<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WORKSCAPE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-2510733
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
11911 FREEDOM DRIVE, SUITE 220
RESTON, VIRGINIA 20190
(888) 605-9620
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES G. CARLSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
WORKSCAPE, INC.
11911 FREEDOM DRIVE, SUITE 220
RESTON, VIRGINIA 20190
(888) 605-9620
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
GREGORY M. PETTIGREW DEANNA L. KIRKPATRICK
LATHAM & WATKINS DAVIS POLK & WARDWELL
633 WEST FIFTH STREET, SUITE 4000 450 LEXINGTON AVENUE
LOS ANGELES, CALIFORNIA 90071-2007 NEW YORK, NEW YORK 10017
TELEPHONE: (213) 485-1234 TELEPHONE: (212) 450-4000
FACSIMILE: (213) 891-8763 FACSIMILE: (212) 450-4800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness 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, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value.............................................. $115,000,000 $30,360
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
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 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED , 2000
[LOGO]
WORKSCAPE
SHARES
COMMON STOCK
This is the initial public offering of Workscape, Inc. and we are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share. We have applied to list
our common stock on the Nasdaq National Market under the symbol "WSCP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS WORKSCAPE
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to
additional shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN ROBERTSON STEPHENS
WARBURG DILLON READ LLC
The date of this prospectus is , 2000
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and our financial statements and the related notes appearing elsewhere in this
prospectus.
We obtained statistical information in this prospectus regarding the HR
self-service applications market from published reports and other sources. We
have not independently verified this information.
WORKSCAPE, INC.
We are a leading provider of Web-enabled human resources, or HR,
self-service solutions to large organizations. We offer a suite of software
solutions that enable employers to improve service to employees, enhance
employee communications and increase overall organizational effectiveness,
thereby freeing management to focus on strategic HR initiatives. Our solutions
leverage technology to increase productivity by streamlining traditionally
paper-based processes while enhancing employer-employee relationships and
creating administrative savings. Our "employee self-service" solutions interface
directly with employees, providing interactive access to HR information and
services. We also offer "manager self-service" solutions which enable managers
to manage their workforce more effectively by automating many tasks and
providing up-to-date HR-related information. Our solutions are highly flexible
and can be deployed in a variety of ways depending on a client's preferences. We
deliver our solutions by hosting our proprietary software for our clients at our
data center, licensing our software applications to employers for use on their
premises or creating a hybrid of hosted/on-premise solutions. Our applications
can be integrated with legacy enterprise resource planning and other technology
systems.
Our self-service solutions can provide employees with "anytime, anywhere"
access via the Internet and employer Intranets, interactive voice response, or
IVR, kiosk, