) 10.17 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
(1) 10.18 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
(1) 10.19 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
(1) 10.20 Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November
7, 1994, and Amendments Nos. 1 and 2 thereto.
(1) 10.21 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and
Registrant, assigned to Registrant on February 29, 1996.
(1) 10.22 Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and
Alison Elder.
(1) 10.23 Series F Stock Purchase Agreement, dated March 12, 1997, between Registrant, General
Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P.
(1) 10.24 Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners
39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein).
(1) 10.25 Standard Office Lease -- Gross, dated March 27, 1997, between Registrant and Westwood
Holdings, Inc.
(1) 10.26 ISDA Master Agreement, dated June 10, 1997, between Registrant and First Union National
Bank.
10.27 ASAP Office Services Lease, dated June 25, 1998, between Registrant and ASAP Office
Services.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1).
(3) 24.1 Powers of attorney.
(3) 27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-23189), declared effective on September 18,
1997.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange
Commission on October 3, 1998.
(3) Previously filed.
(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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton,
State of California, on this 22nd day of September, 1998.
<TABLE>
<S> <C> <C>
PROBUSINESS SERVICES, INC.
By: /s/ THOMAS H. SINTON
-----------------------------------------
Thomas H. Sinton
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to 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
------------------------------------------- Officer and Director (Principal September 22, 1998
Thomas H. Sinton Executive Officer)
Senior Vice President, Finance,
/s/ STEVEN E. KLEI Chief Financial Officer and
------------------------------------------- Secretary (Principal Financial September 22, 1998
Steven E. Klei and Accounting Officer)
WILLIAM T. CLIFFORD*
------------------------------------------- Director September 22, 1998
William T. Clifford
DAVID C. HODGSON*
------------------------------------------- Director September 22, 1998
David C. Hodgson
RONALD W. READMOND*
------------------------------------------- Director September 22, 1998
Ronald W. Readmond
THOMAS P. RODDY*
------------------------------------------- Director September 22, 1998
Thomas P. Roddy
</TABLE>
<TABLE>
<S> <C>
*By: /s/ THOMAS H. SINTON
-------------------------
Thomas H. Sinton
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
SCHEDULE II
PROBUSINESS, INC.
(DOLLARS IN THOUSANDS)
VALUATION ALLOWANCE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Balance at beginning of year......................................................... $ 2,988 $ 3,597 $ 5,988
Additions............................................................................ 609 2,391 3,236
Reductions........................................................................... -- -- --
Balance at end of year............................................................... $ 3,597 $ 5,988 $ 9,224
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year......................................................... $ -- $ -- $ 365
Additions............................................................................ -- 365 84
Reductions........................................................................... -- -- 29
Balance at end of year............................................................... $ -- $ 365 $ 420
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
(3) 1.1 Form of Underwriting Agreement.
(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension
Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere
Administrators, Inc.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of the Registrant.
(1) 4.1 Specimen Common Stock Certificate of Registrant.
(1) 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.
(1) 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon Valley
Bank and related Antidilution and Registration Rights Agreements.
(1) 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast Business
Credit and related Antidilution and Registration Rights Agreement.
(1) 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast Business
Credit and related Antidilution and Registration Rights Agreement.
(1) 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and
LINC Capital Management.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain
purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and T.J. Bristow and Elizabeth S. Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant
and Laurence Shushan and Magdalena Shushan.
(1) 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Louis R.
Baransky.
(1) 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Ben W.
Reppond.
(1) 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.
(1) 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 Sublease, dated April 14, 1998, between the Registrant and Documentum, Inc.
(1) 10.3 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.
(1) 10.4 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.
(1) 10.5 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23,
1996, between Registrant and Hacienda Park Associates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
10.6 Built-to-Suit Lease, dated September 27, 1996, and First Amendment, dated January 27, 1998,
between Registrant and Britannia Hacienda V Limited Partnership.
(1) 10.7 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.
10.8 Sublease, dated October 10, 1997, between Registrant and Drake Mortgage Corporation.
10.9 Build-to-Suit lease, dated January 27, 1998, between Registrant and Britannia Hacienda V
Limited Partnership.
(1) 10.10 1996 Stock Option Plan and related Form of Stock Option Agreement.
(1) 10.11 1996 Employee Stock Purchase Plan.
(1) 10.12 Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight
L. Jackson.
(1) 10.13 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC
Capital Management and related Equipment Schedule.
(1) 10.14 Form of Indemnification Agreement between Registrant and executive officers and directors.
(1) 10.15 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.
10.16 Amended and Restated Loan and Security Agreement, dated June 30, 1998, between Registrant
and Coast Business Credit.
(1) 10.17 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
(1) 10.18 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
(1) 10.19 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
(1) 10.20 Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November
7, 1994, and Amendments Nos. 1 and 2 thereto.
(1) 10.21 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and
Registrant, assigned to Registrant on February 29, 1996.
(1) 10.22 Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and
Alison Elder.
(1) 10.23 Series F Stock Purchase Agreement, dated March 12, 1997, between Registrant, General
Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P.
(1) 10.24 Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners
39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein).
(1) 10.25 Standard Office Lease -- Gross, dated March 27, 1997, between Registrant and Westwood
Holdings, Inc.
(1) 10.26 ISDA Master Agreement, dated June 10, 1997, between Registrant and First Union National
Bank.
10.27 ASAP Office Services Lease, dated June 25, 1998, between Registrant and ASAP Office
Services.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1).
(3) 24.1 Powers of attorney.
(3) 27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-23189), declared effective on September 18,
1997.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange
Commission on October 3, 1998.
(3) Previously filed.
<PAGE>
EXHIBIT 5.1
September 22, 1998
ProBusiness Services, Inc.
4125 Hopyard Road
Pleasanton, CA 94588
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on August 5, 1998 (Registration No.
333-60745), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 2,846,250
shares of your Common Stock (the "Shares"), including an over-allotment option
granted to the underwriters of the offering to purchase up to an additional
371,250 shares. We understand that you are selling the Shares to the
underwriters for resale to the public as described in the Registration
Statement. As your legal counsel, we have examined the proceedings taken, and
are familiar with the proceedings proposed to be taken, by you in connection
with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
proposed to be taken by us, as your legal counsel, prior to the issuance of the
Shares, the Shares will be legally issued, fully paid and non-assessable when
sold in the manner described in the Registration Statement.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.2
STANDARD SUBLEASE
SUBLEASE
1. PARTIES. This Sublease, dated, for reference purposes only, April 14,
1998, is made by and between Pro Business Services, Inc., a Delaware corporation
(herein called "Sublessor") and Documentum, Inc., a Delaware corporation (herein
called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, a portion of that certain real property situated in
the County of Alameda, State of California, commonly known as Saratoga Center
and described as 5934 Gibraltar Drive, Suite 102, Pleasanton, CA 94588,
consisting of approximately 3,555 rentable square feet of office space as shown
by cross-hatched lines on Exhibit A. Said real property, including the land and
all improvements thereon, is hereinafter called the "Premises".
3. TERM.
3.1 TERM. The term of this Sublease shall be for approximately eleven
months and 16 days, months commencing on the date ("commencement date") which is
the earlier of (i) the date Sublessor notifies Sublessee that approval of the
Master Lessor has been obtained and (ii) April 15, 1998; and ending on March 31,
1999 unless sooner terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if
for any reason Sublessor cannot deliver possession of the Premises to Sublessee
on said date, Sublessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease or the obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee shall
not be obligated to pay rent until possession of the Premises is tendered to
Sublessee, provided, however, that if Sublessor shall not have delivered
possession of the Premises within thirty (30) days from said commencement date,
Sublessee may, at Sublessee's option, by notice in writing to Sublessor within
ten (10) days thereafter, cancel this Sublease, in which event the parties shall
be discharged from all obligations hereunder. If Sublessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to all
provisions hereof, such occupancy shall not advance the termination date and
Sublessee shall pay rent for such period at the initial monthly rates set forth
below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $4,350.00, in advance, on the 1st day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $4,350.00
as rent for April 15, 1998 - May 15, 1998. Rent for any period during the term
hereof which is for less than one (1) month (i.e. rent for the remaining unpaid
portion for May, 1998) shall be a pro-rata portion of the monthly installment,
due and payable on the first day of the month. Rent shall be payable in lawful
money of the United States to Sublessor at the address stated herein or to such
other persons or at such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $4,350.00 as security for Sublessee's faithful performance of Sublessee's
obligations hereunder. If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Sublessor may become obligated by reason of Sublessee's default, or
to compensate Sublessor for any loss or damage which Sublessor may suffer
thereby. If Sublessor so uses or applies all or any portion of said deposit,
Sublessee shall within ten (10) days after written demand therefore deposit cash
with Sublessor in an amount sufficient to restore said deposit to the full
amount hereinabove stated and Sublessee's failure to do so shall be a material
breach of this Sublease. Sublessor shall not be required to keep said deposit
separate from its general accounts. If Sublessee performs all of Sublessee's
obligations
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
STANDARD SUBLEASE PAGE 2
hereunder, said deposit, or so much thereof as has not therefore been applied by
Sublessor, shall be returned, without payment of interest or other increment for
its use to Sublessee (or at Sublessor's option to the last assignee, if any, of
Sublessee's interest hereunder) at the expiration of the term hereof, and after
Sublessee has vacated the Premises. No trust relationship is created herein
between Sublessor and Sublessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for general
office purposes.
6.2 COMPLIANCE WITH LAW.
(a) Sublessee shall, at Sublessee's expense, comply promptly with all
applicable statues, ordinances, rules, regulations, orders, restrictions of
record, and requirements in effect during the term or any part of the term
hereof regulating the use by Sublessee of the Premises. Sublessee shall not use
or permit the use of the Premises in any manner that will tend to create waste
or a nuisance or, if there shall be more than one tenant of the building
containing the Premises, which shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES. Except for Sublessor's obligation to
close the opening in the demising wall, and to shampoo the carpets, Sublessee
hereby accepts the Premises in their "as is" condition existing as of the
date of the execution hereof, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating
the use of the Premises, and accepts this Sublease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Sublessee
acknowledges that neither Sublessor nor Sublessor's agents have made any
representation or warranty as to the suitability of the Premises for the
conduct of Sublessee's business.
6.4 ALTERATIONS. Sublessee shall not make any alterations to the
Premises without the prior written consent of Sublessor and Master Lessor. Any
alterations made by Sublessee to the Premises must be installed in accordance
with all applicable building codes and permit requirements and shall be removed
from the Premises by Sublessee at the sole cost and expense of Sublessee at the
expiration of the Sublease Term.
7. MASTER LEASE.
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit B, dated March 23, 1994, as amended by a First Amendment
dated May 25, 1994 and a Second Amendment dated October 5, 1994 wherein
Hacienda Park Associates, a California General Partnership is the Lessor,
hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contraindicated by this Sublease in which event the terms of this
Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent
for obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease EXCEPT for the following paragraphs which are
excluded therefrom and pursuant to which Sublessee has no rights: PARAGRAPH
2(C) BROKERS, PARAGRAPH 2(D) COMMENCEMENT, PARAGRAPH 2(F) EXPENSE STOP,
PARAGRAPH 2(J) RENTAL INSTALLMENTS, PARAGRAPHS 2(O) AND 7 SECURITY DEPOSIT;
PARAGRAPH 2(R) TENANT'S PROPORTIONATE SHARE, PARAGRAPH 5.3 PROJECT OPERATING
EXPENSES, PARAGRAPH 29, TENANT IMPROVEMENT ALLOWANCE; PARAGRAPH 40, REMOVAL OF
TENANT'S FURNITURE & FIXTURES, PARAGRAPH 41 OPTION TO RENEW; PARAGRAPH 2 OF
FIRST AMENDMENT AND PARAGRAPHS 1 AND 2 OF SECOND AMENDMENT.
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
STANDARD SUBLEASE PAGE 3
7.5 Sublessee's permitted use of the Premises shall be for general
office use, notwithstanding Paragraph 2(s) of the Master Lease, which specifies
the Tenant's use as payroll services.
7.6 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.7 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.8 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and
from all liability, judgments, costs, reasonable attorneys' fees, damages,
claims or demands arising out of Sublessor's failure to comply with or perform
Sublessor's Remaining Obligations.
7.9 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that, except as
provided in Section 16(b)(5) of the Master Lease, until a default shall occur
in the performance of Sublessor's Obligations under the Master Lease, that
Sublessor may receive, collect and enjoy the rents accruing under this Sublease.
However, if Sublessor shall default in the performance of its obligations to
Master Lessor then Master Lessor may, at its option, receive and collect,
directly from Sublessee, all rent owing and to be owed under this Sublease.
Master Lessor shall not, by reason of this assignment of the Sublease nor by
reason of the collection of the rents from the Sublessee, be deemed liable to
Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee,
upon receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee for
any such rents to paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor, then this Sublease
shall not be effective unless, within ten (10) days of the date hereof, Master
Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor or its obligations or
alter the primary liability of Sublessor to pay the rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master Lessor from the Sublessee or any
one else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
STANDARD SUBLEASE PAGE 4
(d) In the event of any default of Sublessor under the Master Lease,
Master Lessor may proceed directly against Sublessor, any guarantors or any one
else liable under the Master Lease or this Sublease without first exhausting
Master Lessor's remedies against any other person or entity liable thereon to
Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor nor any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall default in its obligations under
the Master Lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event Master
Lessor shall undertake the obligations of Sublessor under this Sublease from the
time of the exercise of said option to termination of this Sublease but Master
Lessor shall not be liable for any prepaid rents nor any security deposit paid
by Sublessee, nor shall Master Lessor be liable for any other defaults of the
Sublessor under the Sublease.
9.3 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
9.4 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a coy of any such notice of default. Sublessee shall have the
right to cure any default of Sublessor described in any notice of default within
ten (10) days after service of such notice of default on Sublessee. If such
default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. BROKERS FEE.
10.1 Sublessee warrants and represents that it has not dealt with any
real estate broker or agent in connection with this Sublease or its negotiation
except Ted Helgans of Colliers Parrish International, Inc. Sublessee shall
indemnify and hold Sublessor harmless from any cost, expense or liability
(including costs of suit and reasonable attorneys' fees) for any compensation,
commission, or fees claimed by any other real estate broker or agent in
connection with this Sublease or its negotiation by reason of any act of
Sublessee.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court. The provision of this paragraph shall inure to the benefit of the Broker
named herein who seeks to enforce a right hereunder.
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
STANDARD SUBLEASE PAGE 5
12. ADDITIONAL PROVISIONS.
12.1 Sublessor acknowledges that pursuant to Section 12 of the Master
Lease, plans for any alterations shall be submitted to Master Lessor for
approval. Sublessor agrees that, unless otherwise agreed to by Master Lessor in
writing, Sublessor shall be obligated to remove upon the termination of the
Master Lease all additions or alterations (including, without limitation, any
demising walls) which are or may hereafter be constructed by Sublessor in the
Premises.
12.2 Sublessor shall perform the following prior to the commencement
date:
a. Close the opening in order to create the approximately 3,555
rentable square feet of separately demised Premises as shown on
Exhibit A; and
b. Shampoo the carpets in the Premises.
12.3 Sublessee shall not use, allow use of, or dispose of Hazardous
Materials in or about the Premises. Sublessee will indemnify, defend and
hold Sublessor and Master Lessor harmless from any judgment, damages, losses,
claims, actions, attorneys' fees, consultant's fees, costs or expenses which
result from Sublessee's or any of Sublessee's agents (including employees,
contractors and visitors) use, storage, or disposal of Hazardous Materials in
or about the Sublease. As used herein the term "Hazardous Materials" will
mean and include asbestos, petroleum products and any and all toxic or
hazardous substances, materials or wastes listed in the United States
Department of Transportation Table (49 CFR 172.101) or by the Environmental
Protection Agency as hazardous substances (40 CFR 302) and in any and all
amendments to such lists or such substances, materials or wastes otherwise
regulated under applicable local, state or federal law. The provisions of
this paragraph shall survive the expiration or termination of the Sublease.
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
STANDARD SUBLEASE PAGE 6
12.4 Sublessee acknowledges that Sublessee shall have the right to
install lobby directory signage and suite door identification in accordance with
the Master Lease. Sublessee shall not have the right to install monument or
exterior building signage.
If this Sublease has been filled in it has been prepared for
submission to your attorney for his approval. No representation
or recommendation is made by Colliers Parrish International, Inc.
or Lee & Associates or their agents or employees as to the legal
sufficiency, legal effect, of tax consequences of this Sublease or
the transaction relating thereto.
"SUBLESSOR"
Pro Business Services, Inc., a
Executed at Delaware corporation
------------------------ ---------------------------------
on By /s/ [ILLEGIBLE]
-------------------------------- ------------------------------
address By
--------------------------- ------------------------------
"SUBLESSEE"
Documentum, Inc.
Executed at a Delaware corporation
------------------------ ---------------------------------
on By /s/ Mark Ganett
-------------------------------- ------------------------------
address
---------------------------
By
- ----------------------------------- ------------------------------
"MASTER LESSOR"
Executed at Paine Weber [ILLEGIBLE] Hacienda Park Associates
------------------------ ---------------------------------
on 4-8-98 By /s/ [ILLEGIBLE]
-------------------------------- ------------------------------
address 265 Franklin Ct. By V.P.
--------------------------- ------------------------------
COLLIERS PARRISH INTERNATIONAL, INC. IS PLEASED TO BE ABLE TO PROVIDE THE ABOVE
INFORMATION AND IN SO DOING BELIEVES ITS VALIDITY. HOWEVER, WE CANNOT GUARANTEE
ITS ACCURACY OR TAKE RESPONSIBILITY FOR ITS USE.
<PAGE>
EXHIBIT A
5934 GIBRALTAR DRIVE
SECOND FLOOR
[FLOOR PLAN]
[FLOOR PLAN]
5934 GIBRALTAR DRIVE
GROUND FLOOR
4696 WILLOW ROAD
[FLOOR PLAN]
<PAGE>
EXHIBIT 10.6
BUILD-TO-SUIT LEASE
Landlord: Britannia Hacienda V Limited Partnership
Tenant: ProBusiness, Inc.
Date: September 27, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Premises . . . . . . . . . . . . . . . . . 1
1.2 Landlord's Reserved Rights . . . . . . . . 1
1.3 First Refusal Right . . . . . . . . . . . . 2
2. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Term . . . . . . . . . . . . . . . . . . . 3
2.2. Early Possession . . . . . . . . . . . . . 3
2.3. Delay In Possession . . . . . . . . . . . . 4
2.4. Construction . . . . . . . . . . . . . . . 4
2.5 Acknowledgement Of Lease Commencement . . . 5
2.6 Holding Over . . . . . . . . . . . . . . . 5
2.7 Option To Extend Term . . . . . . . . . . . 6
3. RENTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1. Minimum Rental . . . . . . . . . . . . . . 6
3.2. Late Charge . . . . . . . . . . . . . . . . 9
4 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1. Personal Property. . . . . . . . . . . . . 10
4.2. Real Property . . . . . . . . . . . . . . . 10
5. OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . . . . . 10
5.1. Payment Of Operating Expenses . . . . . . . 10
5.2. Definition Of Operating Expenses . . . . . 11
5.3. Determination Of Operating Expenses . . . . 13
5.4. Final Accounting For Lease Year . . . . . . 13
5.5. Proration . . . . . . . . . . . . . . . . . 14
6. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1. Payment . . . . . . . . . . . . . . . . . . 14
6.2. Interruption . . . . . . . . . . . . . . . 14
7. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1. Right To Make Alterations . . . . . . . . . 14
7.2. Title To Alterations . . . . . . . . . . . 15
7.3. Tenant Fixtures . . . . . . . . . . . . . . 15
7.4. No Liens . . . . . . . . . . . . . . . . . 15
8. MAINTENANCE AND REPAIRS . . . . . . . . . . . . . . . . . . . 15
8.1. Landlord's Work . . . . . . . . . . . . . . 15
8.2. Tenant's Obligation For Maintenance . . . . 16
(a) Good Order, Condition And Repair . . . 16
(b) Landlord's Remedy . . . . . . . . . . . 16
(c) Condition Upon Surrender . . . . . . . 16
9. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . 17
9.1. Permitted Use . . . . . . . . . . . . . . . 17
9.2. [Omitted.] . . . . . . . . . . . . . . . . 17
9.3. No Nuisance . . . . . . . . . . . . . . . . 17
9.4. Compliance With Laws . . . . . . . . . . . 17
<PAGE>
<S> <C> <C>
9.5. Liquidation Sales . . . . . . . . . . . . . 17
9.6. Environmental Matters . . . . . . . . . . . 17
10. INSURANCE AND INDEMNITY . . . . . . . . . . . . . . . . . . . . 18
10.1. Insurance . . . . . . . . . . . . . . . . . 18
10.2. Quality Of Policies And Certificates . . . 18
10.3. Workers' Compensation . . . . . . . . . . . 19
10.4. Waiver Of Subrogation . . . . . . . . . . . 19
10.5. Increase In Premiums . . . . . . . . . . . 19
10.6. Indemnification . . . . . . . . . . . . . . 19
10.7. Blanket Policy . . . . . . . . . . . . . . 20
11. SUBLEASEAND ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . 20
11.1. Assignment And Sublease Of Premises . . . . 20
11.2. Rights Of Landlord . . . . . . . . . . . . 20
12. RIGHT OF ENTRY AND QUIET ENJOYMENT . . . . . . . . . . . . . . 21
12.1. Right Of Entry . . . . . . . . . . . . . . 21
12.2. Quiet Enjoyment. . . . . . . . . . . . . . 21
13. CASUALTY AND TAKING . . . . . . . . . . . . . . . . . . . . . . 21
13.1. Termination Or Reconstruction . . . . . . . 21
13.2. Tenant's Rights . . . . . . . . . . . . . . 22
13.3. Lease To Remain In Effect . . . . . . . . . 22
13.4. Reservation Of Compensation . . . . . . . . 23
13.5. Restoration Of Fixtures . . . . . . . . . . 23
14. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
14.1. Events Of Default . . . . . . . . . . . . . 23
(a) Abandonment . . . . . . . . . . . . . . 23
(b) Nonpayment . . . . . . . . . . . . . . 23
(c) Other Obligations . . . . . . . . . . . 23
(d) General Assignment . . . . . . . . . . 23
(e) Bankruptcy . . . . . . . . . . . . . . 24
(f) Receivership . . . . . . . . . . . . . 24
(g) Attachment . . . . . . . . . . . . . . 24
(h) Insolvency . . . . . . . . . . . . . . 24
14.2. Remedies Upon Tenant's Default . . . . . . 24
14.3. Remedies Cumulative . . . . . . . . . . . . 25
15. SUBORDINATION, ATTORNMENT AND SALE . . . . . . . . . . . . . . 25
15.1. Subordination To Mortgage . . . . . . . . . 25
15.2. Sale Of Landlord's Interest . . . . . . . . 25
15.3. Estoppel Certificates . . . . . . . . . . . 26
15.4. Subordination to CC&R's . . . . . . . . . . 26
16. SECURITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.1. Deposit . . . . . . . . . . . . . . . . . . 26
17. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.1. Notices . . . . . . . . . . . . . . . . . . 27
17.2. Successors And Assigns . . . . . . . . . . 28
17.3. No Waiver . . . . . . . . . . . . . . . . . 28
17.4. Severability . . . . . . . . . . . . . . . 28
17.5. Litigation Between Parties . . . . . . . . 28
17.6. Surrender . . . . . . . . . . . . . . . . . 28
17.7. Interpretation . . . . . . . . . . . . . . 28
17.8. Entire Agreement . . . . . . . . . . . . . 28
17.9. Governing Law . . . . . . . . . . . . . . . 28
17.10. No Partnership . . . . . . . . . . . . . . 28
17.11. Financial Information . . . . . . . . . . . 28
-ii-
<PAGE>
<S> <C> <C> <C>
17.12. [Omitted.] . . . . . . . . . . . . . . . . 29
17.13. Time . . . . . . . . . . . . . . . . . . . 29
17.14. Rules And Regulations . . . . . . . . . . . 29
17.15. Brokers . . . . . . . . . . . . . . . . . . 29
17.16. Memorandum Of Lease . . . . . . . . . . . . 29
17.17. Corporate Authority . . . . . . . . . . . . 29
17.18. Execution and Delivery . . . . . . . . . . 30
17.19. Stock Warrants . . . . . . . . . . . . . . 30
17.20. Survival . . . . . . . . . . . . . . . . . 30
17.21. Consents . . . . . . . . . . . . . . . . . 30
17.22. Landlord Defaults . . . . . . . . . . . . . 30
</TABLE>
EXHIBITS
EXHIBIT A Real Property Description
EXHIBIT B Site Plan
EXHIBIT C Construction
C-1: First Floor Plan
C-2: Second Floor Plan
C-3: Finish Specifications
EXHIBIT D Construction Timeline
EXHIBIT E Acknowledgement of Lease Commencement
-iii-
<PAGE>
BUILD-TO-SUIT LEASE
THIS BUILD-TO-SUIT LEASE ("Lease") is made and entered into as of the
27th day of September, 1996, by and between BRITANNIA HACIENDA V LIMITED
PARTNERSHIP, a Delaware limited partnership (hereinafter called "Landlord") and
PROBUSINESS, INC., a California corporation (hereinafter called "Tenant").
THE PARTIES AGREE AS FOLLOWS:
1. PREMISES
1.1 Premises.
(a) Landlord leases to Tenant and Tenant hires and leases from
Landlord, on the terms, covenants and conditions hereinafter set forth, the
premises (the "Premises") consisting of a building, of approximately 129,322
square feet (the "Building") to be constructed by Landlord pursuant to the
terms of this Lease on a portion of the real property described in Exhibit A
attached hereto (the "Property"). The approximate location of the Building on
the Property and the approximate layout of the other site improvements to be
constructed by Landlord on the Property are depicted in the site plan attached
hereto as Exhibit B (the "Site Plan"). The parking areas, driveways,
sidewalks, landscaped areas and other portions of the Property that lie outside
the exterior walls of the Building (excluding any additional buildings depicted
on the Site Plan or otherwise constructed on the Property by Landlord from time
to time), as depicted on the Site Plan and as hereafter modified by Landlord
from time to time in accordance with the provisions of this Lease, are
sometimes referred to herein as the "Common Areas"; provided, however, that the
Common Areas shall not be construed to include any part of the portion of the
Property designated as Phase V or Phase VII on the Site Plan until such time as
(x) the construction of the Common Area improvements contemplated for and
located on such Phase has been completed in all material respects and such
improvements are ready and available for use, and (y) the construction of the
building(s) contemplated for and located on such Phase is substantially complete
(except for "punch list" items which do not materially impair or interfere with
the use of such building(s)).
(b) As an appurtenance to Tenant's leasing of the
Premises pursuant to Section 1.1 (a), Landlord hereby grants to Tenant, for the
benefit of Tenant and its employees, suppliers, shippers, customers and
invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas (as they exist from
time to time) and all easements, access rights and similar rights and
privileges relating to or appurtenant to the Property and created or existing
from time to time under any easement agreements, declarations of covenants,
conditions and restrictions, or other written agreements now or hereafter of
record with respect to the Property, subject however to any limitations
applicable to such rights and privileges under applicable law and/or under the
written agreements creating such rights and privileges.
1.2. Landlord's Reserved Rights. Landlord reserves, in addition to
the right of entry set forth in Section 12.1 hereof, the following rights,
exercisable from time to time in Landlord's discretion: (i) to install, use,
maintain, repair and replace pipes, ducts, conduits, wires and appurtenant
meters and other equipment above the ceiling surfaces, below the floor surfaces
or within the walls of the Building in locations which will not materially
interfere with Tenant's use thereof; (ii) to relocate any pipes, ducts,
conduits, wires and appurtenant meters and equipment located within or outside
the Building; (iii) to construct, alter or add to other buildings or
improvements on the Property; (iv) to build adjoining to the Property; (v) to
lease any part of the Property for the construction of improvements or
buildings; (vi) to make changes to the Common Areas, including (but not limited
to) changes in the location, size or shape of any portion of the Common Areas,
and to relocate parking spaces on the Property; (vii) to close temporarily any
of the Common Areas for maintenance or other reasonable purposes, provided that
reasonable parking and reasonable access to the Building remain available;
(viii) to use the Common Areas while engaged in making additional improvements,
repairs or alterations to the Property or any
-1-
<PAGE>
portion thereof; and (ix) to do and perform such other acts with respect to the
Common Areas and the Property as may be necessary or appropriate; provided,
however, that the exercise by Landlord of its rights under this Section 1.2
shall not, without Tenant's prior written consent, (x) materially reduce the
parking ratio for the Property below that shown on the Site Plan, nor (y)
reduce the number of parking spaces on the portion of the Property designated
as Phase VI on the Site Plan (other than on a temporary basis incidental to
construction or maintenance activities of Landlord on the Property, in which
event Landlord shall exercise reasonable efforts to minimize the number of
parking spaces affected by such temporary activities), nor (z) make any other
change in the Site Plan that would have a material adverse effect on Tenant's
use of the Premises. Moreover, Landlord shall not exercise rights reserved to
it pursuant to this Section 1.2 in such a manner as to materially impair
Tenant's ability to conduct its activities in the normal manner, or in such a
manner as to cause any material diminution of Tenant's rights or any material
increase in Tenant's obligations under this Lease; provided, however, that the
foregoing shall not limit or restrict Landlord's right to undertake reasonable
construction activity and Tenant's use of the Premises shall be subject to
reasonable temporary disruption incidental to such activity diligently
prosecuted.
1.3 First Refusal Right.
(a) Beginning on the date on which Tenant takes occupancy
of the entire Premises (including the second phase of approximately 40,000
square feet as described in Exhibit C) and continuing for the remaining term of
this Lease (including any duly exercised extended terms), Landlord shall not
lease any space in any building(s) existing or to be built from time to time on
the portion of the Property designated as Phase V on the Site Plan, except in
compliance with this Section 1.3; and beginning on the date of this Lease and
continuing for the remaining term of this Lease (including any duly exercised
extended terms), Landlord shall not lease any space in any building(s) existing
or to be built from time to time on the portion of the Property designated as
Phase VII on the Site Plan, except in compliance with this Section 1.3;
provided, however, that the foregoing restrictions shall not apply during any
period in which Tenant is in default under this Lease in any material respect.
(b) If Landlord intends, during any applicable period
described in Section 1.3(a), to lease any space in any of the buildings
existing or to be built on Phase V or Phase VII of the Property from time to
time, and if Tenant is not then in default under this Lease in any material
respect, Landlord shall give written notice of such intention to Tenant,
specifying the material terms on which Landlord proposes to lease such space
(the "Offered Space"), and shall offer to Tenant the opportunity to lease the
Offered Space on the terms specified in Landlord's notice. Landlord shall not
need to have a bona fide written offer from a prospective tenant in order to
give such a notice, and such notice may, in Landlord's discretion, identify a
range of sizes, durations, rental rates, tenant improvement allowances and
other material terms on which Landlord is willing to lease the Offered Space.
Tenant shall have ten (10) business days after receipt of such notice from
Landlord in which to accept such offer by written notice to Landlord; if
Landlord's notice designated alternative terms or a range of terms, Tenant's
acceptance shall specify which alternative, within the offered range, is being
accepted by Tenant. Upon such acceptance by Tenant, the Offered Space (or
applicable portion thereof) shall be leased to Tenant on the terms set forth in
Landlord's notice and elected by Tenant (subject to the provisions of Section
1.3)(c)) and on the additional terms and provisions set forth herein (except to
the extent inconsistent with the terms set forth in Landlord's said notice) and
the parties shall promptly execute an amendment to this Lease adding the
Offered Space to the Premises and making any appropriate amendments to
provisions of this Lease to reflect different rent and other obligations
applicable to the Offered Space under the terms of Landlord's said notice and
Tenant's acceptance. If Tenant does not accept Landlord's offer within the
allotted time, Landlord shall thereafter have the right to lease the Offered
Space or any portion thereof to a third party, at any time within one hundred
eighty (180) days after Tenant's failure to accept Landlord's offer, at a
minimum rental and on other terms and conditions not more favorable to the
lessee than the minimum rental and other terms offered to Tenant in Landlord's
said notice. If Tenant does not accept Landlord's offer, then to the extent
Landlord does not lease the Offered Space to a third party within such 180-day
period, Landlord shall again be required to comply with the provisions of this
Section 1.3 prior to any further leasing of the Offered Space or any portion
thereof.
-2-
<PAGE>
(c) Notwithstanding any other provisions of this Section
1.3, if the terms (or range of terms) offered by Landlord to Tenant with respect
to the Offered Space do not include an expiration date which is coterminous with
the then current term of this Lease, then Tenant's acceptance (if any) of
Landlord's offer may take any of the following three forms: (i) Tenant may
accept the terms (or an alternative within the range of terms, if applicable)
offered by Landlord, without regard to the non-coterminous nature of the
respective lease terms for the Offered Space and for the initial Premises
hereunder; or (ii) Tenant may accept the terms (or an alternative within the
range of terms, if applicable) offered by Landlord with respect to the Offered
Space and concurrently extend the then current term of this Lease with respect
to the initial Premises to terminate concurrently with the lease term for the
Offered Space, in which event such extension by Tenant shall be deemed to be a
permissible early exercise of the extension option set forth in Section 2.7
hereof, without regard to the time limits set forth therein, and the rent for
the initial Premises for such extended term shall be determined in accordance
with Section 3.1(e) hereof for any portion of such extended term falling within
the First five (5) years after the original expiration date of this Lease, and
shall be determined in accordance with Section 3.1(f) hereof for any portion of
such extended term falling more than five (5) years after the original
expiration date of this Lease; or (iii) Tenant may elect to lease the Offered
Space for a term coterminous with the then remaining term of this Lease with
respect to the initial Premises, in which event (x) Landlord shall have no
obligation to improve the Offered Space or provide any tenant improvement
allowance for the Offered Space, regardless of any contrary terms set forth in
Landlord's original notice to Tenant, (y) the "minimum rent" for the Offered
Space shall be the fair market rental value thereof, in the then existing
condition of such space, which fair market rental value shall be determined
promptly in accordance with the procedure described in Section 3.1(e) hereof
(but at 100% of fair market rental value rather than 95%), and (z) Tenant's
lease of the Offered Space shall otherwise be on the terms set forth in
Landlord's notice and on the additional terms and provisions set forth herein
(except to the extent inconsistent with the terms set forth in Landlord's said
notice).
(d) To the extent Tenant elects, pursuant to clause (ii)
of Section 1.3(c) hereof, an early exercise of one or both extended terms under
Section 2.7 hereof in whole or in part, then (A) the determination of the rent
for the initial Premises for the applicable extended term (or portion thereof)
shall be made during the period commencing six (6) months before the
commencement of the applicable extended term, pursuant to the procedure in
Section 3.1(e) or 3.1(f) hereof, as applicable, and (B) to the extent Tenant has
exercised its option as to only a portion of either extended term, then the
unexercised portion of such extended term shall be deemed to remain subject to a
continuing extension option by Tenant, which remaining option shall be
exercisable in accordance with Section 2.7 hereof not more than eight (8) months
and not less than six (6) months prior to the expiration of the initial portion
of such extended term already elected by Tenant under clause (ii) of Section
1.3(c) hereof.
2. TERM
2.1. Term. The term of this Lease shall commence on the earlier to
occur of (i) the date which is five (5) days after the date Landlord notifies
Tenant that Landlord's work pursuant to Section 2.4 and Exhibit C on the
Building shell and core and on the first phase (approximately 90,000 square
feet) of interior improvements is substantially complete and such work is in
fact substantially complete (but in no event earlier than July 1, 1997), or
(ii) the date Tenant takes occupancy of the Premises (except as otherwise
provided in Section 2.2), the earlier of such dates being herein called the
"Commencement Date," and shall end on the day immediately preceding the date
eleven (11) years thereafter, unless sooner terminated or extended as
hereinafter provided. Assuming execution of this Lease by October 1, 1996 and
approval of full plans, specifications and working drawings by December 1,
1996, the parties presently estimate that the Commencement Date will be no
later than September 1, 1997. For purposes of this Section 2.1, Landlord's
work shall be deemed to be "substantially complete" when all of the following
have occurred: (A) all improvements to be constructed by Landlord as part of
the Building shell and core and the first phase (approximately 90,000 square
feet) of interior improvements, pursuant to Exhibit C, have been completed
except for "punch list" items which do not materially, interfere with Tenant's
ability to utilize the First phase (approximately 90,000 square feet) of the
Premises for their intended purpose; (B) the City of Pleasanton has issued a
certificate of occupancy for the first phase (approximately 90,000 square feet)
of the Premises; (C) all utilities reasonably
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necessary for Tenant's use of the first phase approximately, 90,000 square
feet) of the Premises for their intended purpose are connected and available
for use at the Premises; and (D) all improvements to be constructed by Landlord
as part of the Common Areas contemplated for and located on Phase VI of the
Property as shown on the Site Plan have been completed, except for "punch list"
items which do not materially interfere with Tenant's ability to utilize the
Premises for their intended purpose, and are available for use by Tenant.
2.2. Early Possession. If Landlord permits Tenant to occupy, use or
take possession of the Premises prior to the Commencement Date determined under
Section 2.1, such occupancy, use or possession shall be subject to and upon all
of the terms and conditions of this Lease, including the obligation to pay rent
and other charges, unless Landlord and Tenant agree otherwise; provided,
however, that such early possession shall not advance or otherwise affect the
Commencement Date or termination date determined under Section 2.1; provided
further, that if Tenant takes such early possession solely for the purpose of
installing fixtures, equipment, furniture and furnishings and other similar work
preparatory to the commencement of business in the Premises (which early
possession Landlord shall be required to offer to Tenant at least three (3)
weeks prior to the estimated date for substantial completion of Landlord's work
as contemplated in Section 2.1 hereof), Tenant shall not be required to pay rent
or Operating Expenses by reason of such possession until the Commencement Date
otherwise occurs; and provided further, that Tenant shall not interfere with or
delay Landlord's contractors by such early possession and shall indemnify,
defend and hold harmless Landlord and its agents and employees from and against
any and all claims, demands, liabilities, actions, losses, costs and expenses,
including (but not limited to) reasonable attorneys' fees, arising out of or in
connection with Tenant's early entry upon the Premises hereunder.
2.3 Delay In Possession. Landlord agrees to use its best
reasonable efforts to pursue and complete the work described in Section 2.4 and
Exhibit C promptly, diligently, and within the respective time periods set forth
in the construction timeline attached hereto as Exhibit D and incorporated
herein by this reference, as such timeline may be modified from time to time by
mutual agreement of Landlord and Tenant, and subject to the effects of any
delays caused by or attributable to Tenant or any other circumstances beyond
Landlord's reasonable control (excluding any Financial inability); provided,
however, that except to the extent caused by a material default by Landlord of
its obligations set forth in this Lease (including, but not limited to, its
obligations set forth in this Section 2.3 and in Section 2.4 and Exhibit C),
Landlord shall not be liable for any damages caused by any delay in the
completion of such work, nor shall any such delay affect the validity of this
Lease or the obligations of Tenant hereunder.
2.4. Construction.
(a) The obligation of Landlord to construct and improve
the Premises for occupancy by Tenant hereunder, and to construct related site
improvements in the Common Areas for use by Tenant, is set forth in Exhibit C
attached hereto and incorporated herein by this reference. Except as set forth
in this Section 2.4 and in Exhibit C, Landlord shall have no responsibilities
or obligations with respect to preparation of the Premises or the Property for
Tenant's occupancy.
(b) Landlord shall deliver the Building core and shell
and first phase (approximately 90,000 square feet) of interior improvements in
the Building to Tenant clean and free of debris on the Commencement Date
(subject to Tenant's right of early possession stated in the second proviso in
Section 2.2), and Landlord warrants to Tenant, effective as of the Commencement
Date, that (i) the Building core and shell and first phase (approximately
90,000 square feet) of interior improvements therein and the Common Areas
contemplated for or located on Phase VI of the Property as designated on the
Site Plan are substantially completed and are free from material defects in
design and construction, (ii) the electrical, mechanical, plumbing, lighting,
air conditioning and heating systems, and the loading doors, if any, on the
Building are in good operating condition (to the extent necessary to serve the
first phase of approximately 90,000 square feet of interior improvements) and
are free of material defects in design, equipment and/or installation, and
(iii) the Building core and shell and first phase (approximately 90,000 square
feet) of interior improvements therein have been constructed in compliance in
all material respects with the plans and specifications developed and approved
pursuant to Exhibit C. If it is determined that this warranty has been violated
in any respect, then it shall be the obligation
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of Landlord, after receipt of written notice from Tenant setting forth with
specificity, the nature of the violation, to promptly, at Landlord's sole cost,
correct the condition(s) constituting such Violation. Tenant's failure to give
such written notice to Landlord within ninety (90) days after the Commencement
Date shall give rise to a conclusive presumption that Landlord has complied
with all Landlord's obligations under this Section 2.4 and Exhibit C, except
with respect to latent defects.
(c) Landlord warrants to Tenant that the Building core
and shell and first phase (approximately 90,000 square feet) of interior
improvements constructed by Landlord therein, as they exist on the Commencement
Date, but without regard to any use for which Tenant will occupy the Premises
other than general office use, shall not violate any covenants or restrictions
of record or any applicable building code, regulation or ordinance in effect on
the Commencement Date. If it is determined that this warranty has been
violated, then it shall be the obligation of Landlord, after written notice
from Tenant, to promptly, at Landlord's sole cost and expense, correct the
condition(s) constituting such violation. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation or warranty as
to the present or future suitability of the Premises for the conduct of
Tenant's business or proposed business thereon, except as expressly set forth
in this Lease.
(d) Landlord's obligations, representations and
warranties with respect to the second phase (approximately 40,000 square feet)
of interior improvements in the Premises shall be identical to the obligations,
representations and warranties set forth in this Section 2.4 and in Exhibit C
with respect to the first phase of interior improvements, but shall be deemed
to be made as of the date on which Landlord's construction of such second phase
of interior improvements is substantially complete (as defined in Section 2.1).
(e) TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE
IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PHYSICAL CONDITION OF THE BUILDING AND IMPROVEMENTS TO BE CONSTRUCTED BY
LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET
FORTH IN THIS LEASE.
2.5. Acknowledgement Of Lease Commencement. Upon commencement of
the term of this Lease, Landlord and Tenant shall execute a written
acknowledgement of the Commencement Date, date of termination, square footage
of the Premises and of the first phase of interior improvements delivered to
Tenant, excess cost of improvements (if applicable) and related matters,
substantially in the form attached hereto as Exhibit E (with appropriate
insertions), which acknowledgement shall be deemed to be incorporated herein by
this reference. Notwithstanding the foregoing requirement, the failure of
Tenant to execute such a written acknowledgement shall not affect Landlord's
determination of the Commencement Date, date of termination, square footage of
the Premises and of the first phase of interior improvements delivered to
Tenant, excess cost of improvements (if applicable) and related matters in
accordance with the provisions of this Lease.
2.6. Holding Over. If Tenant holds possession of the Premises
after the term of this Lease with Landlord's written consent, then except as
otherwise specified in such consent, Tenant shall become a tenant from month to
month at one hundred twenty-five percent (125%) of the rental and otherwise
upon the terms herein specified for the period immediately prior to such
holding over and shall continue in such status until the tenancy is terminated
by either party upon not less than thirty (30) days prior written notice. If
Tenant holds possession of the Premises after the term of this Lease without
Landlord's written consent, then Landlord in its sole discretion may elect (by
written notice to Tenant) to have Tenant become a tenant either from month to
month or at will, at one hundred twenty-five percent (125%) of the rental
(prorated on a daily basis for an at-will tenancy, if applicable) and otherwise
upon the terms herein specified for the period immediately prior to such
holding over, or may elect to pursue any and all legal remedies available to
Landlord under applicable law with respect to such unconsented holding over by
Tenant. Tenant shall indemnify and hold Landlord harmless from any loss,
damage, claim, liability, cost or expense (including reasonable attorneys'
fees) resulting from any delay by Tenant in surrendering the Premises (except
with Landlord's prior written consent), including but not limited to any
claims made by a succeeding tenant by, reason of such delay. Acceptance
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of rent by Landlord following expiration or termination of this Lease shall not
constitute a renewal of this Lease.
2.7 Option To Extend Term. Tenant shall have the option to extend
the term of this Lease at the minimum rental set forth in Section 3.1 (e)
and (f) and otherwise upon all the terms and provisions set forth herein with
respect to the initial term of this Lease, for up to two (2) additional periods
of five (5) years each, commencing upon expiration of the initial term hereof.
Exercise of such option with respect to the first such extended term shall be
by written notice to Landlord at least six (6) months and not more than eight
(8) months prior to the expiration of the initial term hereof; exercise of such
option with respect to the second such extended term, if the first extension
options has been duly exercised, shall be by like written notice to Landlord at
least six (6) months and not more than eight (8) months prior to the
expiration of the first extended term hereof. If there exists a material event
of default on the part of Tenant on the date of any such notice, then the
notice shall not be effective. If Tenant properly exercises one or more
extension options under this Section, then all references in this Lease (other
than in this Section 2.7) to the "term" of this Lease shall be construed to
include the extension term(s) thus elected by Tenant. Except as expressly set
forth in this Section 2.7 (as modified by clause (ii) of Section 1.3(c), if
applicable), Tenant shall have no right to extend the term of this Lease beyond
its prescribed term. To the extent provided in Sections 1.3(c)(ii) and 1.3(d),
Tenant may elect an early and/or partial exercise of one or both extended terms
in connection with an acceptance of Offered Space; in the event of any such
partial exercise, the remaining unexercised portion of the extended term(s)
shall be subject to a continuing option under this Section 2.7, as provided in
Section 1.3(d), and upon a proper exercise by Tenant of such remaining extended
term(s), the rent for such remainder of the extended term(s) shall be
determined, as of the commencement of such remainder of the extended term(s),
in the manner provided in Section 3.1(e) or 3.1(f), as applicable.
3. RENTAL
3.1. Minimum Rental.
(a) Tenant shall pay to Landlord as minimum rental for
the Premises, in advance, without deduction, offset, notice or demand, on or
before the Commencement Date and on or before the first day of each subsequent
calendar month of the term of this Lease, the following amounts per month: for
months 1-12, the sum of $99,000.00 per month; for months 13-24, the sum of
$142,254.00 per month; and for months 25-132, the adjusted rent determined
under Section 3.1(b) hereof. Notwithstanding the foregoing provisions of this
Section 3.1, however, at any time after month 24 of the term of this Lease,
Tenant in its sole discretion may elect, by written notice to Landlord, to
convert its minimum rental obligation for the period from the date of such
notice through the remainder of the initial term of this Lease to the following
amounts per month (as applicable):
<TABLE>
<CAPTION>
Months After Minimum Rental
Commencement Date (per month)
------------------ ----------------
<S> <C>
25-36 $ 150,789.00
37-48 156,821.00
49-60 163,094.00
61-72 169,617.00
73-84 176,402.00
85-96 183,458.00
97-108 190,796.00
109-120 198,428.00
121-132 206,365.00
</TABLE>
If the obligation to pay minimum rental hereunder commences on other than the
first day of a calendar month or if the term of this Lease terminates on other
than the last day of a calendar month, the minimum rental for such first or
last month of the term of this Lease, as the case may be, shall be prorated
based on the number of days the term of this Lease is in effect during such
month. If an increase in minimum rental becomes effective on a day other than
the first day, of
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a calendar month, the minimum rental for that month shall be the sum of the two
applicable rates, each prorated for the portion of the month during which such
rate is in effect.
(b) If and only if Tenant does not exercise its
election under Section 3.1(a) to convert its minimum rental obligation to the
rent schedule set forth in Section 3.1(a), then and only then shall the
minimum rental hereunder be subject to adjustment as set forth in this Section
3.1(b). To the extent Tenant does not exercise such election as of the end
of month 24 of the term of this Lease, then for so long as such election
remains unexercised minimum rental hereunder shall be subject to adjustment on
the second anniversary of the Commencement Date effective for months 25-36 of
the term of this Lease, and on each subsequent anniversary of the Commencement
Date until the expiration of the initial term of this Lease, effective for the
succeeding twelve (12) months of the term of this Lease (each such anniversary
being herein called an "Adjustment Date"), in accordance with the provisions of
this paragraph (b). The base for computing such adjustment shall be (i) for
the first such adjustment, the Consumer Price Index for All Urban Consumers,
San Francisco/Oakland/San Jose Metropolitan Area, All Items (1982-84 = 100),
produced by the United States Department of Labor, Bureau of Labor Statistics
("Index") which is published for the month two (2) months prior to the month in
which the Commencement Date occurs and (ii) for each subsequent adjustment, the
Extension Index (as hereinafter defined) used for the immediately preceding
adjustment (each such Index identified in clause (i) or (ii) of this sentence,
as applicable, being hereinafter called the "Beginning Index"). If the Index
which is published for the month two (2) months prior to the month in which the
Adjustment Date occurs (the "Extension Index") has increased over the Beginning
Index, the minimum rental payable thereafter shall be increased to the
following amount(s):
(i) For the first such Adjustment Date, to an amount
equal to the minimum rental in effect immediately prior to such
Adjustment Date multiplied by the lesser of (x) 1.06 or (y) a
fraction, the numerator of which is equal to the sum of the Beginning
Index for such first Adjustment Date plus the product of 2.5 times the
difference between the Extension Index for such first Adjustment Date
and the Beginning Index for such First Adjustment Date, and the
denominator of which is the Beginning Index for such first Adjustment
Date; and
(ii) For each subsequent Adjustment Date, to an amount
equal to the minimum rental in effect immediately prior to such
Adjustment Date multiplied by the lesser of (x) 1.05 or (y) a
fraction, the numerator of which is equal to the sum of the Beginning
Index for such Adjustment Date plus the product of 2.5 times the
difference between the Extension Index for such Adjustment Date and
the Beginning Index for such Adjustment Date, and the denominator of
which is the Beginning Index for such Adjustment Date.
If the Extension Index is not available until after the Adjustment Date, Tenant
shall continue to pay the then prevailing minimum rental until the Extension
Index is published, whereupon the adjustment provided in this paragraph shall
be made retroactive to the Adjustment Date and any accumulated excess of the
adjusted minimum rental over the amounts actually paid by Tenant since the
Adjustment Date shall be paid promptly by Tenant to Landlord upon notice by
Landlord to Tenant of the adjusted minimum rental. If the Index is changed so
that the base year differs from the base year used as of the Commencement Date,
the Index shall be converted in accordance with the conversion factor published
by the United States Department of Labor, Bureau of Labor Statistics. If the
Index is discontinued or substantially revised during the term of this Lease,
any comparable governmental index or computation with which it is replaced (or,
if none is available, any privately published index which is comparable in
coverage and purpose) shall be designated by Landlord in order to obtain
substantially the same result as would have been obtained if the Index had not
been discontinued or revised. Upon any adjustment of the monthly minimum
rental in accordance with the provisions of this paragraph, Landlord and Tenant
shall immediately execute a written acknowledgement of the new minimum rental
as adjusted, which acknowledgement shall be deemed to be incorporated herein
by this reference; provided, however, that any failure of one or both parties
to execute and deliver such a written acknowledgement shall not limit or affect
in any way the other obligations of the parties with respect to the applicable
rental adjustment or any subsequent rental adjustments required under this
paragraph (b).
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(c) The minimum rental amounts specified in this Section
3.1 are based upon an estimated area of 129,322 square feet for the Premises
(except during months 1-12 when the estimated area of the Premises is assumed
to be 90,000 square feet, reflecting the estimated area of the first phase of
the build-out of interior improvements in the Premises). If the actual area of
the Premises, when completed, is greater or less than such estimated area, then
the minimum rentals specified in Sections 3.1(a) and/or (b), as applicable,
shall be adjusted for each rental period in strict proportion to the ratio
between the actual area of the Premises during the applicable period (which
area shall be determined on the basis of measurement from the exterior faces of
the exterior walls of the Building, excluding overhangs, and, for purposes of
determining the amount of space occupied by Tenant during the first twelve
months of the term of this Lease, shall be measured to the centerline of any
interior demising walls) and the assumed area of 90,000 or 129,322 square feet,
as applicable. If Tenant occupies more than 90,000 square feet of the Premises
during any portion of the first twelve months of the term of this Lease (due to
acceleration of Tenant's occupancy of the second phase of interior improvements
or for any other reason), or if the actual area of the first phase of interior
improvements is more or less than 90,000 square feet, then the minimum rental
specified above for such portion of the first twelve months of the term of this
Lease shall be adjusted in strict proportion to the ratio between the
additional space occupied by Tenant in excess of 90,000 square feet or the
actual area of the first phase of interior improvements, as applicable, as
determined on the basis of measurement set forth in the immediately preceding
sentence hereof, and the assumed area of 90,000 square feet. If Landlord's
substantial completion of the second phase of interior improvements occurs
later than twelve months after the Commencement Date, then to the extent such
delayed completion results from any cause other than delays attributable to
acts or omissions of Tenant or its agents, employees or contractors, the
minimum rentals specified in Sections 3.1(a) and or (b), as applicable, shall
be reduced, for the period from the beginning of the thirteenth month of the
term of this Lease until the substantial completion and delivery by Landlord of
the second phase of interior improvements, in strict proportion to the ratio
between (i) the greater of the actual area of the space occupied by Tenant in
the Premises or the actual area of the first phase of interior improvements, as
determined in each case on the basis of measurement set forth in the second
preceding sentence hereof, and (ii) the assumed area of 129,322 square feet.
Measurements of building area under this paragraph shall be made initially by
Landlord's architect, subject to review and approval by Tenant's architect.
(d) The minimum rental amounts specified in Section 3.1(a)
do not reflect any excess improvement costs that may be chargeable to Tenant in
accordance with Exhibit C. If, upon completion of construction of the Premises,
it is determined that there are any such excess improvement costs chargeable to
Tenant in accordance with Exhibit C, then Tenant shall pay to Landlord as
additional minimum rental for the Premises during the initial term of this
Lease an amount each month equal to the amount necessary to amortize such
excess improvement costs on a level payment basis over the initial term of this
Lease with an imputed return at the rate of ten percent (10%) per annum. Upon
determination of the amount of any additional minimum rental in accordance with
the provisions of this paragraph, Landlord and Tenant shall incorporate such
amount in the Acknowledgement of Lease Commencement in the form of Exhibit E or
shall execute a separate written acknowledgement of such additional minimum
rental, which acknowledgement shall be deemed to be incorporated herein by this
reference; provided, however, that any failure of one or both parties to
execute and deliver such a written acknowledgement shall not limit or affect in
any way the other obligations of the parties with respect to the additional
minimum rental (if any) due under this paragraph (d). Notwithstanding any
other provisions of this Section 3.1, any additional minimum rental payable
under this paragraph (d) shall not be subject to adjustment under Section 3.1
(a), (b) or (c), regardless of any adjustments that may otherwise be
appropriate for other minimum rental components under such paragraphs (a), (b)
or (c).
(e) If Tenant properly exercises its right to extend the
term of this Lease pursuant to Section 2.7 hereof, the minimum rental during
the first extended term shall be equal to ninety-five percent (95%) of the fair
market rental value of the Premises (in "as is" condition as theretofore
improved under Section 2.4 and Exhibit C, but without regard to any tenant
improvement allowance for the extended term and without regard to the value of
any
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improvements which were installed by Tenant at its own cost and which Tenant has
the right to remove from the Premises pursuant to Article 7 hereof upon
expiration of the Lease), including any cost-of-living adjustments or other
rental increase provisions then customary in the relevant market for comparable
commercial leases, determined as of the commencement of such extended term in
accordance with this paragraph. Upon Landlord's receipt of a proper notice of
Tenant's exercise of its option to extend the term of this Lease, the parties
shall have sixty (60) days in which to agree on the fair market rental
(including any applicable rental increase provisions) for the Premises (as
theretofore improved under Section 2.4 and Exhibit C) at the commencement of the
first extended term for the uses permitted hereunder. If the parties agree on
such fair market rental and rental increase provisions (if any), they shall
execute an amendment to this Lease stating the amount of the applicable minimum
monthly rental and any applicable rental increase provisions. If the parties
are unable to agree on such rental (including any applicable rental increase
provisions) within such sixty (60) day period, then within fifteen (15) days
after the expiration of such period each party, by written notice to the other
party, shall appoint a real estate appraiser with at least five (5) years
experience appraising similar commercial properties in the City of Pleasanton or
County of Alameda. If either party fails to appoint an appraiser within the
allotted time, the single appraiser appointed by the other party shall be the
sole appraiser. If an appraiser is appointed by each party, the two appraisers
so appointed shall appoint a third qualified appraiser within fifteen (15) days
after the appointment of the later of the two appraisers to be appointed; if the
two appraisers are unable to agree upon a third appraiser, either party may,
upon not less than five (5) days notice to the other party, apply to the
Presiding Judge of the Superior Court for the county in which the Property is
located for the appointment of a third qualified appraiser. Each party shall
bear the fees and charges of the appraiser appointed by such party, shall bear
its own legal fees in connection with appointment of the third appraiser and
shall bear one-half of any other costs of appointment of the third appraiser and
of such third appraiser's fee. Each appraiser designated under this paragraph,
however selected, shall be a person who has not acted for either party (or for
any person or entity which controls, is controlled by or is under common control
with either party) in any capacity within five (5) years prior to the date of
such designation hereunder. Within thirty (30) days after the appointment of
the third appraiser, a majority of the three appraisers shall set the fair
market rental and any applicable rental increase provisions for the first
extended term and shall so notify the parties. If a majority are unable to
agree within the allotted time, each of the three appraisers at the end of such
30-day period shall submit his or her written determination of the fair market
rental and any applicable rental increase provisions and (i) the three appraised
fair market rentals shall be added together and divided by three and the
resulting quotient shall be the fair market rental for the first extended term
(except that any fair market appraisal that differs by more than 10% from the
"middle" appraisal shall be disregarded and the averaging process shall be
adjusted accordingly to reflect only the remaining appraisal(s)), and (ii) the
applicable rental increase provision (if any) shall be equal to the mathematical
average (or the nearest reasonable approximation thereto) of the two rental
increase provisions that are most closely comparable, which determinations shall
be binding on the parties and shall be enforceable in any further proceedings
relating to this Lease.
(f) If Tenant properly exercises its right to a second
extended term of this Lease pursuant to Section 2.7 hereof, the minimum rental
during such second extended term shall be determined in the same manner
provided in paragraph (e) of this Section for the first extended term, except
that (i) the determination shall be made as of the commencement of the second
extended term and (ii) the applicable percentage of fair market rental under
clause (ii) of the first sentence of paragraph (e) of this Section shall be one
hundred percent (100%) rather than ninety-five percent (95%).
3.2. Late Charge. If Tenant fails to pay when due rental or other
amounts due Landlord hereunder, such unpaid amounts shall bear interest for the
benefit of Landlord at a rate equal to the lesser of fifteen percent (15%) per
annum or the maximum rate permitted by law, from the date due to the date of
payment. In addition to such interest, Tenant shall pay to Landlord a late
charge in an amount equal to five percent (5%) of any installment of minimum
rental and any other amounts due Landlord if not paid in full on or before the
third (3rd) day after written notice from Landlord to Tenant that such rental
or other amount is past due; provided, however, that if any payment of rent or
other amounts by Tenant is more than five (5) days late and Landlord gave
written notice of delinquency to Tenant prior to such payment, than for the
next twelve (12) calendar months after such written notice was given, Tenant
shall be
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liable for late charges on any further payment of rental or other amount that
is not paid on or before the fifth (5th) day after such rental or other amount
is due, without any requirement of prior notice from Landlord to Tenant of such
default or delinquency. Tenant acknowledges that late payment by Tenant to
Landlord of rental or other amounts due hereunder will cause Landlord to incur
costs not contemplated by this Lease, including, without limitation, processing
and accounting charges and late charges which may be imposed on Landlord by the
terms of any loan relating to the Property. Tenant further acknowledges that
it is extremely difficult and impractical to fix the exact amount of such costs
and that the late charge set forth in this Section 3.2 represents a fair and
reasonable estimate thereof. Acceptance of any late charge by Landlord shall
not constitute a waiver of Tenant's default with respect to overdue rental or
other amounts, nor shall such acceptance prevent Landlord from exercising any
other rights and remedies available to it. Acceptance of rent or other
payments by Landlord shall not constitute a waiver of late charges or interest
accrued with respect to such rent or other payments or any prior installments
thereof, nor of any other defaults by Tenant, whether monetary or non-monetary
in nature, remaining uncured at the time of such acceptance of rent or other
payments.
4. TAXES
4.1. Personal Property. Tenant shall be responsible for and shall
pay prior to delinquency all taxes and assessments levied against or by reason
of (a) any and all alterations, additions and items installed or placed on the
Premises and taxed as personal property rather than as real property, and (b)
all personal property, trade fixtures and other property installed or placed by
Tenant on or about the Property. Upon request by Landlord, Tenant shall
furnish Landlord with satisfactory evidence of Tenant's payment thereof. If at
any time during the term of this Lease any of said alterations, additions or
personal property, whether or not belonging to Tenant, shall be taxed or
assessed as part of the Property, then such tax or assessment shall be paid by
Tenant to Landlord immediately upon presentation by Landlord of copies of the
tax bills in which such taxes and assessments are included and shall, for the
purposes of this Lease, be deemed to be personal property taxes or assessments
under this Section 4.1.
4.2. Real Property. To the extent any real property taxes and
assessments on the Premises, on any improvements therein or on the portion of
the Property identified as Phase VI in the Site Plan are assessed directly to
Tenant, Tenant shall be responsible for and shall pay prior to delinquency all
such taxes and assessments. Upon request by Landlord, Tenant shall furnish
Landlord with satisfactory evidence of Tenant's payment thereof. To the extent
the Property, the Premises and/or any improvements therein are taxed or
assessed to Landlord following the Commencement Date, such real property taxes
and assessments shall constitute Operating Expenses (as that term is defined in
Section 5.2 of this Lease) and shall be paid in accordance with the provisions
of Article 5 of this Lease.
5. OPERATING EXPENSES
5.1. Payment Of Operating Expenses.
(a) Tenant shall pay to Landlord, at the time and in the
manner hereinafter set forth, as additional rental, an amount equal to
sixty-nine and fifty-nine hundredths percent (69.59%) ("Tenant's Building
Operating Cost Share") or thirty-eight and fifty-seven hundredths percent
(38.57%) ("Tenant's Land Operating Cost Share"), as applicable, of the
Operating Expenses defined in Section 5.2. Tenant's Land Operating Cost Share
shall be applicable in determining Tenant's share of (x) the taxes, assessments
and other expenses described in clause (iii) of Section 5.2 (excluding personal
property taxes and the portion of real property taxes, assessments and similar
items allocable to buildings or improvements, as opposed to land), and (y)
assessments and dues described in clause (vi) of Section 5.2 and payable to the
Hacienda Business Park Owners' Association or otherwise payable under the
governing covenants, conditions and restrictions for the Hacienda Business
Park, including (but not limited to) the master Declaration as defined in
Section 15.4 hereof. Tenant's Building Operating Cost Share shall be
applicable in determining Tenant's share of all other Operating Expenses,
including (but not limited to), under Section 5.2(iii), personal property taxes
and the portion of real property taxes, assessments and similar items
allocable to buildings or Improvements as opposed to land.
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(b) The parties acknowledge that Landlord intends to
construct additional buildings on the Property, some of which may be constructed
substantially concurrently with the Building and some of which may be
constructed at a later time. Tenant's Building Operating Cost Share as
specified in paragraph (a) of this Section is based upon an estimated area of
90,000 square feet for the Premises (that being the portion anticipated to be
built out as the first phase of interior improvements and occupied by Tenant
during the first twelve months of the term) and upon an aggregate area of
129,322 square feet for the buildings owned by Landlord on the Property. If the
actual area of the first phase of interior improvements or of the entire
Building (when completed), as determined on the basis of measurement set forth
in Section 3.1 (c) hereof, differs from the assumed numbers set forth above, or
when Tenant occupies more than 90,000 square feet of the Premises as
contemplated in Section 3.1(c) and Exhibit C, then Tenant's Building Operating
Cost Share shall be adjusted to reflect the actual areas so determined. If and
when Landlord constructs additional buildings on the Property from time to time,
then the denominator of the fraction by which Tenant's Building Operating Cost
Share is determined shall be adjusted to include the gross square footage of
each such additional building from and after the date on which construction of
such additional building is substantially complete (as that term is defined in
Section 2.1 hereof), and the good faith determination of the gross square
footage of such additional building by Landlord's architects (in accordance with
whatever basis of measurement is applied by Landlord in good faith in
determining Operating Expense shares for tenants of such additional building
pursuant to the terms of their leases) shall be final and binding upon the
parties for purposes of this Section 5.1(b).
(c) Tenant's Land Operating Cost Share as specified in
paragraph (a) of this Section is based upon an estimated area of 7.46 acres for
the portion of the Property designated as Phase VI on the Site Plan and a
surveyed area of 19.339 acres for the entire Property. If the boundaries of
the Phase VI land area (which is intended to be the land area reasonably
allocable to the Building and its users, albeit on a nonexclusive basis) are
changed at any time by mutual agreement of Landlord and Tenant, or if the
actual area of Phase VI is determined to be greater or smaller than 7.46 acres,
then Tenant's Land Operating Cost Share shall be adjusted accordingly.
(d) If Landlord actually receives (and is not required to
pay over to The Prudential Insurance Company of America), during the term of
this Lease, any refund of real property taxes or assessments with respect to
the Property and such refund is attributable or allocable in whole or in part
to taxes or assessments paid during any period of time during which Tenant was
paying a share of real property taxes and assessments on the Property or any
portion thereof pursuant to this Lease, then the portion of such refund
received by Landlord that is fairly allocable to the amounts actually paid by
Tenant for such real property taxes and assessments during any portion of the
refund period shall be applied as a credit against Tenant's remaining Operating
Expense obligations under this Lease and, to the extent such credit exceeds the
total amount of Tenant's remaining Operating Expense obligations under this
Lease, shall be refunded in cash by Landlord to Tenant concurrently with the
final reconciliation of Tenant's Operating Expense obligations under this
Lease.
5.2. Definition Of Operating Expenses. Subject to the exclusions
and provisions hereinafter contained, the term "Operating Expenses" shall mean
the total costs and expenses incurred by or allocable to Landlord for
management, operation and maintenance of the Property and the buildings and
other improvements thereon, including, without limitation, the following costs
and expenses:
(i) insurance, property management, landscaping and
operations, repairs and maintenance of buildings and Common Areas,
except that property management expenses shall be excluded to the
extent they exceed two percent (2%) of minimum rent,
(ii) all utilities and services;
(iii) real and personal property taxes and assessments or
substitutes therefor, including (but not limited to) any possessory
interest, use, business, license or other taxes or fees, any taxes
imposed directly on rents or services, any assessments or charges for
police or fire protection, housing, transit, open space, street or
sidewalk construction or maintenance or other similar services from
time to time by any governmental or
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quasi-governmental entity, and any other new taxes on landlords in
addition to taxes now in effect, but excluding (aa) fees, exactions
and taxes imposed as a condition to the issuance of any entitlements
or building permits related to the Property and (bb) gift taxes,
inheritance taxes, transfer taxes and net income taxes of Landlord;
(iv) supplies, equipment, utilities and tools used in
management, operation and maintenance of the Property;
(v) capital improvements to the Property or the buildings
and other improvements thereon, amortized over the reasonable useful
life of the applicable improvement, (aa) which reduce or will cause
future reduction of other items of Operating Expenses for which Tenant
is otherwise required to contribute (provided that the amortizable
costs for this category of improvement shall be limited to the amount
of the reasonably estimated savings to be produced thereby), or (bb)
which are required by law, ordinance, regulation or order of any
governmental authority, or (cc) of which Tenant has use or which
benefit Tenant (provided that amortizable improvements under this
category shall be limited to those which are approved in writing by
Tenant or which are merely a reasonably necessary repair or replacement
of an existing improvement with one of like kind and quality, in which
event no such approval by Tenant shall be required; and provided
further that Tenant's obligation with respect to any amortization of
capital expenditures under this Section 5.2(v) shall terminate on the
earlier of (x) the expiration of the term of this Lease or (y) the
next date as of which minimum rental under this Lease is adjusted or
reset to a new rental based on fair market rental value (excluding,
however, any CPI-based or stepped adjustments pursuant to Section 3.1
(a) or (b) or pursuant to a prior fair market rental determination));
and
(vi) any other costs (including, but not limited to, any
parking or utilities fees or surcharges) allocable to or paid by
Landlord, as owner of the Property or the buildings and other
improvements thereon, pursuant to any applicable laws, ordinances,
regulations or orders of any governmental or quasi-governmental
authority or pursuant to the terms of any declarations of covenants,
conditions and restrictions now or hereafter affecting the Property.
The distinction between items of ordinary operating maintenance and repair and
items of a capital nature shall be made in accordance with generally accepted
accounting principles applied on a consistent basis. Notwithstanding any other
provisions of this Section 5.2, Operating Expenses shall not include any of the
following:
(A) any costs attributable to the work for which Landlord
is required to pay under Section 2.4 or Exhibit C;
(B) that portion of any Operating Expenses (other than
Operating Expenses to which Tenant's Land Operating Expense Share is
applicable) that is fairly allocable to any undeveloped portion of the
Property (including, but not limited to, Phase V and Phase VII as
designated on the Site Plan), until such time as the building(s) and
improvements on such portion of the Property have been substantially
completed and such portion of the Property is properly includable in
determining Tenant's Building Operating Cost Share under Section
5.1(b) hereof;
(C) the cost to repair damage caused by (i) fire,
earthquake or other peril, or (ii) the negligence of Landlord, its
agents, employees or contractors, or any other tenants of the Property
or their respective agents, employees, contractors or invitees;
(D) costs associated with procurement of new tenants,
preparation of their spaces and enforcement of their leases, including
(but not limited to) brokerage commissions, tenant improvement costs,
and attorneys' fees;
(E) the cost of maintenance and repair of structural
elements of the buildings located on the Property from time to time,
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(F) the cost to repair any defects in design,
construction or equipment for any building located on the Property
from time to time, to the extent resulting from or attributable to
work undertaken by Landlord or by its contractors on Landlord's behalf
(including, but not limited to, costs to correct any building code
violations caused by or attributable to Landlord's work);
(G) the cost to investigate and/or remediate any
contamination by hazardous or toxic substances or wastes, except to
the extent caused by Tenant or its agents, employees or contractors;
or
(H) the cost to correct any violation of any declaration
of covenants, conditions and restrictions applicable to the Property,
except to the extent such violation is caused by Tenant or its agents,
employees or contractors.
5.3. Determination Of Operating Expenses. On or before the
Commencement Date and during the last month of each calendar year of the term
of this Lease ("Lease Year"), or as soon thereafter as practical, Landlord
shall provide Tenant notice of Landlord's estimate of the Operating Expenses
for the ensuing Lease Year or applicable portion thereof. On or before the
first day of each month during the ensuing Lease Year or applicable portion
thereof, beginning on the Commencement Date, Tenant shall pay to Landlord
Tenant's Land Operating Cost Share or Tenant's Building Operating Cost Share,
as applicable, of the portion of such estimated Operating Expenses allocable
(on a prorata basis) to such month; provided, however, that if such notice is
not given in the last month of a Lease Year, Tenant shall continue to pay on
the basis of the prior year's estimate, if any, until the month after such
notice is given. If at any time or times it appears to Landlord that the
actual Operating Expenses will vary from Landlord's estimate by more than five
percent (5%), Landlord may, by notice to Tenant, revise its estimate for such
year and subsequent payments by Tenant for such year shall be based upon such
revised estimate.
5.4. Final Accounting For Lease Year. Within ninety (90) days
after the close of each Lease Year, or as soon after such 90-day period as
practicable, Landlord shall deliver to Tenant a statement of Tenant's Land
Operating Cost Share and Tenant's Building Operating Cost Share, as applicable,
of the Operating Expenses for such Lease Year prepared by Landlord from
Landlord's books and records, which statement shall be final and binding on
Landlord and Tenant, except as otherwise provided herein. Notwithstanding any
other provisions of this Section 5.4, Tenant shall have the right to audit or
review, directly or through its designated representative, Landlord's books and
records relating to Operating Expenses for any period, subject to the following
conditions: Such right shall be exercisable only by written request to Landlord
within 180 days after Tenant's receipt from Landlord of a statement of actual
Operating Expenses, shall be limited to the period covered by such statement,
and shall be exercisable only during normal business hours, on not less than
ten (10) days prior written notice to Landlord, and at Tenant's sole cost and
expense, except as hereinafter provided. To the extent that Tenant, following
any such review or audit, disputes any item in the applicable statement or in
the calculation of Tenant's obligations thereunder, Tenant shall give Landlord
written notice of the disputed items, in reasonable detail and with reasonable
supporting information, and Landlord and Tenant shall negotiate diligently and
in good faith to try to resolve the dispute. If Landlord and Tenant are unable
to resolve the dispute within thirty (30) days after Landlord's receipt of
Tenant's written notice specifying the disputed items, then either party may
elect, by written notice to the other, to have the dispute resolved through a
review and determination by an independent Certified Public Accountant who has
not previously rendered professional services to either party. Such review and
determination by the independent CPA shall be based on generally accepted
accounting principles and tax accounting principles, consistently applied. The
independent CPA shall be selected by mutual agreement of Landlord and Tenant;
if they are unable to agree on such selection within twenty (20) days after a
party's notice of desire to submit the dispute to a CPA review, then the
independent CPA shall be appointed by the Presiding Judge of the Alameda
County Superior Court upon application by either party (with notice to the
other party). If it is determined, on the basis of Landlord's statement or by
mutual agreement of Landlord and Tenant or by independent CPA review, as
applicable, that Tenant owes an amount that is more or less than the estimated
payments previously made by Tenant for the applicable period, then Tenant or
Landlord, as the case may be, shall pay the deficiency or overpayment to the
other party within thirty (30) days after final determination of such
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underpayment or overpayment. The expenses of the independent CPA, if any,
shall be borne by Tenant unless the CPA's determination reflects an
overstatement or overpayment of five percent (5%) or more in Tenant's
obligation for Operating Expenses for the applicable period, in which event the
expenses of the independent CPA shall be borne by Landlord. Each party agrees
to maintain the confidentiality of the findings of any audit or review in
accordance with the provisions of this Section 5.4. Failure or inability of
Landlord to deliver the annual statement within such ninety (90) day period
shall not impair or constitute a waiver of Tenant's obligation to pay Operating
Expenses, or cause Landlord to incur any liability for damages.
5.5. Proration. If the Commencement Date falls on a day other than
the first day of a Lease Year or if this Lease terminates on a day other than
the last day of a Lease Year, the amount of Tenant's Land Operating Cost Share
and Tenant's Building Operating Cost Share, as applicable, payable by Tenant
with respect to such first or last partial Lease Year shall be prorated on the
basis which the number of days during such Lease Year in which this Lease is in
effect bears to 365. The termination of this Lease shall not affect the
obligations of Landlord and Tenant pursuant to Section 5.4 to be performed
after such termination.
6. UTILITIES
6.1. Payment. Commencing with the Commencement Date and thereafter
throughout the term of this Lease, Tenant shall pay, before delinquency, all
charges for water, gas, heat, light, electricity, power, sewer, telephone,
alarm system, janitorial and other services or utilities supplied to or
consumed in or upon the Premises, including any taxes on such services and
utilities.
6.2 Interruption. There shall be no abatement of rent or other
charges required to be paid hereunder and Landlord shall not be liable in
damages or otherwise for interruption or failure of any service or utility
furnished to or used in the Premises because of accident, making of repairs,
alterations or improvements, severe weather, difficulty or inability in
obtaining services or supplies, labor difficulties or any other cause.
Notwithstanding the foregoing provisions of this Section 6.2, however, in the
event of any interruption or failure of any service or utility to the Premises
which is caused in whole or in part by the negligence or willful misconduct of
Landlord or its agents or employees, which continues for more than 48 hours and
which materially impairs Tenant's ability to use the Premises for their
intended purpose hereunder, then Tenant's rental obligations under this Lease
shall be abated in proportion to the extent of the proportional fault of
Landlord and its agents and employees and in proportion to the degree of
impairment of Tenant's use of the Premises, and such abatement shall be
retroactive to the commencement of the interruption or failure and shall
continue until Tenant's use of the Premises is no longer materially impaired
thereby.
7. ALTERATIONS
7.1. Right To Make Alterations. Tenant shall make no alterations,
additions or improvements to the Premises, other than interior non-structural
alterations costing less than Fifty Thousand Dollars ($50,000.00) in each
instance, without the prior written consent of Landlord. All such alterations,
additions and improvements shall be completed with due diligence in a
first-class workmanlike manner, in compliance with plans and specifications
approved in writing by Landlord and in compliance with all applicable laws,
ordinances, rules and regulations. All such alterations, additions and
improvements shall be performed solely by a licensed and bonded general
contractor approved by Landlord, and Landlord shall be named as an additional
insured on such contractor's bond. Landlord may also, at its election, require
Tenant to furnish to Landlord, at Tenant's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of any such work, to ensure completion of the work and to protect Landlord
against any liens or claims relating thereto. If Tenant wishes to know in
advance whether it will be required to remove any specific alteration, addition
or improvement upon termination of this Lease, as contemplated in Section 7.2
hereof, then Tenant shall make an express written request for such a
determination by Landlord at the time Tenant requests Landlord's approval of
the applicable alteration, addition or improvement; if Tenant makes such a
written request and Landlord does not, in response thereto, advise Tenant that
Landlord intends
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to require (or at least to reserve the right to require) removal of the
applicable alteration, addition or improvement upon expiration of this Lease,
then Landlord shall not be entitled to request such removal, notwithstanding
any contrary provisions in Section 7.2 hereof.
7.2. Title To Alterations. All alterations, additions and
improvements installed in, on or about the Premises shall be part of the
Building and the property of Landlord, unless Landlord elects to require Tenant
to remove the same upon the termination of this Lease; provided, however, that
(a) the foregoing shall not apply to Tenant's movable furniture and trade
fixtures not affixed to the Property, and (b) Tenant shall not under any
circumstances be required to remove any of the improvements constructed by
Landlord pursuant to Section 2.4 and Exhibit C.
7.3. Tenant Fixtures. Notwithstanding the provisions of Sections
7.1 and 7.2, Tenant may install, remove and reinstall trade fixtures without
Landlord's prior written consent, except that any fixtures which are affixed to
the Premises or which affect the exterior or structural portions of the
Building shall require Landlord's written approval. The foregoing shall apply
to Tenant's signs, logos and insignia, all of which Tenant shall have the right
to place and remove and replace subject only to (a) Landlord's prior written
consent as to location, size and composition and (b) compliance with all
applicable legal requirements and all applicable covenants, conditions and
restrictions. Tenant shall immediately repair any damage caused by
installation and removal of fixtures under this Section 7.3.
7.4. No Liens. Tenant shall at all times keep the Premises free
from all liens and claims of any contractors, subcontractors, materialmen,
suppliers or any other parties employed either directly or indirectly by Tenant
in construction work on or about the Premises. Tenant may contest any claim of
lien, but only if, prior to such contest, Tenant either (i) posts security in
the amount of the claim, plus estimated costs and interest, or (ii) records a
bond of a responsible corporate surety in such amount as may be required to
release the lien from the Premises. Tenant shall indemnify, defend and hold
Landlord harmless against any and all liability, loss, damage, cost and other
expenses, including, without limitation, reasonable attorneys' fees, arising out
of claims of any lien for work performed or materials or supplies furnished at
the request of Tenant or persons claiming under Tenant.
8. MAINTENANCE AND REPAIRS
8.1. Landlord's Work.
(a) Landlord shall repair and maintain or cause to be
repaired and maintained the Common Areas of the Property and the roof, exterior
walls and other structural portions of the Building. The cost of all work
performed by Landlord under this Section 8.1(a) shall be an Operating Expense
hereunder, except to the extent such work (i) is required due to the negligence
or willful misconduct of Landlord or its agents or employees, of any other
tenant of the Property other than Tenant or of the agents, employees or
invitees of any such other tenant, (ii) is a service to a specific tenant or
tenants, other than Tenant, for which Landlord has received or has the right to
receive full reimbursement, (iii) is a capital expense not includible as an
Operating Expense under Section 5.2 hereof, (iv) is otherwise expressly
excluded from the definition of Operating Expenses under Section 5.2 hereof, or
(v) is required due to the negligence or willful misconduct of Tenant or its
agents, employees or invitees (in which event Tenant shall bear the full cost
of such work pursuant to the indemnification provided in Section 10.6 hereof,
subject to the release set forth in Section 10.4 hereof). Tenant knowingly and
voluntarily waives the right to make repairs at Landlord's expense, or to
offset the cost thereof against rent, under any law, statute, regulation or
ordinance now or hereafter in effect.
(b) Notwithstanding any contrary provisions of Section
8.1(a) hereof or of any other provision of this Lease, to the extent a
substantially complete replacement (as opposed to ordinary or routine
maintenance or repair) is required from time to time with respect to the roof or
major building systems (HVAC, plumbing, electrical and mechanical systems) of
the Building, or with respect to the parking or driveway areas or other portions
of the Common Areas of the Property, Landlord shall perform such replacement
when and as reasonably required. To the extent such replacement is required as
a result of defective design, construction, installation or
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materials, or as a result of the negligence or willful misconduct of Landlord
or its agents or employees, or as a result of the negligence or willful
misconduct of any other tenant of the Property other than Tenant or of any such
other tenant's agents, employees or invitees, such replacement shall be at
Landlord's sole cost and expense, subject to any rights of reimbursement
Landlord may have against contractors, suppliers, other tenants or other third
parties. To the extent such replacement is required as a result of the
negligence or willful misconduct of Tenant or its agents, employees or
invitees, Tenant shall bear the full cost of such work pursuant to the
indemnification provided in Section 10.6 hereof, subject to the release set
forth in Section 10.4 hereof. To the extent such replacement is required as a
result of casualty or condemnation, the provisions of Article 13 hereof shall
be controlling. To the extent such replacement is required due to ordinary
wear and tear or obsolescence, the cost of such replacement shall be amortized
by Landlord over the useful life of the replacement improvement or system and
either (i) in the case of replacement of the roof or a major building system of
the Building, Tenant shall reimburse to Landlord, as additional rent and not as
an Operating Expense, on a monthly basis or at other regular intervals as
reasonably requested by Landlord, the entire amortized cost of such replacement
allocable to the period of time from the date of replacement until the earlier
of (x) the expiration of the term of this Lease or (y) the next date as of
which minimum rental under this Lease is adjusted or reset to a new rental
based on fair market rental value (excluding, however, any CPI-based or stepped
adjustments pursuant to Section 3.1(a) or (b) or pursuant to a prior fair
market rental determination), or (ii) in the case of replacement of parking or
driveway areas or other portions of the Common Areas, the amortized cost of
such replacement shall be recoverable by Landlord as an Operating Expense
pursuant to Section 5.2(v)(cc) hereof.
8.2. Tenant's Obligation For Maintenance.
(a) Good Order, Condition And Repair. Subject to the
provisions of Section 2.4 hereof, by accepting possession of the Premises
(excluding any portion thereof in which interior improvements have not been
completed as a result of the phased construction of such interior improvements)
on the Commencement Date, Tenant shall be deemed to acknowledge that the
Premises (or the applicable initial portion thereof) are then in good and
sanitary order, condition and repair. Except as provided in Section 8.1
hereof, Tenant at its sole cost and expense shall keep and maintain in good and
sanitary order, condition and repair the Premises and every part thereof,
wherever located, including but not limited to the signs, interior, ceiling,
electrical system, plumbing system, telephone and communications systems, HVAC
equipment and related mechanical systems serving the Premises (for which
equipment and systems Tenant shall enter into a service contract with a person
or entity designated or approved by Landlord), all doors, door checks, windows,
plate glass, door fronts, utility facilities, fixtures, lighting, wall
surfaces, floor surfaces and ceiling surfaces and all other interior repairs,
foreseen and unforeseen, as required.
(b) Landlord's Remedy. If Tenant, after notice from
Landlord, fails to make or perform promptly any repairs or maintenance which
are the obligation of Tenant hereunder, Landlord shall have the right, but
shall not be required, to enter the Premises and make the repairs or perform
the maintenance necessary to restore the Premises to good and sanitary order,
condition and repair. Immediately on demand from Landlord, the cost of such
repairs shall be due and payable by Tenant to Landlord.
(c) Condition Upon Surrender. At the expiration or
sooner termination of this Lease, Tenant shall surrender the Premises,
including any additions, alterations and improvements thereto, broom clean, in
good and sanitary order, condition and repair, ordinary wear and tear excepted,
first, however, removing all goods and effects of Tenant and all fixtures and
items required to be removed or specified to be removed at Landlord's election
pursuant to this Lease, and repairing any damage caused by such removal.
Tenant expressly waives any and all interest in any personal property and trade
fixtures not removed from the Premises by Tenant at the expiration or
termination of this Lease, agrees that any such personal property and trade
fixtures may, at Landlord's election, be deemed to have been abandoned by
Tenant, and authorizes Landlord (at its election and without prejudice to any
other remedies under this Lease or under applicable law to remove and either
retain, store or dispose of such property at Tenant's cost and expense, and
Tenant waives all claims against Landlord for any damages resulting from any
such removal, storage, retention or disposal.
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9. USE OF PREMISES
9.1. Permitted Use. Tenant may use the Premises solely for office
and administrative purposes, production of payroll checks, light assembly of
products, storage, non-retail marketing and sales demonstrations and training
classes, and for no other purpose without the prior written consent of
Landlord.
9.2. [Omitted.]
9.3. No Nuisance. Tenant shall not use the Premises for or carry
on or permit upon the Premises or any part thereof any offensive, noisy or
dangerous trade, business, manufacture, occupation, odor or fumes, or any
nuisance or anything against public policy, nor interfere with the rights or
business of any other tenants or of Landlord in or about the Property, nor
commit or allow to be committed any waste in, on or about the Premises, nor
make any other unreasonable use of the Premises. Tenant shall not do or permit
anything to be done in or about the Premises, nor bring nor keep anything
therein, which will in any way cause the Premises to be uninsurable with
respect to the insurance required by this Lease or with respect to standard
fire and extended coverage insurance with vandalism, malicious mischief and
riot endorsements.
9.4. Compliance With Laws. Tenant shall not use the Premises or
permit the Premises to be used in whole or in part for any purpose or use that
is in violation of any applicable laws, ordinances, regulations or rules of any
governmental agency or public authority. Tenant shall keep the Premises
equipped with all safety appliances required by law, ordinance or insurance on
the Premises, or any order or regulation of any public authority because of
Tenant's particular use of the Premises. Tenant shall procure all licenses and
permits required for Tenant's use of the Premises. Tenant shall use the
Premises in strict accordance with all applicable ordinances, rules, laws and
regulations and shall comply with all requirements of all governmental
authorities now in force or which may hereafter be in force pertaining to the
use of the Premises by Tenant, including, without limitation, regulations
applicable to noise, water, soil and air pollution, and making such
nonstructural alterations and additions thereto as may be required from time to
time by such laws, ordinances, rules, regulations and requirements of
governmental authorities or insurers of the Premises (collectively,
"Requirements") because of Tenant's construction of improvements in or other
particular use of the Premises. Any structural alterations or additions
required from time to time by applicable Requirements because of Tenant's
construction of improvements in or other particular use of the Premises shall,
at Landlord's election, either (i) be made by Tenant, at Tenant's sole cost and
expense, in accordance with the procedures and standards set forth in Section
7.1 for alterations by Tenant, or (ii) be made by Landlord at Tenant's sole
cost and expense, in which event Tenant shall pay to Landlord as additional
rent, within ten (10) days after demand by Landlord, an amount equal to all
costs incurred by Landlord in connection with such alterations or additions.
The judgment of any court, or the admission by Tenant in any proceeding against
Tenant, that Tenant has violated any law, statute, ordinance or governmental
rule, regulation or requirement shall be conclusive of such violation as
between Landlord and Tenant.
9.5. Liquidation Sales. Tenant shall not conduct or permit to be
conducted any auction, bankruptcy sale, liquidation sale, or going out of
business sale, in, upon or about the Premises or the Property, whether said
auction or sale be voluntary, involuntary or pursuant to any assignment for the
benefit of creditors, or pursuant to any bankruptcy or other insolvency
proceeding.
9.6. Environmental Matters. Without limiting the generality of
Tenant's obligations set forth in Section 9.4 of this Lease:
(a) Tenant shall not cause or permit any hazardous or
toxic substance or hazardous waste (as defined in any federal, state or local
law, ordinance or regulation applicable to such substances or wastes) to be
brought upon, kept, stored or used on or about the Property without the prior
written consent of Landlord; provided, however, that nothing in this paragraph
(a) shall prohibit Tenant from using ordinary office and cleaning products and
other materials reasonably necessary for the conduct of Tenant's business for
the permitted uses described in Section 9.1 hereof, regardless of whether such
materials constitute hazardous or toxic substances or hazardous wastes, so long
as Tenant provides Landlord with prior or concurrent written notice
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of such use and complies with the requirements of paragraphs (b) and (c) hereof
with respect to such use:
(b) Tenant shall comply with all applicable laws, rules,
regulations, orders, permits, licenses and operating plans of any governmental
authority with respect to the receipt, use, handling, generation,
transportation, storage, treatment, release and/or disposal of hazardous or
toxic substances or wastes in the course of or in connection with the conduct
of Tenant's business on the Property, and shall provide Landlord with copies of
(x) any and all permits, licenses, registrations and other similar documents
that authorize Tenant to conduct any such activities in connection with
Tenant's use of the Property and (y) any and all notices and written
communications actually given by Tenant to or received by Tenant from, or
required by law to be given by Tenant to, regulatory authorities in connection
with such activities in the course of Tenant's use of the Property;
(c) Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all claims, losses, damages, liabilities,
costs, legal fees and expenses of any sort arising out of or relating to (i)
any failure by Tenant to comply with any provisions of subparagraph (a) or (b)
above, or (ii) any receipt, use, handling, generation, transportation,
storage, treatment, release and/or disposal of any hazardous or toxic
substances or wastes on or about the Property in connection with Tenant's use
or occupancy of the Property or as a result of any intentional or negligent
acts or omissions of Tenant or of any agent or employee of Tenant;
(d) Landlord shall indemnify, defend and hold Tenant
harmless from and against any and all claims, losses, damages, liabilities,
costs, legal fees and expenses of any sort arising out of or relating to (i)
the presence on the Property of any hazardous or toxic substances or wastes
present on the Property as of the Commencement Date (other than as a result of
any intentional or negligent acts or omissions of Tenant or of any agent or
employee of Tenant), and/or (ii) any unauthorized release into the environment
of hazardous or toxic substances or wastes to the extent such release results
from the negligence of or willful misconduct or omission by Landlord or its
agents or employees; and
(e) The provisions of this Section 9.6 shall survive the
termination of this Lease.
10. INSURANCE AND INDEMNITY
10.1. Insurance.
(a) Tenant shall procure and maintain in full force and
effect at all times during the term of this Lease, at Tenant's cost and
expense, commercial general liability insurance to protect against any
liability to the public, or to any invitee of Tenant arising out of or
related to the use of or resulting from any accident occurring in, upon or
about the Premises, with limits of liability of not less than (i) One Million
Dollars ($1,000,000.00) for injury to or death of one person, (ii) Three
Million Dollars ($3,000,000.00) for personal injury or death, per occurrence,
and (iii) Five Hundred Thousand Dollars ($500,000.00) for property damage, or a
combined single limit of bodily injury and property damage insurance of not
less than Five Million Dollars ($5,000,000.00). Such insurance shall name
Landlord and its general partners as additional insureds thereunder. The
amount of such insurance shall not be construed to limit any liability or
obligation of Tenant under this Lease.
(b) Landlord shall procure and maintain in full force and
effect at all times during the term of this Lease, at Landlord's cost and
expense (but reimbursable as an Operating Expense under Section 5.2 hereof),
fire and "all risk" extended coverage property damage insurance for the
Building and for the improvements in the Common Areas of the Property on a full
replacement cost basis, with rental loss insurance. Such insurance may include
earthquake coverage to the extent Landlord in its discretion elects to carry
such coverage, and shall have such commercially, reasonable deductibles and
other terms as Landlord in its discretion determines to be appropriate.
Landlord shall have no obligation to carry property damage insurance for any
alterations, additions or improvements installed by Tenant on or about the
Premises. Tenant shall
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have no obligation to reimburse or compensate Landlord for the "deductible"
portion of any insured losses, except to the extent either (i) such losses
result from the negligence or willful misconduct of Tenant or its agents,
employees or invitees (as contemplated in Section 8.1(a)(v) and/or Section
10.6 hereof, but subject to the release set forth in Section 10.4 hereof), or
(ii) Tenant elects to pay repair or restoration costs under Section 13.1 hereof,
in order to avoid a termination of this Lease under certain circumstances as
specified in such Section 13.1.
(c) Tenant shall procure and maintain in full force and
effect at all times during the term of this Lease, at Tenant's cost and
expense, fire and "all risk" extended coverage property damage insurance for
all alterations, additions and improvements installed by Tenant from time to
time on or about the Premises (excluding, however, Tenant's trade fixtures,
equipment and personal property, as to which Tenant has no insurance obligation
hereunder), on a full replacement cost basis. Such insurance may have such
commercially reasonable deductibles and other terms as Tenant in its discretion
determines to be appropriate.
10.2. Quality Of Policies And Certificates. All policies of
insurance required hereunder shall be issued by responsible insurers and shall
be written as primary policies not contributing with and not in excess of any
coverage that Landlord may carry. Tenant shall deliver to Landlord copies of
policies or certificates of insurance showing that said policies are in effect.
The coverage provided by such policies shall include the clause or endorsement
referred to in Section 10.4. If Tenant fails to acquire, maintain or renew any
insurance required to be maintained by it under this Article 10 or to pay the
premium therefor, then Landlord, at its option and in addition to its other
remedies, but without obligation so to do, may procure such insurance, and any
sums expended by it to procure any such insurance shall be repaid upon demand,
with interest as provided in Section 3.2 hereof. Tenant shall obtain written
undertakings from each insurer under policies required to be maintained by it
to notify all insureds thereunder at least thirty (30) days prior to
cancellation, amendment or revision of coverage.
10.3. Workers' Compensation. Tenant shall maintain in full force
and effect during the term of this Lease workers' compensation insurance
covering all of Tenant's employees working on the Premises.
10.4. Waiver Of Subrogation. Notwithstanding anything to the
contrary contained in this Lease, to the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the
other (i) damage to property, (ii) damage to the Property or any part thereof,
or (iii) claims arising by reason of any of the foregoing, but only to the
extent that any of the foregoing damages and claims under subparts (i)-(iii)
hereof are covered, and only to the extent of such coverage, by insurance
actually carried or required to be carried hereunder by either Landlord or
Tenant. This provision is intended to waive fully, and for the benefit of each
party, any rights and claims which might give rise to a right of subrogation in
any insurance carrier. Each party shall procure a clause or endorsement on any
policy required under this Article 10 denying to the insurer rights of
subrogation against the other party to the extent rights have been waived by
the insured prior to the occurrence of injury or loss. Coverage provided by
insurance maintained by Tenant under this Article 10 shall not be limited,
reduced or diminished by virtue of the subrogation waiver herein contained.
10.5. Increase In Premiums. Tenant shall do all acts and pay all
expenses necessary to insure that the Premises are not used for purposes
prohibited by any applicable fire insurance, and that Tenant's use of the
Premises complies with all requirements necessary to obtain any such insurance.
If Tenant uses or permits the Premises to be used in a manner which increases
the existing rate of any insurance on the Premises carried by Landlord, Tenant
shall pay the amount of the increase in premium caused thereby, and Landlord's
costs of obtaining other replacement insurance policies, including any increase
in premium, within ten (10) days after demand therefor by Landlord.
10.6. Indemnification.
(a) Tenant shall indemnify, defend and hold Landlord, its
partners, shareholders, officers, directors, affiliates, agents, employees and
contractors, harmless from any and all liability for injury to or death of any
person, or loss of or damage to the property of any
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person, and all actions, claims, demands, costs (including, without limitation,
reasonable attorneys' fees), damages or expenses of any kind arising therefrom
which may be brought or made against Landlord or which Landlord may pay or
incur by reason of the use, occupancy and enjoyment of the Property by Tenant
or any invitees, sublessees, licensees, assignees, employees, agents or
contractors of Tenant or holding under Tenant from any cause whatsoever other
than negligence or willful misconduct or omission by Landlord, its agents,
employees or contractors. Landlord, its partners, shareholders, officers,
directors, affiliates, agents, employees and contractors shall not be liable
for, and Tenant hereby waives all claims against such persons for, damages to
goods, wares and merchandise in or upon the Property, or for injuries to
Tenant, its agents or third persons in or upon the Property, from any cause
whatsoever other than negligence or willful misconduct or omission by Landlord,
its agents, employees or contractors. Tenant shall give prompt notice to
Landlord of any casualty or accident in, on or about the Property.
(b) Landlord shall indemnify, defend and hold Tenant,
its partners, shareholders, officers, directors, affiliates, agents, employees
and contractors, harmless from any and all liability for injury to or death of
any person, or loss of or damage to the property of any person, and all
actions, claims, demands, costs (including, without limitation, reasonable
attorneys' fees), damages or expenses of any kind arising therefrom which may
be brought or made against Tenant or which Tenant may pay or incur, to the
extent such liabilities or other matters arise by reason of any negligence or
willful misconduct or omission by Landlord, its agents, employees or
contractors.
10.7. Blanket Policy. Any policy required to be maintained
hereunder may be maintained under a so-called "blanket policy" insuring other
parties and other locations so long as the amount of insurance required to be
provided hereunder is not thereby diminished.
11. SUBLEASE AND ASSIGNMENT
11.1. Assignment And Sublease Of Premises. Tenant shall not have
the right or power to assign its interest in this Lease, or make any sublease
of the Premises or any portion thereof, nor shall any interest of Tenant under
this Lease be assignable involuntarily or by operation of law, without on each
occasion obtaining the prior written consent of Landlord, which consent shall
not be unreasonably withheld. Any purported sublease or assignment of Tenant's
interest in this Lease requiring but not having received Landlord's consent
thereto shall be void. Any dissolution, consolidation, merger or other
reorganization of Tenant, or any series of one or more of such related events,
involving in the aggregate a change of fifty percent (50%) or more in the
beneficial ownership of Tenant, or any sale of all or substantially all of the
assets of Tenant, shall be deemed to be an assignment hereunder and shall be
void without the prior written consent of Landlord as required above.
Notwithstanding the foregoing, Landlord's consent shall not in any event be
required for (i) an initial public offering of the common stock of Tenant, or
for any stock transfer or conversion in connection with any such initial public
offering; (ii) any merger, consolidation or other reorganization, or any sale
of substantially all of the assets of Tenant, provided that (x) the net worth
of the surviving entity or transferee is equal to or greater than that of
Tenant immediately prior to the applicable transaction, (y) Tenant gives
Landlord prior or concurrent written notice of the applicable transaction, and
(z) the surviving entity or transferee expressly assumes in writing, for the
benefit of Landlord, Tenant's remaining obligations under this Lease; and/or
(iii) any sale or transfer of the stock of Tenant, other than pursuant to a
dissolution, consolidation, merger, reorganization or sale of substantially all
assets as specifically described above.
11.2. Rights Of Landlord. Consent by Landlord to one or more
assignments of this Lease, or to one or more sublettings of the Premises or any
portion thereof, or collection of rent by Landlord from any assignee or
sublessee, shall not operate to exhaust Landlord's rights under this Article
11, nor constitute consent to any subsequent assignment or subletting. No
assignment of Tenant's interest in this Lease and no sublease shall relieve
Tenant of its obligations hereunder, notwithstanding any waiver or extension of
time granted by Landlord to any assignee or sublessee, or the failure of
Landlord to assert its rights against any assignee or sublessee. and regardless
of whether Landlord's consent thereto is given or required to be given
hereunder. In the event of a default by any assignee, sublessee or other
successor of Tenant in the performance of any of the terms or obligations of
Tenant under this Lease, Landlord may proceed directly
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against Tenant without the necessity of exhausting remedies against any such
assignee, sublessee or other successor. In addition, Tenant immediately and
irrevocably assigns to Landlord, as security for Tenant's obligations under
this Lease, all rent from any subletting of all or a part of the Premises
as permitted under this Lease, and Landlord, as Tenant's assignee and as
attorney-in-fact for Tenant, or any receiver for Tenant appointed on Landlord's
application, may collect such rent and apply it toward Tenant's obligations
under this Lease; except that, until the occurrence of an act of default by
Tenant, Tenant shall have the right to collect such rent.
12. RIGHT OF ENTRY AND QUIET ENJOYMENT
12.1. Right Of Entry. Landlord and its authorized representatives
shall have the right to enter the Premises at any time during the term of this
Lease during normal business hours and upon not less than twenty-four (24)
hours prior notice, except in the case of emergency (in which event no notice
shall be required and entry may be made at any time), for the purpose of
inspecting and determining the condition of the Premises or for any other
proper purpose including, without limitation, to make repairs, replacements or
improvements which Landlord may deem necessary, to show the Premises to
prospective purchasers, to show the Premises to prospective tenants (but only
during the final year of the term of this Lease), and to post notices of
nonresponsibility. To facilitate exercise of Landlord's right of entry, Tenant
shall ensure that Landlord or its agent at all times has at least one (1) key
to unlock all doors in or about the Building, and Tenant shall not change any
locks in or about the Building without prior notice to Landlord and delivery of
a key for the new locks to Landlord or its agent. Landlord shall not be liable
for inconvenience, annoyance, disturbance, loss of business, quiet enjoyment or
other damage or loss to Tenant by reason of making any repairs or performing
any work upon the Building or the Property or by reason of erecting or
maintaining any scaffolding or protective barricades in connection with any
such work, and the obligations of Tenant under this Lease shall not thereby be
affected in any manner whatsoever; provided, however, Landlord shall use
reasonable efforts to minimize the inconvenience to Tenant's normal business
operations caused thereby.
12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying
the rent and performing its obligations hereunder and subject to all the terms
and conditions of this Lease, shall peacefully and quietly have, hold and enjoy
the Premises throughout the term of this Lease, or until this Lease is
terminated as provided by this Lease.
13. CASUALTY AND TAKING
13.1. Termination Or Reconstruction. If during the term of this
Lease the Building, or any substantial part thereof, is damaged materially by
fire or other casualty or by action of public or other authority in consequence
thereof, or if during the term of this Lease the Building or the parking area
serving the Building, or any material part of either of them, (i) is taken by
eminent domain or by reason of any public improvement or condemnation
proceeding, or in any manner by exercise of the right of eminent domain
(including any transfer in avoidance of an exercise of the power of eminent
domain), or (ii) receives irreparable damage by reason of anything lawfully
done under color of public or other authority, then in any such event this
Lease shall terminate as to the entire Premises at either Landlord's or
Tenant's election, by written notice given to the other party within sixty (60)
days after the damage or taking has occurred, subject to the following
limitations (and, to the extent applicable, the limitations set forth in
Section 13.2):
(a) in the case of damage or destruction by fire or other
peril prior to the final year of the term of this Lease, Landlord's termination
right shall be exercisable only if either (x) the reasonably estimated cost to
repair or restore the Building exceeds eighty percent (80%) of the replacement
cost of the Building and the remaining term of this Lease (including any
extended term, if Tenant elects an early exercise of any extension option under
Section 2.7 hereof in order to avoid a termination under this Section 13.1) is
less than three (3) years, or (y) the reasonably estimated cost to repair or
restore the Building exceeds the insurance proceeds available for such repair
or restoration by an amount greater than five percent (5%) of the replacement
cost of the Building (unless Tenant agrees in writing, within fifteen (15) days
after
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written request by Landlord, to pay all repair and restoration costs in excess
of the sum of the available insurance proceeds plus five percent (5%) of the
replacement cost of the Building, in which event Landlord shall have no
termination right under clause (y) of this paragraph (a));
(b) in the case of damage or destruction by fire or other
peril prior to the final year of the term of this Lease, Tenant's termination
right shall be exercisable only if the time reasonably estimated to be required
for the repair or restoration of the Building to the extent necessary to
permit Tenant to resume substantially all of its normal business activities
therein (which time estimate shall be given by Landlord to Tenant in writing
within forty-five (45) days after the date of the damage or destruction)
exceeds two hundred and seventy (270) days from the date of the damage or
destruction;
(c) in the case of damage or destruction by fire or other
peril during the final year of the term of this Lease (including any extended
term, if Tenant has already duly elected such term or elects an early exercise
of any extension option under Section 2.7 hereof in order to avoid a
termination under this Section 13.1), Landlord's termination right shall be
exercisable to avoid only if either (x) the reasonably estimated cost to repair
or restore the Building exceeds twenty percent (20%) of the replacement cost of
the Building, or (y) the reasonably estimated cost to repair or restore the
Building exceeds the insurance proceeds available for such repair or
restoration by an amount greater than five percent (5%) of the replacement cost
of the Building (unless Tenant agrees in writing, within fifteen (15) days
after written request by Landlord, to pay all repair and restoration costs in
excess of the sum of the available insurance proceeds plus five percent (5%) of
the replacement cost of the Building, in which event Landlord shall have no
termination right under clause (y) of this paragraph (c)); and
(d) in the case of damage or destruction by fire or other
peril during the final year of the term of this Lease (including any extended
term, if Tenant has already duly elected such term or elects an early exercise
of any extension option under Section 2.7 hereof in order to avoid a
termination under this Section 13.1), Tenant's termination right shall be
exercisable only if the damage affects more than twenty percent (20%) of the
floor area of the Building and the time reasonably estimated to be required for
the repair or restoration of the Building to the extent necessary to permit
Tenant to resume substantially all of its normal business activities therein
(which time estimate shall be given by Landlord to Tenant in writing within
thirty (30) days after the date of the damage or destruction) exceeds sixty
(60) days from the date of commencement of repairs.
If neither party elects to terminate this Lease pursuant to the foregoing
termination rights (if any) and/or Section 13.2 (if applicable), then Landlord
shall promptly and diligently repair any such damage and restore the Premises
(to the extent of Landlord's work therein under Section 2.4 and Exhibit C) and
the Building as nearly as reasonably possible to the condition existing before
the damage or taking.
13.2. Tenant's Rights. If any portion of the Premises is so taken
by condemnation, Tenant may elect to terminate this Lease if the portion of the
Premises taken is of such extent and nature as substantially to handicap,
impede or permanently impair Tenant's use of the balance of the Premises.
Tenant must exercise its right to terminate by giving notice to Landlord within
thirty (30) days after the nature and extent of the taking have been finally
determined. If Tenant elects to terminate this Lease, Tenant shall also notify
Landlord of the date of termination, which date shall not be earlier than
thirty (30) days nor later than ninety (90) days after Tenant has notified
Landlord of its election to terminate, except that this Lease shall terminate
on the date of taking if the date of taking falls on any date before the date
of termination designated by Tenant.
13.3. Lease To Remain In Effect. If neither Landlord nor Tenant
terminates this Lease as hereinabove provided, this Lease shall continue in
full force and effect, except that minimum monthly rental and Tenant's
Operating Cost Share shall abate to the extent Tenant's use of the Premises is
impaired for any period that any portion of the Premises is unusable or
inaccessible because of a casualty or taking hereinabove described. Each party
waives the provisions of Code of Civil Procedure Section 1265.130, allowing
either party to petition the Superior Court to terminate this Lease in the
event of a partial condemnation of the Premises or Property.
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13.4. Reservation Of Compensation. Landlord reserves, and Tenant
waives and assigns to Landlord, all rights to any award or compensation for
damage to the Premises. Building, Property and the leasehold estate created
hereby, accruing by reason of any taking in any public improvement,
condemnation or eminent domain proceeding or in any other manner by exercise of
the right of eminent domain or of anything lawfully done by public authority,
except that Tenant shall be entitled to any and all compensation or damages
paid for or on account of Tenant's moving expenses, trade fixtures, equipment
and any leasehold improvements in the Premises, the cost of which was borne
directly by Tenant, but only to the extent of the then remaining unamortized
value of such improvements computed on a straight-line basis over the initial
term of this Lease. Tenant covenants to deliver such further assignments of
the foregoing as Landlord may from time to time request.
13.5. Restoration Of Fixtures. If Landlord repairs or causes repair
of the Premises after such damage or taking, Tenant at its sole expense shall
repair and replace promptly all additions, alterations and improvements and all
other items installed or paid for by Tenant under this Lease (excluding,
however, any of Tenant's trade fixtures, equipment and personal property, the
repair or replacement of which shall be in Tenant's sole discretion, and
excluding any improvements originally constructed by Landlord under Section 2.4
and Exhibit C) that were damaged or taken, so as to restore the same to a
condition substantially equal to that which existed immediately prior to the
damage or taking. Provided that Tenant has maintained in effect the insurance
required under Section 10.1(c) hereof, Tenant's repair and restoration
obligation under the preceding sentence in the event of any casualty shall be
limited to the insurance proceeds available to Tenant with respect to such
casualty, plus the amount of any applicable deductible under Tenant's
applicable insurance policy. Tenant shall have the right to make modifications
to the Premises, fixtures and improvements, subject to the prior written
approval of Landlord and subject to all other applicable provisions of this
Lease. In its review of Tenant's plans and specifications, Landlord may take
into consideration the effect of the proposed modifications on the exterior
appearance, the structural integrity and the mechanical and other operating
systems of the Building.
14. DEFAULT
14.1. Events Of Default. The occurrence of any of the following
shall constitute an event of default on the part of Tenant:
(a) Abandonment. Abandonment of the Premises.
"Abandonment" is hereby defined to include, but is not limited to, the complete
absence by Tenant from the Premises for fifteen (15) consecutive days or
more while there exists an event of default on the part of Tenant under
any other provision of this Section 14.1 which has not been cured on or before
the expiration of such fifteen (15) day period. Tenant waives any right Tenant
may have to notice under Section 1951.3 of the California Civil Code, the terms
of this subsection (a) being deemed such notice to Tenant as required by said
Section 1951.3;
(b) Nonpayment. Failure to pay, when due, any amount
payable to Landlord hereunder, such failure continuing for a period of five (5)
days after written notice of such failure; provided, however, that any such
notice shall be in lieu of, and not in addition to, any notice required under
California Code of Civil Procedure Section 1161 et seq., as amended from time
to time;
(c) Other Obligations. Failure to perform any
obligation, agreement or covenant under this Lease other than those matters
specified in subsection (b) hereof, such failure continuing for fifteen (15)
days after written notice of such failure, or, if such default is curable in
nature but it is not possible to cure such default within fifteen (15) days,
failure to commence cure within said fifteen (15) day period and thereafter to
proceed diligently to complete cure; provided, however, that any such notice
shall be in lieu of, and not in addition to, any notice required under
California Code of Civil Procedure Section 1161 et seq., as amended from time
to time:
(d) General Assignment. A general assignment by Tenant
for the benefit of creditors:
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(e) Bankruptcy. The filing of any voluntary petition in
bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of
thirty (30) days. In the event that under applicable law the trustee in
bankruptcy or Tenant has the right to affirm this Lease and continue to perform
the obligations of Tenant hereunder, such trustee or Tenant shall, in such time
period as may be permitted by the bankruptcy court having jurisdiction, cure
all defaults of Tenant hereunder outstanding as of the date of the affirmance
of this Lease and provide to Landlord such adequate assurances as may be
necessary to ensure Landlord of the continued performance of Tenant's
obligations under this Lease. Specifically, but without limiting the
generality of the foregoing, such adequate assurances must include assurances
that the Premises continue to be operated only for the use permitted hereunder.
The provisions hereof are to assure that the basic understandings between
Landlord and Tenant with respect to Tenant's use of the Premises and the
benefits to Landlord therefrom are preserved, consistent with the purpose and
intent of applicable bankruptcy laws:
(f) Receivership. The employment of a receiver appointed
by court order to take possession of substantially all of Tenant's assets or
the Premises, if such receivership remains undissolved for a period of thirty
(30) days;
(g) Attachment. The attachment, execution or other
judicial seizure of all or substantially all of Tenant's assets or the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of thirty (30) days after the levy thereof; or
(h) Insolvency. The admission by Tenant in writing of
its inability to pay its debts as they become due, the filing by Tenant of a
petition seeking any reorganization or arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, the filing by Tenant of an answer admitting or failing
timely to contest a material allegation of a petition filed against Tenant in
any such proceeding or, if within thirty (30) days after the commencement of
any proceeding against Tenant seeking any reorganization or arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such proceeding shall not have
been dismissed.
14.2. Remedies Upon Tenant's Default.
(a) Upon the occurrence of any event of default described
in Section 14.1 hereof, Landlord, in addition to and without prejudice to any
other rights or remedies it may have, shall have the immediate right to
re-enter the Premises or any part thereof and repossess the same, expelling and
removing therefrom all persons and property (which property may be stored in a
public warehouse or elsewhere at the cost and risk of and for the account of
Tenant), using such force as may be necessary to do so (as to which Tenant
hereby waives any claim for loss or damage that may thereby occur). In
addition to or in lieu of such re-entry, and without prejudice to any other
rights or remedies it may have, Landlord shall have the right either (i) to
terminate this Lease and recover from Tenant all damages incurred by Landlord
as a result of Tenant's default, as hereinafter provided, or (ii) to continue
this Lease in effect and recover rent and other charges and amounts as they
become due.
(b) Even if Tenant has breached this Lease or abandoned
the Premises, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under subsection (a) hereof and
Landlord may enforce all of its rights and remedies under this Lease, including
the right to recover rent as it becomes due, and Landlord, without terminating
this Lease, may exercise all of the rights and remedies of a lessor under
California Civil Code Section 1951.4 (lessor may continue lease in effect after
lessee's breach and abandonment and recover rent as it becomes due, if lessee
has right to sublet or assign, subject only to reasonable limitations), or any
successor Code section. Acts of maintenance, preservation or efforts to relet
the Premises or the appointment of a receiver upon application of Landlord to
protect Landlord's interests under this Lease shall not constitute a
termination of Tenant's right to possession.
(c) If Landlord terminates this Lease pursuant to this
Section 14.2, Landlord shall have all of the rights and remedies of a landlord
provided by Section 1951.2 of the Civil Code of the State of California, or any
Successor Code section, which remedies include
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Landlord's right to recover from Tenant (i) the worth at the time of award of
the unpaid rent and additional rent which had been earned at the time of
termination, (ii) the worth at the time of award of the amount by which the
unpaid rent and additional rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided, (iii) the worth at the time of award
of the amount by which the unpaid rent and additional rent for the balance of
the term after the time of award exceeds the amount of such rental loss that
Tenant proves could be reasonably avoided, and (iv) any other amount necessary
to compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including, but not
limited to, the cost of recovering possession of the Premises, expenses of
reletting, reasonable attorneys' fees, and other reasonable costs. The "worth
at the time of award" of the amounts referred to in clauses (i) and (ii) above
shall be computed by allowing interest at ten percent (10%) per annum from the
date such amounts accrued to Landlord. The "worth at the time of award" of the
amounts referred to in clause (iii) above shall be computed by discounting such
amount at one percentage point above the discount rate of the Federal Reserve
Bank of San Francisco at the time of award.
14.3. Remedies Cumulative. All rights, privileges and elections or
remedies of Landlord contained in this Article 14 are cumulative and not
alternative to the extent permitted by law and except as otherwise provided
herein.
15. SUBORDINATION, ATTORNMENT AND SALE
15.1. Subordination To Mortgage. This Lease, and any sublease
entered into by Tenant under the provisions of this Lease, shall be subject and
subordinate to any ground lease, mortgage, deed of trust, sale/leaseback
transaction or any other hypothecation for security now or hereafter placed upon
the Building, the Property, or both, and the rights of any assignee of Landlord
or of any ground lessor, mortgagee, trustee, beneficiary or leaseback lessor
under any of the foregoing, and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof, provided, however, that such subordination in the case of
any future ground lease, mortgage, deed of trust, sale/leaseback transaction or
any other hypothecation for security placed upon the Building, the Property, or
both shall be conditioned on Tenant's receipt from the ground lessor, mortgagee,
trustee, beneficiary or leaseback lessor of a nondisturbance agreement in a form
reasonably acceptable to Tenant (and subject only to reasonable limitations),
confirming that so long as Tenant is not in default hereunder, Tenant's rights
hereunder shall not be disturbed by such person or entity following any
foreclosure or other acquisition of the Property. Moreover, Tenant's obligations
under this Lease shall be conditioned on Tenant's receipt, within thirty (30)
days after mutual execution of this Lease, from SDK Incorporated and from any
other ground lessor, mortgagee, trustee, beneficiary or leaseback lessor
currently owning or holding a security interest in the Property, of a
nondisturbance agreement in a form reasonably acceptable to Tenant (and subject
only to reasonable limitations), confirming that so long as Tenant is not in
default hereunder, Tenant's rights hereunder shall not be disturbed by such
person or entity following any foreclosure or other acquisition of the Property.
If any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or
assignee elects to have this Lease be an encumbrance upon the Property prior to
the lien of its mortgage, deed of trust, ground lease or leaseback lease or
other security arrangement and gives notice thereof to Tenant, this Lease shall
be deemed prior thereto, whether this Lease is dated prior or subsequent to the
date thereof or the date of recording thereof. Tenant, and any sublessee, shall
execute such documents as may reasonably be requested by any mortgagee, trustee,
beneficiary, ground lessor, sale/leaseback lessor or assignee to evidence the
subordination herein set forth or to make this Lease prior to the lien of any
mortgage, deed of trust, ground lease, leaseback lease or other security
arrangement, as the case may be. Upon any default by Landlord in the
performance of its obligations under any mortgage, deed of trust, ground lease,
leaseback lease or assignment, Tenant (and any sublessee) shall, notwithstanding
any subordination hereunder, attorn to the mortgagee, trustee, beneficiary,
ground lessor, leaseback lessor or assignee thereunder upon demand and become
the tenant of the successor in interest to Landlord, at the option of such
successor in interest, and shall execute and deliver any instrument or
instruments confirming the attornment herein provided for.
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15.2. Sale Of Landlord's Interest. Upon sale, transfer or
assignment of Landlord's entire interest in the Building and Property, Landlord
shall be relieved of its obligations hereunder with respect to liabilities
accruing from and after the date of such sale, transfer or assignment;
provided, however, that such relief from liabilities (i) shall be effective
only if and to the extent that the transferee expressly assumes in writing, for
the benefit of Tenant, Landlord's obligations under this Lease. (ii) shall not
apply to Landlord's environmental indemnification under Section 9.6(d) hereof
unless the transferee has, immediately after the transfer, a net worth equal to
or greater than that of Landlord immediately prior to the transfer, and (iii)
shall not in any event apply to Landlord's obligations with respect to the
initial construction of the Building and Common Areas under Section 2.4 and
Exhibit C. Moreover, in recognition of Tenant's substantial reliance upon
Landlord's creditworthiness and development experience with respect to the
initial construction of the Building and Common Areas, Landlord shall not sell,
transfer, convey or otherwise dispose of its ownership interest in the portion
of the Property designated as Phase VI on the Site Plan, or any portion
thereof, prior to the Commencement Date under Section 2.1 hereof, except (x)
with Tenant's prior written consent or (y) to an entity of which Britannia
Hopyard, LLC, or an entity controlling, controlled by or under common control
with Britannia Hopyard, LLC, is a general partner or has management
responsibilities and equity participation comparable to those of a general
partner.
15.3. Estoppel Certificates. Tenant shall at any time and from
time to time, within ten (10) days after written request by Landlord, execute,
acknowledge and deliver to Landlord a certificate in writing stating: (i) that
this Lease is unmodified and in full force and effect, or if there have been
any modifications, that this Lease is in full force and effect as modified and
stating the date and the nature of each modification; (ii) the date to which
rental and all other sums payable hereunder have been paid; (iii) that Landlord
is not in default in the performance of any of its obligations under this
Lease, that Tenant has given no notice of default to Landlord and that no event
has occurred which, but for the expiration of the applicable time period, would
constitute an event of default hereunder, or if Tenant alleges that any such
default, notice or event has occurred, specifying the same in reasonable
detail; and (iv) such other matters as may reasonably be requested by Landlord
or any institutional lender, mortgagee, trustee, beneficiary, ground lessor,
sale/leaseback lessor or prospective purchaser of the Property. Any such
certificate under this Section 15.3 may be relied upon by any lender,
mortgagee, trustee, beneficiary, assignee or successor in interest to Landlord,
by any prospective purchaser, by any purchaser on foreclosure or sale, by any
grantee under a deed in lieu of foreclosure of any mortgage or deed of trust on
the Property or Premises, or by any other third party. Failure to execute and
return within the required time any estoppel certificate requested
hereunder shall be deemed to be an admission of the truth of the matters set
forth in the form of certificate submitted to Tenant for execution.
15.4. Subordination to CC&R's. This Lease, and any permitted
sublease entered into by Tenant under the provisions of this Lease, shall be
subject and subordinate (a) to any declarations of covenants, conditions and
restrictions affecting the Property from time to time, which may include
easements, access rights and similar nonexclusive use rights and privileges in
favor of appropriate third parties, provided that the terms of such future
declarations are approved by Tenant in writing; (b) to the Declaration of
Covenants, Conditions and Restrictions for Hacienda Business Park (No. 2)
recorded on January 24, 1985 as Instrument No. 85-14396, Alameda County
Records, as amended from time to time (the "Master Declaration"), the
provisions of which Master Declaration are an integral part of this Lease; and
(c) to the provisions of the Corporation Grant Deed and Rider recorded on
June 28, 1996 as Instrument No. 96-158374, which provisions are binding upon
Tenant as if set forth herein in full. Tenant agrees to execute, upon request
by Landlord, any documents reasonably required from time to time to evidence
such subordination.
16. SECURITY
16.1. Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of One Hundred Forty-Three Thousand
Dollars ($143,000.00), which sum (the "Security Deposit") shall be held by
Landlord as security for the faithful performance of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provision of
this Lease,
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including, without limitation, the provisions relating to the payment of rental
and other sums due hereunder. Landlord shall have the right, but shall not be
required, to use, apply or retain all or any part of the Security Deposit for
the payment of rental or any other amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any Portion of the Security Deposit is so used or applied,
Tenant shall, within ten (10) days after written demand therefor, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
original amount and Tenant's failure to do so shall be a material breach of
this Lease. Landlord shall not be required to keep any deposit under this
Section separate from Landlord's general funds, and Tenant shall not be
entitled to interest thereon. If Tenant fully and faithfully performs every
provision of this Lease to be performed by it, the Security Deposit, or any
balance thereof, shall be returned to Tenant or, at Landlord's option, to the
last assignee of Tenant's interest hereunder, at the expiration of the term of
this Lease and after Tenant has vacated the Premises. In the event of
termination of Landlord's interest in this Lease, Landlord shall transfer all
deposits then held by Landlord under this Section to Landlord's successor in
interest, whereupon Tenant agrees to release Landlord from all liability for
the return of such deposit or the accounting thereof.
17. MISCELLANEOUS
17.1. Notices. All notices, consents, waivers and other
communications which this Lease requires or permits either party to give to the
other shall be in writing and shall be deemed given when delivered personally
(including delivery by private courier or express delivery service) or four (4)
days after deposit in the United States mail, registered or certified mail,
postage prepaid, addressed to the parties at their respective addresses as
follows:
To Tenant: (until Commencement Date)
ProBusiness, Inc.
5934 Gibraltar Drive
Pleasanton, CA 94588
Attn: Mitch Everton, Executive Vice President
(after Commencement Date)
ProBusiness, Inc.
[street address of Premises, when known]
Pleasanton, CA 94588
Attn: Mitch Everton, Executive Vice President
with copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Bradford C. O'Brien
To Landlord: Britannia Hacienda V Limited Partnership
1939 Harrison Street, Suite 412
Park Plaza Building
Oakland, CA 94612
Attn: T. J. Bristow
with copy to: Folger & Levin
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, CA 94111
Attn: Donald E. Kelley, Jr.
or to such other address as may be contained in a notice at least fifteen (15)
days prior to the address change from either party to the other given pursuant
to this Section. Rental payments and other sums required by this Lease to be
paid by Tenant shall be delivered to Landlord at
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Landlord's address provided in this Section, or to such other address as
Landlord may from time to time specify in writing to Tenant, and shall be
deemed to be paid only upon actual receipt.
17.2. Successors And Assigns. The obligations of this Lease shall
run with the land, and this Lease shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
except that, subject to the provisions of Section 15.2 hereof, the original
Landlord named herein and each successive Landlord under this Lease shall be
liable only for obligations accruing during the period of its ownership of the
Property, said liability terminating upon termination of such ownership and
passing to the successor lessor.
17.3. No Waiver. The failure of Landlord to seek redress for
violation, or to insist upon the strict performance, of any covenant or
condition of this Lease shall not be deemed a waiver of such violation, or
prevent a subsequent act which would originally have constituted a violation
from having all the force and effect of an original violation.
17.4. Severability. If any provision of this Lease or the
application thereof is held to be invalid or unenforceable, the remainder of
this Lease or the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable shall not be
affected thereby, and each of the provisions of this Lease shall be valid and
enforceable, unless enforcement of this Lease as so invalidated would be
unreasonable or grossly inequitable under all the circumstances or would
materially frustrate the purposes of this Lease.
17.5. Litigation Between Parties. In the event of any litigation or
other dispute resolution proceedings between the parties hereto arising out of
or in connection with this Lease, the prevailing party shall be reimbursed for
all reasonable costs, including, but not limited to, reasonable accountants'
fees and attorneys' fees, incurred in connection with such proceedings
(including, but not limited to, any appellate proceedings relating thereto) or
in connection with the enforcement of any judgment or award rendered in such
proceedings. "Prevailing party" within the meaning of this Section shall
include, without limitation, a party who dismisses an action for recovery
hereunder in exchange for payment of the sums allegedly due, performance of
covenants allegedly breached or consideration substantially equal to the relief
sought in the action.
17.6. Surrender. A voluntary or other surrender of this Lease by
Tenant, or a mutual termination thereof between Landlord and Tenant, shall not
result in a merger but shall, at the option of Landlord, operate either as an
assignment to Landlord of any and all existing subleases and subtenancies, or a
termination of all or any existing subleases and subtenancies. This
provision shall be contained in any and all assignments or subleases made
pursuant to this Lease.
17.7. Interpretation. The provisions of this Lease shall be
construed as a whole, according to their common meaning, and not strictly for
or against Landlord or Tenant. The captions preceding the text of each Section
and subsection hereof are included only for convenience of reference and shall
be disregarded in the construction or interpretation of this Lease.
17.8. Entire Agreement. This written Lease, together with the
exhibits hereto, contains all the representations and the entire understanding
between the parties hereto with respect to the subject matter hereof. Any
prior correspondence, memoranda or agreements are replaced in total by this
Lease and the exhibits hereto. This Lease may be modified only by an agreement
in writing signed by each of the parties.
17.9. Governing Law. This Lease and all exhibits hereto shall be
construed and interpreted in accordance with and be governed by all the
provisions of the laws of the State of California.
17.10. No Partnership. The relationship between Landlord and Tenant
is solely that of a lessor and lessee. Nothing contained in this Lease shall
be construed as creating any type or manner of partnership, joint venture or
joint enterprise with or between Landlord and Tenant.
17.11. Financial Information. From time to time Tenant shall
promptly provide directly to prospective lenders and purchasers of the Property
designated by Landlord such financial
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information pertaining to the financial status of Tenant as Landlord may
reasonably request, provided, Tenant shall be permitted to provide such
financial information in a manner which Tenant deems reasonably necessary to
protect the confidentiality of such information, including (if Tenant so
requests) conditioning disclosure of such information upon execution of a
reasonable confidentiality agreement by Landlord and by any other proposed or
permitted recipient of such information; and provided further, that if Tenant
is then a publicly traded company filing periodic reports under the Securities
Exchange Act of 1934, as amended, and the regulations thereunder, Tenant shall
be required only to furnish copies of Tenant's most recent Form 10K, 10Q and 8K
(if any) reports and shall not be required to disclose any nonpublic financial
information pursuant to this Section 17.11. In addition, from time to time,
Tenant shall provide Landlord with such financial information pertaining to the
financial status of Tenant as Landlord may reasonably request, subject to the
final proviso of the immediately preceding sentence. Landlord agrees that all
financial information supplied to Landlord by Tenant shall be treated as
confidential material, and shall not be disseminated to any party or entity
(including any entity affiliated with Landlord) without Tenant's prior written
consent. For purposes of this Section, without limiting the generality of the
obligations provided herein it shall be deemed reasonable for Landlord to
request (and sufficient for Tenant to provide) copies of (i) Tenant's most
recent audited annual financial statements, or, if audited statements have not
been prepared, unaudited financial statements for Tenant's most recent fiscal
year, and (ii) Tenant's unaudited financial statements for Tenant's most recent
fiscal quarter, all of which unaudited statements shall be accompanied by a
certificate of Tenant's chief financial officer as to the accuracy of such
unaudited statements.
Landlord and Tenant recognize the need of Tenant to maintain
the confidentiality of information regarding its financial status and the need
of Landlord to be informed of, and to provide to prospective lenders and
purchasers of the Premises financial information pertaining to, Tenant's
financial status. Landlord and Tenant agree to cooperate with each other in
achieving these needs within the context of the obligations set forth in this
Section.
17.12. [Omitted.]
17.13. Time. Time is of the essence of this Lease, and of every term
and condition hereof.
17.14. Rules And Regulations. Tenant shall observe, comply with and
obey, and shall cause its employees, agents and, to the best of Tenant's
ability, invitees to observe, comply with and obey such rules and regulations
as Landlord may promulgate from time to time for the safety, care, cleanliness,
order and use of the Premises, the Building and the Property, provided that any
such rules and regulations promulgated after the date of this Lease shall not
materially and adversely affect Tenant's rights under this Lease.
17.15. Brokers. Landlord agrees to pay a brokerage commission to
Tenant's broker, Colliers Parrish International, Inc. in connection with the
consummation of this Lease in accordance with a separate agreement between
Landlord and such broker. Tenant represents and warrants that no other broker
participated in the consummation of this Lease and agrees to indemnify, defend
and hold Landlord harmless against any liability, cost or expense, including,
without limitation, reasonable attorneys' fees, arising out of any claims for
brokerage commissions or other similar compensation in connection with any
conversations, prior negotiations or other dealings by Tenant with any other
broker.
17.16. Memorandum Of Lease. At any time during the term of this
Lease, either party, at its sole expense, shall be entitled to record a
memorandum of this Lease and, if either party so elects, both parties agree to
cooperate in the preparation, execution, acknowledgement and recordation of
such document in reasonable form.
17.17. Corporate Authority. The person signing this Lease on behalf
of Tenant warrants that he or she is fully authorized to do so and, by so
doing, to bind Tenant. As evidence of such authority, Tenant shall deliver to
Landlord, upon or prior to execution of this Lease, a certified copy of a
resolution of Tenant's board of directors authorizing the execution of this
Lease and naming the officer that is authorized to execute this Lease on behalf
of Tenant.
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17.18. Execution and Delivery. Submission of this Lease for
examination or signature by Tenant does not constitute an agreement or
reservation of or option for lease of the Premises. This instrument shall not
be effective or binding upon either party, as a lease or otherwise, until
executed and delivered by both Landlord and Tenant. This Lease may be executed
in one or more counterparts and by separate parties on separate counterparts,
but each such counterpart shall constitute an original and all such
counterparts together shall constitute one and the same instrument.
17.19. Stock Warrants. In consideration of their mutual execution of
this Lease, Landlord and Tenant shall proceed diligently and in good faith to
negotiate and enter into a Warrant Purchase Agreement in mutually satisfactory
form within thirty (30) days after the date hereof, covering the issuance of
warrants for the purchase of an aggregate of twenty-two thousand five hundred
(22,500) shares of Series E Preferred Stock of Tenant at an exercise price of
$7.94 per share (which Series E Preferred Stock is then, under its present
terms, convertible into 45,000 shares of Common Stock of Tenant at no
additional cost).
17.20. Survival. Without limiting survival provisions which would
otherwise be implied or construed under applicable law or which are otherwise
explicitly set forth herein, the provisions of Sections 2.6, 5.4, 7.2, 7.3,
7.4, 9.6, 10.6, 13.4 and 17.5 hereof shall survive the termination of this
Lease with respect to matters occurring prior to the expiration of this Lease.
17.21. Consents. Whenever the approval or consent of a party is
required to be obtained under any provision of this Lease as a condition or
prerequisite to the taking of any action or effectiveness of any action by the
other party, then such approval or consent shall not be unreasonably withheld,
delayed or conditioned, regardless of whether or not such reasonableness
requirement is expressly stated in the applicable provision of this Lease.
17.22 Landlord Defaults. If Landlord fails to perform any
obligation, agreement or covenant under this Lease which relates specifically to
the Premises and does not materially affect other tenants of the Property (such
as, by way of example and not limitation, Landlord's obligation to maintain the
roof, exterior walls and other structural portions of the Building), and if such
failure continues for fifteen (15) days after written notice of such failure is
given by Tenant to Landlord or, if such default is curable in nature but it is
not possible to cure such default within fifteen (15) days, Landlord fails to
commence cure within such fifteen (15) day period or thereafter fails to proceed
diligently to complete cure, then Tenant shall have the right to perform such
obligation or cure such default of Landlord, and Landlord shall reimburse Tenant
for the reasonable cost thereof, together with interest at the rate specified in
the first sentence of Section 3.2 hereof from the date of payment by Tenant to
the date of reimbursement by Landlord, within fifteen (15) days after written
notice from Tenant of the completion and cost of such cure, accompanied by
copies of invoices or other supporting documentation. Under no circumstances,
however, shall Tenant have any right to offset the cost of any such cure against
rent or other charges falling due from time to time under this Lease.
[rest of page intentionally left blank)
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IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA V LIMITED PROBUSINESS, INC.,
PARTNERSHIP, a Delaware limited a California corporation
partnership
By: BRITANNIA HOPYARD, LLC, By: /s/ Thomas H. Sinton
a California limited liability ---------------------------
company, General Partner Its: President
--------------------------
By: /s/ T. J. Bristow
--------------------------
T. J. Bristow
Manager & President
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EXHIBITS
EXHIBIT A Real Property Description
EXHIBIT B Site Plan
EXHIBIT C Construction
C-1: First Floor Plan
C-2: Second Floor Plan
C-3: Finish Specifications
EXHIBIT D Construction Timeline
EXHIBIT E Acknowledgement of Lease Commencement
<PAGE>
EXHIBIT A
REAL PROPERTY DESCRIPTION
PARCEL ONE:
Lot 14A of Amended Parcel Map No. 4571, filed November 23, 1987, in Book 172 of
Maps, Pages 81 and 82, Alameda County Records.
PARCEL TWO:
Non-exclusive easements, appurtenant to Parcel One above, for the purpose of
vehicular (including trucks of all sizes) and pedestrian ingress and egress
over, along and across all that portion of Lot 14B as shown on said Parcel Map
No. 4517 lying within the lines of that certain "Community Driveway Easement"
depicted in said Parcel Map No. 4517, as the grant of such easement was
confirmed unto The Prudential Insurance Company of America, a New Jersey
corporation, pursuant to that certain "Grant of Easement and Maintenance
Agreement" dated July 30, 1985, recorded July 30, 1985, as Series No.
85-150156, Official Records of Alameda County.
EXHIBIT A
<PAGE>
[SITE PLAN MAP]
EXHIBIT B TO
BUILD-TO-SUIT LEASE
<PAGE>
[AP+1 Design, Inc. Logo]
PROBUSINESS
Tenant Improvement Notes
September 26, 1996
Page One
FLOORS
1. Provide direct glue carpet throughout unless otherwise noted.
Provide material cost of S18 per square yard for general office carpet.
2. Provide upgraded carpet in first floor lobby insets, lobby conference
rooms, stair, second floor atrium area, boardroom and presentation rooms.
Provide material cost of $34 per square yard for upgraded carpet. Provide
carpet pad at the stair.
3. Provide sheet linoleum in the servery and dining area of the
cafeteria. Provide quarry tile in the kitchen/prep area. Provide material
cost of $5 for the linoleum.
4. Provide 2" x 2" ceramic tile on the floors of all general office and
gym toilet rooms and shower rooms.
5. Provide stone flooring in the first floor lobby, lobby toilet rooms
and the elevator cab. Provide material cost of $10 per square foot.
6. Provide VCT at coffee bars, file rooms, storage rooms and the
Production area except at offices within Production.
7. Provide 6" stone base at all areas of stone flooring.
8. Provide 4" wood base at all upgraded carpet.
9. Provide 4" top set base at all general office carpet.
10. Provide 6" cove base at linoleum.
WALLS
11. Provide two coats of flat latex paint over smooth finish walls
throughout unless otherwise noted.
12. Provide eggshell enamel paint finish in Coffee Bars and other to be
determined areas.
Architecture Planning Interior Design
3945 Freedom Circle, Suite 108 Santa Clara, CA 95054 408.496.1892
FAX 408.496.1896
EXHIBIT C-3
<PAGE>
ProBusiness
September 26, 1996
Page Two
13. Provide 4' wainscot of 4" x 4" ceramic tile in toilet rooms on wet
walls. Provide eggshell enamel paint above ceramic tile.
14. Provide furring and gyp board on all exterior concrete walls.
15. At owner's option, provide full height one hour walls at the lobby for
future use as multitenant building. (Current exiting configuration does not
require tile rating of the lobby, however, construction of tile walls to one
hour now should save time and effort later should the building become
multi-tenant).
16. All walls that are insulated at offices and conference rooms are to
attach to the structure above for optimum acoustical protection.
17. All columns are to be furred.
CEILINGS
18. Delete
19. Provide 9'- 0" dropped ceilings with building standard ceiling boards
in all open office areas, enclosed offices, conference rooms, and coffee areas.
except as defined in item 20.
20. Provide 2' x 2' Fineline 9/16" grid at upgraded ceilings in board
room, presentation rooms and upgraded areas. Provide upgraded ceiling tile
allowance of $3 per square foot for these areas.
21. Provide gyp board ceilings with smooth finish in the lobby and second
floor atrium space and toilet rooms.
22. Provide allowance for soffits and/or ceiling elevation changes in the
lobby, second floor atrium space, board room and presentation rooms.
23. Provide an allowance for four skylights in the second floor lobby.
Size to be determined.
DOORS, WINDOWS AND FRAMES
24. Provide 3' x 9' solid core maple veneer doors with clear aluminum
frames.
25. Provide clear anodized aluminum frames for all sidelights and glass
throughout the building
26. Provide Schlage "D" series Rhodes lever handles, brushed chrome
finish.
27. Provide wire glass at all rated walls as shown on the plans.
<PAGE>
ProBusiness
September 26, 1996
Page Three
FIRE SPRINKLERS
28. Provide semi-recessed heads with white painted escutcheons in all
finished ceilings. Provide heads painted to match structure in open ceiling
areas.
INSULATION
29. Delete
30. Provide R-19, foil faced batt insulation to be installed throughout
the roof structure.
31. Provide R-11 foil faced batt insulation to be installed at all
exterior walls of conditioned spaces.
32. Provide 1/2" rigid sound board and fiberglass sound batts in all
office walls, conference rooms and toilet room walls. Provide 4' of fiberglass
batts over the ceiling on each side, of each insulated wall.
33. Provide R-11 foil faced batt insulation between conditioned spaces and
unconditioned warehouse areas.
ELECTRICAL
34. Provide three duplex electrical receptacles in all private offices and
conference rooms. Provide general convenience outlets throughout the space.
Provide allowance for additional dedicated or special electrical requirements
(as yet unspecified) in areas such as copy rooms, presentation rooms,
boardroom, etc.
35. Provide one pull wire for telephone and data in all private offices
and conference rooms.
36. Provide one junction box for every three open office furniture
workstations, 15 amps.
37. Light fixtures in all open office areas, enclosed offices, conference
rooms, coffee areas, etc. to be suspended 2' x 4' fluorescent fixtures with
parabolic lenses. Light fixtures in upgraded ceilings in board room,
presentation rooms and upgraded areas to be suspended 2' x 2' fluorescent
fixtures with parabolic lenses. Provide allowance for sconces at first floor
lobby, second floor atrium, boardroom and servery/dining area.
38. Provide downlights in key areas such as the first and second floor
lobby, boardroom and presentation rooms.
39. Provide emergency and exit lighting and smoke detectors in the unused
areas that serve as exits for the adjacent office areas.
40. Provide allowance for pendant light fixtures over the reception desk,
in the dining area and in the gallery space outside of the workout room.
<PAGE>
ProBusiness
September 26, 1996
Page Four
HEATING & AIR CONDITIONING
41. Provide roof top variable air volume system.
42. Provide additional air conditioning in the IS computer room and the
Production room.
MISCELLANEOUS
43. Provide plastic laminate top and splash in the toilet rooms and locker
room.
44. Provide plastic laminate upper and lower cabinets with sinks at all
Coffee Bars.
45. Provide plastic laminate toilet room partitions, floor mounted,
overhead braced.
46. Provide stainless steel toilet room accessories.
47. Provide fiberglass shower stalls in the shower room.
48. Provide 1" horizontal blinds on all exterior and interior windows.
49. Delete
50. Provide allowance of $15,000 for the reception desk and $30,000 for
all audio visual cabinetry in the Boardroom and both Sales Presentation Rooms.
51. ProBusiness has contacted the caterer Bon Appetite to provide services
in the Kitchen/Servery. While the areas have not been planned yet, Bon Appetite
was instrumental in establishing the sizes of the areas. ProBusiness will
provide landlord with a proposed layout for the Kitchen/Servery. Landlord to
provide all plumbing, electrical, HVAC in accordance to the above layout.
<PAGE>
[MAP]
<PAGE>
[MAP]
EXHIBIT C-2
<PAGE>
[MAP]
[SPACE PLAN NO. 1]
<PAGE>
[MAP]
EXHIBIT C-1
<PAGE>
PRO BUSINESS, BRITANNIA BUSINESS CENTER, HACIENDA 5, PLEASANTON
PREPARED ON 25 SEPTEMBER 96
SITE & SHELL
<TABLE>
<CAPTION>
SEP OCT 96 NOV 96 DEC 96 JAN 97
23 30 1 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20
<S> <C> <C> <C> <C>
GRADE SITE **** **** **** *****
SITE UTILITIES **** *****
FOUNDATIONS **** **** **** *****
UNDERSLAB UTILITIES **** **** *****
GROUND FLOOR SLAB **** **** **** *****
PANELS **** **** **** **** **** *****
ERECT PANELS **
STEEL DETAILING **** **** **** **** **** **** **** *****
FAB STEEL **** **** **** **** **** **** **** *****
<CAPTION>
FEB 97 MAR 97 APR 97 MAY 97
27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26
<S> <C> <C> <C> <C> <C>
ERECT STEEL ** **** **** **** **** **** **** **** *****
STEEL JOISTS/DECKING **** **** **** **** **** **** **** *****
EXTERIOR FRAMING **** **** **** **** **** *****
ROOFING MEMBRANE **** **** *****
EXT PAINTING **** **** ****
ALUMINUM & GLAZING **** **** **** **** **** *****
<CAPTION>
<S> <C> <C> <C>
JUNE 97 JULY 97 AUG 97 SEP 97
2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15
GRADE SITE AND PAD
SITE UTILITIES
FOUNDATIONS
UNDERSLAB UTILITIES
GROUND FLOOR SLAB
PANELS
ERECT PANELS
STEEL DETAILING
FAB STEEL
ERECT STEEL
STEEL JOISTS/DECKING
EXTERIOR FRAMING
ROOFING MEMBRANE
EXT PAINTING
ALUMINUM & GLAZING
</TABLE>
<TABLE>
<CAPTION>
SEP OCT 96 NOV 96 DEC 96 JAN 97 FEB 97
23 30 1 7 14 21 28 4 11 18 25 2 9 18 23 30 6 13 20 27 3 10 17 24
<S> <C> <C> <C> <C> <C>
DESIGN SCHEDULE
FINAL LOBBY DESIGN 25 SEPT 96
T.I. SPACE PLAN
ALL PLUMBING LOCATED 30 SEPT 96
ANY OTHER UNDERGROUND 30 SEPT 96
SUBMIT SHELL FOR PERMIT 14 OCT 96
ARCH DWGS COMPLETE RESUBMIT 04 NOV 96
FINAL T.I. SPACE PLAN 18 OCT 96
SUBMIT FOR T.I. PERMIT 15 JAN 97
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
TENANT IMPROVEMENTS
VOICE/DATA TRENCHING **** **** **** *****
ROUGH M.E.P. **** **** **** **** *****
FRAME HIGH WALLS **** **** **** *****
DRYWALL @ HIGH WALLS **** *****
T-BAR GRID **** **** *****
FRAME BELOW GRID **** **** *****
M.E.P. **** *****
INSULATE WALLS *****
DRYWALL, TAPE & TOP **** *****
INTERIOR PAINTING *****
FINISH RESTROOMS **** **** *****
FLOOR COVERINGS *****
CABINETRY *****
FINISH MEP *****
PUNCH LIST *
MOVE IN *
SITE WORK
SITE CONCRETE **** **** **** *****
LANDSCAPING **** **** **** **** *****
PAVING **** **** *****
MAR 97 APR 97 MAY 97 JUNE 97 JULY 97 AUG 97 SEP 97
3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15
</TABLE>
EXHIBIT D
to
Build-to-Suit Lease
<PAGE>
EXHIBIT E
ACKNOWLEDGEMENT OF LEASE COMMENCEMENT
This Acknowledgement is executed as of ______________, 1997, by
BRITANNIA HACIENDA V LIMITED PARTNERSHIP, a Delaware limited partnership
("Landlord"), and PROBUSINESS, INC., a California corporation ("Tenant"),
pursuant to Section 2.5 of the Lease dated September 27, 1996 between Landlord
and Tenant (the "Lease") covering premises located at______________________,
Pleasanton, CA 94588 (the "Premises").
Landlord and Tenant hereby acknowledge and agree as follows:
1. The Commencement Date under the Lease is______________, 1997.
2. The termination date under the Lease shall be __________, 2008,
subject to any applicable provisions of the Lease for extension or early
termination thereof.
3. The agreed square footage of the Building, as built, is ______
square feet; the agreed square footage of the portion of the Premises initially
occupied by Tenant as of the Commencement Date is ___________ square feet.
4. Tenant accepts the Premises and acknowledges the satisfactory
completion of all improvements therein (if any) required to be made by
Landlord, subject only to any applicable "punch list" or similar procedures
specifically provided under the Lease.
5. The excess cost of improvements (if any) for which Tenant is
responsible under Exhibit C to the Lease is $______________ , resulting in an
additional rent amount of $_____________ per month pursuant to Section 3.1(d)
of the Lease.
EXECUTED as of the date first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA V LIMITED PROBUSINESS, INC.,
PARTNERSHIP, a Delaware limited a California corporation
partnership
By: BRITANNIA HOPYARD, LLC, a By:______________________
California limited liability Its:_____________________
company, General Partner
By:______________________
T. J. Bristow
Manager & President
<PAGE>
FIRST AMENDMENT TO BUILD-TO-SUIT LEASE
---------------------------------------
THIS FIRST AMENDMENT TO BUILD-TO-SUIT LEASE ("AMENDMENT") is entered into
as of January 27, 1998 between BRITANNIA HACIENDA V LIMITED PARTNERSHIP, a
Delaware limited partnership ("LANDLORD") and PROBUSINESS SERVICES, INC., a
Delaware corporation ("TENANT"), formerly known as ProBusiness, Inc., a
California corporation, with reference to the following facts:
A. Landlord and Tenant are parties to a Build-to-Suit Lease dated
September 27, 1996 (the "LEASE"), covering certain premises commonly known as
4125 Hopyard Road, Pleasanton, California 94588 (the "PREMISES"). Since
entering into the Lease under the name "ProBusiness, Inc.," Tenant has changed
its name and state of organization and is now ProBusiness Services, Inc., a
Delaware corporation.
B. Concurrently with the execution of this Amendment, Landlord and Tenant
are entering into a Build-to-Suit Lease (the "PHASE VII LEASE") covering a new
building to be constructed by Landlord on a portion of the Property adjacent to
the Premises and designated as "Phase VII" on the Site Plans attached to the
Lease and the Phase VII Lease, respectively.
C. In connection with the execution of the Phase VII Lease, Landlord and
Tenant wish to make certain changes in the Lease as more particularly set forth
herein.
D. Terms used herein as defined terms but not specifically defined herein
shall have the meanings assigned to such terms in the Lease.
NOW, THEREFORE, in consideration of the mutual agreements set forth herein
and for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Landlord and Tenant agree as follows:
1. ADDRESS OF PREMISES. Landlord and Tenant acknowledge that the address
of the Premises is 4125 Hopyard Road, Pleasanton, California 94588, and that
such address shall constitute the notice address for Tenant under Section 17.1
of the Lease, unless and until further changed by Tenant.
2. EXTENSION OF TERM. Subject to the provisions of Paragraph 2.6 below:
2.1 The termination date under the Lease (which has heretofore been
established as September 21, 2008) is extended until the termination date under
the Phase VII Lease (which date will not be definitively established until
completion of the improvements contemplated under the Phase VII Lease).
2.2 Notwithstanding any contrary provisions in Section 1.3 of the
Lease, the extended term established under Paragraph 2.1 above shall NOT be
construed to be an early or partial exercise of Tenant's first extension right
under Section 2.7 of the Lease, and all extension rights set forth in such
Section 2.7 shall remain in full force and effect in accordance with their
terms, commencing upon expiration of the extended term established under
Paragraph 2.1 above.
2.3 Notwithstanding any contrary provisions in the Lease, the
minimum rental payable during the portion of the extended term (if any)
beginning on September 22, 2008 and continuing through September 21, 2009 shall
be equal to the LESSER of (i) the Indexed Rent (as hereinafter defined) or (ii)
ninety-five percent (95%) of the fair market rental value of the Premises,
determined as of September 22, 2008 in accordance
<PAGE>
with the procedure set forth in Section 3.1(e) of the Lease. Landlord and
Tenant shall use their best reasonable and good faith efforts to determine,
during the six months preceding September 22, 2008, the minimum rental to become
applicable as of September 22, 2008 pursuant to this Paragraph 2.3.
2.4 The minimum rental payable during the portion of the extended
term (if any) beginning on September 22, 2009 and continuing through the
expiration of the extended term established under Paragraph 2.1 above shall be
equal to the minimum rental determined under Section 2.3 above multiplied, as of
September 22, 2009 and as of September 22 of each year thereafter during the
period described in this Paragraph 2.4, by an adjustment factor determined in
the same manner as the adjustment factor used for calculation of the Indexed
Rent as hereinafter defined.
2.5 For purposes of this Paragraph 2, the "Indexed Rent" shall mean
the minimum rental in effect immediately prior to September 21, 2008 (and shall
not include any additional minimum rental constituting an amortization of excess
improvement costs pursuant to Section 3.1(d) of the Lease, since such
amortization of excess improvement costs shall be completed as of September 22,
2008) multiplied by either (i) one hundred four percent (104%), if Tenant is
paying rent on the basis set forth in Section 3.1(a) of the Lease immediately
prior to September 21, 2008, or (ii) an adjustment factor determined in the
manner described in subparagraph (ii) of Section 3.1(b) of the Lease, if Tenant
is paying rent on the basis set forth in Section 3.1(b) of the Lease immediately
prior to September 21, 2008.
2.6 The provisions of this Paragraph 2 shall become effective only
if and when the Commencement Date occurs under the Phase VII Lease, and shall be
of no force or effect if that Commencement Date does not occur.
3. FIRST REFUSAL RIGHT (LEASING). A first refusal right with respect to
leasing of Phase V of the Property, substantially identical in its terms to
subsections (a) through (d) of Section 1.3 of the Lease as they apply to Phase V
of the Property; is contained in subsections (a) through (d) of Section 1.3 of
the Phase VII Lease. It is not the intention of the parties thereby to create
two separately enforceable first refusal rights with respect to Phase V of the
Property; rather, their intention is to give Tenant the ability to choose to
have its first refusal right with respect to Phase V of the Property be
effective under this Lease OR under the Phase VII Lease (but not both).
Accordingly, Section 1.3 of the Lease is amended by adding thereto a new
subsection (e), reading in its entirety as follows:
"(e) Landlord and Tenant acknowledge that a first refusal right with
respect to Phase V of the Property, substantially identical in its terms to
subsections (a) through (d) of this Section 1.3 as they apply to Phase V of
the Property, is contained in subsections (a) through (d) of Section 1.3 of
the Phase VII Lease (as defined in the First Amendment to this Lease),
except that such first refusal right under the Phase VII Lease shall become
effective only if and when Tenant gives written notice to Landlord that
Tenant is releasing and renouncing all further rights under this Section
1.3 with respect to Phase V of the Property. Such notice may be given by
Tenant at any time (and may, without limiting the generality of the
foregoing, be given concurrently with Tenant's acceptance of Landlord's
offer), in the manner prescribed in Section 17.1 of this Lease, and upon
the giving of such notice, the provisions of this Section 1.3 shall
terminate and be of no further force or effect with respect to Phase V of
the Property."
- 2 -
<PAGE>
4. FIRST REFUSAL RIGHT (PURCHASE). A first refusal right with respect to
purchase of the buildings on the Property is contained in subsections (a)
through (d) of Section 1.4 of the Phase VII Lease. The parties wish to include
a similar right in the Lease, but it is not the intention of the parties thereby
to create two separately enforceable first refusal rights with respect to
purchase of the buildings on the Property; rather, their intention is to give
Tenant the ability to choose to have its first refusal right with respect to
such buildings be effective under this Lease OR under the Phase VII Lease (but
not both). Accordingly, a new Section 1.4 is added to the Lease, to read in its
entirety as follows:
"1.4 FIRST REFUSAL RIGHT (PURCHASE).
(a) During the term of this Lease (including any duly
exercised extended terms), Landlord shall not sell any building(s) existing
from time to time on the Property, except in compliance with this Section
1.4; PROVIDED, however, that the foregoing restrictions shall not apply
during any period in which Tenant is in default under this Lease in any
material respect.
(b) If Landlord intends, during any applicable period
described in Section 1.4(a), to sell any of the buildings existing on the
Property from time to time (including, but not limited to, any such
proposed sale which also includes, as part of a single bulk transaction
with a single purchaser or group of purchasers, other buildings or
properties owned by Landlord or by affiliates of Landlord and located in
Pleasanton, California), and if Tenant is not then in default under this
Lease in any material respect, Landlord shall give written notice of such
intention to Tenant, specifying the material terms on which Landlord
proposes to sell such buildings and properties (including, but not limited
to, any such other buildings or properties owned by Landlord or by
affiliates of Landlord in Pleasanton, California, if applicable)
(collectively, the "Offered Building(s)"), and shall offer to Tenant the
opportunity to purchase the Offered Building(s) on the terms specified in
Landlord's notice. Landlord shall not need to have a bona fide written
offer from a prospective purchaser in order to give such a notice, and such
notice may, in Landlord's discretion, identify a range of material terms on
which Landlord is willing to sell the Offered Building(s). Tenant shall
have ten (10) business days after receipt of such notice from Landlord in
which to accept such offer by written notice to Landlord; if Landlord's
notice designated alternative terms or a range of terms, Tenant's
acceptance shall specify which alternative, within the offered range, is
being accepted by Tenant. Upon such acceptance by Tenant, the Offered
Building(s) shall be sold to Tenant on the terms set forth in Landlord's
notice and elected by Tenant and on the additional terms and provisions set
forth herein (except to the extent inconsistent with the terms set forth in
Landlord's said notice) and the parties shall promptly execute a purchase
and sale agreement reflecting such terms and such other terms as may
reasonably and customarily apply to such a purchase and sale transaction.
If Tenant does not accept Landlord's offer within the allotted time,
Landlord shall thereafter have the right to sell the Offered Building(s) to
a third party, at any time within one (1) year after Tenant's failure to
accept Landlord's offer, at a price and on other terms and conditions not
more favorable to the purchaser than the price and other terms offered to
Tenant in Landlord's said notice. If Tenant does not accept Landlord's
offer, then to the extent Landlord does not sell the Offered Building(s) to
a third party within such one-year period, Landlord shall
- 3 -
<PAGE>
again be required to comply with the provisions of this Section 1.4 prior
to any further sale of the Offered Building(s) or any portion thereof.
(c) Notwithstanding any other provisions of this Section 1.4,
(i) Tenant's first refusal right shall not apply to any proposed
transaction in which Landlord and its affiliates are selling or proposing
to sell, in a single bulk transaction to a single purchaser or group of
purchasers, not only the Property but also at least one additional property
out of their real estate portfolio holdings NOT located in Pleasanton,
California, and (ii) if Landlord's offer to Tenant under this Section 1.4
includes more than one building on the Property OR includes one or more
other buildings or properties in Pleasanton, California (I.E., buildings or
properties OTHER THAN the Property and the buildings thereon) which are
owned by Landlord or its affiliates and which Landlord and its affiliates
propose to sell in a single bulk transaction to a single purchaser or group
of purchasers (recognizing that an offer or proposed sale of fewer than all
the buildings on the Property can occur only if the Property is legally
subdivided, since the entire Property is now a single legal parcel),
Tenant's sole choice shall be to take all or none of the offered buildings
and properties, and Tenant shall have no right to take some but not all of
the offered buildings and properties (PROVIDED, however, that if Tenant
declines such an offer and Landlord thereafter wishes to sell to a third
party fewer than all of the buildings and properties offered to Tenant in
Landlord's initial notice, Landlord shall be required, in accordance with
the terms of this Section 1.4, to give a new notice to Tenant reflecting
the changed identification of buildings and properties and any other
changed terms in such revised proposal).
(d) Landlord and Tenant acknowledge that a first refusal
right to purchase the buildings on the Property, substantially identical in
its terms to subsections (a) through (c) of this Section 1.4, is contained
in subsections (a) through (c) of Section 1.4 of the Phase VII Lease,
except that such first refusal right under the Phase VII Lease shall become
effective only if and when Tenant gives written notice to Landlord that
Tenant is releasing and renouncing all further rights under this Section
1.4 with respect to the Property. Such notice may be given by Tenant at
any time, in the manner prescribed in Section 17.1 of this Lease, and upon
the giving of such notice, the provisions of this Section 1.4 shall
terminate and be of no further force or effect. Without limiting the
generality of the foregoing, such notice may be given concurrently with
Tenant's acceptance notice to Landlord as described in Section 1.4(b)
above."
5. TAX CHALLENGES. A new Section 4.3 is added to the Lease, to read in
its entirety as follows:
"4.3. CHALLENGE TO ASSESSMENTS. Notwithstanding any other provisions
of this Article 4:
(a) If Tenant requests by written notice to Landlord that
Landlord challenge or contest the amount of any real or personal property
taxes or assessments which are levied generally against Landlord and/or the
Property and which are relevant to the determination of real or personal
property taxes for which Tenant is liable under this Article 4 or under
Article 5 (which notice shall include a specification, with all reasonable
supporting information, of the basis on which Tenant believes that there is
a reasonable basis for such challenge or contest), and if
-4-
<PAGE>
Landlord agrees that there is a reasonable basis for such challenge or
contest, then Landlord shall initiate and pursue such a challenge or
contest, diligently and with commercially reasonable efforts, at Landlord's
sole cost and expense (except as otherwise provided below and subject to
the possible application of the provisions of Article 5 hereof with respect
to such expenses). If Landlord's challenge or contest results in a net
recovery of any previously paid taxes (after Landlord first deducts and
retains from any such recovery, as a reimbursement to Landlord, the amount
of the costs and expenses reasonably incurred by Landlord to obtain the
recovered amounts, except to the extent Landlord has previously elected or
then elects, in Landlord's reasonable discretion, to treat such expenses as
Operating Expenses under Article 5 hereof), Landlord shall pay such net
recovery to Tenant in proportion to the extent Tenant initially bore the
economic burden of the recovered amounts, and shall retain such net
recovery in proportion to the extent the economic burden of the recovered
amounts was initially borne by Landlord or by any other tenant other than
Tenant.
(b) If Landlord fails to challenge or contest any real or
personal property taxes or assessments following a request by Tenant under
Section 4.3(a) above, or if Section 4.3(a) is inapplicable because the real
or personal property taxes or assessments in question are assessed directly
against Tenant or its property rather than being assessed generally against
Landlord or the Property, then Tenant shall have the right to challenge or
contest, at Tenant's sole cost and expense (except as otherwise provided
below), the amount of any such real or personal property taxes or
assessments relevant to the determination of real or personal property
taxes for which Tenant is liable under this Article 4 or under Article 5,
PROVIDED that as a condition of its exercise of such right, Tenant shall
indemnify, defend and hold Landlord and the Property harmless from and
against any and all fines, penalties, late charges, liens, tax sales and
other adverse consequences arising out of or in connection with such
challenge or contest by Tenant or arising out of or in connection with the
taxes and assessments which are the subject thereof, and shall take all
steps reasonably necessary and prudent to prevent any liens (other than the
normal liens for non-delinquent real and personal property taxes), tax
sales and other enforcement proceedings from arising with respect to the
Property as a result of Tenant's challenge or contest. If Tenant's
challenge or contest results in a net recovery of any previously paid taxes
(after Tenant first deducts and retains from any such recovery, as a
reimbursement to Tenant, the amount of the costs and expenses reasonably
incurred by Tenant to obtain the recovered amounts), Tenant shall be
entitled to retain such net recovery in proportion to the extent Tenant
initially bore the economic burden of the recovered amounts, and shall pay
such net recovery over to Landlord in proportion to the extent the economic
burden of the recovered amounts was initially borne by Landlord or by any
other tenant other than Tenant."
6. ELECTRICAL POWER. Section 6.1 of the Lease is amended by adding the
following new sentence at the end thereof:
"In connection with the impending deregulation of the supply of electrical
power in California, Tenant shall have the right to designate or select the
service provider for electrical power to be supplied to the Building (but
not to the Common Areas, as to which any such designation or selection
shall be made by Landlord alone)."
-5-
<PAGE>
7. CROSS-DEFAULT. Section 14.1 of the Lease is amended by adding
thereto, as an additional event of default, the following:
"(i) CROSS-DEFAULT. Any default by Tenant under the Build-to-Suit
Lease entered into by Landlord and Tenant, substantially concurrently with
the First Amendment to this Lease, with respect to Phase VII of the
Property (the "PHASE VII LEASE"), to the extent such default continues
beyond any applicable cure periods provided in the Phase VII Lease and to
the extent Landlord therefore has (and exercises concurrently with any
termination of this Lease) a right to terminate the Phase VII Lease;
PROVIDED, however, that the default event set forth in this Section
14.1 (i) shall not apply with respect to any default under the Phase VII
Lease if, at the time of such default, the holder of the lessee's interest
under the Phase VII Lease is neither the person or entity which is then the
holder of the lessee's interest under this Lease nor a person or entity
which controls, is controlled by or is under common control with the person
or entity which is then the holder of the lessee's interest under this
Lease."
8. FULL FORCE AND EFFECT. Except as expressly set forth herein, the
Lease has not been modified or amended and remains in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of
the date first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA V LIMITED PROBUSINESS SERVICES, INC., a
PARTNERSHIP, a Delaware Delaware corporation (formerly
limited partnership known as ProBusiness, Inc., a
California corporation)
By: BRITANNIA HOPYARD, LLC, a
California limited
liability company, By: /s/ Thomas H. Sinton
General Partner -------------------------
Its: President
By: /s/ T. J. Bristow -------------------------
--------------------
T. J. Bristow By: [ILLEGIBLE]
Manager & President -------------------------
Its: SVP
-------------------------
-6-
<PAGE>
EXHIBIT 10.8
SUBLEASE
This Sublease, made as of the 10th day of October, 1997, by and between
Drake Mortgage Corporation, a Washington corporation, referred to herein as the
"Sublessor", and ProBusiness Services, Inc., a Delaware corporation, referred to
herein as the "Sublessee".
WITNESSETH:
WHEREAS, Sublessor, as "Tenant" and The Trustees under the will and of the
Estate of James Campbell, Deceased, acting in their fiduciary and not in their
individual capacities (the "Master Landlord"), as "Landlord", have heretofore
entered into a certain 400 Building Lease Agreement, dated August 25, 1993, as
amended by a certain amendment of lease, Amendment No. 2, and as amended by a
certain amendment of lease agreement dated February 14, 1996, (collectively, the
"Master Lease"), a copy of which is attached hereto as Exhibit "A", pursuant to
which, among other things, the Master Landlord leased to Sublessor certain
premises (the "Master Leased Premises") consisting of portions of the building
commonly known as The 400 Building (the "Building") and located at 400 108th
Avenue N.E. in Bellevue, Washington, having a rental area of approximately
65,867 square feet, and more fully described in the Master Lease; and
WHEREAS, Sublessor desires to sublease to Sublessee, and Sublessee desires
to sublease from Sublessor, a part of the Master Leased Premises (referred to
herein as the "Subleased Premises"), consisting of approximately 4,782 square
feet, known as Suite 400 located in the western most part of the fourth floor.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Sublessor and Sublessee agree as follows:
1. DEMISE OF SUBLEASED PREMISES. Sublessor hereby subleases to
Sublessee, and Sublessee hereby accepts from Sublessor, on the terms and
conditions hereinafter set forth, the Subleased Premises. Sublessee accepts the
Subleased Premises in their "as is" condition on the date hereof. Sublessor may
coordinate changing the locks securing the Subleased Premises with the Master
Landlord, to ensure compatibility of locks throughout the Building and access to
the Subleased Premises by Master Landlord in cases of emergency.
2. RENT. Sublessee shall pay to Sublessor as rent for the Subleased
Premises, monthly in advance, on the Commencement Date and on the first day of
each calendar month thereafter during the Term of this Sublease, without
deduction, set off, prior notice or demand, in lawful money of the United States
of America, the sum of $5,350.00 (see Addendum A) (the "Base Rent"). It is
intended by Sublessor and Sublessee that the monthly Base Rent provided for
herein shall be "Gross" rent and, except for reimbursement of a portion of the
operating expenses payable by Sublessor under the Master Lease, as set forth in
paragraph 3 below, shall include all costs of Sublessee's use and occupancy of
the Subleased Premises, including, but not limited to: gas, electricity for
lighting and operation of customary office machines, water, elevator service,
heat and air conditioning during "Normal Business Hours", as such are defined in
the Master lease, "Operating Costs" as such are defined in the Master lease,
security, property taxes, insurance (except for insurance maintained by
Sublessee for its own benefit or to comply with Sublessee's legal obligations),
cleaning and janitor service and maintenance and repairs.
<PAGE>
3. OPERATING COSTS. In addition to the Base Rent provided for in
paragraph 2 hereof, Sublessee shall reimburse Sublessor for Sublessee's
Proportionate Share (as hereinafter defined) of actual Operating Costs (as
defined in paragraph 3 of the Master Lease) in excess of Operating Costs for the
base year 1993 ("Excess Operating Costs"), which are payable by Sublessor
pursuant to the Master Lease. Sublessee shall pay Sublessee's Proportionate
Share of such Excess Operating Costs for the calendar year 1998 and for each
calendar year thereafter during the Term, within 30 days after receipt of
Sublessee's Proportionate Share of such Excess Operating Costs and a copy of the
statement of Sublessor's actual Operating Costs, delivered to Sublessor by the
Master Landlord pursuant to paragraph 3 of the Master Lease.
4. TERM AND POSSESSION. The term of this Sublease ("Term") shall begin
upon the Sublessor's vacation of the Premises targeted for December 15, 1997,
(the "Commencement Date") and end on January 31, 1999, unless sooner terminated
by reason of Sublessee's default. On and after the date upon which Sublessor
delivers possession of the Subleased Premises to Sublessee, all of the terms and
conditions of this Sublease shall be applicable to Sublessee's use and occupancy
of the Subleased Premises.
5. USE. Sublessee shall use the Subleased Premises for general office
uses and uses reasonably incidental thereto and for no other purpose without the
prior written consent of Sublessor and Master Landlord.
6. ALTERATIONS AND IMPROVEMENTS. Sublessee, at Sublessee's sole cost
and expense, shall have the right, at any time and from time to time during the
Term to construct such alterations, additions and improvements to the Subleased
Premises as Sublessee, in its sole discretion, deems necessary or advisable,
subject only to the consent of the Master Landlord, as provided in paragraph 6
of the Master Lease, and the prior written consent of Sublessor, which consent
Sublessor agrees will not be withheld or delayed unreasonably. In the event
Sublessee desires to make any proposed alterations, additions or improvements to
the Subleased Premises, Sublessee shall submit to each of Master Landlord and
Sublessor, together with Sublessee's request for such consent, two copies of
plans and specifications, setting forth in reasonable detail the proposed design
and plan of such alterations, additions or improvements. Any proposed
alterations, additions or improvements to the Subleased Premises shall be deemed
approved, if Sublessor or Master Landlord has not notified Sublessee of
Sublessor's or Master Landlord's disapproval within 10 days after receiving
Sublessee's request for approval. Sublessor's or Master Landlord's disapproval
of any alteration, addition or improvement requested by Sublessee shall be in
writing and shall state with reasonable specificity Sublessor's or Master
Landlord's reasons for such disapproval.
7. PARKING. Sublessor shall make available to Sublessee from time to
time throughout the Term, at the current market rate of $95.00 per stall to
Sublessee, a number of parking spaces under contract by Sublessor. Initially,
Sublessor shall make available 4 parking stalls, of which at least 4 shall be
covered.
8. SIGNAGE. Sublessee, at its sole cost and expense, shall be
permitted to install and maintain monument and lobby signage, subject only to
approval thereof by Sublessor, which approval Sublessor agrees shall not be
withheld or delayed unreasonably, and approval by the Master Landlord as
required under paragraph 17 of the Master Lease. Sublessee shall remove all
signage and repair any damage caused thereby, at its sole cost and expense,
prior to the expiration of the term of this Sublease.
<PAGE>
9. MASTER LEASE.
(a) Except as set forth hereinafter in this paragraph, the terms and
conditions of the Master lease are incorporated in this Sublease as though
fully set forth herein, and, except as set forth below, Sublessee shall
perform, observe and be bound by all of the terms and conditions of the
Master Lease to be performed and observed by the Tenant thereunder, insofar
as the same are applicable to the Subleased Premises, Sublessor shall
perform, observe and be bound by, or cause the Master Landlord to perform and
observe, all of the terms and conditions of the Master Lease to be performed
or observed by the Landlord thereunder, insofar as the same are applicable to
the Subleased Premises; Sublessee shall have, as to Sublessor, all of the
rights and benefits arising and accruing to the Tenant under the Master
lease; and Sublessor shall have, as to Sublessee, all of the rights and
benefits arising or accruing to the Landlord under the Master Lease.
Notwithstanding the foregoing, the following provisions of the Master Lease
are not incorporated herein and shall not apply to this Sublease:
(i) The payment by Sublessee of Operating Costs shall be governed
by paragraph 3 of this Sublease, and Sublessee shall have no rights
or obligations with respect to paragraph 3 of the Master Lease;
(ii) Sublessee's defaults shall be governed by paragraph 10 of
this Sublease and not be paragraph 23 of the Master Lease;
(b) Sublessor and Sublessee agree, each with the other, that neither
will take or permit any action or fail to perform or observe any obligation,
which causes an event of default under the Master Lease and/or causes the Master
Lease to be terminated or forfeited, and each shall indemnify the other and
hold the other harmless from and against any and all claims, demands, suits,
costs, expenses, damages and liabilities, including reasonably attorneys' fees,
arising by reason of any act or omission on the part of the indemnifying party
which causes the Master lease to be terminated or forfeited.
10. EVENTS OF DEFAULT. Each of the following shall constitute an event
of default by Sublessee under this Sublease and shall entitle Sublessor to
exercise any and all remedies available to the Master landlord under the Master
lease and/or available to Sublessor by operation of law:
(a) Sublessee shall fail to pay when due any monthly installment of Base
Rent or any other payment required to be made by Sublessee, and such failure
shall continue for five days after receipt by Sublessee of Sublessor's written
notice thereof;
(b) Sublessee shall fail to observe or perform any other term or
condition to be observed or performed by Sublessee hereunder or under the Master
Lease, and such failure shall continue for 30 days after receipt by Sublessee of
Sublessor's written notice thereof, unless such failure of performance, by its
nature, cannot be cured within 30 days, in which event, such failure of
performance shall be deemed cured if Sublessee commences to cure the same within
such 30 day period and completes such cure as soon as reasonably practicable;
(c) Sublessee shall file a petition in bankruptcy or avail itself of any
other state or federal law providing for the relief of debtors.
11. NOTICES. All notices or demands required or permitted under this
Sublease shall be in writing and shall be address as set forth herein below or
to such other address as either party may, by
<PAGE>
written notice to the other, specify in writing from time to time. All notices
shall be deemed served upon delivery, if hand-delivered, or 24 hours after
delivery to Federal Express or another recognized overnight courier with charges
prepaid, if served by overnight courier, or three business days after deposited
in the United States mail, with postage pre-paid, registered or certified mail,
return receipt requested, if served by mail. Notices hereunder may also be
served by facsimile, with a copy sent by United States mail postage prepaid, and
shall be deemed served when received by the recipient's facsimile machine.
Notices to Sublessor shall be address as follows:
Stanley R. Drake
Drake Mortgage
400 108th Avenue N.E., Suite 100
Bellevue, WA 98004
Notices to Sublessee shall be addressed as follows:
Mitch Everton
ProBusiness Services, Inc.
4125 Hopyard Road
Pleasanton, CA 94566
A copy of all notices service by one party hereto upon the other shall also
be sent to Master Landlord and shall be addressed as follows:
Jeff Iseman
The Seneca Group
10900 N.E. 4th Street, Suite 800
Bellevue, WA 98004
12. GENERAL PROVISIONS.
(a) The Waiver by either party hereto of a breach of any covenant,
obligation or condition set forth herein to be performed or observed by the
other party hereto shall not be deemed to be a waiver of any subsequent breach
of the same or of any other covenant, obligation or condition of this Sublease
to be performed or observed by such party.
(b) This Sublease shall be governed by and construed in accordance with
the laws of the State of Washington.
(c) If any term, covenant or condition of this Sublease or the
application thereof to any person or circumstance shall be held to be or
rendered invalid, unenforceable or illegal, then such term, covenant or
condition shall be considered separate and severable from the remainder of this
Sublease, shall not affect, impair or invalidate the remainder of this Sublease,
and shall continue to be applicable to and enforceable to the fullest extent
permitted by law against any person or circumstances other than those as to
which it has been held or rendered invalid, unenforceable or illegal.
(d) This Sublease may be executed in one or more counterparts, each of
which shall constitute an original but all of which together shall constitute
one and the same instrument.
(e) This Sublease sets forth all the covenants, promises, agreements,
conditions or understandings between the parties hereto concerning the Subleased
Premises and the subject matter of
<PAGE>
this Sublease. There are no covenants, promises, agreements, conditions or
understandings, either oral or written, between the parties hereto other than
as herein set forth. Except as herein otherwise provided, no alteration,
amendment or change of, or addition to this Sublease shall be binding upon
the parties hereto unless in writing and signed by Sublessor and Sublessee.
(f) The captions and paragraph numbers appearing in this Sublease are
inserted only as a matter of convenience and in no way define, limit,
construe or describe the scope or intent of any of the provisions hereof nor
in any way affect this Sublease.
(g) The words "hereof," "herein," "hereunder" and similar expressions
used in any provision of this Sublease relate to the whole of this Sublease
and not to such provision alone, unless otherwise expressly provided, and
whenever the singular number of a gender is used herein the same shall be
construed as including the plural and the masculine, feminine and neuter
respectively where the fact or context so requires.
(h) Time is of the essence of this Sublease and of every part hereof.
(i) Each party to this Sublease represents and warrants to the other
party hereto that the execution, delivery and performance of this Sublease by
the representing and warranting party has been authorized by all necessary
corporate action of such party and that the officer or officers executing this
Sublease on behalf of such party have full power and authority to do so and to
bind such party hereto.
IN WITNESS WHEREOF, Sublessor and Sublessee have duly executed this Sublease as
of the day and year first above written.
SUBLESSOR: SUBLESSEE:
Drake Mortgage Corporation ProBusiness Services, Inc.
A Washington corporation A Delaware corporation
By: /s/ Stanley Drake By: /s/ Mitch Everton
--------------------------- ---------------------------
Its: President Its: SVP - OPERATIONS
-------------------------- --------------------------
CONSULT YOUR ATTORNEY. THIS DOCUMENT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR THEIR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
PACIFIC REAL ESTATE PARTNERS, INC. OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY OR LEGAL EFFECT OF THIS DOCUMENT. THESE ARE QUESTIONS FOR YOUR
ATTORNEY.
<PAGE>
ADDENDUM A
This Addendum is a continuation of that certain Sublease dated October 10, 1997,
between Drake Mortgage Corporation, a Washington corporation, and ProBusiness
Services, a Delaware corporation, on real property in King County, Washington
and by this reference shall become part of that agreement.
Sublessee shall pay to Sublessor upon receipt of invoice, approximately December
18, 1997, $31,000.00. Payment to be considered a partial prepayment of Base
Rent as illustrated below and a one-time payment of $5,000.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000.00 X 13 = $26,000 + $5,000 = $31,000
(rent reduction) (number of months in the lease term) (one-time payment)
</TABLE>
Initials: Subleases ME Sublessor
----- ----
<PAGE>
EXHIBIT 10.9
BUILD-TO-SUIT LEASE
Landlord: Britannia Hacienda V Limited Partnership
Tenant: ProBusiness Services, Inc.
Date: January 27, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Landlord's Reserved Rights . . . . . . . . . . . . . . . . 1
1.3. First Refusal Right (Leasing). . . . . . . . . . . . . . . 2
1.4. First Refusal Right (Purchase) . . . . . . . . . . . . . . 3
2. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1. Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2. Early Possession . . . . . . . . . . . . . . . . . . . . . 5
2.3. Delay In Possession. . . . . . . . . . . . . . . . . . . . 5
2.4. Construction . . . . . . . . . . . . . . . . . . . . . . . 6
2.5. Acknowledgement Of Lease Commencement. . . . . . . . . . . 6
2.6. Holding Over . . . . . . . . . . . . . . . . . . . . . . . 7
2.7. Option To Extend Term. . . . . . . . . . . . . . . . . . . 7
3. RENTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1. Minimum Rental . . . . . . . . . . . . . . . . . . . . . . 7
3.2. Late Charge. . . . . . . . . . . . . . . . . . . . . . . . 11
4. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1. Personal Property. . . . . . . . . . . . . . . . . . . . . 11
4.2. Real Property. . . . . . . . . . . . . . . . . . . . . . . 11
4.3. Challenge to Assessments . . . . . . . . . . . . . . . . . 11
5. OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1. Payment Of Operating Expenses. . . . . . . . . . . . . . . 12
5.2. Definition Of Operating Expenses . . . . . . . . . . . . . 13
5.3. Determination Of Operating Expenses. . . . . . . . . . . . 15
5.4. Final Accounting For Lease Year. . . . . . . . . . . . . . 15
5.5. Proration. . . . . . . . . . . . . . . . . . . . . . . . . 16
6. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1. Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.2. Interruption . . . . . . . . . . . . . . . . . . . . . . . 16
7. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1. Right To Make Alterations. . . . . . . . . . . . . . . . . 16
7.2. Title To Alterations . . . . . . . . . . . . . . . . . . . 17
7.3. Tenant Fixtures. . . . . . . . . . . . . . . . . . . . . . 17
7.4. No Liens . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. MAINTENANCE AND REPAIRS . . . . . . . . . . . . . . . . . . . . . . . 17
8.1. Landlord's Work. . . . . . . . . . . . . . . . . . . . . . 17
8.2. Tenant's Obligation For Maintenance. . . . . . . . . . . . 18
(a) Good Order, Condition And Repair. . . . . . . . . . . 18
(b) Landlord's Remedy . . . . . . . . . . . . . . . . . . 18
(c) Condition Upon Surrender. . . . . . . . . . . . . . . 19
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
9. USE OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.1. Permitted Use. . . . . . . . . . . . . . . . . . . . . . . 19
9.2. [Omitted]. . . . . . . . . . . . . . . . . . . . . . . . . 19
9.3. No Nuisance. . . . . . . . . . . . . . . . . . . . . . . . 19
9.4. Compliance With Laws . . . . . . . . . . . . . . . . . . . 19
9.5. Liquidation Sales. . . . . . . . . . . . . . . . . . . . . 19
9.6. Environmental Matters. . . . . . . . . . . . . . . . . . . 20
10. INSURANCE AND INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . 20
10.1. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 20
10.2. Quality Of Policies And Certificates . . . . . . . . . . . 21
10.3. Workers' Compensation. . . . . . . . . . . . . . . . . . . 21
10.4. Waiver of Subrogation. . . . . . . . . . . . . . . . . . . 21
10.5. Increase In Premiums . . . . . . . . . . . . . . . . . . . 22
10.6. Indemnification. . . . . . . . . . . . . . . . . . . . . . 22
10.7. Blanket Policy . . . . . . . . . . . . . . . . . . . . . . 22
11. SUBLEASE AND ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . 22
11.1. Assignment And Sublease Of Premises. . . . . . . . . . . . 22
11.2. Rights Of Landlord . . . . . . . . . . . . . . . . . . . . 23
12. RIGHT OF ENTRY AND QUIET ENJOYMENT . . . . . . . . . . . . . . . . . 23
12.1. Right Of Entry . . . . . . . . . . . . . . . . . . . . . . 23
12.2. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . 23
13. CASUALTY AND TAKING. . . . . . . . . . . . . . . . . . . . . . . . . 23
13.1. Termination Or Reconstruction. . . . . . . . . . . . . . . 23
13.2. Tenant's Rights. . . . . . . . . . . . . . . . . . . . . . 24
13.3. Lease To Remain In Effect. . . . . . . . . . . . . . . . . 25
13.4. Reservation Of Compensation. . . . . . . . . . . . . . . . 25
13.5. Restoration Of Fixtures. . . . . . . . . . . . . . . . . . 25
14. DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14.1. Events Of Default. . . . . . . . . . . . . . . . . . . . . 25
(a) Abandonment . . . . . . . . . . . . . . . . . . . . . 25
(b) Nonpayment. . . . . . . . . . . . . . . . . . . . . . 25
(c) Other Obligations . . . . . . . . . . . . . . . . . . 26
(d) General Assignment. . . . . . . . . . . . . . . . . . 26
(e) Bankruptcy. . . . . . . . . . . . . . . . . . . . . . 26
(f) Receivership. . . . . . . . . . . . . . . . . . . . . 26
(g) Attachment. . . . . . . . . . . . . . . . . . . . . . 26
(h) Insolvency. . . . . . . . . . . . . . . . . . . . . . 26
(i) Cross-Default . . . . . . . . . . . . . . . . . . . . 26
14.2. Remedies Upon Tenant's Default . . . . . . . . . . . . . . 26
14.3. Remedies Cumulative. . . . . . . . . . . . . . . . . . . . 27
15. SUBORDINATION, ATTORNMENT AND SALE . . . . . . . . . . . . . . . . . 27
15.1. Subordination To Mortgage. . . . . . . . . . . . . . . . . 27
15.2. Sale Of Landlord's Interest. . . . . . . . . . . . . . . . 28
15.3. Estoppel Certificates. . . . . . . . . . . . . . . . . . . 28
15.4. Subordination to CC&R's. . . . . . . . . . . . . . . . . . 29
16. SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
16.1. Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
17. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.1. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.2. Successors And Assigns . . . . . . . . . . . . . . . . . . 30
17.3. No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . 30
17.4. Severability . . . . . . . . . . . . . . . . . . . . . . . 30
17.5. Litigation Between Parties . . . . . . . . . . . . . . . . 30
17.6. Surrender. . . . . . . . . . . . . . . . . . . . . . . . . 30
17.7. Interpretation . . . . . . . . . . . . . . . . . . . . . . 30
17.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . 31
17.9. Governing Law. . . . . . . . . . . . . . . . . . . . . . . 31
17.10. No Partnership . . . . . . . . . . . . . . . . . . . . . . 31
17.11. Financial Information. . . . . . . . . . . . . . . . . . . 31
17.12. [Omitted]. . . . . . . . . . . . . . . . . . . . . . . . . 31
17.13. Time . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.14. Rules and Regulations. . . . . . . . . . . . . . . . . . . 31
17.15. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.16. Memorandum Of Lease. . . . . . . . . . . . . . . . . . . . 32
17.17. Corporate Authority. . . . . . . . . . . . . . . . . . . . 32
17.18. Execution and Delivery . . . . . . . . . . . . . . . . . . 32
17.19. [Omitted]. . . . . . . . . . . . . . . . . . . . . . . . . 32
17.20. Survival . . . . . . . . . . . . . . . . . . . . . . . . . 32
17.21. Consents . . . . . . . . . . . . . . . . . . . . . . . . . 32
17.22. Landlord Defaults. . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
EXHIBITS
EXHIBIT A Real Property Description
EXHIBIT B Site Plan
EXHIBIT C Construction
C-1: Building Shell Specifications
EXHIBIT D Acknowledgement of Lease Commencement
<PAGE>
BUILD-TO-SUIT LEASE
THIS BUILD-TO-SUIT LEASE ("Lease") is made and entered into as of the
____day of January, 1998, by and between BRITANNIA HACIENDA V LIMITED
PARTNERSHIP, a Delaware limited partnership (hereinafter called "Landlord")
and PROBUSINESS SERVICES, INC., a Delaware corporation (hereinafter called
"Tenant").
THE PARTIES AGREE AS FOLLOWS:
1. PREMISES
1.1. PREMISES.
(a) Landlord leases to Tenant and Tenant hires and leases from
Landlord, on the terms, covenants and conditions hereinafter set forth,
the premises (the "Premises") consisting of a one-story concrete tilt-up
building of approximately 70,425 square feet, plus or minus 3,500 square feet
(the "Building") to be constructed by Landlord pursuant to the terms of this
Lease on a portion of the real property described in EXHIBIT A attached
hereto (the "Property"). The approximate location of the Building on the
Property and the approximate layout of the other site improvements
constructed or to be constructed by Landlord on the Property are
depicted in the site plan attached hereto as EXHIBIT B (the "Site Plan").
The parking areas, driveways, sidewalks, landscaped areas and other
portions of the Property that lie outside the exterior walls of the
Building (excluding any additional buildings depicted on the Site Plan
or otherwise constructed on the Property by Landlord from time to time),
as depicted on the Site Plan and as hereafter modified by Landlord from
time to time in accordance with the provisions of this Lease, are
sometimes referred to herein as the "Common Areas."
(b) As an appurtenance to Tenant's leasing of the Premises
pursuant to Section 1.1(a), Landlord hereby grants to Tenant, for the benefit
of Tenant and its employees, suppliers, shippers, customers and invitees,
during the term of this Lease, the non-exclusive right to use, in common with
others entitled to such use, the Common Areas (as they exist from time to
time) and all easements, access rights and similar rights and privileges
relating to or appurtenant to the Property and created or existing from time
to time under any easement agreements, declarations of covenants, conditions
and restrictions, or other written agreements now or hereafter of record with
respect to the Property, subject however to any limitations applicable to
such rights and privileges under applicable law and/or under the written
agreements creating such rights and privileges. Landlord agrees that parking
in the Common Areas of the Property shall be provided at a minimum ratio of
at least 3.8 parking spaces for each 1,000 square feet of buildings existing
on the Property from time to time.
1.2. LANDLORD'S RESERVED RIGHTS. Landlord reserves, in addition to
the right of entry set forth in Section 12.1 hereof, the following rights,
exercisable from time to time in Landlord's discretion: (i) to install, use,
maintain, repair and replace pipes, ducts, conduits, wires and appurtenant
meters and other equipment above the ceiling surfaces, below the floor
surfaces or within the walls of the Building in locations which will not
materially interfere with Tenant's use thereof; (ii) to relocate any pipes,
ducts, conduits, wires and appurtenant meters and equipment located within or
outside the Building; (iii) to construct, alter or add to other buildings or
improvements on the Property; (iv) to build adjoining to the Property; (v) to
lease any part of the Property for the construction of improvements or
buildings; (vi) to make changes to the Common Areas, including (but not
limited to) changes in the location, size or shape of any portion of the
Common Areas, and to relocate parking spaces on the Property; (vii) to close
temporarily any of the Common Areas for maintenance or other reasonable
purposes, provided that reasonable parking and reasonable access to the
Building remain available; (viii) to use the Common Areas while engaged in
making additional improvements, repairs or alterations to the Property or
any portion thereof; and (ix) to do and perform such other acts with respect
to the Common Areas and the Property as may be necessary or appropriate;
PROVIDED, however, that the exercise by Landlord of its rights under this
Section 1.2 shall not, without Tenant's prior written consent, (x) materially
reduce the parking ratio for the Property below that shown on the Site Plan,
nor (y)
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<PAGE>
reduce the number of parking spaces on the portion of the Property designated
as Phase VII on the Site Plan (other than on a temporary basis incidental to
construction or maintenance activities of Landlord on the Property, in which
event Landlord shall exercise reasonable efforts to minimize the number of
parking spaces affected by such temporary activities), nor (z) make any other
change in the Site Plan that would have a material adverse effect on Tenant's
use of the Premises. Moreover, Landlord shall not exercise rights reserved to
it pursuant to this Section 1.2 in such a manner as to materially impair
Tenant's ability to conduct its activities in the normal manner, or in such a
manner as to cause any material diminution of Tenant's rights or any material
increase in Tenant's obligations under this Lease; PROVIDED, however, that the
foregoing shall not limit or restrict Landlord's right to undertake reasonable
construction activity and Tenant's use of the Premises shall be subject to
reasonable temporary disruption incidental to such activity diligently
prosecuted.
1.3 FIRST REFUSAL RIGHT (LEASING).
(a) During the term of this Lease (including any duly exercised
extended terms), Landlord shall not lease any space in any building(s) existing
or to be built from time to time on the portion of the Property designated as
Phase V on the Site Plan, except in compliance with this Section 1.3; PROVIDED,
however, that the foregoing restrictions shall not apply during any period in
which Tenant is in default under this Lease in any material respect.
(b) If Landlord intends, during any applicable period
described in Section 1.3(a), to lease any space in any of the buildings
existing or to be built on Phase V of the Property from time to time, and if
Tenant is not then in default under this Lease in any material respect,
Landlord shall give written notice of such intention to Tenant, specifying
the material terms on which Landlord proposes to lease such space (the
"Offered Space"), and shall offer to Tenant the opportunity to lease the
Offered Space on the terms specified in Landlord's notice. Landlord shall not
need to have a bona fide written offer from a prospective tenant in order to
give such a notice, and such notice may, in Landlord's discretion, identify a
range of sizes, durations, rental rates, tenant improvement allowances and
other material terms on which Landlord is willing to lease the Offered Space.
Tenant shall have ten (10) business days after receipt of such notice from
Landlord in which to accept such offer by written notice to Landlord; if
Landlord's notice designated alternative terms or a range of terms, Tenant's
acceptance shall specify which alternative, within the offered range, is
being accepted by Tenant. Upon such acceptance by Tenant, the Offered Space
(or applicable portion thereof) shall be leased to Tenant on the terms set
forth in Landlord's notice and elected by Tenant (subject to the provisions
of Section 1.3(c)) and on the additional terms and provisions set forth
herein (except to the extent inconsistent with the terms set forth in
Landlord's said notice) and the parties shall promptly execute an amendment
to this Lease adding the Offered Space to the Premises and making any
appropriate amendments to provisions of this Lease to reflect different rent
and other obligations applicable to the Offered Space under the terms of
Landlord's said notice and Tenant's acceptance. If Tenant does not accept
Landlord's offer within the allotted time, Landlord shall thereafter have the
right to lease the Offered Space or any portion thereof to a third party, at
any time within one hundred eighty (180) days after Tenant's failure to
accept Landlord's offer, at a minimum rental and on other terms and conditions
not more favorable to the lessee than the minimum rental and other terms
offered to Tenant in Landlord's said notice. If Tenant does not accept
Landlord's offer, then to the extent Landlord does not lease the Offered
Space to a third party within such 180-day period, Landlord shall again be
required to comply with the provisions of this Section 1.3 prior to any
further leasing of the Offered Space or any portion thereof.
(c) Notwithstanding any other provisions of this Section 1.3,
if the terms (or range of terms) offered by Landlord to Tenant with respect
to the Offered Space do not include an expiration date which is coterminous
with the then current term of this Lease, then Tenant's acceptance (if any)
of Landlord's offer may take any of the following three forms: (i) Tenant may
accept the terms (or an alternative within the range of terms, if applicable)
offered by Landlord, without regard to the non-coterminous nature of the
respective lease terms for the Offered Space and for the initial Premises
hereunder; or (ii) Tenant may accept the terms (or an alternative within the
range of terms, if applicable) offered by Landlord with respect to the
Offered Space and concurrently extend the then current term of this Lease
with respect to the initial Premises to terminate concurrently with the lease
term for the Offered Space, in which event such extension by Tenant shall be
deemed to be a permissible early exercise of the
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<PAGE>
extension option set forth in Section 2.7 hereof, without regard to the time
limits set forth therein, and the rent for the initial Premises for such
extended term shall be determined in accordance with Section 3.1(e) hereof
for any portion of such extended term falling within the first five (5) years
after the original expiration date of this Lease, and shall be determined in
accordance with Section 3.1(f) hereof for any portion of such extended term
falling more than five (5) years after the original expiration date of this
Lease; or (iii) Tenant may elect to lease the Offered Space for a term
coterminous with the then remaining term of this Lease with respect to the
initial Premises, in which event (x) Landlord shall have no obligation to
improve the Offered Space or provide any tenant improvement allowance for the
Offered Space, regardless of any contrary terms set forth in Landlord's
original notice to Tenant, (y) the "minimum rent" for the Offered Space shall
be the fair market rental value thereof, in the then existing condition of
such space, which fair market rental value shall be determined promptly in
accordance with the procedure described in Section 3.1 (e) hereof (but at
100% of fair market rental value rather than 95%), and (z) Tenant's lease
of the Offered Space shall otherwise be on the terms set forth in
Landlord's notice and on the additional terms and provisions set
forth herein (except to the extent inconsistent with the terms set
forth in Landlord's said notice).
(d) To the extent Tenant elects, pursuant to clause (ii) of
Section 1.3(c) hereof, an early exercise of one or both extended terms under
Section 2.7 hereof in whole or in part, then (A) the determination of the rent
for the initial Premises for the applicable extended term (or portion
thereof) shall be made during the period commencing six (6) months before the
commencement of the applicable extended term, pursuant to the procedure in
Section 3.1(e) or 3.1(f) hereof, as applicable, and (B) to the extent
Tenant has exercised its option as to only a portion of either extended term,
then the unexercised portion of such extended term shall be deemed to remain
subject to a continuing extension option by Tenant, which remaining option
shall be exercisable in accordance with Section 2.7 hereof not more than
eight (8) months and not less than six (6) months prior to the expiration
of the initial portion of such extended term already elected by Tenant under
clause (ii) of Section 1.3(c) hereof.
(e) Landlord and Tenant acknowledge that a first refusal right
with respect to Phase V of the Property, substantially identical in its terms
to subsections (a) through (d) of this Section 1.3 as they apply to Phase V of
the Property, is contained in subsections (a) through (d) of Section 1.3 of
the Build-to-Suit Lease dated as of September 27, 1996 between Landlord and
Tenant (then known as ProBusiness, Inc., a California corporation) with
respect to Phase VI of the Property as designated on the Site Plan (the
"Phase VI Lease"), except that such first refusal right under the Phase VI
Lease is presently effective and shall terminate if and when Tenant gives
written notice to Landlord that Tenant is releasing and renouncing all
further rights under Section 1.3 of the Phase VI Lease with respect to
Phase V of the Property. The provisions of this Section 1.3 of this Lease
shall be of no force or effect unless and until Tenant gives such a written
notice to Landlord under the Phase VI Lease, and shall become effective only
upon the effective date of such written notice, after which Tenant's first
refusal rights with respect to Phase V of the Property shall be determined
solely under this Section 1.3 and not under Section 1.3 of the Phase VI Lease.
Such notice may be given by Tenant to Landlord at any time and, without limiting
the generality of the foregoing, may be given concurrently with Tenant's
acceptance of Landlord's offer under Section 1.3 of this Lease or under
Section 1.3 of the Phase VI Lease, as applicable.
1.4 FIRST REFUSAL RIGHT (PURCHASE).
(a) During the term of this Lease (including any duly
exercised extended terms), Landlord shall not sell any building(s) existing
from time to time on the Property, except in compliance with this Section
1.4; PROVIDED, however, that the foregoing restrictions shall not apply during
any period in which Tenant is in default under this Lease in any material
respect.
(b) If Landlord intends, during any applicable period
described in Section 1.4(a), to sell any of the buildings existing on the
Property from time to time (including, but not limited to, any such proposed
sale which also includes, as part of a single bulk transaction with a single
purchaser or group of purchasers, other buildings or properties
owned by Landlord or by affiliates of Landlord and located in Pleasanton,
California), and if Tenant is not then in default under this Lease in any
material respect, Landlord shall give written notice of such intention to
Tenant, specifying the material terms on which Landlord proposes to sell such
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<PAGE>
buildings and properties (including, but not limited to, any such other
buildings or properties owned by Landlord or by affiliates of Landlord in
Pleasanton, California, if applicable) (collectively, the "Offered
Building(s)"), and shall offer to Tenant the opportunity to purchase the
Offered Building(s) on the terms specified in Landlord's notice. Landlord
shall not need to have a bona fide written offer from a prospective purchaser
in order to give such a notice, and such notice may, in Landlord's
discretion, identify a range of material terms on which Landlord is willing
to sell the Offered Building(s). Tenant shall have ten (10) business days after
receipt of such notice from Landlord in which to accept such offer by written
notice to Landlord; if Landlord's notice designated alternative terms or a
range of terms, Tenant's acceptance shall specify which alternative, within
the offered range, is being accepted by Tenant. Upon such acceptance by
Tenant, the Offered Building(s) shall be sold to Tenant on the terms set
forth in Landlord's notice and elected by Tenant and on the additional terms
and provisions set forth herein (except to the extent inconsistent with the
terms set forth in Landlord's said notice) and the parties shall promptly
execute a purchase and sale agreement reflecting such terms and such other
terms as may reasonably and customarily apply to such a purchase and sale
transaction. If Tenant does not accept Landlord's offer within the allotted
time, Landlord shall thereafter have the right to sell the Offered
Building(s) to a third party, at any time within one (1) year after Tenant's
failure to accept Landlord's offer, at a price and on other terms and
conditions not more favorable to the purchaser than the price and other terms
offered to Tenant in Landlord's said notice. If Tenant does not accept
Landlord's offer, then to the extent Landlord does not sell the Offered
Building(s) to a third party within such one-year period, Landlord shall
again be required to comply with the provisions of this Section 1.4 prior to
any further sale of the Offered Building(s) or any portion thereof.
(c) Notwithstanding any other provisions of this Section 1.4,
(i) Tenant's first refusal right shall not apply to any proposed transaction
in which Landlord and its affiliates are selling or proposing to sell, in a
single bulk transaction to a single purchaser or group of purchasers, not
only the Property but also at least one additional property out of their real
estate portfolio holdings NOT located in Pleasanton, California, and (ii) if
Landlord's offer to Tenant under this Section 1.4 includes more than one
building on the Property or includes one or more other buildings or
properties in Pleasanton, California (I.E., buildings or properties other
than the Property and the buildings thereon) which are owned by Landlord or
its affiliates and which Landlord and its affiliates propose to sell in a
single bulk transaction to a single purchaser or group of purchasers
(recognizing that an offer or proposed sale of fewer than all the buildings
on the Property can occur only if the Property is legally subdivided, since
the entire Property is now a single legal parcel), Tenant's sole choice shall
be to take all or none of the offered buildings and properties, and Tenant
shall have no right to take some but not all of the offered buildings and
properties (PROVIDED, however, that if Tenant declines such an offer and
Landlord thereafter wishes to sell to a third party fewer than all of the
buildings and properties offered to Tenant in Landlord's initial notice,
Landlord shall be required, in accordance with the terms of this Section 1.4,
to give a new notice to Tenant reflecting the changed identification of
buildings and properties and any other changed terms in such revised
proposal).
(d) Landlord and Tenant acknowledge that a first refusal to
purchase the buildings on the Property, substantially identical in its terms
to subsections (a) through (c) of this Section 1.4, is contained in
subsections (a) through (c) of Section 1.4 of the Phase VI Lease; except that
such first refusal right under the Phase VI Lease is presently effective and
shall terminate if and when Tenant gives written notice to Landlord that
Tenant is releasing and renouncing all further rights under Section 1.4 of
the Phase VI Lease. The provisions of this Section 1.4 of this Lease shall be
of no force or effect unless and until Tenant gives such a written notice to
Landlord under the Phase VI Lease, and shall become effective only upon the
effective date of such written notice, after which Tenant's first refusal
purchase rights with respect to the buildings on the Property shall be
determined solely under this Section 1.4 and not under Section 1.4 of the
Phase VI Lease. Such notice may be given by Tenant to Landlord at any time
and, without limiting the generality of the foregoing, may be given
concurrently with Tenant's acceptance of Landlord's offer under Section 1.4
of this Lease or under Section 1.4 of the Phase VI Lease, as applicable.
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<PAGE>
2. TERM
2.1. TERM. The term of this Lease shall commence on the earlier
to occur of (i) the date which is five (5) days after the date Landlord
notifies Tenant that Landlord's work pursuant to Section 2.4 and EXHIBIT C on
the Building shell and core and on the first phase (at least 35,000 square feet)
of interior improvements is substantially complete and such work is in fact
substantially complete (but in no event earlier than July 1, 1999), or (ii) the
date Tenant takes occupancy of the Premises (except as otherwise provided in
Section 2.2), the earlier of such dates being herein called the "Commencement
Date," and shall end on the day immediately preceding the date eleven (11)
years thereafter, unless sooner terminated or extended as hereinafter provided.
Assuming execution of this Lease by December 1, 1997 and approval of full plans,
specifications and working drawings by July 1, 1998, the parties presently
estimate that the Commencement Date will be no later than July 1, 1999. For
purposes of this Section 2.1, Landlord's work shall be deemed to be
"substantially complete" when all of the following have occurred: (A) all
improvements to be constructed by Landlord as part of the Building shell and
core and the first phase (at least 35,000 square feet) of interior improvements,
pursuant to EXHIBIT C have been completed except for "punch list" items which
do not materially interfere with Tenant's ability to utilize the first phase
(at least 35,000 square feet) of the Premises for their intended purpose;
(B) the City of Pleasanton has issued a certificate of occupancy for the first
phase (at least 35,000 square feet) of the Premises; (C) all utilities
reasonably necessary for Tenant's use of the first phase (at least 35,000
square feet) of the Premises for their intended purpose are connected and
available for use at the Premises; and (D) all improvements to be constructed
by Landlord as part of the Common Areas contemplated for and located on
Phase VII of the Property as shown on the Site Plan have been completed, except
for "punch list" items which do not materially interfere with Tenant's ability
to utilize the Premises for their intended purpose, and are available for use
by Tenant.
2.2. EARLY POSSESSION. If Landlord permits Tenant to occupy,
use or take possession of the Premises prior to the Commencement Date
determined under Section 2.1, such occupancy, use or possession shall be
subject to and upon all of the terms and conditions of this Lease, including
the obligation to pay rent and other charges, unless Landlord and Tenant
agree otherwise; PROVIDED, however, that such early possession shall not
advance or otherwise affect the Commencement Date or termination date
determined under Section 2.1; PROVIDED FURTHER, that if Tenant takes such
early possession solely for the purpose of installing fixtures, equipment,
furniture and furnishings and other similar work preparatory to the
commencement of business in the Premises (which early possession Landlord
shall be required to offer to Tenant at least three (3) weeks prior to the
estimated date for substantial completion of Landlord's work as contemplated
in Section 2.1 hereof), Tenant shall not be required to pay rent or Operating
Expenses by reason of such possession until the Commencement Date otherwise
occurs; and PROVIDED FURTHER, that Tenant shall not interfere with or delay
Landlord's contractors by such early possession and shall indemnify, defend
and hold harmless Landlord and its agents and employees from and against any
and all claims, demands, liabilities, actions, losses, costs and expenses,
including (but not limited to) reasonable attorneys' fees, arising out of or
in connection with Tenant's early entry upon the Premises hereunder.
2.3. DELAY IN POSSESSION. Landlord agrees to use its best
reasonable efforts to pursue and complete the work described in Section 2.4
and EXHIBIT C promptly, diligently, and within the respective time periods set
forth in a construction timeline to be mutually agreed upon by Landlord and
Tenant following final approval of plans and specifications pursuant to
EXHIBIT C, as such timeline may be modified from time to time by mutual
agreement of Landlord and Tenant, and subject to the effects of any delays
caused by or attributable to Tenant or any other circumstances beyond
Landlord's reasonable control (excluding any financial inability); PROVIDED,
however, that except to the extent caused by a material default by Landlord of
its obligations set forth in this Lease (including, but not limited to, its
obligations set forth in this Section 2.3 and in Section 2.4 and EXHIBIT C),
Landlord shall not be liable for any damages caused by any delay in the
completion of such work, nor shall any such delay affect the validity of this
Lease or the obligations of Tenant hereunder.
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<PAGE>
2.4. CONSTRUCTION.
(a) The obligation of Landlord to construct and improve the
Premises for occupancy by Tenant hereunder, and to construct related site
improvements in the Common Areas for use by Tenant, is set forth in EXHIBIT C
attached hereto and incorporated herein by this reference. Except as set
forth in this Section 2.4 and in EXHIBIT C, Landlord shall have no
responsibilities or obligations with respect to preparation of the Premises
or the Property for Tenant's occupancy of the Premises under this Lease.
(b) Landlord shall deliver the Building core and shell and
first phase (at least 35,000 square feet) of interior improvements in the
Building to Tenant clean and free of debris on the Commencement Date (subject
to Tenant's right of early possession stated in the second proviso in
Section 2.2), and Landlord warrants to Tenant, effective as of the
Commencement Date, that (i) the Building core and shell and first phase (at
least 35,000 square feet) of interior improvements therein and the Common
Areas contemplated for or located on Phase VII of the Property as designated
on the Site Plan are substantially completed and are free from material
defects in design and construction, (ii) the electrical, mechanical,
plumbing, lighting, air conditioning and heating systems, and the loading
doors, if any, on the Building are in good operating condition (to the extent
necessary to serve the first phase of at least 35,000 square feet of interior
improvements) and are free of material defects in design, equipment and/or
installation, and (iii) the Building core and shell and first phase (at least
35,000 square feet) of interior improvements therein have been constructed in
compliance in all material respects with the plans and specifications
developed and approved pursuant to EXHIBIT C. If it is determined that this
warranty has been violated in any respect, then it shall be the obligation of
Landlord, after receipt of written notice from Tenant setting forth with
specificity the nature of the violation, to promptly, at Landlord's sole
cost, correct the condition(s) constituting such violation. Tenant's failure
to give such written notice to Landlord within ninety (90) days after the
Commencement Date shall give rise to a conclusive presumption that Landlord
has complied with all Landlord's obligations under this Section 2.4 and
EXHIBIT C, except with respect to latent defects.
(c) Landlord warrants to Tenant that the Building core and
shell and first phase (at least 35,000 square feet) of interior improvements
constructed by Landlord therein, as they exist on the Commencement Date, but
without regard to any use for which Tenant will occupy the Premises other than
general office use, shall not violate any covenants or restrictions of record
or any applicable building code, regulation or ordinance in effect on the
Commencement Date. If it is determined that this warranty has been violated,
then it shall be the obligation of Landlord, after written notice from Tenant,
to promptly, at Landlord's sole cost and expense, correct the condition(s)
constituting such violation. Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation or warranty as to the present or
future suitability of the Premises for the conduct of Tenant's business or
proposed business thereon, except as expressly set forth in this Lease.
(d) Landlord's obligations, representations and warranties
with respect to the second phase (35,425 square feet or less) of interior
improvements in the Premises shall be identical to the obligations,
representations and warranties set forth in this Section 2.4 and in EXHIBIT C
with respect to the first phase of interior improvements, but shall be deemed
to be made as of the date on which Landlord's construction of such second phase
of interior improvements is substantially complete (as defined in Section 2.1).
(e) TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE
IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PHYSICAL CONDITION OF THE BUILDING AND IMPROVEMENTS TO BE CONSTRUCTED BY
LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET
FORTH IN THIS LEASE.
2.5. ACKNOWLEDGEMENT OF LEASE COMMENCEMENT. Upon commencement
of the term of this Lease, Landlord and Tenant shall execute a written
acknowledgement of the Commencement Date, date of termination, square footage
of the Premises and of the first phase of interior improvements delivered to
Tenant, excess cost of improvements (if applicable) and related matters,
substantially in the form attached hereto as EXHIBIT D (with appropriate
insertions), which acknowledgement shall be deemed to be incorporated herein
by this reference.
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<PAGE>
Notwithstanding the foregoing requirement, the failure of Tenant to execute
such a written acknowledgement shall not affect Landlord's determination of
the Commencement Date, date of termination, square footage of the Premises
and of the first phase of interior improvements delivered to Tenant, excess
cost of improvements (if applicable) and related matters in accordance with
the provisions of this Lease.
2.6. HOLDING OVER. If Tenant holds possession of the Premises after the
term of this Lease with Landlord's written consent, then except as
otherwise specified in such consent, Tenant shall become a tenant from month
to month at one hundred twenty-five percent (125%) of the rental and
otherwise upon the terms herein specified for the period immediately prior to
such holding over and shall continue in such status until the tenancy is
terminated by either party upon not less than thirty (30) days prior written
notice. If Tenant holds possession of the Premises after the term of this
Lease without Landlord's written consent, then Landlord in its sole
discretion may elect (by written notice to Tenant) to have Tenant become a
tenant either from month to month or at will, at one hundred twenty-five
percent (125%) of the rental (prorated on a daily basis for an at-will
tenancy, if applicable) and otherwise upon the terms herein specified for the
period immediately prior to such holding over, or may elect to pursue any and
all legal remedies available to Landlord under applicable law with respect to
such unconsented holding over by Tenant. Tenant shall indemnify and hold
Landlord harmless from andy loss, damage, claim, liability, cost or expense
(including reasonable attorneys' fees) resulting from any delay by Tenant in
surrendering the Premises (except with Landlord's prior written consent),
including but not limited to any claims made by a succeeding tenant by reason
of such delay. Acceptance of rent by Landlord following expiration or
termination of this Lease shall not constitute a renewal of this Lease.
2.7. OPTION TO EXTEND TERM. Tenant shall have the option to extend the
term of this Lease, at the minimum rental set forth in Section 3.1(e) and (f)
and otherwise upon all the terms and provisions set forth herein with respect
to the initial term of this Lease, for up to two (2) additional periods of
five (5) years each, commencing upon expiration of the initial term hereof.
Exercise of such option with respect to the first such extended term shall be
by written notice to Landlord at lease six (6) months and not more than eight
(8) months prior to the expiration of the initial term hereof; exercise of
such option with respect to the second such extended term, if the first
extension options has been duly exercised, shall be by like written notice to
Landlord at least six (6) months and not more than eight (8) months prior to
the expiration of the first extended term hereof. If there exists a material
event of default on the part of Tenant on the date of any such notice, then
the notice shall not be effective. If Tenant properly exercises one or more
extension options under this Section, then all references in this Lease
(other than in this Section 2.7) to the "term" of this Lease shall be
construed to include the extension term(s) thus elected by Tenant. Except as
expressly set forth in this Section 2.7, Tenant shall have no right to extend
the term of this Lease beyond its prescribed term. To the extent provided in
Section 1.3(c)(ii) and 1.3(d), Tenant may elect an early and/or partial
exercise of one or both extended terms in connection with an acceptance of
Offered Space; in the event of any such partial exercise, the remaining
unexercised portion of the extended term(s) shall be subject to a continuing
option under this Section 2.7, as provided in Section 1.3(d), and upon a
proper exercise by Tenant of such remaining extended term(s), the rent for
such remainder of the extended term(s) shall be determined, as of the
commencement of such remainder of the extended terms(s), in the manner
provided in Section 3.1(e) or 3.1(f), as applicable.
3. RENTAL
3.1. MINIMUM RENTAL.
(a) Tenant shall pay to Landlord as minimum rental for
the Premises, in advance, without deduction, offset, notice or demand, on or
before the Commencement Date and on or before the first day of each
subsequent calendar month of the term of this Lease, the following amounts
per month: for months 1-12, the sum of $43,750.00 per month; and for months
13-132, the adjusted rent determined under Section 3.1(b) hereof.
Notwithstanding the foregoing provisions of this Section 3.1, however, at any
time after month 12 of the term of this Lease, Tenant in its sole discretion
may elect, by written notice to Landlord, to convert its
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minimum rental obligation for the period from the date of such notice through
the remainder of the initial term of this Lease to the following amounts per
month (as applicable):
<TABLE>
<CAPTION>
Months After Minimum Rental
Commencement Date (per month)
----------------- --------------
<C> <C>
13-24 $ 91,000.00
25-36 94,640.00
37-48 98,426.00
49-60 102,363.00
61-72 106,458.00
73-84 110,716.00
85-96 115,145.00
97-108 119,751.00
109-120 124,541.00
121-132 129,523.00
</TABLE>
If the obligation to pay minimum rental hereunder commences on other than the
first day of a calendar month or if the term of this Lease terminates on
other than the last day of a calendar month, the minimum rental for such
first or last month of the term of this Lease, as the case may be, shall be
prorated based on the number of days the term of this Lease is in effect
during such month. If an increase in minimum rental becomes effective on a
day other than the first day of a calendar month, the minimum rental for that
month shall be the sum of the two applicable rates, each prorated for the
portion of the month during which such rate is in effect.
(b) If and only if Tenant does not exercise its election under
Section 3.1(a) to convert its minimum rental obligation to the rent schedule
set forth in Section 3.1(a), then and only then shall the minimum rental
hereunder be subject to adjustment as set forth in this Section 3.1(b). To
the extent Tenant does not exercise such election as of the end of month 12
of the term of this Lease, then for so long as such election remains
unexercised, minimum rental hereunder shall be subject to adjustment on the
first anniversary of the Commencement Date, effective for months 13-24 of the
term of this Lease, and on each subsequent anniversary of the Commencement
Date until the expiration of the initial term of this Lease, effective for
the succeeding twelve (12) months of the term of this Lease (each such
anniversary being herein called an "Adjustment Date"), in accordance with the
provisions of this paragraph (b). The base for computing such adjustment
shall be (i) for the first such adjustment, the Consumer Price Index for All
Urban Consumers, San Francisco/Oakland/San Jose Metropolitan Area, All Items
(1982-84 = 100), produced by the United States Department of Labor, Bureau of
Labor Statistics ("Index") which is published for the month two (2) months
prior to the month in which the Commencement Date occurs and (ii) for each
subsequent adjustment, the Extension Index (as hereinafter defined) used for
the immediately preceding adjustment (each such Index identified in clause
(i) or (ii) of this sentence, as applicable, being hereinafter called the
"Beginning Index"). If the Index which is published for the month two (2)
months prior to the month in which the Adjustment Date occurs (the "Extension
Index") has increased over the Beginning Index, the minimum rental payable
thereafter shall be increased to an amount equal to the minimum rental in
effect immediately prior to such Adjustment Date multiplied by the lesser of
(x) 1.05 or (y) a fraction, the numerator of which is equal to the sum of the
Beginning Index for such Adjustment Date plus the product of 2.5 times the
difference between the Extension Index for such Adjustment Date and the
Beginning Index for such Adjustment Date, and the denominator of which is the
Beginning Index for such Adjustment Date. If the Extension Index is not
available until after the Adjustment Date, Tenant shall continue to pay the
then prevailing minimum rental until the Extension Index is published,
whereupon the adjustment provided in this paragraph shall be made retroactive
to the Adjustment Date and any accumulated excess of the adjusted minimum
rental over the amounts actually paid by Tenant since the Adjustment Date
shall be paid promptly by Tenant to Landlord upon notice by Landlord to
Tenant of the adjusted minimum rental. If the Index is changed so that the
base year differs from the base year used as of the Commencement Date, the
Index shall be converted in accordance with the conversion factor published
by the United States Department of Labor, Bureau of Labor Statistics. If the
Index is discontinued or substantially revised during the term of this Lease,
any comparable governmental index or computation with which it is replaced
(or, if none is available, any privately published index which is comparable
in coverage and purpose) shall be designated by
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Landlord in order to obtain substantially the same result as would have been
obtained if the Index had not been discontinued or revised. Upon any
adjustment of the monthly minimum rental in accordance with the provisions of
this paragraph, Landlord and Tenant shall immediately execute a written
acknowledgement of the new minimum rental as adjusted, which acknowledgement
shall be deemed to be incorporated herein by this reference; PROVIDED,
however, that any failure of one or both parties to execute and deliver such
a written acknowledgement shall not limit or affect in any way the other
obligations of the parties with respect to the applicable rental adjustment
or any subsequent rental adjustments required under this paragraph (b).
(c) The minimum rental amounts specified in this Section 3.1
are based upon an estimated area of 70,000 square feet for the Premises
(except during months 1-12, when the estimated area of the Premises is
assumed to be 35,000 square feet, reflecting the estimated area of the first
phase of the build-out of interior improvements in the Premises.) If the
actual area of the Premises, when completed, is greater or less than such
estimated area (PROVIDED that under no circumstances shall the first phase of
construction of tenant improvements for the Premises be less than 35,000
square feet), then the minimum rentals specified in Sections 3.1(a) and/or
(b), as applicable, shall be adjusted for each rental period in strict
proportion to the ratio between the actual area of the Premises during the
applicable period (which area shall be certified by Landlord's architect as
being determined on the basis of measurement from the exterior faces of the
exterior walls of the Building and from the dripline of any overhangs, and,
for purposes of determining the amount of space occupied by Tenant during the
first twelve months of the term of this Lease, shall be measured to the
centerline of any interior demising walls) and the assumed area of 35,000 or
70,000 square feet, as applicable. If Tenant occupies more than 35,000 square
feet of the Premises during any portion of the first twelve months of the
term of this Lease (due to expansion, at Tenant's request, of the first phase
of interior improvements, acceleration of Tenant's occupancy of the second
phase of interior improvements or for any other reason), or if the actual
area of the first phase of interior improvements is more than 35,000 square
feet, then the minimum rental specified above for such portion of the first
twelve months of the term of this Lease shall be adjusted in strict
proportion to the ratio between the additional space occupied by Tenant in
excess of 35,000 square feet or the actual area of the first phase of
interior improvements (but in no event less than 35,000 square feet), as
applicable, as determined on the basis of measurement set forth in the
immediately preceding sentence hereof, and the assumed area of 35,000 square
feet. If Landlord's substantial completion of the second phase of interior
improvements occurs later than twelve months after the Commencement Date,
then to the extent such delayed completion results from any cause other than
delays attributable to acts or omissions of Tenant or its agents, employees
or contractors, the minimum rentals specified in Sections 3.1(a) and/or (b),
as applicable, shall be reduced, for the period from the beginning of the
thirteenth month of the term of this Lease until the substantial completion
and delivery by Landlord of the second phase of interior improvements, in
strict proportion to the ratio between (i) the greater of the actual area of
the space occupied by Tenant in the Premises or the actual area of the first
phase of interior improvements, as determined in each case on the basis of
measurement set forth in the second preceding sentence hereof, and (ii) the
assumed area of 70,000 square feet. Measurements of building area under this
paragraph shall be made initially by Landlord's architect, subject to review
and approval by Tenant's architect.
(d) The minimum rental amounts specified in Section 3.1(a) do
not reflect any excess improvement costs that may be chargeable to Tenant in
accordance with EXHIBIT C. If, upon completion of construction of the
Premises, it is determined that there are any such excess improvement costs
chargeable to Tenant in accordance with EXHIBIT C, then Tenant shall pay to
Landlord as additional minimum rental for the Premises during the initial
term of this Lease an amount each month equal to the amount necessary to
amortize such excess improvement costs on a level payment basis over the
initial term of this Lease with an imputed return at the rate of ten percent
(10%) per annum. Upon determination of the amount of any additional minimum
rental in accordance with the provisions of this paragraph, Landlord and
Tenant shall incorporate such amount in the Acknowledgement of Lease
Commencement in the form of EXHIBIT E or shall execute a separate written
acknowledgement of such additional minimum rental, which acknowledgement
shall be deemed to be incorporated herein by this reference; PROVIDED,
however, that any failure of one or both parties to execute and deliver
such a written acknowledgement shall not limit or affect in any way the other
obligations of the parties with respect to the additional minimum rental (if
any) due under this paragraph (d). Notwithstanding any other provisions of
this Section 3.1, any additional minimum rental payable under this paragraph (d)
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shall NOT be subject to adjustment under Section 3.1(a), (b) or (c),
regardless of any adjustments that may otherwise be appropriate for other
minimum rental components under such paragraphs (a), (b) or (c).
(e) If Tenant properly exercises its right to extend the term
of this Lease pursuant to Section 2.7 hereof, the minimum rental during the
first extended term shall be equal to ninety-five percent (95%) of the fair
market rental value of the Premises (in "as is" condition as theretofore
improved under Section 2.4 and EXHIBIT C, but without regard to any tenant
improvement allowance for the extended term and without regard to the value
of any improvements which were installed by Tenant at its own cost and which
Tenant has the right to remove from the Premises pursuant to Article 7 hereof
upon expiration of the Lease), including any cost-of-living adjustments or
other rental increase provisions then customary in the relevant market for
comparable commercial leases, determined as of the commencement of such
extended term in accordance with this paragraph. Upon Landlord's receipt of a
proper notice of Tenant's exercise of its option to extend the term of this
Lease, the parties shall have sixty (60) days in which to agree on the fair
market rental (including any applicable rental increase provisions) for the
Premises (as theretofore improved under Section 2.4 and EXHIBIT C) at the
commencement of the first extended term for the uses permitted hereunder. If
the parties agree on such fair market rental and rental increase provisions
(if any), they shall execute an amendment to this Lease stating the amount of
the applicable minimum monthly rental and any applicable rental increase
provisions. If the parties are unable to agree on such rental (including any
applicable rental increase provisions) within such sixty (60) day period,
then within fifteen (15) days after the expiration of such period each party,
by written notice to the other party, shall appoint a real estate appraiser
with at least five (5) years experience appraising similar commercial
properties in the City of Pleasanton or County of Alameda. If either party
fails to appoint an appraiser within the allotted time, the single appraiser
appointed by the other party shall be the sole appraiser. If an appraiser is
appointed by each party, the two appraisers so appointed shall appoint a
third qualified appraiser within fifteen (15) days after the appointment of
the later of the two appraisers to be appointed; if the two appraisers are
unable to agree upon a third appraiser, either party may, upon not less than
five (5) days notice to the other party, apply to the Presiding Judge of the
Superior Court for the county in which the Property is located for the
appointment of a third qualified appraiser. Each party shall bear the fees
and charges of the appraiser appointed by such party, shall bear its own
legal fees in connection with appointment of the third appraiser and shall
bear one-half of any other costs of appointment of the third appraiser and of
such third appraiser's fee. Each appraiser designated under this paragraph,
however selected, shall be a person who has not acted for either party (or
for any person or entity which controls, is controlled by or is under common
control with either party) in any capacity within five (5) years prior to the
date of such designation hereunder. Within thirty (30) days after the
appointment of the third appraiser, a majority of the three appraisers shall
set the fair market rental and any applicable rental increase provisions for
the first extended term and shall so notify the parties. If a majority are
unable to agree within the allotted time, each of the three appraisers at the
end of such 30-day period shall submit his or her written determination of
the fair market rental and any applicable rental increase provisions and (i)
the three appraised fair market rentals shall be added together and divided
by three and the resulting quotient shall be the fair market rental for the
first extended term (except that any fair market appraisal that differs by
more than 10% from the "middle" appraisal shall be disregarded and the
averaging process shall be adjusted accordingly to reflect only the remaining
appraisal(s)), and (ii) the applicable rental increase provision (if any)
shall be equal to the mathematical average (or the nearest reasonable
approximation thereto) of the two rental increase provisions that are most
closely comparable, which determinations shall be binding on the parties and
shall be enforceable in any further proceedings relating to this Lease.
(f) If Tenant properly exercises its right to a second
extended term of this Lease pursuant to Section 2.7 hereof, the minimum
rental during such second extended term shall be determined in the same
manner provided in paragraph (e) of this Section for the first extended term,
except that (i) the determination shall be made as of the commencement of
the second extended term and (ii) the applicable percentage of fair market
rental under clause (ii) of the first sentence of paragraph (e) of this
Section shall be one hundred percent (100%) rather than ninety-five percent
(95%).
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3.2. LATE CHARGE. If Tenant fails to pay when due rental or other
amounts due Landlord hereunder, such paid amounts shall bear interest for
the benefit of Landlord at a rate equal to the lesser of fifteen percent (15%)
per annum or the maximum rate permitted by law, from the date due to the date
of payment. In addition to such interest, Tenant shall pay to Landlord a later
charge in an amount equal to five percent (5%) of any installment of minimum
rental and any other amounts due Landlord if not paid in full on or before the
third (3rd) day after written notice from Landlord to Tenant that such rental
or other amount is past due; PROVIDED, however, that if any payment of rent
or other amounts by Tenant is more than five (5) days late and Landlord gave
written notice of delinquency to Tenant prior to such payment, than for the
next twelve (12) calendar months after such written notice was given, Tenant
shall be liable for later charges on any further payment of rental or other
amount that is not paid on or before the fifth (5th) day after such rental or
other amount is due, WITHOUT any requirement of prior notice from Landlord to
Tenant of such default or delinquency. Tenant acknowledges that late payment
by Tenant to Landlord of rental or other amounts due hereunder will cause
Landlord to incur costs not contemplated by this Lease, including,
without limitation, processing and accounting charges and late charges which
may be imposed on Landlord by the terms of any loan relating to the Property.
Tenant further acknowledges that it is extremely difficult and impractical to
fix the exact amount of such costs and that the late charge set forth
in this Section 3.2 represents a fair and reasonable estimate thereof.
Acceptance of any late charge by Landlord shall not constitute a waiver
of Tenant's default with respect to overdue rental or other amounts, nor
shall such acceptance prevent Landlord from exercising any other rights and
remedies available to it. Acceptance of rent or other payments by Landlord
shall not constitute a waiver of late charges or interest accrued with
respect to such rent or other payments or any prior installments thereof, nor
of any other defaults by Tenant, whether monetary or non-monetary in nature,
remaining uncured at the time of such acceptance of rent or other payments.
4. TAXES
4.1 PERSONAL PROPERTY. Tenant shall be responsible for and shall
pay prior to delinquency all taxes and assessments levied against or by
reason of (a) any and all alterations, additions and items installed or
placed on the Premises and taxed as personal property rather than as real
property, and (b) all personal property, trade fixtures and other property
installed or placed by Tenant on or about the Property. Upon request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of Tenant's
payment thereof. If at any time during the term of this Lease any of said
alterations, additions or personal property, whether or not belonging to
Tenant, shall be taxed or assessed as part of the Property, then such tax or
assessment shall be paid by Tenant to Landlord immediately upon presentation
by Landlord of copies of the tax bills in which such taxes and assessments
are included and shall, for the purposes of this Lease, be deemed to be
personal property taxes or assessments under this Section 4.1.
4.2. REAL PROPERTY. To the extent any real property taxes and
assessments on the Premises, on any improvements therein or on the portion of
the Property identified as Phase VII in the Site Plan are assessed directly
to Tenant, Tenant shall be responsible for and shall pay prior to delinquency
all such taxes and assessments. Upon request by Landlord, Tenant shall
furnish Landlord with satisfactory evidence of Tenant's payment thereof. To
the extent the Property, the Premises and/or any improvements there are
taxed or assessed to Landlord following the Commencement Date, such real
property taxes and assessments shall constitute Operating Expenses (as that
term is defined in Section 5.2 of this Lease) and shall be paid in
accordance with the provisions of Article 5 of this Lease.
4.3 CHALLENGE TO ASSESSMENT. Notwithstanding any other provision of
this Article 4:
(a) If Tenant requests by written notice to Landlord that
Landlord challenge or contest the amount of any real or personal property
taxes or assessments which are levied generally against Landlord and/or the
Property and which are relevant to the determination of real or personal
property taxes for which Tenant is liable under this Article 4 or under
Article 5 (which notice shall include a specification, with all reasonable
supporting information, of the basis on which Tenant believes that there is a
reasonable basis for such challenge or contest), and if Landlord agrees that
there is a reasonable basis for such challenge or contest, then Landlord
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shall initiate and pursue such a challenge or contest, diligently and with
commercially reasonable efforts, at Landlord's sole cost and expense (except
as otherwise provided below and subject to the possible application of the
provisions of Article 5 hereof with respect to such expense). If Landlord's
challenge or contest results in a net recovery of any previously paid taxes
(after Landlord first deducts and retains from any such recovery, as a
reimbursement to Landlord, the amount of the costs and expenses reasonably
incurred by Landlord to obtain the recovered amounts, except to the extent
Landlord has previously elected or then elects, in Landlord's reasonable
discretion, to treat such expenses as Operation Expenses under Article 5
hereof), Landlord shall pay such net recovery to Tenant in proportion to the
extent Tenant initially bore the economic burden of the recovered amounts,
and shall retain such net recovery in proportion to the extent the economic
burden of the recovered amounts was initially borne by Landlord or by any
other tenant other than Tenant.
(b) If Landlord fails to challenge or contest any real or
personal property taxes or assessments following a request by Tenant under
Section 4.3(a) above, or if Section 4.3(a) is inapplicable because the real
or personal property taxes or assessments in question are assessed directly
against Tenant or its property rather than being assessed generally against
Landlord or the Property, then Tenant shall have the right to challenge or
contest, at Tenant's sole cost and expense (except as otherwise provided
below), the amount of any such real or personal property taxes or assessments
relevant to the determination of real or personal property taxes for which
Tenant is liable under this Article 4 or under Article 5, PROVIDED that as a
condition of its exercise of such right, Tenant shall indemnify, defend and
hold Landlord and the Property harmless from and against any and all fines,
penalties, late charges, liens, tax sales and other adverse consequences
arising out of or in connection with such challenge or contest by Tenant or
arising out of or in connection with the taxes and assessments which are the
subject thereof, and shall take all steps reasonably necessary and prudent to
prevent any liens (other than the normal liens for non-delinquent real and
personal property taxes), tax sales and other enforcement proceedings from
arising with respect to the Property as a result of Tenant's challenge or
contest. If Tenant's challenge or contest results in a net recovery of any
previously paid taxes (after Tenant first deducts and retains from any such
recovery, as a reimbursement to Tenant, the amount of the costs and expenses
reasonably incurred by Tenant to obtain the recovered amounts), Tenant shall
be entitled to retain such net recovery in proportion to the extent Tenant
initially bore the economic burden of the recovered amounts, and shall pay
such net recovery over to Landlord in proportion to the extent the economic
burden of the recovered amounts was initially borne by Landlord or by any
other tenant other than Tenant.
5. OPERATING EXPENSES
5.1 PAYMENT OF OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, at the time and in the manner
hereinafter set forth, as additional rental, an amount equal to twelve and four
hundredths percent (12.04%) ("Tenant's Building Operating Cost Share") and
twelve and eighty-eight hundredths percent (12.88%) ("Tenant's Land Operating
Cost Share"), as applicable, of the Operating Expenses defined in Section 5.2;
PROVIDED, however, that upon substantial completion of the second phase of
improvements in the Premises (at which time Tenant will occupy the entire
Building), Tenant's Building Operating Cost Share shall increase to
twenty-four and eight hundredths percent (24.08%) and Tenant's Land Operating
Cost Share shall increase to twenty-five and seventy-five hundredths percent
(25.75%), assuming a final area of 70,000 square feet for the entire Building
(measured in accordance with Section 3.1(b)). Tenant's Land Operating Cost
Share shall be applicable in determining Tenant's share of (x) the taxes,
assessments and other expenses described in clause (iii) of Section 5.2
(excluding personal property taxes and the portion of real property taxes,
assessments and similar items allocable to buildings or improvements, as
opposed to land), and (y) assessments and dues described in clause (vi) of
Section 5.2 and payable to the Hacienda Business Park Owners' Association or
otherwise payable under the governing covenants, conditions and restrictions
for the Hacienda Business Park, including (but not limited to) the Master
Declaration as defined in Section 15.4 hereof. Tenant's Building Operating
Cost Share shall be applicable in determining Tenant's share of all other
Operating Expenses, including (but not limited to), under Section 5.2(iii),
personal property taxes and the portion of real
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property taxes, assessments and similar items allocable to buildings or
improvements, as opposed to land.
(b) Tenant's Building Operating Cost Share and Land Operating
Cost Share as specified in paragraph (a) of this Section are based upon an
estimated area of 35,000 square feet for the Premises (that being the portion
anticipated to be built out as the first phase of interior improvements and
occupied by Tenant during the first twelve months of the term) and upon an
estimated aggregate area of 290,586 square feet for the buildings to be owned
by Landlord on the Property as of the Commencement Date. If the actual area
of the first phase of interior improvements or of the entire Building (when
completed), as determined on the basis of measurement set forth in Section
3.1(c) hereof, or the gross square footage of any of the other buildings on
the Property (as determined in good faith by Landlord's architects in
accordance with whatever basis of measurement is applied by Landlord in good
faith in determining Operating Expense shares for tenants of such additional
building pursuant to the terms of their leases), differs from the assumed
numbers set forth above (PROVIDED that the first phase shall in no event be
less than 35,000 square feet), or when Tenant occupies more than 35,000
square feet of the Premises as contemplated in Section 3.1(c) and EXHIBIT C,
then Tenant's Building Operating Cost Share and Tenant's Land Operating
Cost Share shall be adjusted to reflect the actual areas so determined and so
occupied by Tenant.
(c) Tenant's Land Operating Cost Share as specified in
paragraph (a) of this Section is based upon an estimated area of 4.979 acres
for the portion of the Property designated as Phase VII on the Site Plan and
a surveyed area of 19.339 acres for the entire Property. If the boundaries of
the Phase VII land area (which is intended to be the land area reasonably
allocable to the Building and its users, albeit on a nonexclusive basis) are
changed at any time by mutual agreement of Landlord and Tenant, or if the
actual area of Phase VII is determined to be greater or smaller than 4.979
acres, then Tenant's Land Operating Cost Share shall be adjusted accordingly.
(d) If Landlord actually receives (and is not required to pay
over to The Prudential Insurance Company of America), during the term of this
Lease, any refund of real property taxes or assessments with respect to the
Property and such refund is attributable or allocable in whole or in part to
taxes or assessments paid during any period of time during which Tenant was
paying a share of real property taxes and assessments on the Property or any
portion thereof pursuant to this Lease, then the portion of such refund
received by Landlord that is fairly allocable to the amounts actually paid by
Tenant for such real property taxes and assessments during any portion of the
refund period shall be applied as a credit against Tenant's remaining
Operating Expense obligations under this Lease and, to the extent such credit
exceeds the total amount of Tenant's remaining Operating Expense obligations
under this Lease, shall be refunded in cash by Landlord to Tenant
concurrently with the final reconciliation of Tenant's Operating Expense
obligations under this Lease.
5.2. DEFINITION OF OPERATING EXPENSES. Subject to the exclusions and
provisions hereinafter contained, the term "Operating Expenses" shall mean
the total costs and expenses incurred by or allocable to Landlord for
management, operation and maintenance of the Property and the buildings and
other improvements thereon, including, without limitation, the following
costs and expenses:
(i) insurance, property management, landscaping and
operations, repairs and maintenance of buildings and Common Areas, EXCEPT
that property management expenses shall be excluded to the extent they
exceed two percent (2%) of minimum rent;
(ii) all utilities and services;
(iii) real and personal property taxes and assessments or
substitutes therefor, including (but not limited to) any possessory
interest, use, business, license or other taxes or fees, any taxes
imposed directly on rents or services, any assessments or charges for
police or fire protection, housing, transit, open space, street or
sidewalk construction or maintenance or other similar services from time
to time by any governmental or quasi-governmental entity, and any other
new taxes on landlords in addition to taxes now in effect, but EXCLUDING
(aa) fees, exactions and taxes imposed as a condition to the
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issuance of any entitlements or building permits related to the Property
and (bb) gift taxes, inheritance taxes, transfer taxes and net income
taxes of Landlord;
(iv) supplies, equipment, utilities and tools used in
management, operation and maintenance of the Property;
(v) capital improvements to the Property or the buildings and
other improvements thereon, amortized over the reasonable useful life of
the applicable improvement, (aa) which reduce or will cause future
reduction of other items of Operating Expenses for which Tenant is
otherwise required to contribute (PROVIDED that the amortizable costs
for this category of improvement shall be limited to the amount of the
reasonably estimated savings to be produced thereby), or (bb) which are
required by law, ordinance, regulation or order of any governmental
authority, or (cc) of which Tenant has use or which benefit Tenant
(PROVIDED that amortizable improvements under this category shall be
limited to those which are approved in writing by Tenant or which are
merely a reasonably necessary repair or replacement of an existing
improvement with one of like kind and quality, in which event no such
approval by Tenant shall be required; and PROVIDED FURTHER that Tenant's
obligation with respect to any amortization of capital expenditures under
this Section 5.2(v) shall terminate on the earlier of (x) the expiration
of the term of this Lease or (y) the next date as of which
minimum rental under this Lease is adjusted or reset to a new rental
based on fair market rental value (excluding, however, any CPI-based or
stepped adjustments pursuant to Section 3.1(a) or (b) or pursuant to a
prior fair market rental determination)); and
(vi) any other costs (including, but not limited to, any
parking or utilities fees or surcharges) allocable to or paid by
Landlord, as owner of the Property or the buildings and other
improvements thereon, pursuant to any applicable laws, ordinances,
regulations or orders of any governmental or quasi-governmental authority
or pursuant to the terms of any declarations of covenants, conditions and
restrictions now or hereafter affecting the Property.
The destination between items of ordinary operating maintenance and repair
and items of a capital nature shall be made in accordance with generally
accepted accounting principles applied on a consistent basis. Notwithstanding
any other provisions of this Section 5.2, Operating Expenses shall NOT
include any of the following:
(A) any costs attributable to the work for which Landlord is
required to pay under Section 2.4 or EXHIBIT C;
(B) that portion of any Operating Expenses (other than Operating
Expenses to which Tenant's Land Operating Expense Share is applicable)
that is fairly allocable to any undeveloped portion of the Property,
until such time as the building(s) and improvements on such portion of
the property have been substantially completed and such portion of the
Property is properly includable in determining Tenant's Building
Operating Cost Share under Section 5.1(b) hereof;
(C) that cost to repair damage caused by (i) fire, earthquake
or other peril, or (ii) the negligence of Landlord, its agents, employees
or contractors, or any other tenants of the Property or their respective
agents, employees, contractors or invitees;
(D) costs associated with procurement of new tenants,
preparation of their spaces and enforcement of their leases, including
(but not limited to) brokerage commissions, tenant improvement costs, and
attorneys' fees;
(E) the cost of maintenance and repair of structural elements
of the buildings located on the Property from time to time;
(F) the cost to repair any defects in design, construction or
equipment for any building located on the Property from time to time, to
the extent resulting from or attributable to work undertaken by Landlord
or by its contractors on Landlord's behalf
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(including, but not limited to, costs to correct any building code
violations caused by or attributable to Landlord's work);
(G) the cost to investigate and/or remediate any contamination
by hazardous or toxic substances or wastes, except to the extent caused
by Tenant or its agents, employees or contractors; or
(H) the cost to correct any violation of any declaration of
covenants, conditions and restrictions applicable to the Property, except
to the extent such violation is caused by Tenant or its agents,
employees or contractors.
5.3. DETERMINATION OF OPERATING EXPENSES. On or before the
Commencement Date and during the last month of each calendar year of the term
of this Lease ("Lease Year"), or as soon thereafter as practical, Landlord
shall provide Tenant notice of Landlord's estimate of the Operating Expenses
for the ensuing Lease Year or applicable portion thereof. On or before the
first day of each month during the ensuing Lease Year or applicable portion
thereof, beginning on the Commencement Date, Tenant shall pay to Landlord
Tenant's Land Operating Cost Share or Tenant's Building Operating Cost Share,
as applicable, of the portion of such estimated Operating Expenses allocable
(on a prorata basis) to such month; provided, however, that if such notice is
not given in the last month of a Lease Year, Tenant shall continue to pay on
the basis of the prior year's estimate, if any, until the month after such
notice is given. If at any time or times it appears to Landlord that the
actual Operating Expenses will vary from Landlord's estimate by more than five
percent (5%), Landlord may, by notice to Tenant, revise its estimate for such
year and subsequent payments by Tenant for such year shall be based upon such
revised estimate.
5.4. FINAL ACCOUNTING FOR LEASE YEAR. Within ninety (90) days after
the close of each Lease Year, or as soon after such 90-day period as
practicable, Landlord shall deliver to Tenant a statement of Tenant's Land
Operating Cost Share and Tenant's Building Operating Cost Share, as
applicable, of the Operating Expenses for such Lease Year prepared by
Landlord from Landlord's books and records, which statement shall be final
and binding on Landlord and Tenant, except as otherwise provided herein.
Notwithstanding any other provisions of this Section 5.4, Tenant shall have
the right to audit or review, directly or through its designated
representative, Landlord's books and records relating to Operating Expenses
for any period subject to the following conditions: Such right shall be
exercisable only by written request to Landlord within 180 days after
Tenant's receipt from Landlord of a statement of actual Operating Expenses,
shall be limited to the period covered by such statement, and shall be
exercisable only during normal business hours, on not less than ten (10) days
prior written notice to Landlord, and at Tenant's sole cost and expense,
except as hereinafter provided. To the extent that Tenant, following any such
review or audit, disputes any item in the applicable statement or in the
calculation of Tenant's obligations thereunder, Tenant shall give Landlord
written notice of the disputed items, in reasonable detail and with
reasonable supporting information, and Landlord and Tenant shall negotiate
diligently and in good faith to try to resolve the dispute. If Landlord and
Tenant are unable to resolve the dispute within thirty (30) days after
Landlord's receipt of Tenant's written notice specifying the disputed items,
then either party may elect, by written notice to the other, to have the
dispute resolved through a review and determination by an independent
Certified Public Accountant who has not previously rendered professional
services to either party. Such review and determination by the independent
CPA shall be based on generally accepted accounting principles and tax
accounting principles, consistently applied. The independent CPA shall be
selected by mutual agreement of Landlord and Tenant; if they are unable to
agree on such selection within twenty (20) days after a party's notice of
desire to submit the dispute to a CPA review, then the independent CPA shall
be appointed by the Presiding Judge of the Alameda County Superior Court upon
application by either party (with notice to the other party). If it is
determined, on the basis of Landlord's statement or by mutual agreement of
Landlord and Tenant or by independent CPA review, as applicable, that Tenant
owes an amount that is more or less than the estimated payments previously
made by Tenant for the applicable period, then Tenant or Landlord, as the
case may be, shall pay the deficiency or overpayment to the other party
within thirty (30) days after final determination of such underpayment or
overpayment. The expenses of the independent CPA, if any, shall be borne by
Tenant unless the CPA's determination reflects an overstatement or overpayment
of five percent (5%) or more in Tenant's obligation for Operating Expenses for
the applicable period, in which
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event the expenses of the independent CPA shall be borne by Landlord. Each
party agrees to maintain the confidentiality of the findings of any audit or
review in accordance with the provisions of this Section 5.4. Failure or
inability of Landlord to deliver the annual statement within such ninety (90)
day period shall not impair or constitute a waiver of Tenant's obligation to
pay Operating Expenses, or cause Landlord to incur any liability for damages.
5.5. PRORATION. If the Commencement Date falls on a day other than
the first day of a Lease Year or if this Lease terminates on a day other than
the last day of a Lease Year, the amount of Tenant's Land Operating Cost
Share and Tenant's Building Operating Cost Share, as applicable, payable by
Tenant with respect to such first or last partial Lease Year shall be
prorated on the basis which the number of days during such Lease year in
which this Lease is in effect bears to 365. The termination of this Lease
shall not affect the obligations of Landlord and Tenant pursuant to Section
5.4 to be performed after such termination.
6. UTILITIES
6.1. PAYMENT - Commencing with the Commencement Date and thereafter
throughout the term of this Lease, Tenant shall pay, before delinquency, all
charges for water, gas, heat, light, electricity, power, sewer, telephone,
alarm system, janitorial and other services or utilities supplied to or
consumed in or upon the Premises, including any taxes on such services and
utilities. In connection with the impending deregulation of the supply of
electrical power in California, Tenant shall have the right to designate or
select the service provider for electrical power to be supplied to the
Building (but not to the Common Areas, as to which any such designation or
selection shall be made by Landlord alone).
6.2. INTERRUPTION. There shall be no abatement of rent or other
charges required to be paid hereunder and Landlord shall not be liable in
damages or otherwise for interruption or failure of any service or utility
furnished to or used in the Premises because of accident, making of repairs,
alterations or improvements, severe weather, difficulty or inability in
obtaining services or supplies, labor difficulties or any other cause.
Notwithstanding the foregoing provisions of this Section 6.2, however, in the
event of any interruption or failure of any service or utility to the
Premises which is caused in whole or in part by the negligence or willful
misconduct of Landlord or its agents or employees, which continues for more
than 48 hours and which materially impairs Tenant's ability to use the
Premises for their intended purpose hereunder, then Tenant's rental
obligations under this Lease shall be abated in proportion to the extent of
the proportional fault of Landlord and its agents and employees and in
proportion to the degree of impairment of Tenant's use of the Premises, and
such abatement shall be retroactive to the commencement of the interruption
or failure and shall continue until Tenant's use of the premises is no longer
materially impaired thereby.
7. ALTERATIONS
7.1. RIGHT TO MAKE ALTERATIONS. Tenant shall make no alterations,
additions or improvements to the Premises, other than interior non-structural
alterations costing less than Fifty Thousand Dollars ($50,000.00) in each
instance, without the prior written consent of Landlord. All such alterations,
additions and improvements shall be completed with due diligence in a
first-class workmanlike manner, in compliance with plans and specifications
approved in writing by Landlord and in compliance with all applicable laws,
ordinances, rules and regulations. All such alterations, additions and
improvements shall be performed solely by a licensed and bonded general
contractor approved by Landlord, and Landlord shall be named as an additional
insured on such contractor's bond. Landlord may also, at its election,
require Tenant to furnish to Landlord, at Tenant's sole cost and expense, a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of any such work, to ensure completion of the work and to
protect Landlord against any liens or claims relating thereto. If Tenant
wishes to know in advance whether it will be required to remove any specific
alteration, addition or improvement upon termination of this Lease, as
contemplated in Section 7.2 hereof, then Tenant shall make an express written
request for such a determination by Landlord at the time Tenant requests
Landlord's approval of the applicable alteration, addition or improvement; if
Tenant makes such a written request and Landlord does not, in response
thereto, advise Tenant that Landlord intends
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to require (or at least to reserve the right to require) the removal of the
applicable alteration, addition or improvement upon expiration of this Lease,
then Landlord shall not be entitled to request such removal, notwithstanding
any contrary provisions in Section 7.2 hereof.
7.2. TITLE TO ALTERATIONS. All alterations, additions and
improvements installed in, on or about the Premises shall be part of the
Building and the property of Landlord, unless Landlord elects to require
Tenant to remove the same upon the termination of this Lease; PROVIDED,
however, that (a) the foregoing shall not apply to Tenant's movable
furniture and trade fixtures not affixed to the Property, and (b) Tenant
shall not under any circumstances be required to remove any of the
improvements constructed by Landlord pursuant to Section 2.4 and EXHIBIT C.
7.3. TENANT FIXTURES. Notwithstanding the provisions of Sections 7.1
and 7.2, Tenant may install, remove and reinstall trade fixtures without
Landlord's prior written consent, except that any fixtures which are affixed
to the Premises or which affect the exterior or structural portions of the
Building shall require Landlord's written approval. The foregoing shall apply
to Tenant's signs, logos and insignia, all of which Tenant shall have the
right to place and remove and replace subject only to (a) Landlord's prior
written consent as to location, size and composition and (b) compliance with
all applicable legal requirements and all applicable covenants, conditions
and restrictions. It is the intention of the parties that Tenant shall have
signage rights on the Building consistent with Hacienda Business Park Owners'
Association requirements, applicable City requirements and applicable
covenants, conditions and restrictions, and that Landlord's approval with
respect to any signage proposed by Tenant that meets the foregoing criteria
shall not be unreasonably withheld or delayed. In addition to Building
signage, Tenant shall have exclusive rights to use a monument sign to be
installed by Landlord at the entrance to the Building off of Coronado Avenue,
PROVIDED that (i) such sign shall be subject to Hacienda Business Park
Owners' Association requirements, applicable City requirements and applicable
covenants, conditions and restrictions, (ii) such sign shall be subject to
Landlord's written consent (not unreasonably withheld or delayed) as set
forth above, and (iii) such sign shall be charged against the tenant
improvement allowance for Landlord's work under Section 2.4 and EXHIBIT C or,
to the extent not so charged, shall be paid by Tenant to Landlord in cash, as
Tenant's sole cost and expense, within thirty (30) days after written request
by Landlord to Tenant (accompanied by reasonably detailed supporting
information regarding the costs for which such payment or reimbursement is
being claimed). Tenant shall immediately repair any damage caused by
installation and removal of fixtures by Tenant or its employees, agents or
contractors under this Section 7.3.
7.4. NO LIENS. Tenant shall at all times keep the Premises free from
all liens and claims of any contractors, subcontractors, materialmen,
suppliers or any other parties employed either directly or indirectly by
Tenant in construction work on or about the Premises. Tenant may contest any
claim of lien, but only if, prior to such contest, Tenant either (i) posts
security in the amount of the claim, plus estimated costs and interest, or
(ii) records a bond of a responsible corporate surety in such amount as may
be required to release the lien from the Premises. Tenant shall indemnify,
defend and hold Landlord harmless against any and all liability, loss,
damage, cost and other expenses, including, without limitation, reasonable
attorneys' fees, arising out of claims of any lien for work performed or
materials or supplies furnished at the request of Tenant or persons claiming
under Tenant.
8. MAINTENANCE AND REPAIRS
8.1. LANDLORD'S WORK.
(a) Landlord shall repair and maintain or cause to be repaired
and maintained the Common Areas of the Property and the roof, exterior walls
and other structural portions of the Building. The cost of all work performed
by Landlord under this Section 8.1(a) shall be an Operating Expense
hereunder, except to the extent such work (i) is required due to the
negligence or willful misconduct of Landlord or its agents or employees, of
any other tenant of the Property other than Tenant or of the agents, employees
or invitees of any such other tenant, (ii) is a service to a specific tenant
or tenants, other than Tenant, for which Landlord has received or has the
right to receive full reimbursement, (iii) is a capital expense not
includible as an Operating Expense
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under Section 5.2 hereof, (iv) is otherwise expressly excluded from the
definition of Operating Expenses under Section 5.2 hereof, or (v) is required
due to the negligence or willful misconduct of Tenant or its agents, employees
or invitees (in which event Tenant shall bear the full cost of such work
pursuant to the indemnification provided in Section 10.6 hereof, subject to
the release set forth in Section 10.4 hereof). Tenant knowingly and
voluntarily waives the right to make repairs at Landlord's expense, or to
offset the cost thereof against rent, under any law, statute, regulation or
ordinance now or hereafter in effect.
(b) Notwithstanding any contrary provisions of Section 8.1(a)
hereof or of any other provision of this Lease, to the extent a substantially
complete replacement (as opposed to ordinary or routine maintenance or
repair) is required from time to time with respect to the roof or major
building systems (HVAC, plumbing, electrical and mechanical systems) of the
Building, or with respect to the parking or driveway areas or other portions
of the Common Areas of the Property, Landlord shall perform such replacement
when and as reasonably required. To the extent such replacement is required
as a result of defective design, construction, installation or materials, or
as a result of the negligence or willful misconduct of Landlord or its agents
or employees, or as a result of the negligence or willful misconduct of any
other tenant of the Property other than Tenant or of any such other tenant's
agents, employees or invitees, such replacement shall be at Landlord's sole
cost and expense, subject to any rights of reimbursement Landlord may have
against contractors, suppliers, other tenants or other third parties. To the
extent such replacement is required as a result of the negligence or willful
misconduct of Tenant or its agents, employees or invitees, Tenant shall bear
the full cost of such work pursuant to the indemnification provided in Section
10.6 hereof, subject to the release set forth in Section 10.4 hereof. To the
extent such replacement is required as a result of casualty or condemnation,
the provisions of Article 13 hereof shall be controlling. To the extent such
replacement is required due to ordinary wear and tear or obsolescence, the
cost of such replacement shall be amortized by Landlord over the useful life
of the replacement improvement or system and either (i) in the case of
replacement of the roof or a major building system of the Building, Tenant
shall reimburse to Landlord, as additional rent and not as an Operating
Expense, on a monthly basis or at other regular intervals as reasonably
requested by Landlord, the entire amortized cost of such replacement
allocable to the period of time from the date of replacement until the
earlier of (x) the expiration of the term of this Lease or (y) the next date
as of which minimum rental under this Lease is adjusted or reset to a new
rental based on fair market rental value (excluding, however, any CPI-based
or stepped adjustments pursuant to Section 3.1(a) or (b) or pursuant to a
prior fair market rental determination), or (ii) in the case of replacement
of parking or driveway areas or other portions of the Common Areas, the
amortized cost of such replacement shall be recoverable by Landlord as an
Operating Expense pursuant to Section 5.2(v)(cc) hereof.
8.2. TENANT'S OBLIGATION FOR MAINTENANCE.
(a) GOOD ORDER, CONDITION AND REPAIR. Subject to the
provisions of Section 2.4 hereof, by accepting possession of the Premises
(excluding any portion thereof in which interior improvements have not been
completed as a result of the phased construction of such interior
improvements) on the Commencement Date, Tenant shall be deemed to acknowledge
that the Premises (or the applicable initial portion thereof) are then in
good and sanitary order, condition and repair. Except as provided in Section
8.1 hereof, Tenant at its sole cost and expense shall keep and maintain in
good and sanitary order, condition and repair the Premises and every part
thereof, wherever located, including but not limited to the signs, interior,
ceiling, electrical system, plumbing system, telephone and communications
systems, HVAC equipment and related mechanical systems serving the Premises
(for which equipment and systems Tenant shall enter into a service contract
with a person or entity designated or approved by Landlord), all doors,
door checks, windows, plate glass, door fronts, utility facilities, fixtures,
lighting, wall surfaces, floor surfaces and ceiling surfaces and all other
interior repairs, foreseen and unforeseen, as required.
(b) LANDLORD'S REMEDY. If Tenant, after notice from Landlord,
fails to make or perform promptly any repairs or maintenance which are the
obligation of Tenant hereunder, Landlord shall have the right, but shall not
be required, to enter the Premises and make the repairs or perform the
maintenance necessary to restore the Premises to good and sanitary order,
condition and repair. Immediately on demand from Landlord, the cost of such
repairs shall be due and payable by Tenant to Landlord.
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(c) CONDITION UPON SURRENDER. At the expiration or sooner
termination of this Lease, Tenant shall surrender the Premises, including any
additions, alterations and improvements thereto, broom clean, in good and
sanitary order, condition and repair, ordinary wear and tear excepted, first,
however, removing all goods and effects of Tenant and all fixtures and items
required to be removed or specified to be removed at Landlord's election
pursuant to this Lease, and repairing any damage caused by such removal.
Tenant expressly waives any and all interest in any personal property and
trade fixtures not removed from the Premises by Tenant at the expiration or
termination of this Lease, agrees that any such personal property and trade
fixtures may, at Landlord's election, be deemed to have been abandoned by
Tenant, and authorizes Landlord (at its election and without prejudice to any
other remedies under this Lease or under applicable law) to remove and either
retain, store or dispose of such property at Tenant's cost and expense, and
Tenant waives all claims against Landlord for any damages resulting from any
such removal, storage, retention or disposal.
9. USE OF PREMISES
9.1. PERMITTED USE. Tenant may use the Premises solely for office and
administrative purposes, production of payroll checks, light assembly of
products, storage, non-retail marketing and sales demonstrations and training
classes, and for no other purpose without the prior written consent of
Landlord.
9.2. [Omitted.]
9.3. NO NUISANCE. Tenant shall not use the Premises for or carry on
or permit upon the Premises or any part thereof any offensive, noisy or
dangerous trade, business, manufacture, occupation, odor or fumes, or any
nuisance or anything against public policy, nor interfere with the rights or
business of any other tenants or of Landlord in or about the Property, nor
commit or allow to be committed any waste in, on or about the Premises, nor
make any other unreasonable use of the Premises. Tenant shall not do or
permit anything to be done in or about the Premises, nor bring nor keep
anything therein, which will in any way cause the Premises to be uninsurable
with respect to the insurance required by this Lease or with respect to
standard fire and extended coverage insurance with vandalism, malicious
mischief and riot endorsements.
9.4. COMPLIANCE WITH LAWS. Tenant shall not use the Premises or
permit the Premises to be used in whole or in part for any purpose or use that
is in violation of any applicable laws, ordinances, regulations or rules of
any governmental agency or public authority. Tenant shall keep the Premises
equipped with all safety appliances required by law, ordinance or insurance
on the Premises, or any order or regulation of any public authority because
of Tenant's particular use of the Premises. Tenant shall procure all licenses
and permits required for Tenant's use of the Premises. Tenant shall use the
Premises in strict accordance with all applicable ordinances, rules, laws and
regulations and shall comply with all requirements of all governmental
authorities now in force or which may hereafter be in force pertaining to the
use of the Premises by Tenant, including, without limitation, regulations
applicable to noise, water, soil and air pollution, and making such
nonstructural alterations and additions thereto as may be required from time
to time by such laws, ordinances, rules, regulations and requirements of
governmental authorities or insurers of the Premises (collectively,
"Requirements") because of Tenant's construction of improvements in or other
particular use of the Premises. Any structural alterations or additions
required from time to time by applicable Requirements because of Tenant's
construction of improvements in or other particular use of the Premises
shall, at Landlord's election, either (i) be made by Tenant, at Tenant's
sole cost and expense, in accordance with the procedures and standards set
forth in Section 7.1 for alterations by Tenant, or (ii) be made by Landlord
at Tenant's sole cost and expense, in which event Tenant shall pay to Landlord
as additional rent, within ten (10) days after demand by Landlord, an amount
equal to all costs incurred by Landlord in connection with such alterations
or additions. The judgment of any court, or the admission by Tenant in any
proceeding against Tenant, that Tenant has violated any law, statute,
ordinance or governmental rule, regulation or requirement shall be conclusive
of such violation as between Landlord and Tenant.
9.5. LIQUIDATION SALES. Tenant shall not conduct or permit to be
conducted any auction, bankruptcy sale, liquidation sale, or going out of
business sale, in, upon or about the
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Premises or the Property, whether said auction or sale be voluntary,
involuntary or pursuant to any assignment for the benefit of creditors, or
pursuant to any bankruptcy or other insolvency proceeding.
9.6. ENVIRONMENTAL MATTERS. Without limiting the generality of
Tenant's obligations set forth in Section 9.4 of this Lease:
(a) Tenant shall not cause or permit any hazardous or toxic
substance or hazardous waste (as defined in any federal, state or local law,
ordinance or regulation applicable to such substances or wastes) to be
brought upon, kept, stored or used on or about the Property without the prior
written consent of Landlord; PROVIDED, however, that nothing in this
paragraph (a) shall prohibit Tenant from using ordinary office and cleaning
products and other materials reasonably necessary for the conduct of Tenant's
business for the permitted uses described in Section 9.1 hereof, regardless
of whether such materials constitute hazardous or toxic substances or
hazardous wastes, so long as Tenant provides Landlord with prior or
concurrent written notice of such use and complies with the requirements of
paragraphs (b) and (c) hereof with respect to such use;
(b) Tenant shall comply with all applicable laws, rules,
regulations, orders, permits, licenses and operating plans of any
governmental authority with respect to the receipt, use, handling,
generation, transportation, storage, treatment, release and/or disposal of
hazardous or toxic substances or wastes in the course of or in connection
with the conduct of Tenant's business on the Property, and shall provide
Landlord with copies of (x) any and all permits, licenses, registrations and
other similar documents that authorize Tenant to conduct any such activities
in connection with Tenant's use of the Property and (y) any and all notices
and written communications actually given by Tenant to or received by Tenant
from, or required by law to be given by Tenant to, regulatory authorities in
connection with such activities in the course of Tenant's use of the Property;
(c) Tenant shall indemnify, defend and hold Landlord harmless
from and against any and all claims, losses, damages, liabilities, costs,
legal fees and expenses of any sort arising out of or relating to (i) any
failure by Tenant to comply with any provisions of subparagraph (a) or (b)
above, or (ii) any receipt, use, handling, generation, transportation,
storage, treatment, release and/or disposal of any hazardous or toxic
substances or wastes on or about the Property in connection with Tenant's use
or occupancy of the Property or as a result of any intentional or negligent
acts or omissions of Tenant or of any agent or employee of Tenant;
(d) Landlord shall indemnify, defend and hold Tenant harmless
from and against any and all claims, losses, damages, liabilities, costs,
legal fees and expenses of any sort arising out of or relating to (i) the
presence on the Property of any hazardous or toxic substances or wastes
present on the Property as of the Commencement Date (other than as a result
of any intentional or negligent acts or omissions of Tenant or of any agent
or employee of Tenant), and/or (ii) any unauthorized release into the
environment of hazardous or toxic substances or wastes to the extent such
release results from the negligence of or willful misconduct or omission by
Landlord or its agents or employees; and
(e) The provisions of this Section 9.6 shall survive the
termination of this Lease.
10. INSURANCE AND INDEMNITY
10.1. INSURANCE.
(a) Tenant shall procure and maintain in full force and effect
at all times during the term of this Lease, at Tenant's cost and expense,
commercial general liability insurance to protect against any liability to
the public, or to any invitee of Tenant, arising out of or related to the use
of or resulting from any accident occurring in, upon or about the Premises,
with limits of liability of not less than (i) One Million Dollars
($1,000,000.00) for injury to or death of one person, (ii) Three Million
Dollars ($3,000,000.00) for personal injury or death, per occurrence,
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and (iii) Five Hundred Thousand Dollars ($500,000.00) for property damage, or
a combined single limit of bodily injury and property damage insurance of not
less than Five Million Dollars ($5,000,000.00). Such insurance shall name
Landlord and its general partners as additional insureds thereunder. The
amount of such insurance shall not be construed to limit any liability or
obligation of Tenant under this Lease.
(b) Landlord shall procure and maintain in full force and effect
at all times during the term of this Lease, at Landlord's cost and expense
(but reimbursable as an Operating Expense under Section 5.2 hereof), fire and
"all risk" extended coverage property damage insurance for the Building and
for the improvements in the Common Areas of the Property on a full
replacement cost basis, with rental loss insurance. Such insurance may
include earthquake coverage to the extent Landlord in its discretion elects
to carry such coverage, and shall have such commercially reasonable
deductibles and other terms as Landlord in its discretion determines to be
appropriate. Landlord shall have no obligation to carry property damage
insurance for any alterations, additions or improvements installed by Tenant
on or about the Premises. Tenant shall have no obligation to reimburse or
compensate Landlord for the "deductible" portion of any insured losses,
except to the extent either (i) such losses result from the negligence or
willful misconduct of Tenant or its agents, employees or invitees (as
contemplated in Section 8.1(a)(v) and/or Section 10.6 hereof, but subject to
the release set forth in Section 10.4 hereof), or (ii) Tenant elects to pay
repair or restoration costs under Section 13.1 hereof in order to avoid a
termination of this Lease under certain circumstances as specified in such
Section 13.1.
(c) Tenant shall procure and maintain in full force and effect
at all times during the term of this Lease, at Tenant's cost and expense,
fire and "all risk" extended coverage property damage insurance for all
alterations, additions and improvements installed by Tenant from time to time
on or about the Premises (excluding, however, Tenant's trade fixtures,
equipment and personal property, as to which Tenant has no insurance
obligation hereunder), on a full replacement cost basis. Such insurance may
have such commercially reasonable deductibles and other terms as Tenant in
its discretion determines to be appropriate.
10.2. QUALITY OF POLICIES AND CERTIFICATES. All policies of insurance
required hereunder shall be issued by responsible insurers and shall be
written as primary policies not contributing with and not in excess of any
coverage that Landlord may carry. Tenant shall deliver to Landlord copies of
policies or certificates of insurance showing that said policies are in
effect. The coverage provided by such policies shall include the clause or
endorsement referred to in Section 10.4. If Tenant fails to acquire, maintain
or renew any insurance required to be maintained by it under this Article 10
or to pay the premium therefor, then Landlord, at its option and in addition
to its other remedies, but without obligation so to do, may procure such
insurance, and any sums expended by it to procure any such insurance shall be
repaid upon demand, with interest as provided in Section 3.2 hereof. Tenant
shall obtain written undertakings from each insurer under policies required
to be maintained by it to notify all insureds thereunder at least thirty (30)
days prior to cancellation, amendment or revision of coverage.
10.3. WORKERS' COMPENSATION. Tenant shall maintain in full force and
effect during the term of this Lease workers' compensation insurance covering
all of Tenant's employees working on the Premises.
10.4. WAIVER OF SUBROGATION. Notwithstanding anything to the contrary
contained in this Lease, to the extent permitted by law and without affecting
the coverage provided by insurance required to be maintained hereunder,
Landlord and Tenant each waive any right to recover against the other (i)
damage to property, (ii) damage to the Property or any part thereof, or (iii)
claims arising by reason of any of the foregoing, but only to the extent that
any of the foregoing damages and claims under subparts (i)-(iii) hereof are
covered, and only to the extent of such coverage, by insurance actually
carried or required to be carried hereunder by either Landlord or Tenant.
This provision is intended to waive fully, and for the benefit of each party,
any rights and claims which might give rise to a right of subrogation in any
insurance carrier. Each party shall procure a clause or endorsement on any
policy required under this Article 10 denying to the insurer rights of
subrogation against the other party to the extent rights have been waived by
the insured prior to the occurrence of injury or loss. Coverage provided by
insurance maintained by Tenant under this Article 10 shall not be limited,
reduced or diminished by virtue of the subrogation waiver herein contained.
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10.5. INCREASE IN PREMIUMS. Tenant shall do all acts and pay all
expenses necessary to insure that the Premises are not used for purposes
prohibited by any applicable fire insurance, and that Tenant's use of the
Premises complies with all requirements necessary to obtain any such
insurance. If Tenant uses or permits the Premises to be used in a manner
which increases the existing rate of any insurance on the Premises carried by
Landlord, Tenant shall pay the amount of the increase in premium caused
thereby, and Landlord's costs of obtaining other replacement insurance
policies, including any increase in premium, within ten (10) days after
demand therefor by Landlord.
10.6. INDEMNIFICATION.
(a) Tenant shall indemnify, defend and hold Landlord, its
partners, shareholders, officers, directors, affiliates, agents, employees
and contractors, harmless from any and all liability for injury to or death
of any person, or loss of or damage to the property of any person, and all
actions, claims, demands, costs (including, without limitation, reasonable
attorneys' fees), damages or expenses of any kind arising therefrom which may
be brought or made against Landlord or which Landlord may pay or incur by
reason of the use, occupancy and enjoyment of the Property by Tenant or any
invitees, sublessees, licensees, assignees, employees, agents or contractors
of Tenant or holding under Tenant from any cause whatsoever other than
negligence or willful misconduct or omission by Landlord, its agents,
employees or contractors. Landlord, its partners, shareholders, officers,
directors, affiliates, agents, employees and contractors shall not be liable
for, and Tenant hereby waives all claims against such persons for, damages to
goods, wares and merchandise in or upon the Property, or for injuries to
Tenant, its agents or third persons in or upon the Property, from any cause
whatsoever other than negligence or willful misconduct or omission by
Landlord, its agents, employees or contractors. Tenant shall give prompt
notice to Landlord of any casualty or accident in, on or about the Property.
(b) Landlord shall indemnify, defend and hold Tenant, its
partners, shareholders, officers, directors, affiliates, agents, employees
and contractors, harmless from any and all liability for injury to or death
of any person, or loss of or damage to the property of any person, and all
actions, claims, demands, costs (including, without limitation, reasonable
attorneys' fees), damages or expenses of any kind arising therefrom which may
be brought or made against Tenant or which Tenant may pay or incur, to the
extent such liabilities or other matters arise by reason of any negligence or
willful misconduct or omission by Landlord, its agents, employees or
contractors.
10.7. BLANKET POLICY. Any policy required to be maintained hereunder
may be maintained under a so-called "blanket policy" insuring other parties
and other locations so long as the amount of insurance required to be
provided hereunder is not thereby diminished.
11. SUBLEASE AND ASSIGNMENT
11.1. ASSIGNMENT AND SUBLEASE OF PREMISES. Tenant shall not have the
right or power to assign its interest in this Lease, or make any sublease of
the Premises or any portion thereof, nor shall any interest of Tenant under
this Lease be assignable involuntarily or by operation of law, without on
each occasion obtaining the prior written consent of Landlord, which consent
shall not be unreasonably withheld. Any purported sublease or assignment of
Tenant's interest in this Lease requiring but not having received Landlord's
consent thereto shall be void. Any dissolution, consolidation, merger or
other reorganization of Tenant, or any series of one or more of such related
events, involving in the aggregate a change of fifty percent (50%) or more
in the beneficial ownership of Tenant, or any sale of all or substantially all
of the assets of Tenant, shall be deemed to be an assignment hereunder and
shall be void without the prior written consent of Landlord as required above.
Notwithstanding the foregoing, Landlord's consent shall not in any event be
required for (i) an initial public offering of the common stock of Tenant, or
for any stock transfer or conversion in connection with any such initial
public offering; (ii) any merger, consolidation or other reorganization, or
any sale of substantially all of the assets of Tenant, PROVIDED that (x) the
net worth of the surviving entity or transferee is equal to or greater than
that of Tenant immediately prior to the applicable transaction, (y) Tenant
gives Landlord prior or concurrent written notice of the applicable
transaction, and (z) the surviving entity or transferee expressly assumes in
writing, for the benefit of Landlord, Tenant's remaining obligations under
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this Lease; and/or (iii) any sale or transfer of the stock of Tenant, other
than pursuant to a dissolution, consolidation, merger, reorganization or sale
of substantially all assets as specifically described above.
11.2. RIGHTS OF LANDLORD. Consent by Landlord to one or more
assignments of this Lease, or to one more sublettings of the Premises or any
portion thereof, or collection of rent by Landlord from any assignee or
sublessee, shall not operate to exhaust Landlord's rights under this Article
11, nor constitute consent to any subsequent assignment or subletting. No
assignment of Tenant's interest in this Lease and no sublease shall relieve
Tenant of its obligations hereunder, notwithstanding any waiver or extension
of time granted by Landlord to any assignee or sublessee, or the failure of
Landlord to assert its rights against any assignee or sublessee, and
regardless of whether Landlord's consent thereto is given or required to be
given hereunder. In the event of a default by any assignee, sublessee or
other successor of Tenant in the performance of any of the terms or
obligations of Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against any such
assignee, sublessee or other successor. In addition, Tenant immediately and
irrevocably assigns to Landlord, as security for Tenant's obligations under
this Lease, all rent from any subletting of all or a part of the Premises as
permitted under this Lease, and Landlord, as Tenant's assignee and as
attorney-in-fact for Tenant, or any receiver for Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this Lease; except that, until the occurrence of an act of
default by Tenant, Tenant shall have the right to collect such rent.
12. RIGHT OF ENTRY AND QUIET ENJOYMENT
12.1. RIGHT OF ENTRY. Landlord and its authorized representatives
shall have the right to enter the Premises at any time during the term of
this Lease during normal business hours and upon not less than twenty-four
(24) hours prior notice, except in the case of emergency (in which event no
notice shall be required and entry may be made at any time), for the purpose
of inspecting and determining the condition of the Premises or for any other
proper purpose including, without limitation, to make repairs, replacements
or improvements which Landlord may deem necessary, to show the Premises to
prospective purchasers, to show the Premises to prospective tenants (but only
during the final year of the term of this Lease), and to post notices of
nonresponsibility. To facilitate exercise of Landlord's right of entry,
Tenant shall ensure that Landlord or its agent at all times has at least one
(1) key to unlock all doors in or about the Building, and Tenant shall not
change any locks in or about the Building without prior notice to Landlord
and delivery of a key for the new locks to Landlord or its agent. Landlord
shall not be liable for inconvenience, annoyance, disturbance, loss of
business, quiet enjoyment or other damage or loss to Tenant by reason of
making any repairs or performing any work upon the Building or the Property
or by reason of erecting or maintaining any scaffolding or protective
barricades in connection with any such work, and the obligations of Tenant
under this Lease shall not thereby be affected in any manner whatsoever;
PROVIDED, however, Landlord shall use reasonable efforts to minimize the
inconvenience to Tenant's normal business operations caused thereby.
12.2. QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying
the rent and performing its obligations hereunder and subject to all the
terms and conditions of this Lease, shall peacefully and quietly have, hold
and enjoy the Premises throughout the term of this Lease, or until this Lease
is terminated as provided by this Lease.
13. CASUALTY AND TAKING.
13.1 TERMINATION OR RECONSTRUCTION. If during the term of this Lease
the Building, or any substantial part thereof, is damaged materially by fire
or other casualty or by action of public or other authority in consequence
thereof, or if during the term of this Lease the Building or the parking
area serving the Building, or any material part of either of them, (i) is
taken by eminent domain or by reason of any public improvement or
condemnation proceeding, or in any manner by exercise of the right of eminent
domain (including any transfer in avoidance of an exercise of the power of
eminent domain), or (ii) receives irreparable damage by reason of anything
lawfully done under color of public or other authority, then in any such
event this Lease
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shall terminate as to the entire Premises at either Landlord's or Tenant's
election, by written notice given to the other party within sixty (60) days
after the damage or taking has occurred, subject to the following limitations
(and, to the extent applicable, the limitations set forth in Section 13.2):
(a) in the case of damage or destruction by fire or other peril
prior to the final year of the term of this Lease, Landlord's termination
right shall be exercisable only if either (x) the reasonably estimated cost
to repair or restore the Building exceeds eighty percent (80%) of the
replacement cost of the Building and the remaining term of this Lease
(including any extended term, if Tenant elects an early exercise of any
extension option under Section 2.7 hereof in order to avoid a termination
under this Section 13.1) is less than three (3) years, or (y) the reasonably
estimated cost to repair or restore the Building exceeds the insurance
proceeds available for such repair or restoration by an amount greater than
five percent (5%) of the replacement cost of the Building (unless Tenant
agrees in writing, within fifteen (15) days after written request by
Landlord, to pay all repair and restoration costs in excess of the sum of the
available insurance proceeds plus five percent (5%) of the replacement cost
of the Building, in which event Landlord shall have no termination right
under clause (y) of this paragraph (a));
(b) in the case of damage or destruction by fire or other peril
prior to the final year of the term of this Lease, Tenant's termination right
shall be exercisable only if the time reasonably estimated to be required for
the repair or restoration of the Building to the extent necessary to permit
Tenant to resume substantially all of its normal business activities therein
(which time estimate shall be given by Landlord to Tenant in writing within
forty-five (45) days after the date of the damage or destruction) exceeds two
hundred and seventy (270) days from the date of the damage or destruction;
(c) in the case of damage or destruction by fire or other peril
during the final year of the term of this Lease (including any extended term,
if Tenant has already duly elected such term or elects an early exercise of
any extension option under Section 2.7 hereof in order to avoid a termination
under this Section 13.1), Landlord's termination right shall be exercisable
only if either (x) the reasonably estimated cost to repair or restore the
Building exceeds twenty percent (20%) of the replacement cost of the
Building, or (y) the reasonably estimated cost to repair or restore the
Building exceeds the insurance proceeds available for such repair or
restoration by an amount greater than five percent (5%) of the replacement
cost of the Building (unless Tenant agrees in writing, within fifteen (15)
days after written request by Landlord, to pay all repair and restoration
costs in excess of the sum of the available insurance proceeds plus five
percent (5%) of the replacement cost of the Building, in which event Landlord
shall have no termination right under clause (y) of this paragraph (c)); and
(d) in the case of damage or destruction by fire or other peril
during the final year of the term of this Lease (including any extended term,
if Tenant has already duly elected such term or elects an early exercise of
any extension option under Section 2.7 hereof in order to avoid a termination
under this Section 13.1), Tenant's termination right shall be exercisable only
if the damage affects more than twenty percent (20%) of the floor area of the
Building and the time reasonably estimated to be required for the repair or
restoration of the Building to the extent necessary to permit Tenant to
resume substantially all of its normal business activities therein (which
time estimate shall be given by Landlord to Tenant in writing within thirty
(30) days after the date of the damage or destruction) exceeds sixty (60)
days from the date of commencement of repairs.
If neither party elects to terminate this Lease pursuant to the foregoing
termination rights (if any) and/or Section 13.2 (if applicable), then
Landlord shall promptly and diligently repair any such damage and restore the
Premises (to the extent of Landlord's work therein under Section 2.4 and
EXHIBIT C) and the Building as nearly as reasonably possible to the
condition existing before the damage or taking.
13.2 TENANT'S RIGHTS. If any portion of the Premises is so taken by
condemnation, Tenant may elect to terminate this Lease if the portion of the
Premises taken is of such extent and nature as substantially to handicap,
impede or permanently impair Tenant's use of the balance of the Premises.
Tenant must exercise its right to terminate by giving notice to Landlord
within thirty (30) days after the nature and extent of the taking have been
finally determined. If Tenant
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elects to terminate this Lease, Tenant shall also notify Landlord of the date
of termination, which date shall not be earlier than thirty (30) days nor
later than ninety (90) days after Tenant has notified Landlord of its
election to terminate, except that this Lease shall terminate on the date of
taking if the date of taking falls on any date before the date of termination
designated by Tenant.
13.3 LEASE TO REMAIN IN EFFECT. If neither Landlord nor Tenant
terminates this Lease as hereinabove provided, this Lease shall continue in
full force and effect, except that minimum monthly rental and Tenant's
Operating Cost Share shall abate to the extent Tenant's use of the Premises
is impaired for any period that any portion of the Premises is unusable or
inaccessible because of a casualty or taking hereinabove described. Each
party waives the provisions of Code of Civil Procedure Section 1265.130,
allowing either party to petition the Superior Court to terminate this Lease
in the event of a partial condemnation of the Premises or Property.
13.4 RESERVATION OF COMPENSATION. Landlord reserves, and Tenant
waives and assigns to Landlord, all rights to any award or compensation for
damage to the Premises, Building, Property and the leasehold estate created
hereby, accruing by reason of any taking in any public improvement,
condemnation or eminent domain proceeding or in any other manner by exercise
of the right of eminent domain or of anything lawfully done by public
authority, except that Tenant shall be entitled to any and all compensation
or damages paid for or on account of Tenant's moving expenses, trade fixtures,
equipment and any leasehold improvements in the Premises, the cost of which
was borne directly by Tenant, but only to the extent of the then remaining
unamortized value of such improvements computed on a straight-line basis over
the initial term of this Lease. Tenant covenants to deliver such further
assignments of the foregoing as Landlord may from time to time request.
13.5 RESTORATION OF FIXTURES. If Landlord repairs or causes repair of
the Premises after such damage or taking, Tenant at its sole expense shall
repair and replace promptly all additions, alterations and improvements and
all other items installed or paid for by Tenant under this Lease (excluding,
however, any of Tenant's trade fixtures, equipment and personal property, the
repair or replacement of which shall be in Tenant's sole discretion, and
excluding any improvements originally constructed by Landlord under Section
2.4 and EXHIBIT C) that were damaged or taken, so as to restore the same to a
condition substantially equal to that which existed immediately prior to the
damage or taking. Provided that Tenant has maintained in effect the insurance
required under Section 10.1(c) hereof, Tenant's repair and restoration
obligation under the preceding sentence in the event of any casualty shall be
limited to the insurance proceeds available to Tenant with respect to such
casualty, plus the amount of any applicable deductible under Tenant's
applicable insurance policy. Tenant shall have the right to make
modifications to the Premises, fixtures and improvements, subject to the
prior written approval of Landlord and subject to all other applicable
provisions of this Lease. In its review of Tenant's plans and specifications,
Landlord may take into consideration the effect of the proposed modifications
on the exterior appearance, the structural integrity and the mechanical and
other operating systems of the Building.
14. DEFAULT
14.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default on the part of Tenant:
(a) ABANDONMENT. Abandonment of the Premises. "Abandonment" is
hereby defined to include, but is not limited to, the complete absence by
Tenant from the Premises for fifteen (15) consecutive days or more while
there exists an event of default on the part of Tenant under any other
provision of this Section 14.1 which has not been cured on or before the
expiration of such fifteen (15) day period. Tenant waives any right Tenant
may have to notice under Section 1951.3 of the California Civil Code, the
terms of this subsection (a) being deemed such notice to Tenant as required
by said Section 1951.3;
(b) NONPAYMENT. Failure to pay, when due, any amount payable to
Landlord hereunder, such failure continuing for a period of five (5) days
after written notice of such failure; PROVIDED, however, that any such notice
shall be in lieu of, and not in addition to, any
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notice required under California Code of Civil Procedure Section 1161 ET
SEQ., as amended from time to time;
(c) OTHER OBLIGATIONS. Failure to perform any obligation,
agreement or covenant under this Lease other than those matters specified in
subsection (b) hereof, such failure continuing for fifteen (15) days after
written notice of such failure, or, if such default is curable in nature but
it is not possible to cure such default within fifteen (15) days, failure to
commence cure within said fifteen (15) day period and thereafter to proceed
diligently to complete cure; PROVIDED, however, that any such notice shall be
in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 ET SEQ., as amended from time to time;
(d) GENERAL ASSIGNMENT. A general assignment by Tenant for the
benefit of creditors;
(e) BANKRUPTCY. The filing of any voluntary petition in
bankruptcy by Tenant, of the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged for a period of
thirty (30) days. In the event that under applicable law the trustee in
bankruptcy or Tenant has the right to affirm this Lease and continue to
perform the obligations of Tenant hereunder, such trustee or Tenant shall, in
such time period as may be permitted by the bankruptcy court having
jurisdiction, cure all defaults of Tenant hereunder outstanding as of the
date of the affirmance of this Lease and provide to Landlord such adequate
assurances as may be necessary to ensure Landlord of the continued
performance of Tenant's obligations under this Lease. Specifically, but
without limiting the generality of the foregoing, such adequate assurances
must include assurances that the Premises continue to be operated only for
the use permitted hereunder. The provisions hereof are to assure that the
basic understandings between Landlord and Tenant with respect to Tenant's use
of the Premises and the benefits to Landlord therefrom are preserved,
consistent with the purpose and intent of applicable bankruptcy laws;
(f) RECEIVERSHIP. The employment of a receiver appointed by
court to take possession of substantially all of Tenant's assets or the
Premises, if such receivership remains undissolved for a period of thirty
(30) days;
(g) ATTACHMENT. The attachment, execution or other judicial
seizure of all or substantially all of Tenant's assets or the Premises, if
such attachment or other seizure remains undismissed or undischarged for a
period of thirty (30) days after the levy thereof;
(h) INSOLVENCY. The admission by Tenant in writing of its
inability to pay its debts as they become due, the filing by Tenant of a
petition seeking any reorganization or arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, the filing by Tenant of an answer admitting or
failing timely to contest a material allegation of a petition filed against
Tenant in any such proceeding or, if within thirty (30) days after the
commencement of any proceeding against Tenant seeking any reorganization or
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, such
proceeding shall not have been dismissed; or
(i) CROSS-DEFAULT. Any default by Tenant under the Phase VI
Lease, to the extent such default continues beyond any applicable cure
periods provided in the Phase VI Lease and to the extent Landlord therefore
has (and exercises concurrently with any termination of this Lease) a right to
terminate the Phase VI Lease; PROVIDED, however, that the default event set
forth in this Section 14.1(i) shall not apply with respect to any default
under the Phase VI Lease if, at the time of such default, the holder of the
lessee's interest under the Phase VI Lease is neither the person or entity
which is then the holder of the lessee's interest under this Lease nor a
person or entity which controls, is controlled by or is under common control
with the person or entity which is then the holder of the lessee's interest
under this Lease.
14.2 REMEDIES UPON TENANT'S DEFAULT.
(a) Upon the occurrence of any event of default described in
Section 14.1 hereof, Landlord, in addition to and without prejudice to any
other rights or remedies it may
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have, shall have the immediate right to re-enter the Premises or any part
thereof and repossess the same, expelling and removing therefrom all persons and
property (which property may be stored in a public warehouse or elsewhere at
the cost and risk of and for the account of Tenant), using such force as may be
necessary to do so (as to which Tenant hereby waives any claim for loss or
damage that may thereby occur). In addition to or in lieu of such re-entry,
and without prejudice to any other rights or remedies it may have, Landlord
shall have the right either (i) to terminate this Lease and recover from
Tenant all damages incurred by Landlord as a result of Tenant's default, as
hereinafter provided, or (ii) to continue this Lease in effect and recover
rent and other charges and amounts as they become due.
(b) Even if Tenant has breached this Lease or abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under subsection (a) hereof and
Landlord may enforce all of its rights and remedies under this Lease,
including the right to recover rent as it becomes due, and Landlord, without
terminating this Lease, may exercise all of the rights and remedies of a
lessor under California Civil Code Section 1951.4 (lessor may continue lease
in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to
reasonable limitations), or any successor Code section. Acts of maintenance,
preservation or efforts to relet the Premises or the appointment of a
receiver upon application of Landlord to protect Landlord's interests under
this Lease shall not constitute a termination of Tenant's right to possession.
(c) If Landlord terminates this Lease pursuant to this Section
14.2, Landlord shall have all of the rights and remedies of a landlord
provided by Section 1951.2 of the Civil Code of the State of California, or
any successor Code section, which remedies include Landlord's right to
recover from Tenant (i) the worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination, (ii) the
worth at the time of award of the amount by which the unpaid rent and
additional rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided, (iii) the worth at the time of award of the amount
by which the unpaid rent and additional rent for the balance of the term after
the time of award exceeds the amount of such rental loss that Tenant proves
could be reasonably avoided, and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including, but not
limited to, the cost of recovering possession of the Premises, expenses of
reletting, reasonable attorneys' fees, and other reasonable costs. The "worth
at the time of award" of the amounts referred to in clauses (i) and (ii)
above shall be computed by allowing interest at ten percent (10%) per annum
from the date such amounts accrued to Landlord. The "worth at the time of
award" of the amounts referred to in clause (iii) above shall be computed by
discounting such amount at one percentage point above the discount rate of
the Federal Reserve Bank of San Francisco at the time of award.
14.3. REMEDIES CUMULATIVE. All rights, privileges and elections
or remedies of Landlord contained in this Article 14 are cumulative and not
alternative to the extent permitted by law and except as otherwise provided
herein.
15. SUBORDINATION, ATTORNMENT AND SALE
15.1. SUBORDINATION TO MORTGAGE. This Lease, and any sublease entered
into by Tenant under the provisions of this Lease, shall be subject and
subordinate to any ground lease, mortgage, deed of trust, sale/leaseback
transaction or any other hypothecation for security now or hereafter placed
upon the Building, the Property, or both, and the rights of any assignee of
Landlord or of any ground lessor, mortgagee, trustee, beneficiary or leaseback
lessor under any of the foregoing, and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof; PROVIDED, however, that such
subordination in the case of any future ground lease, mortgage, deed of
trust, sale/leaseback transaction or any other hypothecation for security
placed upon the Building, the Property, or both shall be conditioned on
Tenant's receipt from the ground lessor, mortgagee, trustee, beneficiary or
leaseback lessor of a nondisturbance agreement in a form reasonably acceptable
to Tenant (and subject only to reasonable limitations), confirming that so
long as Tenant is not
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in default hereunder, Tenant's rights hereunder shall not be disturbed by
such person or entity following any foreclosure or other acquisition of the
Property. Moreover, Tenant's obligations under this Lease shall be
conditioned on Tenant's receipt, within thirty (30) days after mutual
execution of this Lease, from Slough Parks Incorporated and from any other
ground lessor, mortgagee, trustee, beneficiary or leaseback lessor currently
owning or holding a security interest in the Property, of a nondisturbance
agreement in a form reasonably acceptable to Tenant (and subject only to
reasonable limitations), confirming that so long as Tenant is not in default
hereunder, Tenant's rights hereunder shall not be disturbed by such person or
entity following any foreclosure or other acquisition of the Property. If any
mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or
assignee elects to have this Lease be an encumbrance upon the Property prior
to the lien of its mortgage, deed of trust, ground lease or leaseback lease
or other security arrangement and gives notice thereof to Tenant, this Lease
shall be deemed prior thereto, whether this Lease is dated prior or subsequent
to the date thereof or the date of recording thereof. Tenant, and any
sublessee, shall execute such documents as may reasonably be requested by any
mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or
assignee to evidence the subordination herein set forth or to make this Lease
prior to the lien of any mortgage, deed of trust, ground lease, leaseback
lease or other security arrangement, as the case may be. Upon any default by
Landlord in the performance of its obligations under any mortgage, deed of
trust, ground lease, leaseback lease or assignment, Tenant (and any
sublessee) shall, notwithstanding any subordination hereunder, attorn to the
mortgagee, trustee, beneficiary, ground lessor, leaseback lessor or assignee
thereunder upon demand and become the tenant of the successor in interest to
Landlord, at the option of such successor in interest, and shall execute and
deliver any instrument or instruments confirming the attornment herein
provided for.
15.2. SALE OF LANDLORD'S INTEREST. Upon sale, transfer or assignment
of Landlord's entire interest in the Building and Property, Landlord shall be
relieved of its obligations hereunder with respect to liabilities accruing
from and after the date of such sale, transfer or assignment; PROVIDED,
however, that such relief from liabilities (i) shall be effective only if and
to the extent that the transferee expressly assumes in writing, for the
benefit of Tenant, Landlord's obligations under this Lease, (ii) shall not
apply to Landlord's environmental indemnification under Section 9.6(d) hereof
unless the transferee has, immediately after the transfer, a net worth equal
to or greater than that of Landlord immediately prior to the transfer, and
(iii) shall not in any event apply to Landlord's obligations with respect to
the initial construction of the Building and Common Areas under Section 2.4
and EXHIBIT C. Moreover, in recognition of Tenant's substantial reliance upon
Landlord's creditworthiness and development experience with respect to the
initial construction of the Building and Common Areas, Landlord shall not
sell, transfer, convey or otherwise dispose of its ownership interest in the
portion of the Property designated as Phase VII on the Site Plan, or any
portion thereof, prior to the Commencement Date under Section 2.1 hereof,
except (x) with Tenant's prior written consent or (y) to an entity of which
Britannia Hopyard, LLC, or an entity controlling, controlled by or under
common control with Britannia Hopyard, LLC, is a general partner or has
management responsibilities and equity participation comparable to those of a
general partner.
15.3. ESTOPPEL CERTIFICATES. Tenant shall at any time and from time
to time, within ten (10) days after written request by Landlord, execute,
acknowledge and deliver to Landlord a certificate in writing stating: (i)
that this Lease is unmodified and in full force and effect, or if there have
been any modifications, that this Lease is in full force and effect as
modified and stating the date and the nature of each modification; (ii) the
date to which rental and all other sums payable hereunder have been paid;
(iii) that Landlord is not in default in the performance of any of its
obligations under this Lease, that Tenant has given no notice of default to
Landlord and that no event has occurred which, but for the expiration of the
applicable time period, would constitute an event of default hereunder, or if
Tenant alleges that any such default, notice or event has occurred,
specifying the same in reasonable detail; and (iv) such other matters as may
reasonably be requested by Landlord or any institutional lender, mortgagee,
trustee, beneficiary, ground lessor, sale/leaseback lessor or prospective
purchaser of the Property. Any such certificate provided under this Section
15.3 may be relied upon by any lender, mortgagee, trustee, beneficiary,
assignee or successor in interest to Landlord, by any prospective purchaser,
by any purchaser on foreclosure or sale, by any grantee under a deed in lieu
of foreclosure of any mortgage or deed of trust on the Property or Premises,
or by any other third party. Failure to execute and return within the
required time any estoppel certificate requested hereunder shall be
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deemed to be an admission of the truth of the matters set forth in the form
of certificate submitted to Tenant for execution.
15.4. SUBORDINATION TO CC&R's. This Lease, and any permitted
sublease entered into by Tenant under the provisions of this Lease, shall be
subject and subordinate (a) to any declarations of covenants, conditions and
restrictions affecting the Property from time to time, which may include
easements, access rights and similar nonexclusive use rights and privileges
in favor of appropriate third parties, PROVIDED that the terms of such future
declarations are approved by Tenant in writing; (b) to the Declaration of
Covenants, Conditions and Restrictions for Hacienda Business Park (No. 2)
recorded on January 24, 1985 as Instrument No. 85-14396, Alameda County
Records, as amended from time to time (the "Master Declaration"), the
provisions of which Master Declaration are an integral part of this Lease; and
(c) to the provisions of the Corporation Grant Deed and Rider recorded on
June 28, 1996 as Instrument No. 96-158374, which provisions are binding upon
Tenant as if set forth herein in full. Tenant agrees to execute, upon request
by Landlord, any documents reasonably required from time to time to evidence
such subordination.
16. SECURITY
16.1. DEPOSIT. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of Eighty-Seven Thousand Five
Hundred Dollars ($87,500.00), which sum (the "Security Deposit") shall be
held by Landlord as security for the faithful performance of all of the
terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the term hereof. If Tenant defaults with respect to any
provision of this Lease, including, without limitation, the provisions
relating to the payment of rental and other sums due hereunder, Landlord
shall have the right, but shall not be required, to use, apply or retain all
or any part of the Security Deposit for the payment of rental or any other
amount which Landlord may spend or become obligated to spend by reason of
Tenant's default or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used or applied, Tenant shall, within ten (10) days
after written demand therefor, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount and
Tenant's failure to do so shall be a material breach of this Lease. Landlord
shall not be required to keep any deposit under this Section separate from
Landlord's general funds, and Tenant shall not be entitled to interest
thereon. If Tenant fully and faithfully performs every provision of this
Lease to be performed by it, the Security Deposit, or any balance thereof,
shall be returned to Tenant or, at Landlord's option, to the last assignee of
Tenant's interest hereunder, at the expiration of the term of this Lease and
after Tenant has vacated the Premises. In the event of termination of
Landlord's interest in this Lease, Landlord shall transfer all deposits then
held by Landlord under this Section to Landlord's successor in interest,
whereupon Tenant agrees to release Landlord from all liability for the return
of such deposit or the accounting thereof.
17. MISCELLANEOUS
17.1. NOTICES. All notices, consents, waivers and other communications
which this Lease requires or permits either party to give to the other shall
be in writing and shall be deemed given when delivered personally (including
delivery by private courier or express delivery service) or four (4) days
after deposit in the United States mail, registered or certified mail,
postage prepaid, addressed to the parties at their respective addresses as
follows:
To Tenant: ProBusiness Services, Inc.
4125 Hopyard Road
Pleasanton, CA 94588
Attn: Mitch Everton, Senior Vice President
with copy to: Lisa Barton Armando, Esq.
Wise & Shepard LLP
3030 Hansen Way, Suite 100
Palo Alto, CA 94304
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<PAGE>
To Landlord: Britannia Hacienda V Limited Partnership
1939 Harrison Street, Suite 412
Park Plaza Building
Oakland, CA 94612
Attn: T. J. Bristow
with copy to: Folger Levin & Kahn LLP
Embarcadero Center West
275 Battery Street, 23rd Floor
San Francisco, CA 94111
Attn: Donald E. Kelley, Jr.
or to such other address as may be contained in a notice at least fifteen
(15) days prior to the address change from either party to the other given
pursuant to this Section. Rental payments and other sums required by this
Lease to be paid by Tenant shall be delivered to Landlord at Landlord's
address provided in this Section, or to such other address as Landlord may
from time to time specify in writing to Tenant, and shall be deemed to be
paid only upon actual receipt.
17.2. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall run
with the land, and this Lease shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, except that,
subject to the provisions of Section 15.2 hereof, the original Landlord named
herein and each successive Landlord under this Lease shall be liable only for
obligations accruing during the period of its ownership of the Property, said
liability terminating upon the termination of such ownership and passing to
the successor lessor.
17.3. NO WAIVER. The failure of Landlord to seek redress for
violation, or to insist upon the strict performance, of any covenant or
condition of this Lease shall not be deemed a waiver of such violation, or
prevent a subsequent act which would originally have constituted a violation
from having all the force and effect of an original violation.
17.4. SEVERABILITY. If any provision of this Lease or the application
thereof is held to be invalid or unenforceable, the remainder of this Lease
or the application of such provision to persons or circumstances other than
those as to which it is invalid or unenforceable shall not be affected thereby,
and each of the provisions of this Lease shall be valid and enforceable,
unless enforcement of this Lease as so invalidated would be unreasonable or
grossly inequitable under all the circumstances or would materially frustrate
the purposes of this Lease.
17.5. LITIGATION BETWEEN PARTIES. In the event of any litigation or
other dispute resolution proceedings between the parties hereto arising out
of or in connection with this Lease, the prevailing party shall be reimbursed
for all reasonable costs, including, but not limited to, reasonable
accountants' fees and attorneys' fees, incurred in connection with such
proceedings (including, but not limited to, any appellate proceedings
relating thereto) or in connection with the enforcement of any judgment or
award rendered in such proceedings. "Prevailing party" within the meaning of
this Section shall include, without limitation, a party who dismisses an
action for recovery hereunder in exchange for payment of the sums allegedly
due, performance of covenants allegedly breached or consideration
substantially equal to the relief sought in the action.
17.6. SURRENDER. A voluntary or other surrender of this Lease by
Tenant, or a mutual termination thereof between Landlord and Tenant, shall not
result in a merger but shall, at the option of the Landlord, operate either
as an assignment to Landlord of any and all existing subleases and
subtenancies, or a termination of all or any existing subleases and
subtenancies. This provision shall be contained in any and all assignments or
subleases made pursuant to this Lease.
17.7. INTERPRETATION. The provisions of this Lease shall be construed
as a whole, according to their common meaning, and not strictly for or against
Landlord or Tenant. The captions preceding the text of each Section and
subsection hereof are included only for convenience of reference and shall be
disregarded in the construction or interpretation of this Lease.
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<PAGE>
17.8. ENTIRE AGREEMENT. This written Lease, together with the
exhibits hereto, contains all the representations and the entire
understanding between the parties hereto with respect to the subject matter
hereof. Any prior correspondence, memoranda or agreements are replaced in
total by this Lease and the exhibits hereto. This Lease may be modified only
by an agreement in writing signed by each of the parties.
17.9. GOVERNING LAW. This Lease and all exhibits hereto shall be
construed and interpreted in accordance with and be governed by all the
provisions of the laws of the State of California.
17.10. NO PARTNERSHIP. The relationship between Landlord and Tenant is
solely that of a lessor and lessee. Nothing contained in this Lease shall be
construed as creating any type or manner of partnership, joint venture or
joint enterprise with or between Landlord and Tenant.
17.11. FINANCIAL INFORMATION. From time to time Tenant shall promptly
provide directly to prospective lenders and purchasers of the Property
designated by Landlord such financial information pertaining to the financial
status of Tenant as Landlord may reasonably request; PROVIDED, Tenant shall
be permitted to provide such financial information in a manner which Tenant
deems reasonably necessary to protect the confidentiality of such
information, including (if Tenant so requests) conditioning disclosure of
such information upon execution of a reasonable confidentiality agreement by
Landlord and by any other proposed or permitted recipient of such information;
and PROVIDED FURTHER, that if Tenant is then a publicly traded company filing
periodic reports under the Securities Act of 1934, as amended, and the
regulations thereunder, Tenant shall be required to furnish copies of
Tenant's most recent Form 10K, 10Q and 8K (if any) reports and shall not be
required to disclose any nonpublic financial information pursuant to this
Section 17.11. In addition, from time to time, Tenant shall provide Landlord
with such financial information pertaining to the financial status of Tenant
as Landlord may reasonably request, subject to the final proviso of the
immediately preceding sentence. Landlord agrees that all financial
information supplied to Landlord by Tenant shall be treated as confidential
material, and shall not be disseminated to any party or entity (including
any entity affiliated with Landlord) without Tenant's prior written consent.
For purposes of this Section, without limiting the generality of the
obligations provided herein, it shall be deemed reasonable for Landlord to
request (and sufficient for Tenant to provide) copies of (i) Tenant's most
recent audited annual financial statements, or, if audited statements have
not been prepared, unaudited financial statements for Tenant's most recent
fiscal year, and (ii) Tenant's unaudited financial statements for Tenant's
most recent fiscal quarter, all of which unaudited statements shall be
accompanied by a certificate of Tenant's chief financial officer as to the
accuracy of such unaudited statements.
Landlord and Tenant recognize the need of Tenant to maintain the
confidentiality of information regarding its financial status and the need of
Landlord to be informed of, and to provide to prospective lenders and
purchasers of the Premises financial information pertaining to, Tenant's
financial status. Landlord and Tenant agree to cooperate with each other in
achieving these needs within the context of the obligations set forth in this
Section.
17.12. [Omitted.]
17.13. TIME. Time is of the essence of this Lease, and of every term
and condition hereof.
17.14. RULES AND REGULATIONS. Tenant shall observe, comply with and
obey, and shall cause its employees, agents and, to the best of Tenant's
ability, invitees to observe, comply with and obey such rules and regulations
as Landlord may promulgate from time to time for the safety, care,
cleanliness, order and use of the Premises, the Building and the Property,
PROVIDED that any such rules and regulations promulgated after the date of
this Lease shall not materially and adversely affect Tenant's rights under
this Lease.
17.15. BROKERS. Landlord agrees to pay a brokerage commission to
Colliers Parrish International, Inc. and to Cornish & Carey Commercial in
connection with the consummation of this Lease, in accordance with a separate
agreement between Landlord and such brokers. Tenant represents and warrants
that no other broker participated in the consummation of this Lease and
agrees to indemnify, defend and hold Landlord harmless against any liability,
cost or expense,
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<PAGE>
including, without limitation, reasonable attorneys' fees, arising out of any
claims for brokerage commissions or other similar compensation in connection
with any conversations, prior negotiations or other dealings by Tenant with
any other broker.
17.16. MEMORANDUM OF LEASE. At any time during the term of this Lease,
either party, at its sole expense, shall be entitled to record a memorandum of
this Lease and, if either party so elects, both parties agree to cooperate in
the preparation, execution, acknowledgement and recordation of such document
in reasonable form.
17.17. CORPORATE AUTHORITY. The person signing this Lease on behalf of
Tenant warrants that he or she is fully authorized to do so and, by so doing,
to bind Tenant. As evidence of such authority, Tenant shall deliver to
Landlord, upon or prior to execution of this Lease, a certified copy of a
resolution of Tenant's board of directors authorizing the execution of this
Lease and naming the officer that is authorized to execute this Lease on
behalf of Tenant.
17.18. EXECUTION AND DELIVERY. Submission of this Lease for
examination or signature by Tenant does not constitute an agreement or
reservation of or option for lease of the Premises. This instrument shall not
be effective or binding upon either party, as a lease or otherwise, until
executed and delivered by both Landlord and Tenant. This Lease may be executed
in one or more counterparts and by separate parties on separate counterparts,
but each counterpart shall constitute an original and all such counterparts
together shall constitute one and the same instrument.
17.19. [Omitted.]
17.20. SURVIVAL. Without limiting survival provisions which would
otherwise be implied or construed under applicable law or which are otherwise
explicitly set forth herein, the provisions of Sections 2.6, 5.4, 7.2, 7.3,
7.4, 9.6, 10.6, 13.4 and 17.5 hereof shall survive the termination of this
Lease with respect to matters occurring prior to the expiration of this Lease.
17.21. CONSENTS. Whenever the approval or consent of a party is
required to be obtained under any provision of this Lease as a condition or
prerequisite to the taking of any action or effectiveness of any action by
the other party, then such approval or consent shall not be unreasonably
withheld, delayed or conditioned, regardless of whether or not such
reasonableness requirement is expressly stated in the applicable provision of
this Lease.
17.22. LANDLORD DEFAULTS. If Landlord fails to perform any
obligation, agreement or covenant under this Lease which relates
specifically to the Premises and does not materially affect other tenants of
the Property (such as, by the way of example and not limitation, Landlord's
obligation to maintain the roof, exterior walls and other structural portions
of the Building), and if such failure continues for fifteen (15) days after
written notice of such failure is given by Tenant or Landlord or, if such
default is curable in nature but it is not possible to cure such default within
fifteen (15) days, Landlord fails to commence cure within such fifteen (15)
day period or thereafter fails to proceed diligently to complete cure, then
Tenant shall have the right to perform such obligation or cure such default
of Landlord, and Landlord shall reimburse Tenant for the reasonable cost
thereof, together with interest at the rate specified in the first sentence
of Section 3.2 hereof from the date of payment by Tenant to the date of
reimbursement by Landlord, within fifteen (15) days after written notice from
Tenant of the completion and cost of such cure, accompanied by copies of
invoices or other supporting documentation. Under no circumstances, however,
shall Tenant have any right to offset the cost of any such cure against rent
or other charges falling due from time to time under this Lease.
[rest of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA V LIMITED PROBUSINESS SERVICES, INC., a
PARTNERSHIP, a Delaware limited Delaware corporation
partnership
By: BRITANNIA HOPYARD, LLC, a By: [ILLEGIBLE]
California limited liability -----------------------------
company, General Partner Its: President
----------------------------
By: /s/ T. J. Bristow By: [ILLEGIBLE]
----------------------- -----------------------------
T. J. Bristow Its: SVP
Manager & President ----------------------------
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<PAGE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A Real Property Description
EXHIBIT B Site Plan
EXHIBIT C Construction
C-1: Building Shell Specifications
EXHIBIT D Acknowledgement of Lease Commencement
</TABLE>
<PAGE>
EXHIBIT A
REAL PROPERTY DESCRIPTION
PARCEL ONE:
Lot 14A of Amended Parcel Map No. 4571, filed November 23, 1987, in Book 172
of Maps, Pages 81 and 82, Alameda County Records.
PARCEL TWO:
Non-exclusive easements, appurtenant to Parcel One above, for the purpose of
vehicular (including trucks of all sizes) and pedestrian ingress and egress
over, along and across all that portion of Lot 14B as shown on said Parcel
Map No. 4517 lying within the lines of that certain "Community Driveway
Easement" depicted in said Parcel Map No. 4517, as the grant of such easement
was confirmed unto The Prudential Insurance Company of America, a New Jersey
corporation, pursuant to that certain "Grant of Easement and Maintenance
Agreement" dated July 30, 1985, recorded July 30, 1985, as Series No.
85-150156, Official Records of Alameda County.
<PAGE>
SITE PLAN
[MAP]
EXHIBIT B
TO BUILD-TO-SUIT LEASE
<PAGE>
EXHIBIT C
CONSTRUCTION
1. Landlord, at its sole cost and expense (except as may otherwise be
expressly agreed in writing between Landlord and Tenant at any time
hereafter, and subject to the rental adjustment provisions hereinafter set
forth), using architects and contractors selected by Landlord in its sole
discretion (except that API or another architect selected by Tenant and
approved by Landlord ("Tenant's Architect") shall provide architectural
services with respect to the interior improvements to be constructed by
Landlord in the Building), shall undertake and diligently complete, subject
to delays for causes beyond its reasonable control (excluding financial
inability), (a) a one-story concrete tilt-up building shell of approximately
70,425 square feet (the "Building Shell"), meeting the specifications set
forth in EXHIBIT C-1 attached hereto and incorporated herein by this
reference (which are the same specifications applicable to the buildings
already constructed by Landlord on Phase V of the Property), (b) interior
tenant improvements (the "Interior Improvements") in accordance with plans
and specifications to be developed by Tenant's Architect and approved by
Landlord's architect following mutual execution of this Lease and to be
subject to mutual written approval by Landlord and Tenant, which approval
shall not be unreasonably withheld or delayed (the "Approved Interior Plans
and Specifications"), and (c) landscaping, sidewalks, parking and driveway
areas and other Common Area improvements within the boundaries of Phase VII,
similar to those already constructed by Landlord on Phase V, as shown on the
Site Plan and/or on such Approved Plans and Specifications (the "Common Area
Improvements"), all such work being referred to herein collectively as
"Landlord's Work." Notwithstanding the references in the preceding sentence
to the Phase V building shell standards and the Phase V common area
improvements, the Phase VII Building Shell and Common Area Improvements shall
also incorporate and conform to any code changes adopted by the City of
Pleasanton since the Phase V building shells and common area improvements
were completed. Concurrently with the development and approval of the
Approved Interior Plans and Specifications, Landlord shall develop, subject
to mutual written approval by Landlord and Tenant, a Construction Timeline in
a level of detail comparable to that used in the construction timeline under
the Phase VI Lease, setting forth pertinent milestones and deadlines to be
met by the parties in connection with the design and construction of the
Building Shell, the Interior Improvements and the Common Area Improvements.
Without limiting the generality of the foregoing, the Construction Timeline
shall include or accommodate the following: Landlord shall provide Tenant's
Architect with preliminary base building plans as soon as reasonably
practical; Tenant's Architect shall have the opportunity to provide Tenant's
requests for initial locations, specifications and quantities of Interior
Improvements as specified in EXHIBIT C-1, to include, but not be limited to,
toilet cores, HVAC system, Building exhaust system, specialty items, etc., to
Landlord prior to final Building Shell design; and Landlord's architect for
the Building Shell design shall use reasonable efforts to adapt, include and
accommodate Tenant's requests with respect to such items and Tenant's
proposed Interior Improvements in the Building Shell design, plans and
specifications, subject to structural and code constraints and other
reasonable design requirements. Landlord and Tenant shall use their
respective commercially reasonable efforts, diligence and good faith to
develop, review and approve the Approved Interior Plans and Specifications
and Construction Timeline contemplated above, and all further working
drawings and/or final drawings necessary to implement the same as
contemplated below, as promptly as reasonably possible following mutual
execution of this Lease, and in all events within a time period which leaves
Landlord a reasonable period of time to complete the permitting and
construction of the Building Shell, Interior Improvements and Common Area
Improvements prior to July 1, 1999. For purposes of this EXHIBIT C, Tenant
shall be provided at least 10 business days under this EXHIBIT C and in the
Construction Timeline to approve or give reasons for its disapproval of any
plans or specifications or Construction Timelines submitted to Tenant for
Tenant's approval.
2. The Interior Improvements shall be constructed in two phases, an initial
phase of approximately (but not less than) 35,000 square feet (intended for
delivery on or about July 1, 1999) and a second phase of approximately 35,000
feet (intended for delivery on or about July 1, 2000); PROVIDED, however,
that the respective sizes of the first and second phases and the delivery
date for the second phase may be modified by mutual written agreement of
Landlord and
EXHIBIT C (Page 1 of 5)
<PAGE>
Tenant, so long as the first phase contains not less than 35,000 square feet.
The portions of the Interior Improvements to be completed as part of each
phase shall be subject to mutual approval by Landlord and Tenant, and the
working drawings and final plans and specifications that will be necessary
for actual construction of each phase of the Interior Improvements shall be
prepared by Tenant's Architect on the basis of the Approved Interior Plans
and Specifications and on the basis of such agreed phasing of the Interior
Improvements, with all material changes from the Approved Interior Plans and
Specifications to be subject to mutual approval by Landlord and Tenant, such
approval not to be unreasonably withheld, delayed or conditioned by either
party; PROVIDED, however, that any changes required from time to time in the
Approved Interior Plans and Specifications, in the working drawings and/or in
the final plans and specifications as a result of applicable law or
governmental requirements, or at the insistence of any other third party
whose approval may be required with respect to the Building Shell, Interior
Improvements or Common Area Improvements, or as a result of unanticipated
conditions encountered in the course of construction, may be implemented by
Landlord after prior written notice to Tenant, but shall not require Tenant's
approval or consent (although Landlord agrees to give reasonable
consideration to Tenant's views regarding functional characteristics of any
such required changes). Without limiting the generality of the foregoing
procedures, Landlord agrees that Tenant shall in all events have the
opportunity to work (and have its engineers and consultants work) with
Landlord to develop, review and approve all design aspects and specifications
for the electrical and HVAC systems in the Building, to ensure that the
zones, loading, distribution, capacity and other features of such systems are
adequate for Tenant's anticipated needs.
3. Landlord's Work shall be performed in a neat and workmanlike manner and
shall conform to all applicable governmental codes, laws and regulations in
force at the time such work is completed, and otherwise in accordance with
Section 2.4 of the Lease. Landlord shall use its best reasonable efforts to
complete Landlord's Work within the time periods set forth in the
Construction Timeline to be mutually approved by Landlord and Tenant as
contemplated above, as such timeline may be modified from time to time by
mutual agreement of Landlord and Tenant, and subject to the effects of any
Tenant Delays or any other circumstances beyond Landlord's reasonable control
(excluding financial inability).
4. The cost of construction of the Building Shell and Common Area
Improvements shall be Landlord's sole responsibility and expense, including
any costs or cost increases incurred as a result of unavoidable delays,
governmental requirements or unanticipated conditions; PROVIDED, however,
that to the extent the cost of any item or component of such work is
increased as a result of any Tenant Delays or as a result of any changes
requested by Tenant (PROVIDED that such additional cost was identified to
Tenant and approved by Tenant as part of Tenant's approval of the applicable
Change Order, as provided below), or as a result of any other plan changes or
compliance costs attributable to Tenant's particular use requirements, the
amount of such increase in the cost of Landlord's Work shall be Tenant's
responsibility, shall constitute an "excess improvement cost" and, as such,
shall be payable in cash by Tenant or result in a rental adjustment in
accordance with Section 3.1(d) of the Lease in the same manner provided for
"excess improvement costs" in the next paragraph of this EXHIBIT C. For
purposes of this EXHIBIT C, "Tenant Delay" shall mean (x) any delay resulting
from Tenant's failure to furnish within the time period reasonably specified
by Landlord or its architect or contractor, as applicable, any information
requested by Landlord or its architect or contractor in connection with the
design or construction of the improvements, or from Tenant's failure to
approve, within the time period reasonably specified by Landlord or its
architect or contractor, as applicable, any matters requiring approval by
Tenant, PROVIDED that in no case shall the time period specified for any such
information or approval, for purposes of this definition of Tenant Delay, be
less than ten (10) business days; (y) any delay resulting from changes
requested by Tenant, including any delay resulting from the need to revise
any drawings or obtain further governmental approvals as a result of any such
changes, following mutual approval of the Approved Interior Plans and
Specifications, PROVIDED that such delay was identified to Tenant and
approved by Tenant as part of Tenant's approval of the applicable Change
Order (as provided below); and/or (z) any delay of any other kind or nature
caused by Tenant or its contractors, agents or employees, PROVIDED that no
such delay period under this clause (z) shall begin to run until Tenant has
first been given written notice by Landlord or its architect or contractor,
as applicable, of the behavior, inaction or other circumstances constituting
the alleged delay and has failed to correct such behavior,
EXHIBIT C (Page 2 of 5)
<PAGE>
inaction or other circumstances within two (2) business days after Tenant's
receipt of such written notice.
5. Once the Building Shell Plans and Specifications and the Approved
Interior Plans and Specifications have been completed, Landlord shall engage
a general contractor (the "Building Contractor") to construct the Building
Shell, the Interior Improvements and the Common Area Improvements. Landlord
shall require that the Building Contractor competitively bid the Interior
Improvements work for each trade to at least three (3) subcontractors. Prior
to commencement of the bidding process for each respective trade, Landlord
shall provide Tenant with a preapproved subcontractor list and with
reasonable minimal qualifications applicable to such subcontractors and to
any other subcontractors whom Tenant may wish to propose. Within five (5)
business days after receipt of such list from Landlord, Tenant at its sole
option shall have the right to submit in writing to Landlord the name,
professional experience and other qualifications of any other properly
licensed subcontractor(s) whom Tenant wishes to have included in the bidding
process, and Landlord shall include in the bidding process at least one such
additional subcontractor proposed by Tenant for each trade, subject to the
following limitations: Landlord shall have the right to require reasonable
minimum qualifications and appropriate licensing from each such
subcontractor, provided that such qualifications are applied on a
nondiscriminatory basis to all proposed subcontractors in the applicable
trade, and shall have the right to approve or disapprove Tenant's proposed
subcontractors, which approval shall not be unreasonably denied, conditioned
or delayed. If Landlord reasonably disapproves any subcontractors proposed by
Tenant, Landlord's written notice of such disapproval shall specify the
reasons for disapproval and Tenant shall have the right to replace the
disapproved subcontractor with the name of an additional subcontractor (with
appropriate supporting information) for Landlord's review. Tenant and its
architect and consultants shall have the right to review and comment on all
trade bids on an "open book" basis, and to work with Landlord in selecting
all trade subcontractors for the Interior Improvements. To facilitate
reasonable comparison of bids for subcontractor selection and reasonable
final accounting for construction costs as provided in Paragraph 9 below,
Landlord shall use its best efforts to cause all bids to include all
reasonably anticipated cost categories in reasonable detail and in line item
format. Although Landlord shall give reasonable consideration to the views of
Tenant and its architect and consultants with respect to subcontractor
selection and bid approvals, the final selection of all trade subcontractors
and approval of bids shall be made solely by Landlord in its reasonable
discretion, taking into account the lowest bids, the best expected
performance value, subcontractor qualifications and experience and other
pertinent factors. Landlord shall submit a copy of the final prices for the
Interior Improvements, including all design fees, permitting costs and other
soft costs (including architectural fees of Tenant's Architect) to Tenant for
approval. Tenant shall have the right within five (5) days after receipt of
such final prices to notify Landlord in writing that Tenant wishes to make
reasonable revisions in the design of the Interior Improvements, in which
event Tenant's Architect shall have ten (10) days after Tenant's receipt of
Landlord's final prices for the Interior Improvements to make revisions to
the Approved Interior Plans and Specifications for review and approval by
Landlord and for revised line item bidding by affected subcontractors.
Following approval of such revised plans by Landlord and receipt of revised
bids from subcontractors, Landlord shall resubmit a copy of the revised final
prices for the Interior Improvements to Tenant for approval. Subject to the
procedure set forth in the preceding two sentences (which shall not be
construed as a Tenant Delay, so long as such procedure is pursued by Tenant
in good faith and with reasonable diligence), Tenant shall approve the final
prices for the Interior Improvements, or give specific reasons for
disapproval, within ten (10) days after Landlord's submission of such final
prices to Tenant. Tenant's failure to respond within such time period shall
be deemed to constitute Tenant's approval of such prices. Such pricing, as
approved by Tenant (or deemed approved), shall be referred to as the "Final
Pricing."
6. If, after the Final Pricing has been approved, Tenant requests any
change or addition to the Interior Improvements, Landlord shall notify Tenant
of the anticipated increase or reduction in expenses attributable to such
change or addition (along with a description of the additional time or time
savings anticipated to result from implementing such change or addition) and
if Tenant approves of such increased or reduced expense and time, Tenant
shall sign a written change order confirming Tenant's agreement to such
additional or reduced expense and time (a "Change Order"). Tenant shall be
responsible for any additional expense incurred in connection with such a
Change Order, as provided below, and shall be entitled to the benefit of any
cost
EXHIBIT C (Page 3 of 5)
<PAGE>
savings in the sense that the amounts thus saved shall be available for use
elsewhere in the construction of improvements as provided in Section 2.4 and
this EXHIBIT C.
7. The rent structure set forth in the Lease is predicated upon a tenant
improvement allowance of Thirty-Seven and 50/100 Dollars ($37.50) per square
foot, or Two Million Six Hundred Forty Thousand Nine Hundred Thirty-Seven and
50/100 Dollars ($2,640,937.50) in the aggregate for a 70,425 square foot
building, for the Interior Improvements, including restrooms and HVAC system;
such tenant improvement allowance may also be used by Tenant for installation
of cabling, a generator, refurbishment to the building presently occupied by
Tenant on Phase VI pursuant to the Phase VI Lease, and any other tangible
improvements that are added to, enhance and become a part of such building or
of the Building hereunder, PROVIDED, however, that under no circumstances may
more than Five and No/100 Dollars ($5.00) per square foot of such allowance
(Three Hundred Fifty-Two Thousand One Hundred Twenty-Five and No/100 Dollars
($352,125.00) for a 70,425 square foot building) be used for refurbishment or
improvements to the Phase VI building. To the extent Landlord's aggregate
direct costs of leasing and construction of the Interior Improvements
(including, but not limited to, payments to contractors or subcontractors for
labor, materials and profits or overhead, permit fees and charges, plan check
fees, testing and inspection costs, sales and use taxes, costs of power,
water and other utilities and of collection and removal of debris,
architects', engineers/ and other consulting and professional fees, and all
other related costs incurred in connection with the design and construction
of such work) and/or of any other items to which Tenant elects to apply the
tenant improvement allowance under the preceding sentence of this paragraph
(collectively, "Interior Improvement Costs") exceeds the maximum amount of
the tenant improvement allowance (after taking into account any cost savings
resulting from Change Orders approved by Tenant with respect to the Interior
Improvements, as contemplated above), such excess shall constitute "excess
improvement costs" that shall be paid by Tenant to Landlord in cash within
thirty (30) days after substantial completion of Landlord's Work hereunder
or, at Tenant's election, may instead result in a rental adjustment in
accordance with Section 3.1(d) of the Lease; PROVIDED, however, that under no
circumstances shall the aggregate amount of "excess improvement costs"
eligible for treatment as a rental adjustment in accordance with Section
3.1(d) of the Lease exceed Five and No/100 Dollars ($5.00) per square foot
contained in the Premises, or Three Hundred Fifty-Two Thousand One Hundred
Twenty-Five and No/100 Dollars ($352,125.00) for a 70,425 square foot
Building. Notwithstanding any other provisions of this Paragraph 7, however,
Tenant shall have no liability for "excess improvement costs" or for any
portion of the Interior Improvement Costs (as defined below) except to the
extent such costs (i) were part of the Final Pricing approved by Tenant, (ii)
are attributable to plan changes or compliance costs attributable to Tenant's
particular use requirements and are requested by or approved by Tenant (which
approval shall not be unreasonably withheld), (iii) are attributable to
Change Orders approved by Tenant in accordance with Paragraph 6 above (but
only to the extent such costs were approved by Tenant as part of the approval
procedure for such Change Orders as contemplated in Paragraph 6), or (iv) are
attributable to any Tenant Delay (PROVIDED that any such delay attributable
to a Change Order requested and approved by Tenant shall constitute a Tenant
Delay only to the extent such delay was approved by Tenant as part of the
approval procedure for such Change Order as contemplated in Paragraph 6
above).
8. Recognizing that the Interior Improvements will be completed in two
separate phases, the parties agree that the determination of Interior
Improvement Costs (as contemplated in Paragraph 9 below) and of "excess
improvement costs" under Paragraph 7 above shall be made initially on an
interim basis for the first phase of such Interior Improvements, based solely
on the square footage of such first phase; to the extent it is thereby
determined that there are any such "excess improvement costs" for the first
phase of Interior Improvements (I.E., Interior Improvement Costs in excess of
$37.50 per square foot times the square footage of such first phase),
notwithstanding any other provisions of the Lease (and in lieu of any rental
adjustment under Section 3.1(d) of the Lease and/or any additional cash
payment under Paragraph 7 hereof with respect to the first phase of Interior
Improvements), Tenant shall pay to Landlord as additional rent, for each
month or partial month during the period beginning on the Commencement Date
and ending on the date the square footage of the second phase of Interior
Improvements is first taken into account under Section 3.1(c) of the Lease in
determining Tenant's minimum monthly rental obligations under Section 3.1(a)
of the Lease, an amount equal to the amount of such "excess improvement
costs" for the first phase of Interior Improvements
EXHIBIT C (Page 4 of 5)
<PAGE>
times 0.833% per month (equivalent to an annualized imputed interest rate of
10% per annum). Following completion of the second phase of Interior
Improvements, the Interior Improvement Costs and "excess improvement costs"
shall be redetermined in accordance with Paragraphs 7 and 9 hereof on an
aggregate basis reflecting the cost results for both the first and the second
phases of the Interior Improvements, and such redetermination shall be the
basis for determining the amount of the ongoing rental adjustment (if any)
that will apply under Section 3.1(d) of the Lease (which rental adjustment,
if any, shall become effective beginning on the date the square footage of
the second phase of Interior Improvements is first taken into account under
Section 3.1(c) of the Lease in determining Tenant's minimum monthly rental
obligations under Section 3.1(a) of the Lease), and the amount of the
additional cash payment (if any) that will be due from Tenant under Paragraph
7 hereof, with respect to the construction of the Interior Improvements as a
whole. To the extent Tenant elects to apply any of the permitted portion of
the tenant improvement allowance on refurbishment of or improvements to the
Phase VI building as contemplated above, the amounts expended for that
purpose shall be deemed to be part of the direct costs and Interior
Improvement Costs for the first phase to the extent such expenditures occur
prior to substantial completion of the first phase of the Interior
Improvements, and shall be deemed to be part of the direct costs and Interior
Improvement Costs for the second phase to the extent such expenditures occur
after substantial completion of the first phase of the Interior Improvements.
9. Within fifteen (15) days after substantial completion of Landlord's
Work, as defined above, or as soon after such fifteen (15) day period as
reasonably practicable, Landlord shall deliver to Tenant a statement of Final
Accounting for Interior Improvement Construction Costs (the "Final
Accounting"), prepared by Landlord from Landlord's books and records and
other reasonable sources, which statement shall include all Interior
Improvement Costs as defined above and shall be final and binding on Landlord
and Tenant, except as otherwise provided herein. Notwithstanding any other
provisions of this Paragraph 9, Tenant shall have the right to audit or
review, directly or through its designated representative, all books and
records of Landlord reasonably related to the Interior Improvement Costs as
identified in the Final Accounting, subject to the following conditions: Such
right shall be exercisable only by written request to Landlord within ten
(10) days after Tenant's receipt from Landlord of the Final Accounting, and
shall be exercisable only during normal business hours, on not less than ten
(10) days prior written notice to Landlord, at such place as Landlord may
reasonably designate; each party shall bear its own costs and expenses in
connection with such audit or review. To the extent Tenant, following any
such review or audit, disputes any item in the applicable statement, Tenant
shall give Landlord written notice of the disputed items, in reasonable
detail and with reasonable supporting information, and Landlord and Tenant
shall negotiate diligently and in good faith to try to resolve the dispute.
If Landlord and Tenant are unable to resolve the dispute within thirty (30)
days after Landlord's receipt of Tenant's written notice specifying the
disputed items, then either party may elect, by written notice to the other,
to have the dispute resolved and the disputed items of Interior Improvement
Costs determined in accordance with the procedure set forth in Section 5.4 of
the Lease.
10. Landlord, Tenant and their respective agents shall use commercially
reasonable efforts, diligence and good faith to minimize all costs and
expenses of Landlord's Work.
Attachment to EXHIBIT C:
C-1: Building Shell Specifications
EXHIBIT C (Page 5 of 5)
<PAGE>
EXHIBIT D
ACKNOWLEDGEMENT OF LEASE COMMENCEMENT
This Acknowledgement is executed as of ______________, 1999, by
BRITANNIA HACIENDA V LIMITED PARTNERSHIP, a Delaware limited partnership
("Landlord"), and PROBUSINESS SERVICES, INC., a California corporation
("Tenant"), pursuant to Section 2.5 of the Lease dated January __, 1998
between Landlord and Tenant (the "Lease") covering premises located at
___________________, Pleasanton, CA 94588 (the "Premises").
Landlord and Tenant hereby acknowledge and agree as follows:
1. The Commencement Date under the Lease is ___________, 1999.
2. The termination date under the Lease shall be ____________, 2010,
subject to any applicable provisions of the Lease for extension or early
termination thereof.
3. The agreed square footage of the Building, as built, is ________
square feet; the agreed square footage of the portion of the Premises
initially occupied by Tenant as of the Commencement Date is _________ square
feet.
4. Tenant accepts the Premises and acknowledges the satisfactory
completion of all improvements therein required to be made by Landlord,
subject only to any applicable "punch list" or similar procedures
specifically provided under the Lease.
5. The excess cost of improvements (if any) for which Tenant is
responsible under EXHIBIT C to the Lease is $_________, resulting in an
additional rent amount of $_________ per month pursuant to Section 3.1(d) of
the Lease.
EXECUTED as of the date first set forth above.
"Landlord" "Tenant"
BRITANNIA HACIENDA V LIMITED PROBUSINESS SERVICES, INC., a
PARTNERSHIP, a Delaware limited Delaware corporation
partnership
By: BRITANNIA HOPYARD, LLC, a By:
California limited liability ----------------------------
company, General Partner Its:
----------------------------
By: By:
------------------------ -----------------------------
T.J. Bristow Its:
Manager & President -----------------------------
EXHIBIT D
<PAGE>
EXHIBIT 10.16
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
by and between
PROBUSINESS SERVICES, INC.,
a Delaware corporation
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of June 30, 1998
- -----------------------------------------------------------------------------
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ----------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
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<S> <C>
1. DEFINITIONS............................................ 1
Account Debtor.................................... 1
Affiliate......................................... 1
Audit............................................. 2
Borrower.......................................... 2
Borrower's Address................................ 2
Business Day...................................... 2
Change of Control................................. 2
Client Acquisition Costs.......................... 2
Closing Date...................................... 2
Coast............................................. 2
Code.............................................. 2
Collateral........................................ 2
Collection Loans.................................. 2
Credit Limit...................................... 2
Default........................................... 2
Deposit Account................................... 2
Dollars or $...................................... 2
Early Termination Fee............................. 2
EBITDA............................................ 2
Eligible Collections.............................. 2
Equipment......................................... 2
Event of Default.................................. 2
Fiduciary Collections............................. 2
GAAP.............................................. 3
General Intangibles............................... 3
Inventory......................................... 3
Investment Property............................... 3
Letter of Credit.................................. 3
Letter of Credit Sublimit......................... 3
Loan Documents.................................... 3
Loans............................................. 3
Material Adverse Effect........................... 3
Maturity Date..................................... 3
Maximum Dollar Amount............................. 3
Minimum Annual Interest........................... 3
Obligations....................................... 3
Other Terms....................................... 4
Permitted Liens................................... 4
Person............................................ 4
Prime Rate........................................ 4
Receivables....................................... 4
Renewal Date...................................... 4
Renewal Fee....................................... 5
Solvent........................................... 5
Total Fixed Debt Service Requirements............. 5
Year 2000 Problem................................. 5
2. CREDIT FACILITIES...................................... 5
2.1 Loans............................................. 5
2.2 Letters of Credit................................. 5
3. INTEREST AND FEES...................................... 6
3.1 Interest.......................................... 6
3.2 Fees.............................................. 6
4. SECURITY INTEREST...................................... 6
5. CONDITIONS PRECEDENT................................... 6
5.1 Status of Accounts at Closing..................... 6
5.2 Intentionally Deleted............................. 6
5.3 Landlord Waiver................................... 6
5.4 Executed Agreement................................ 6
5.5 Intentionally Deleted............................. 6
5.6 Priority of Coast's Liens......................... 6
5.7 Insurance......................................... 6
5.8 Borrower's Existence.............................. 6
5.9 Organizational Documents.......................... 6
5.10 Year 2000 Problem Assessment Certificate.......... 6
5.11 Due Diligence..................................... 6
5.12 Other Documents and Agreements.................... 7
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF
THE BORROWER........................................... 7
6.1 Existence and Authority........................... 7
6.2 Name; Trade Names and Styles...................... 7
6.3 Place of Business; Location of Collateral......... 7
6.4 Title to Collateral; Permitted Liens.............. 7
6.5 Maintenance of Collateral......................... 8
6.6 Books and Records................................. 8
6.7 Financial Condition, Statements and Reports....... 8
6.8 Tax Returns and Payments; Pension Contributions... 8
6.9 Compliance with Law............................... 8
6.10 Litigation........................................ 8
6.11 Use of Proceeds................................... 8
6.12 Year 2000 Compliance.............................. 8
</TABLE>
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
7. RECEIVABLES............................................. 9
7.1 Representations Relating to Receivables............ 9
7.2 Representations Relating to Documents
and Legal Compliance............................... 9
7.3 Schedules and Documents Relating to Receivables.... 9
7.4 Collection of Receivables.......................... 9
7.5 Remittance of Proceeds............................. 9
7.6 Disputes........................................... 9
7.7 Verification....................................... 10
7.8 No Liability....................................... 10
8. ADDITIONAL DUTIES OF THE BORROWER....................... 10
8.1 Financial and Other Covenants...................... 10
8.2 Insurance.......................................... 10
8.3 Reports............................................ 10
8.4 Access to Collateral, Books and Records............ 10
8.5 Negative Covenants................................. 11
8.6 Litigation Cooperation............................. 11
8.7 Further Assurances................................. 11
9. TERM.................................................... 12
9.1 Maturity Date...................................... 12
9.2 Early Termination.................................. 12
9.3 Payment of Obligations............................. 12
10. EVENTS OF DEFAULT AND REMEDIES.......................... 12
10.1 Events of Default.................................. 12
10.2 Remedies........................................... 13
10.3 Standards for Determining Commercial
Reasonableness..................................... 15
10.4 Power of Attorney.................................. 15
10.5 Application of Proceeds............................ 16
10.6 Remedies Cumulative................................ 16
11. GENERAL PROVISIONS...................................... 16
11.1 Interest Computation............................... 16
11.2 Application of Payments............................ 17
11.3 Charges to Accounts................................ 17
11.4 Monthly Accountings................................ 17
11.5 Notices............................................ 17
11.6 Severability....................................... 17
11.7 Integration........................................ 17
11.8 Waivers............................................ 17
11.9 No Liability for Ordinary Negligence............... 18
11.10 Amendment......................................... 18
11.11 Time of Essence................................... 18
11.12 Attorneys Fees, Costs and Charges................. 18
11.13 Benefit of Agreement.............................. 18
11.14 Publicity......................................... 18
11.15 Paragraph Headings; Construction.................. 18
11.16 Governing Law; Jurisdiction; Venue................ 19
11.17 Mutual Waiver of Jury Trial....................... 19
</TABLE>
<PAGE>
COAST
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
BORROWER: PROBUSINESS SERVICES, INC., A DELAWARE CORPORATION
ADDRESS: 4125 HOPYARD ROAD
PLEASANTON, CA 94588
DATE: JUNE 30, 1998
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Agreement") is
entered into on the above date between COAST BUSINESS CREDIT, a division of
Southern Pacific Bank ("Coast"), a California corporation, with offices at
12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025, and the
borrower named above (the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of
this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section
1 below.)
WHEREAS, Borrower and Coast have previously entered into that certain Loan
and Security Agreement, dated April 30, 1996 between Borrower and Coast,
(the "Loan Agreement") as amended by Amendment Number One to Loan and Security
Agreement, dated October 25, 1996, ("Amendment One") Amendment Number Two to
Loan and Security Agreement, dated January 6, 1997, ("Amendment Two") and
Amendment Number Three to Loan and Security Agreement, dated December 16,
1997 ("Amendment Three") (collectively, the Loan Agreement, Amendment One,
Amendment Two and Amendment Three are, the "Prior Loan Agreement").
WHEREAS, Benesphere Administrators, Inc., a Washington corporation, which was
added as a Co-Borrower in Amendment Two, was subsequently merged into
Borrower and thus is not a party to this Agreement.
NOW THEREFOR, Borrower and Coast desire to amend and restate in its entirety
the Prior Loan Agreement as provided for herein.
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable or General Intangible.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
1 Amend & Restated
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
"AUDIT" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"BORROWER" has the meaning set forth in the introduction to this
Agreement.
"BORROWER'S ADDRESS" has the meaning set forth in the introduction to
this Agreement.
"BUSINESS DAY" means a day on which Coast is open for business.
"CHANGE OF CONTROL" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in the Borrower) becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty
percent (20%) of the total voting power of all classes of stock or other
ownership interests then outstanding of any Borrower normally entitled to
vote in the election of directors or analogous governing body.
"CLIENT ACQUISITION COSTS" means sales, marketing and acquisition costs
associated with a new customer account.
"CLOSING DATE" means June 30, 1998.
"COAST" has the meaning set forth in the introduction to this Agreement.
"CODE" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 4 hereof.
"COLLECTION LOANS" means the Loans described in Section 2.1(a) of the
Schedule.
"CREDIT LIMIT" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code.
"DOLLARS OR $" means United States dollars.
"EARLY TERMINATION FEE" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBITDA" means, in any fiscal period, Borrower's net income (other than
extraordinary or non-recurring items of Borrower for such period), PLUS (i)
the amount of all interest expense, income tax expense, depreciation and
amortization of Borrower for such period, and plus or minus (as the case may
be) (ii) any other non-cash charges which have been added or subtracted, as
the case may be, in calculating Borrower's net income for such period.
"ELIGIBLE COLLECTIONS" means, cash collected from payments on accounts
receivable (including recurring payments from customers pursuant to ACH
agreements), and interest from Fiduciary Collections.
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, computer equipment, check
processors, readers, office partitions, equipment, furnishings, fixtures,
trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other
goods (other than Inventory) of every kind and description used in Borrower's
operations or owned by Borrower and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions or improvements to any of the foregoing, wherever located.
"EVENT OF DEFAULT" means any of the events set forth in Section 10.1 of
this Agreement.
"FIDUCIARY COLLECTIONS" means Borrower funds which are segregated from
its general funds and held on behalf of third parties for remittance to
taxing authorities, health and welfare insurance carriers, and certain
persons under Internal Revenue Code Section 125 Flexible Spending Plans.
2 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, investment property, inventions, designs,
drawings, blueprints, patents, patent applications, trademarks and the
goodwill of the business symbolized thereby, names, trade names, trade
secrets, goodwill, copyrights, registrations, licenses, franchises, customer
lists, security and other deposits, rights in all litigation presently or
hereafter pending for any cause or claim (whether in contract, tort or
otherwise), and all judgments now or hereafter arising therefrom, all claims
of Borrower against Coast, rights to purchase or sell real or personal
property, rights as a licensor or licensee of any kind, royalties, telephone
numbers, proprietary information, purchase orders, and all insurance policies
and claims (including without limitation life insurance, key man insurance,
credit insurance, liability insurance, property insurance and other
insurance), tax refunds and claims, computer programs, discs, tapes and tape
files, claims under guaranties, security interests or other security held by
or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"INVENTORY" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be
furnished under any contract of service or held for sale or lease (including
without limitation all raw materials, work in process, finished goods and
goods in transit, and including without limitation all farm products), and all
materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with
the manufacture, packing, shipping, advertising, selling or finishing of such
goods, merchandise or other personal property, and all warehouse receipts,
documents of title and other documents representing any of the foregoing.
"INVESTMENT PROPERTY" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"LETTER OF CREDIT" has the meaning set forth in Section 2.2 hereof.
"LETTER OF CREDIT SUBLIMIT" has the meaning set forth in Section 2.2
hereof.
"LOAN DOCUMENTS" means this Agreement, the agreements and documents
listed on Section 5 hereof, and any other agreement, instrument or document
executed in connection herewith or therewith.
"LOANS" has the meaning set forth in Section 2.1 hereof.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations
of Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including,
without limitation, repayment of the Obligations as they come due) or (iii)
the validity or enforceability of this Agreement or any other agreement or
document entered into by any party in connection herewith, or the rights or
remedies of Coast hereunder or thereunder.
"MATURITY DATE" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"MAXIMUM DOLLAR AMOUNT" has the meaning set forth in Section 2 of the
Schedule.
"MINIMUM ANNUAL INTEREST" has the meaning set forth in Section 3 of the
Schedule.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants,duties and indebtedness at
any time owing by Borrower to Coast, whether evidenced by this Agreement or
any note or other instrument or document, whether arising from an extension
of credit, opening of a letter of credit, banker's acceptance, loan,
guaranty, indemnification or otherwise, whether direct or indirect
(including, without limitation, those acquired by assignment and any
participation by Coast in Borrower's debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all
interest, charges, expenses, fees, attorneys' fees (including attorneys' fees
and expenses incurred in bankruptcy), expert witness fees, audit fees,
3 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
letter of credit fees, collateral monitoring fees, closing fees, facility
fees, termination fees, minimum interest charges and any other sums
chargeable to Borrower under this Agreement or under any other present or
future instrument or agreement between Borrower and Coast.
"OTHER TERMS" means all accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in
accordance with GAAP. All other terms contained in this Agreement, unless
otherwise indicated, shall have the meanings provided by the Code, to the
extent such terms are defined therein.
"PERMITTED LIENS" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above
in clauses (a) or (b) above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien
and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods;
(i) liens in favor of Coast;
(j) liens in existence on the date hereof; or
(k) any judgment, attachment or similar liens, which is fully
covered by insurance or has been discharged or execution thereof is
effectively stayed and bonded against pending appeal within thirty (30) days
of the entry thereof.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest
or lien sign an intercreditor agreement on Coast's then standard form,
acknowledge that the security interest is subordinate to the security
interest in favor of Coast, and agree not to take any action to enforce its
subordinate security interest so long as any Obligations remain outstanding,
and that Borrower agree that any uncured default in any obligation secured
by the subordinate security interest shall also constitute an Event of
Default under this Agreement.
"PERSON" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability
company, joint venture, trust, unincorporated organization, association,
corporation, government, or any agency or political division thereof, or any
other entity.
"PRIME RATE" means the actual "Reference Rate" or the substitute
therefor of the Bank of America NT & SA whether or not that rate is the
lowest interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published
in the Wall Street Journal on the first Business Day of the applicable month,
as the base rate on corporate loans at large U.S. money center commercial
banks.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities
accounts, security entitlements, commodity contracts, commodity accounts,
investment property and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise
returned to or repossessed by Borrower, and all rights of stoppage in transit
and all other rights or remedies of an unpaid vendor, lienor or secured party.
"RENEWAL DATE" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and
4 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
each anniversary thereafter that this Agreement is renewed pursuant to
Section 9.1 hereof.
"RENEWAL FEE" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"SOLVENT" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it
will, incur debts beyond such Person's ability to pay as such debts mature,
and (e) such Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such Person's
properties and assets would constitute unreasonably small capital after
giving due consideration to the prevailing practices in the industry in which
such Person is engaged. In computing the amount of contingent liabilities at
any time, it is intended that such liabilities will be computed at the amount
that, in light of all the facts and circumstances existing at such time,
represents the amount that reasonably can be expected to become an actual or
matured liability.
"TOTAL FIXED DEBT SERVICE REQUIREMENTS" means payments on principal,
interest, and leases on all indebtedness other than trade debt.
"YEAR 2000 PROBLEM" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
and in percentages to be determined by Coast in its reasonable discretion, up
to the Credit Limit, provided no Default or Event of Default has occurred and
is continuing. In addition, Coast may create reserves against or reduce its
collections multiple without declaring a Default or an Event of Default if it
determines that there has occurred a Material Adverse Effect.
2.2 LETTERS OF CREDIT. At the request of Borrower, Coast may, in its
sole discretion, arrange for the issuance of letters of credit for the
account of Borrower (collectively, "Letters of Credit"), by issuing
guarantees to the issuer of the letter of credit or by other means. All
Letters of Credit shall be in form and substance satisfactory to Coast in its
sole discretion. The aggregate face amount of all outstanding Letters of
Credit from time to time shall not exceed the amount shown on the Schedule
(the "Letter of Credit Sublimit"), and shall be reserved against Loans which
would otherwise be available hereunder. Borrower shall pay all customary bank
charges for the issuance of Letters of Credit. Any payment by Coast under or
in connection with a Letter of Credit shall constitute a Loan hereunder on
the date such payment is made. Each Letter of Credit shall have an expiry
date no later than thirty (30) days prior to the Maturity Date. Borrower
hereby agrees to indemnify, save, and hold Coast harmless from any loss,
cost, expense, or liability, including payments made by Coast in compliance
with the terms of the relevant Letter of Credit, expenses, and reasonable
attorneys' fees incurred by Coast arising out of or in connection with any
Letters of Credit. Borrower agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Coast
and opened for Borrower's account or by Coast's interpretations of any Letter
of Credit issued by Coast for Borrower's account, and Borrower understands
and agrees that Coast shall not be liable for any error, negligence, or
mistake, whether of omission or commission, in following Borrower's
instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require coast to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Coast harmless with
respect to any loss, cost, expense, or liability incurred by Coast under any
Letter of Credit as a result of Coast's indemnification of any such issuing
bank. The provisions of this Agreement, as it pertains to Letters of Credit,
and any other present or future documents or agreements between Borrower and
Coast relating to Letters of Credit are cumulative.
5 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth
to the contrary in this Agreement. Interest shall be payable monthly, on the
last day of the month. Interest may, in Coast's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the
same rate as the other Loans.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast and are
deemed fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when
due, Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and
wherever located: All Receivables, Inventory, Equipment, Investment Property,
and General Intangibles, including, without limitation, all of Borrower's
Deposit Accounts except Fiduciary Collections and all money, and all property
now or at any time in the future in Coast's possession (including claims and
credit balances), and all proceeds of any of the foregoing (including
proceeds of any insurance policies, proceeds of proceeds, and claims against
third parties), all products of any of the foregoing, and all books and
records related to any of the foregoing (all of the foregoing, together with
all other property in which Coast may now or in the future be granted a lien
or security interest, is referred to herein, collectively, as the
"Collateral").
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the
satisfaction, in the sole and absolute discretion of Coast, at or prior to
the first advance of funds hereunder, of each, every and all of the following
conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due
and unpaid ninety (90) days past its due date except for such accounts
payable being contested in good faith in appropriate proceedings and for
which adequate reserves have been provided.
5.2 INTENTIONALLY DELETED.
5.3 LANDLORD WAIVER. Coast shall have received duly executed landlord
waivers and access agreements in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and, when deemed appropriate by Coast,
in form for recording in the appropriate recording office, with respect to
all leased locations where Borrower maintains any inventory or equipment in
excess of One Hundred Thousand Dollars ($100,000).
5.4 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed by Borrower.
5.5 INTENTIONALLY DELETED.
5.6 PRIORITY OF COAST'S LIENS. Coast shall have received the results
of "of record" searches satisfactory to Coast in its sole and absolute
discretion, reflecting its Uniform Commercial Code filings against Borrower
indicating that Coast has a perfected, first priority lien in and upon all of
the Collateral, subject only to Permitted Liens.
5.7 INSURANCE. Coast shall have received copies of the insurance
binders or certificates evidencing Borrower's compliance with Section 8.2
hereof, including lender's loss payee endorsements.
5.8 BORROWER'S EXISTENCE. Coast shall have received copies of
Borrower's articles of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the
Closing Date, and Coast shall have received Certificates of Foreign
Qualification for Borrower from the Secretary of State of each state wherein
the failure to be so qualified could have a Material Adverse Effect.
5.9 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing
the execution and delivery of this Agreement and the other documents
contemplated hereby, and authorizing the transactions contemplated hereunder
and thereunder, and authorizing specific officers of Borrower to execute the
same on behalf of Borrower, in each case certified by the Secretary or other
acceptable officer of
6 Amend & Restated
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Borrower as of the Closing Date.
5.10 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have
received a certificate from the relevant officer of Borrower to the effect
that, as the result of a comprehensive assessment undertaken by Borrower of
Borrower's computer systems, software and applications and after due inquiry
made to Borrower's material suppliers, vendors and customers, Borrower knows
of no facts that would cause Borrower to reasonably believe that the Year
2000 Problem will cause a Material Adverse Effect.
5.11 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.12 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such
other agreements, instruments and documents as Coast may require in
connection with the transactions contemplated hereby, all in form and
substance satisfactory to Coast in Coast's sole and absolute discretion, and
in form for filing in the appropriate filing office.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be,
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be
qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a Material Adverse Effect. The execution,
delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (a) have been duly and validly authorized, (b)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally), and (c) do not violate in any material respect
Borrower's articles of incorporation or Borrower's by-laws, or any law or any
material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which
is binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in
the heading to this Agreement is its correct name. Listed on the Schedule are
all prior names of Borrower and all of Borrower's present and prior trade
names. Borrower shall give Coast thirty (30) days' prior written notice
before changing its name or doing business under any other name. Borrower has
complied, and will in the future comply, in all material respects with all
laws relating to the conduct of business under a fictitious business name.
6.3. PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth
in the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule. Borrower will give Coast at least
thirty (30) days' prior written notice before opening any additional place of
business, changing its chief executive office, or moving any of the
Collateral to a location other than Borrower's Address or one of the
locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will
at all times in the future be, the sole owner of all the Collateral, except
for items of Equipment which are leased by Borrower. The Collateral now is
and will remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for Permitted Liens. Coast
now has, and will continue to have, a first-priority perfected and
enforceable security interest in all of the Collateral, subject only to the
Permitted Liens, and Borrower will at all times defend Coast and the
Collateral against all claims of others. None of the Collateral now is or
will be affixed to any real property in such a manner, or with such intent,
as to become a fixture. Borrower is not and will not become a lessee under
any real property lease pursuant to which the lessor may obtain any rights in
any of the Collateral and no such lease now prohibits, restrains, impairs or
will prohibit, restrain or impair Borrower's rights to remove any Collateral
from the leased premises except to the extent that a landlord waiver is
obtained from lessor pursuant to the terms hereof. Whenever any Collateral is
located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or
7 Amend & Restated
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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otherwise), Borrower shall, whenever requested by Coast, use its best efforts
to cause such third party to execute and deliver to Coast, in form reasonably
acceptable to Coast, such waivers and subordinations as Coast shall specify,
so as to ensure that Coast's rights in the Collateral are, and will continue
to be, superior to the rights of any such third party. Borrower will keep in
full force and effect, and will comply in all material respects with the
terms of, any lease of real property where any of the Collateral now or in
the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral
in good working condition (ordinary wear and tear excepted), and Borrower
will not use the Collateral for any unlawful purpose. Borrower will
immediately notify Coast in writing of any material loss or damage to the
Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements now or in the future delivered to Coast have been, and will be,
prepared in conformity with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year-end
adjustments) and now and in the future will fairly reflect in all material
respects the financial condition of Borrower, at the times and for the
periods therein stated. Between the last date covered by any such statement
provided to Coast and the date hereof, there has been no Material Adverse
Effect. Borrower is now and will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and will
timely pay, all foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by Borrower. Borrower
may, however, defer payment of any contested taxes, provided that Borrower
(i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted,
(ii) notifies Coast in writing of the commencement of, and any material
development in, the proceedings, and (iii) establishes adequate reserves for
or takes any other steps required to keep the contested taxes from becoming
a lien upon any of the Collateral. As of the date hereof, Borrower is unaware
of any claims or adjustments proposed for any of Borrower's prior tax years
which would result in additional taxes becoming due and payable by Borrower.
Borrower has paid, and shall continue to pay all amounts necessary to fund all
present and future pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not and will not withdraw from
participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental
agency.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in
all material respects, with all provisions of all material foreign, federal,
state and local laws and regulations relating to Borrower, including, but not
limited to, the Fair Labor Standards Act, and those relating to Borrower's
ownership of real or personal property, the conduct and licensing of
Borrower's business, and environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in any
Material Adverse Effect. Borrower will promptly inform Coast in writing of
any claim, proceeding, litigation or investigation in the future threatened
or instituted by or against Borrower involving an amount set forth on the
Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely
for lawful business purposes. Borrower is not purchasing or carrying any
"margin stock" (as defined in Regulation G of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan will be used
to purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software
and
8 Amend & Restated
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
-------------------------------------------------------------------
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers, Borrower represents and warrants that the Year 2000
Problem will not result in a Material Adverse Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: All Eligible Collections with respect to which
Loans are requested by Borrower shall, on the date each Loan is requested and
made, represent undisputed bona fide existing collections from Account
Debtors on Receivables created by the sale, delivery and acceptance of goods
or the rendition of services in the ordinary course of Borrower's business and
interest earned on the Fiduciary Collections.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE.
Borrower represents and warrants to Coast as follows: All statements made and
all unpaid balances appearing in all invoices, instruments and other
documents evidencing the Receivables are and shall be true and correct in all
material respects and all such invoices, instruments and other documents and
all of Borrower's books and records are and shall be genuine and in all
material respects what they purport to be. All sales and other transactions
underlying or giving rise to each Receivable shall fully comply with all
applicable laws and governmental rules and regulations. To the best of
Borrower's knowledge, all signatures and indorsements on all documents,
instruments, and agreements relating to all Receivables are and shall be
genuine, and all such documents, instruments and agreements are and shall be
legally enforceable in accordance with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, and schedules of collections, all on Coast's standard forms;
PROVIDED, HOWEVER, that Borrower's failure to execute and deliver the same
shall not affect or limit Coast's security interest and other rights in all
of Borrower's Receivables, nor shall Coast's failure to advance or lend
against a specific Receivable affect or limit Coast's security interest and
other rights therein. Loan requests received after 11:00 A.M. Pacific time,
will not be considered by Coast until the next Business Day. Borrower shall
also furnish to Coast an aged accounts receivable trial balance in such form
and at such intervals as Coast shall request. In addition, Borrower shall
deliver to Coast as and when requested the originals of all instruments,
chattel paper, security agreements, guarantees and other documents and
property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary indorsements, all of which
shall be with recourse. Borrower shall also provide Coast with copies of all
credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to
collect all Receivables, unless and until an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust
for Coast, and upon the earlier of (a) at any time the amount of the
outstanding Obligations exceeds Ten Million Dollars ($10,000,000) or (b) an
Event of Default has occurred, Borrower shall deliver all such payments and
proceeds to Coast within one (1) Business Day after receipt by Borrower, in
their original form, duly endorsed to Coast, to be applied to the Obligations
in such order as Coast shall determine. Coast may, in its discretion, require
that all proceeds of Collateral be deposited by Borrower into a lockbox
account, or such other "blocked account" as Coast may specify, pursuant to a
blocked account agreement in such form as is reasonably satisfactory to
Coast. Coast or its designee may, upon the occurrence and continuance of any
default or Event of Default, notify Account Debtors that Coast has been
granted a security interest in the Receivables.
7.5. REMITTANCE OF PROCEEDS. Upon the earlier of (a) at any time the
amount of the Obligations exceeds Ten Million Dollars ($10,000,000) or (b) an
Event of Default has occurred, all proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of
Borrower's other funds or property, but will hold such proceeds separate and
apart from such other funds and property and in an express trust for Coast.
Nothing in this Section limits the restrictions on disposition of Collateral
set forth elsewhere in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables exceeding One Hundred Thousand Dollars
($100,000) in the
9 Amend & Restated
Loan and Security Agmt
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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aggregate. Borrower shall not forgive (completely or partially), compromise
or settle any Receivable for less than payment in full, or agree to do any of
the foregoing, except that Borrower may do so, provided that: (a) Borrower
does so in good faith, in a commercially reasonable manner, in the ordinary
course of business, and in arm's length transactions, which are reported to
Coast on the regular reports provided to Coast; (b) no Default or Event of
Default has occurred and is continuing; and (c) taking into account all such
discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence and
continuance of an Event of Default, settle or adjust disputes or claims
directly with Account Debtors for amounts and upon terms which Coast
considers advisable in its reasonable credit judgment and, in all cases,
Coast shall credit Borrower's Loan account with only the net amounts received
by Coast in payment of any Receivables.
7.7 VERIFICATION. Coast may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters
relating to the Receivables, by means of mail, telephone or otherwise, either
in the name of Borrower or Coast or such other name as Coast may choose.
7.8 NO LIABILITY. Coast shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss
or destruction of, any goods, the sale or other disposition of which gives
rise to a Receivable, or for any error, act, omission or delay of any kind
occurring in the settlement, failure to settle, collection or failure to
collect any Receivable, or for settling any Receivable in good faith for less
than the full amount thereof, nor shall Coast be deemed to be responsible for
any of Borrower's obligations under any contract or agreement giving rise to
a Receivable. Nothing herein shall, however, relieve Coast from liability for
its own gross negligence or willful misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast
may reasonably require, and Borrower shall provide evidence of such insurance
to Coast, so that Coast is satisfied that such insurance is, at all times, in
full force and effect. All liability insurance policies of Borrower shall
name Coast as an additional insured, and all property casualty and related
insurance policies of Borrower shall name Coast as a loss payee thereon and
Borrower shall cause a lender's loss payee endorsement in form reasonably
acceptable to Coast. If the amount of the Loans outstanding exceeds Ten
Million Dollars ($10,000,000) then Coast shall retain all such proceeds of
insurance provided to it by the insurer; provided, however, in the event that
the Loans outstanding are Ten Million Dollars ($10,000,000) or less, then
Coast shall promptly remit to Borrower all such insurance proceeds. Upon
receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion. Any such proceeds respecting Equipment remitted by Coast to
Borrower shall be utilized by Borrower solely for the replacement or repair
of the Equipment with respect to which the insurance proceeds were paid.
Coast may require reasonable assurance that the insurance proceeds so
released will be so used. If Borrower fails to provide or pay for any
insurance, Coast may, but is not obligated to, obtain the same at Borrower's
expense. Borrower shall promptly deliver to Coast copies of all reports made
to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other
written reports with respect to Borrower (including budgets, sales
projections, operating plans and other financial documentation), as Coast
shall from time to time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times
during regular business hours but not less frequently than semi-annually in
the event that there are Loans outstanding hereunder, and on three (3)
Business Day's notice, Coast, or its agents, shall have the right to perform
Audits. Coast shall take reasonable steps to keep confidential all
confidential information obtained in any Audit, but Coast shall have the
right to disclose any such information to its auditors, regulatory agencies,
and attorneys, and pursuant to any subpoena or other legal process. The
Audits shall be at Borrower's expense and the charge for the Audits shall be
Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount
as shall
10 Amend & Restated
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<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
------------------------------------------------------------------------
represent Coast's then current standard charge for the same), plus reasonable
out-of-pocket expenses. Borrower will not enter into any agreement with any
accounting firm, service bureau or third party to store Borrower's books or
records at any location other than Borrower's Address, without first
notifying Coast of the same and obtaining the written agreement from such
accounting firm, service bureau or other third party to give Coast the same
rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will, on a timely basis, adequately and
completely address the Year 2000 Problem in all material respects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior
written consent, do any of the following:
(a) merge or consolidate with another entity, except in a
transaction in which (i) the owners of the Borrower hold at least fifty
percent (50%) of the ownership interest in the surviving entity immediately
after such merger or consolidation, and (ii) the Borrower is the surviving
entity;
(b) Intentionally Deleted;
(c) enter into any other transaction outside the ordinary course
of business;
(d) sell or transfer any Collateral, except for the sale of
finished Inventory in the ordinary course of Borrower's business, and except
for the sale of obsolete or unneeded Equipment in the ordinary course of
business;
(e) store any Inventory or other Collateral with any warehouseman
or other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i)
advances to customers or suppliers in the ordinary course of business, (ii)
travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business, and (iii) loans to employees,
officers and directors for the purpose of purchasing equity securities of the
Borrower;
(h) incur any debts, outside the ordinary course of business,
which would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity, other than guarantees limited to Two
Hundred Fifty Thousand Dollars ($250,000) or less with respect to (a)
advances to customers or suppliers in the ordinary course of business, (b)
travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business, and (c) loans to employees,
officers and directors for the purpose of purchasing equity securities of the
Borrower;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely
in stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would
have a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default is continuing or would occur
as a result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Coast with respect to any Collateral or relating
to Borrower which reasonably would be likely to result in a Material Adverse
Effect, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully
consummate the transactions contemplated by this
11 Amend & Restated
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be
extended, and this Agreement shall automatically and continuously renew, for
successive additional terms of one year each, unless one party gives written
notice to the other, not less than sixty (60) days prior to the Maturity Date
or the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence and continuance of an Event of Default, effective
immediately upon notice. If this Agreement is terminated by Borrower or by
Coast under this Section 9.2, Borrower shall pay to Coast an Early
Termination Fee in the amount shown in Section 3 of the Schedule. The Early
Termination Fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the rate applicable to
the Collection Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether
or not all or any part of such Obligations are otherwise then due and
payable. Without limiting the generality of the foregoing, if on the Maturity
Date, the Renewal Date, or on any earlier effective date of termination,
there are any outstanding Letters of Credit issued by Coast or issued by
another institution based upon an application, guarantee, indemnity or
similar agreement on the part of Coast, then on such date Borrower shall
provide to Coast cash collateral in an amount equal to the face amount of all
such Letters of Credit plus all interest, fees and costs due or to become due
in connection therewith, to secure all of the Obligations relating to said
Letters of Credit, pursuant to Coast's then standard form cash pledge
agreement. Notwithstanding any termination of this Agreement, all of Coast's
security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until
all Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are subject to the discretion of Coast, Coast
may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and
performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Coast shall promptly deliver
to Borrower termination statements, requests for reconveyances and such other
documents as may be required to fully terminate Coast's security interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower
shall give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers,
employees or agents, now or in the future, shall be untrue or misleading and
results in a Material Adverse Effect; or
(b) Borrower shall fail to pay within three (3) Business Days
after due any Loan or any interest thereon or any other monetary Obligation;
or
(c) The total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit which is not cured within five (5) Business
Days after the occurrence thereof; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above, or
shall breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other
non-monetary Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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five (5) Business Days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance (other
than a Permitted Lien) is made on all or any part of the Collateral which is
not cured or satisfied within ten (10) Business Days after the occurrence of
the same; or
(h) Any default or event of default occurs under any obligation secured
by a Permitted Lien, which is not cured within any applicable cure period or
waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has or
may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business failure
of Borrower or any guarantor of any of the Obligations; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) The commencement of any proceeding against Borrower or any guarantor
of any of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute
of any jurisdiction, now or in the future in effect, which is (i) not timely
controverted, or (ii) not cured by the dismissal thereof within forty-five
(45) days after the date commenced; or
(l) Revocation or termination of, or limitation or denial of liability
upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) Revocation or termination of, or limitation or denial of liability
upon, any pledge of any certificate of deposit, securities or other property
or asset of any kind pledged by any third party to secure any or all of the
Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or
(o) Except as permitted under Section 8.5(a) or as a result of a public
offering of Borrower's common stock on a nationally recognized market,
Borrower shall suffer or experience any Change of Control without Coast's
prior written consent, which consent shall be in the discretion of Coast in
the exercise of its reasonable business judgement; or
(p) Borrower shall generally not pay its debts as they become due, or
Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law; or
(q) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any
of the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without demand of any kind (all
of which are hereby expressly waived by Borrower), may do any one or more of
the following:
(a) Cease making Loans or otherwise extending credit to Borrower under
this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may be
found, and for that purpose
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Borrower hereby authorizes Coast without judicial process to enter onto any
of Borrower's premises without interference to search for, take possession
of, keep, store or remove any of the Collateral, and remain on the premises
or cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Coast deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; PROVIDED, HOWEVER, that should Coast seek to take possession of
any of the Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgement;
(d) Require Borrower to assemble any or all of the Collateral and make
it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such
locations as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any Collateral
prior to a disposition thereof and, for such purpose and for the purpose of
removal, Coast shall have the right to use Borrower's premises, vehicles,
hoists, lifts, cranes, equipment and all other property without charge. Coast
is hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks, service marks, and advertising matter, or any property of
a similar nature, as it pertains to the Collateral, in completing production
of, advertising for sale, and selling any Collateral and Borrower's rights
under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or any further
manufacturing, processing or repair, at one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other
than oral announcement at the time scheduled for sale. Coast shall have the
right to conduct such disposition on Borrower's premises without charge, for
such time or times as Coast deems reasonable, or on Coast's premises, or
elsewhere and the Collateral need not be located at the place of disposition.
Coast may directly or through any affiliated company purchase or lease any
Collateral at any such public disposition, and if permissible under
applicable law, at any private disposition. Any sale or other disposition of
Collateral shall not relieve Borrower of any liability Borrower may have if
any Collateral is defective as to title or physical condition or otherwise at
the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's
sole discretion, to grant extensions of time to pay, compromise claims and
settle Receivables and the like for less than face value; and
(h) Offset against any sums in any of Borrower's general, special or
other Deposit Accounts with Coast;
(i) Demand and receive possession of any of Borrower's federal and state
income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All reasonable attorneys' fees, expenses, costs, liabilities and
obligations incurred by Coast (including attorneys' fees and expenses
incurred in connection with bankruptcy) with respect to the foregoing shall
be due from the Borrower to Coast within five (5) Business Days following
receipt of invoice. If Borrower has not paid the same when due, Coast may
charge the same to Borrower's loan account, and the same shall thereafter bear
interest at the same rate as is applicable to the Collection Loans. Without
limiting any of Coast's rights and remedies, from and after the occurrence of
any Event of Default, the interest rate applicable to the Obligations shall
be increased
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by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general, non-specific
terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.
Pacific time;
(e) Payment of the purchase price in cash or by cashier's check or wire
transfer is required; and
(f) With respect to any sale or any of the Collateral, Coast may (but is
not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of
attorney with full power of substitution coupled with an interest,
authorizing and permitting Coast (acting through any of its employees,
attorneys or agents) at any time, at its option, but without obligation, with
or without notice to Borrower, and at Borrower's expense, to do any or all of
the following, in Borrower's name or otherwise, but Coast agrees to exercise
the following powers in a commercially reasonable matter:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of
Borrower or Coast, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other present and future
agreements;
(b) Upon the occurrence and continuance of an Event of Default, execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Coast's Collateral or
in which Coast has an interest;
(c) Upon the occurrence and continuance of an Event of Default, execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's
or other lien, or assignment or satisfaction of mechanic's, materialman's
or other lien;
(d) Take control in any manner of any cash or non-cash items of payment
or proceeds of Collateral; endorse the name of Borrower upon any instruments,
or documents, evidence of payment or Collateral that may come into Coast's
possession;
(e) Endorse all checks and other forms of remittances received by Coast;
(f) Upon the occurrence and continuance of an Event of Default, pay,
contest or settle any lien, charge, encumbrance, security interest and
adverse claim in or to any of the Collateral, or any judgement based thereon,
or otherwise take any action to terminate or discharge the same;
(g) Upon the occurrence and continuance of an Event of Default, grant
extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and
other documents in connection therewith;
(h) If Borrower has not done so by the due date or other applicable
date, pay any sums required on account of Borrower's taxes or to secure the
release of any liens therefor, or both;
(i) Upon the occurrence and continuance of an Event of Default, settle
and adjust, and give releases of,
15 Amend & Restated
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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any insurance claim that relates to any of the Collateral and obtain payment
therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same
rights of access and other rights with respect thereto as Coast has under
this Agreement; and
(k) If Borrower has not done so by the due date or other applicable
date, take any action or pay any sum required of Borrower pursuant to this
Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees
and expenses incurred pursuant to bankruptcy) with respect to the foregoing
shall be added to and become part of the Obligations, and shall be payable on
demand. Coast may charge the foregoing to Borrower's loan account and the
foregoing shall thereafter bear interest at the same rate applicable to the
Collection Loans. In no event shall Coast's rights under the foregoing power
of attorney or any of Coast's other rights under this Agreement be deemed to
indicate that Coast is in control of the business, management or properties
of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each
of its officers, directors, employees, counsel, agents, and attorneys-in-fact
(each, an "Indemnified Person") harmless (to the fullest extent permitted by
law) from and against any and all claims, demands, suits, actions,
investigations, proceedings, and damages, and all attorneys fees and
disbursements and other costs and expenses actually incurred in connection
therewith (as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred by any of
them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration of this Agreement and
any other Loan Documents or the transactions contemplated herein, and with
respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person hereunder with
respect to any Indemnified Liability that a court of competent jurisdiction
finally determines to have resulted from the gross negligence or willful
misconduct of such Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of
any sale of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and reasonable attorneys' fees incurred by
Coast in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Coast shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other Persons legally entitled
thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast,
in its sole discretion, directly or indirectly enters into a deferred payment
or other credit transaction with any purchaser at any sale of Collateral,
Coast shall have the option, exercisable at any time, in its sole discretion,
of either reducing the Obligations by the principal amount of purchase price
or deferring the reduction of the Obligations until the actual receipt by
Coast of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise
by Coast of one or more of its rights or remedies shall not be deemed an
election, nor bar Coast from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Coast to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the
Obligations have been indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations,
all checks, wire transfers and other items of payment received by Coast
(including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by Coast on account of the Obligations one (1)
Business Day after receipt by Coast of immediately available funds, and, for
purposes of the foregoing, any such funds received after 11:00 AM Pacific
time, on any
16 Amend & Restated
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day shall be deemed received on the next Business Day. Coast shall be entitled
to charge Borrower's account for such one (1) Business Day of "clearance" or
"float" at the rate(s) set forth in Section 3 of the Schedule on all checks,
wire transfers and other items received by Coast, regardless of whether such
one (1) Business Day of "clearance" or "float" actually occur, and shall be
deemed to be the equivalent of charging one (1) Business Day of interest on
such collections. This across-the-board one (1) Business Day clearance or float
charge on all collections is acknowledged by the parties to constitute an
integral aspect of the pricing of Coast's financing of Borrower. Coast shall
not, however, be required to credit Borrower's account for the amount of any
item of payment which is unsatisfactory to Coast in its reasonable discretion,
and Coast may charge Borrower's loan account for the amount of any item of
payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all
payments with respect to the Obligations may be applied, and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and
manner as Coast shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to
Borrower's Loan account, in which event they will bear interest from the date
due to the date paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall constitute PRIMA FACIE evidence of the items
stated and shall be an account stated (except for reverses and reapplications
of payments made and corrections of errors discovered by Coast), unless
Borrower notifies Coast in writing to the contrary within thirty (30) days
after each account is rendered, describing the nature of any alleged errors or
omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in
the heading to this Agreement, or at any other address designated in writing
by one party to the other party. Notices to Coast shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, faxed (at time of
confirmation of transmission), or at the expiration of one (1) Business Day
following delivery to the private delivery service, or two (2) Business Days
following the deposit thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in
full force and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. THERE
ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES
WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS
SIGNED BY THE PARTIES IN CONNECTION HEREWITH.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or
any other present or future agreement between Borrower and Coast shall not
waive or diminish any right of Coast later to demand and receive strict
compliance therewith. Any waiver of any Default shall not waive or affect any
other Default, whether prior or subsequent, and whether or not similar. None
of the provisions of this Agreement or any other agreement now or in the
future executed by Borrower and delivered to Coast shall be deemed to have
been waived by any act or knowledge of Coast or its agents or employees, but
only by a specific written waiver signed by an authorized officer of Coast and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time
held by Coast on which Borrower is or may in any way be liable, and notice
of any action taken by Coast, unless expressly required by this Agreement.
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11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred
or suffered by Borrower or any other party through the ordinary negligence of
Coast, or any of its directors, officers, employees, agents, attorneys or any
other Person affiliated with or representing Coast, but nothing herein shall
relieve Coast from liability for its own gross negligence or willful
misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all reasonable attorneys' fees (including attorneys' fees and expenses
incurred pursuant to bankruptcy) and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Coast,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs (including attorneys' fees and expenses incurred
pursuant to bankruptcy) Coast incurs in order to do the following: prepare
and negotiate this Agreement and the documents relating to this Agreement;
obtain legal advice in connection with this Agreement or Borrower; enforce,
or seek to enforce, any of its rights; prosecute actions against, or defend
actions by, Account Debtors; commence, intervene in, or defend any action or
proceeding; initiate any complaint to be relieved of the automatic stay in
bankruptcy; file or prosecute any probate claim, bankruptcy claim,
third-party claim, or other claim; examine, Audit, copy, and inspect any of
the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce Coast=s security
interest in, the Collateral; and otherwise represent Coast in any litigation
relating to Borrower. If either Coast or Borrower files any lawsuit against
the other predicated on a breach of this Agreement, the prevailing party in
such action shall be entitled to recover its reasonable costs and attorneys'
fees (including attorneys' fees and expenses incurred pursuant to
bankruptcy), including (but not limited to) reasonable attorneys' fees and
costs incurred in the enforcement of, execution upon or defense of any order,
decree, award or judgment. Borrower shall also pay Coast's standard charges
for returned checks and for wire transfers, in effect from time to time. All
attorneys' fees, costs and charges (including attorneys' fees and expenses
incurred pursuant to bankruptcy) and other fees, costs and charges to which
Coast may be entitled pursuant to this Agreement may be charged by Coast to
Borrower's loan account and shall thereafter bear interest at the same rate as
the Collection Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights
and delegate its duties hereunder without the consent of Borrower. Coast
reserves the right to syndicate all or a portion of the transaction created
herein or sell, assign, transfer, negotiate, or grant participations in all or
any part of, or any interest in Coast's rights and benefits hereunder. In
connection with any such syndication, assignment or participation, Coast may
disclose all documents and information which Coast now or hereafter may have
relating to Borrower or Borrower's business. To the extent that Coast assigns
its rights and obligations hereunder to a third Person, Coast thereafter shall
be released from such assigned obligations to Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published
announcing the consummation of this transaction and the aggregate amount
thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean
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"including (but not limited to)". This Agreement has been fully reviewed and
negotiated between the parties and no uncertainty or ambiguity in any term or
provision of this Agreement shall be construed strictly against Coast or
Borrower under any rule of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and
Borrower shall be governed by the internal laws of the State of California,
without regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall be litigated in courts located within California, and that the
exclusive venue therefor shall be Los Angeles County; (b) consents to the
jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to
object to the jurisdiction of any such court, or to transfer or change the
venue of any such action or proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT,
ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE.
BORROWER:
PROBUSINESS SERVICES, INC., a Delaware corporation
By /s/ [Illegible]
------------------------------
President or Vice President
By /s/ [Illegible]
------------------------------
Secretary or Ass't Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/ [Illegible]
------------------------------
Title: VP
--------------------------
19 Amend & Restated
Loan and Security Agmt
<PAGE>
- --------------------------------------------------------------------------------
COAST
SCHEDULE TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
BORROWER: PROBUSINESS SERVICES, INC., A DELAWARE CORPORATION
ADDRESS: 4125 HOPYARD ROAD
PLEASANTON, CA 94588
DATE: JUNE 30, 1998
This Schedule forms an integral part of the Amended and Restated Loan and
Security Agreement between Coast Business Credit, a division of Southern
Pacific Bank, and the above-borrower of even date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 2 - CREDIT FACILITIES
SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time
outstanding not to exceed the lesser
of a total of Twenty Million Dollars
($20,000,000) at any one time
outstanding (the "Maximum Dollar
Amount"), or the sum of (a)(b) and
(c) below:
(a) Collection Loans in an amount not to
exceed five (5) times Borrower's
average monthly net collections of
Eligible Collections for each
preceding three (3) month period (net
of W-2 billings/collections). The
multiple shall be decreased by a
factor of one (1) for each
twenty-five percent (25%) decrease in
Borrower's collections when comparing
the prior three (3) month period with
the most recent three (3) month
period. The multiple may be increased
by a factor of one (1) (up to the
maximum of five (5)) with each five
percent (5%) increase in collections,
sustained for a two (2) month period
when comparing the most recent three
(3) months collections to the
previous three (3) months
collections.
(b) Collection Loans on the interest
earned on Fiduciary Collections;
loans in an amount not to exceed the
lesser of:
20 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
(i) five (5) times Borrower's average
monthly collections of the interest
on tax investment funds for each
preceding three (3) months. The
multiple shall be decreased by a
factor of one (1) for each
twenty-five percent (25%) decrease in
Borrower's collections when comparing
the prior three (3) month period with
the most recent three (3) month
period. The multiple may be increased
by a factor of one (1) (up to the
maximum of five (5)) with each five
percent (5%) increase in collections,
sustained for a two (2) month period
when comparing the most recent three
(3) months collections to the
previous three (3) months
collections; PROVIDED, HOWEVER, to
the extent that Borrower receives
collections of interest from the tax
funds resulting from investments with
a term greater than one (1) month,
then Borrower shall be permitted to
demonstrate to Coast, and Coast may
consider, the impact the longer term
investment has had on the present and
prior three month collections.
(ii) Five Million Dollars
($5,000,000); PLUS
EXAMPLE
For (a) & (b) above, if collections
decrease by fifty percent (50%) in
the current three month period from
100M to 50M then the multiple if it
was at five (5) shall be lowered to
three (3) (one for each twenty-five
percent (25%) decrease).
(c) Letter of Credit Sublimit: One
Million Five Hundred Thousand Dollars
($1,500,000).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus
1% per annum, calculated on the basis
of a 360-day year for the actual
number of days elapsed. The interest
rate applicable to all Loans shall be
adjusted monthly as of the first day
of each month, and the interest to be
charged for each month shall be based
on the highest Prime Rate in effect
during the prior month, but in no
event shall the rate of interest
charged on any Loans in any month be
less than 7.5% per annum.
SECTION 3.1 - MINIMUM ANNUAL
INTEREST: NONE
SECTION 3.2 - LOAN FEE: One Hundred Fifty Thousand Dollars
($150,000) fully earned and payable
21 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
concurrently with the execution of this
Agreement, and Two Hundred Thousand
($200,000) fully earned and payable on
December 31, 1999.
SECTION 3.2 - LETTER OF CREDIT
FEES: Two percent (2%) of the face amount of
all outstanding Letters of Credit per
annum, plus bank charges and fees.
SECTION 9.1 - RENEWAL FEE: NONE
SECTION 9.2 - EARLY TERMINATION
FEE: An amount equal to three percent (3%)
of the Maximum Dollar Amount (as
defined in the Schedule), if
termination occurs on or before the
first anniversary of the effective
date of this Agreement; two percent
(2%) of the Maximum Dollar Amount, if
termination occurs after the first
anniversary and before the Maturity
Date of this Agreement; and one
percent (1%) of the Maximum Dollar
Amount, if termination occurs at any
time during the term of this
Agreement because the obligations are
indefeasibly paid in full via a
public offering of the stock of
Borrower or as a result of Borrower
being merged or acquired.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF
BORROWER: ProBusiness Centers, Inc.
SECTION 6.2 - PRIOR TRADE NAMES
OF BORROWER: Benesphere Administrators, Inc.
SECTION 6.2 - EXISTING TRADE NAMES
OF BORROWER: ProBusiness Administrative Services
SECTION 6.3 - OTHER LOCATIONS AND
ADDRESSES: 2355 Main Street, Suite 140,
Irvine, California 92616
400 108th Avenue, N.E., Suite 400,
Bellevue, Washington 98004
SECTION 6.10 - MATERIAL ADVERSE
LITIGATION: None.
SECTION 6.10 - FUTURE CLAIMS AND
LITIGATION: Borrower will promptly inform Coast
in writing of any claim, proceeding,
litigation or investigation in the
future threatened or instituted by or
against Borrower involving any single
claim of One Hundred Thousand
($100,000) or more, or involving Two
Hundred
22 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
Thousand ($200,000) or more in the aggregate.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS: (1) Borrower shall provide Coast with
reasonable advance notice for the
initial request to borrow so that
Coast may obtain an Audit
satisfactory to Coast prior to the
requested borrowing.
(2) As long as the Obligations are less
than Ten Million Dollars
($10,000,000) a blocked account
agreement will not be required,
however, before the Obligations may
exceed Ten Million Dollars
($10,000,000) Borrower, Coast and a
bank, reasonably acceptable to Coast,
shall enter into a blocked account
agreement so as to permit Coast to
receive Borrower's daily collections.
(3) Borrower's Book Net Worth (as defined
by GAAP) shall always be greater than
or equal to Fourteen Million Dollars
($14,000,000).
(4) Assuming for the calculation of this
covenant that the Maximum Dollar
Amount is fully drawn and outstanding
and is being amortized over sixty
(60) months and measured quarterly,
Borrower shall at all times maintain
a minimum ratio of (EBITDA + Client
Acquisition Costs) to (Total Fixed
Debt Service Requirements) of
1.5:1.0.
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the
following, provided, however, Coast,
at its sole discretion shall have the
right to receive upon its request
additional and enhanced financial
requests from Borrower:
1. Quarterly internally prepared
financial statements, as soon as
available, and in any event within
forty-five (45) days after the end of
each fiscal quarter of Borrower.
2. Annual financial statements, as soon
as available, and in any event within
ninety (90) days following the end of
Borrower's fiscal year and audited
by, an independent certified public
accountant acceptable to Coast.
3. Prior to any borrowing, and fifteen
(15) days after the end of each month
when there are borrowings, Borrower
shall provide to Coast a cash
collection certificate.
23 Amend & Restated
Loan and Security Agmt
<PAGE>
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE: December 31, 2000, subject to
automatic renewal as provided in
Section 9.1 of the Agreement, and
early termination as provided in
Section 9.2 of the Agreement.
24 Amend & Restated
Loan and Security Agmt
<PAGE>
[LOGO] 4125 Hopyard Road
Pleasanton, CA 94588
(925) 737-3500
www.probusiness.com
PROBUSINESS SERVICES, INC.,
SECRETARY'S CERTIFICATE
In connection with the Amended and Restated Loan and Security
Agreement, dated as of June 30, 1998, between ProBusiness Services, Inc., a
Delaware corporation ("Company"), on the one hand, and Coast Business Credit
("Coast"), a division of Southern Pacific Bank, a California corporation, on
the other hand, (the "Agreement"), I, Steve Klei, certify that I am the
Secretary of the Company and hereby further certify that:
1. The below-named persons are the duly elected and duly
qualified officers of the Company and have held the respective offices set
forth below at all times since the dates set forth below to and including the
date hereof and set forth opposite their names are their genuine signatures.
NAME OFFICE DATE SIGNATURE
- ---- ------ ---- ---------
Tom Sinton President & CEO 6/30/98 /s/ Tom Sinton
-------------------
Steve Klei SVP & CFO 6/30/98 /s/ Steve Klei
-------------------
Glenda Citragno Corporate Controller 6/30/98 /s/ Glenda Citragno
-------------------
Mark Resnick Director - Treasury 6/30/98 /s/ Mark Resnick
-------------------
2. Attached hereto as EXHIBIT "A" is a true and correct copy of
the Certificate of Incorporation of the Company as filed in and certified by
the office of the Secretary of State of Delaware, together with all
amendments thereto, adopted through the date hereof.
3. Attached hereto as EXHIBIT "B" is a true and correct copy of
the Bylaws of the Company as in effect on the date hereof, together with all
amendments thereto, adopted through the date hereof.
4. Attached hereto as EXHIBIT "C" are true and correct copies of
resolutions duly adopted by the Board of Directors of the Company by
unanimous written consent on the date indicated in such resolutions, which
resolutions have not been revoked, modified, amended, or rescinded and are
still in full force and effect. Except for those resolutions contained in
EXHIBIT "C", no resolutions have been adopted by the Board of Directors of
the Company regarding the execution, delivery or performance of the Agreement
or any of the documents required to be executed, delivered or performed
pursuant to the Agreement.
<PAGE>
5. I know of no proceeding for the dissolution or liquidation of
the company or threatening its existence.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of
June, 1998.
/s/ Steve Klei
----------------------------
Steve Klei, Secretary
- -----------------------------------------------------------------------------
I, Tom Sinton, President & CEO of the Company, do hereby certify
that Steve Klei is the duly elected or appointed Secretary of the Company and
the signatures on the foregoing certificate is his genuine signature.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of
June, 1998.
/s/ Tom Sinton
----------------------------
Tom Sinton, President & CEO
<PAGE>
EXHIBIT 10.27
ASAP OFFICE SERVICES LEASE
As of this 25TH day of JUNE 1998, ASAP OFFICE SERVICES ("Lessor") and
PROBUSINESS, INC. ("Lessee") agree as follows:
1. LEASED PREMISES
Lessor, with full right and authority to enter into this Lease, in
consideration of the rents to be paid and covenants performed on the part of
the Lessee, does hereby Lease to the Lessee the following described premises:
5450 Far Hills Avenue, Suite #'s 216 & 222, Kettering, Ohio 45429-2346.
This office space described and the appurtenances thereto are
hereinafter referred to as the "Leased Premises." The entire office building
is hereinafter referred to as the "Building."
2. TERM AND OPTION
A. The original term of this Lease shall be for a period of TWELVE (12)
MONTHS, commencing on the 1ST day of AUGUST 1998, and to be fully completed
on the 31ST day of JULY 1999.
Should the Leased Premises become available for occupancy by the
Lessee prior to the established commencement of the term, the Lessee may take
possession, paying rent on a pro rata basis at the rental rate hereinafter
provided. Should the Leased Premises not become available for occupancy by
the date established for the commencement of the term, but no more than 15
days after anticipated commencement date, the Lessee, nevertheless, shall
become liable under the Lease but will not be required to pay rent for such
period of delay.
B. The Lessee shall have two (2) options to renew for a like term upon
the same terms and conditions hereof except that the rent may be increased by
a reasonable amount not to exceed 5% per year. In order to exercise such
option, Lessee must give Lessor written notice of such exercise not less than
60 days prior to the expiration of the then current term and must not at such
time be in default of any of the provisions of the lease.
If the Lessee does not intend to renew this Lease or exercise its
option, if any, specified herein, upon the full expiration of the term set
forth above, in order to provide Lessor time to advertise that space is
available, Lessee shall give Lessor 60 days written notice prior to the
expiration of the term of its intention not to exercise its option, or 60
days notice of the date of vacating in the event of holdover - see paragraph
17 hereof. Holdover tenancy shall be month to month.
<PAGE>
3. RENTAL AND DEPOSIT
Lessee shall pay to the Lessor rent for the Leased Premises according to
the following schedule:
Lease Period: AUGUST 1, 1998 - JULY 31, 1999 (1 YEAR)
<TABLE>
<S> <C>
Total Rent For Lease Period: $11,340.00
Monthly Rent Amount: $ 945.00
SECURITY DEPOSITS:
Security Deposit for Suite #216 & 222: $ 915.00 (Paid)
$ 30.00 (Due)
Security Deposit for Executive Phone Instrument: $ .00
TENANT SUPPLYING OWN PHONE INSTRUMENT(S)
TOTAL DUE AT SIGNING OF LEASE: $30.00
</TABLE>
All rents shall be payable in advance, no later than the first day of
each month.
All checks should be made payable to ASAP Office Services, 5450 Far
Hills Avenue, Suite 111, Dayton, Ohio 45429-2346.
Time is of the essence in this Lease regarding each and every rental
payment. An assessment of 1-1/2% of the monthly rent will be charged per day
after the FIFTH day of each month until rental is paid to cover Lessor's
added costs for late payments.
The Lessee has deposited NINE HUNDRED FORTY FIVE and 00/100 Dollars
($945.00) which was equal to one month's rent, and 00/100 ($.00) PER PHONE
INSTRUMENT. The Suite Security Deposit will be increased as the monthly rent
increases and will be retained as a security for the payment of rent and
performance of the covenants and conditions of this Lease and as indemnity
for any damages to the Lessor by reason of the Lessee's violation of the
terms of this Lease. In the event that Lessee complies fully with such
covenants and conditions and surrenders the Leased Premises in good condition
to the Lessor at the expiration of the term of this lease, (reasonable wear
and tear excepted) the Security Deposits (LESS A REASONABLE AMOUNT FOR
CLEANING CARPETS AND PAINTING WALLS) shall be returned to the Lessee within
thirty (30) days after the premises have been vacated. No interest shall be
accrued to the Lessee on any such deposit.
2
<PAGE>
Signed as of the date first above written.
WITNESSES: LESSOR: ASAP OFFICE SERVICES
/s/ Kimberly Horton /s/ David V. Sadler
- ------------------------------- -------------------------------
Kimberly Horton David V. Sadler
LESSEE:
By /s/ Gary Stanaford
- ------------------------------- -------------------------------
Gary Stanaford
By
- ------------------------------- -------------------------------
*All notices, invoices and other written communications under this Lease
between Lessor and Lessee should be sent to Lessee at:
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
9
<PAGE>
EXHIBIT 23.1
CONSENT AND REPORT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 23, 1998, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-60745) and related Prospectus of
ProBusiness Services, Inc. for the registration of shares of its common stock.
Our audits also included the financial statement schedule of ProBusiness
Services, Inc. listed in Item 16(b). 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
September 22, 1998
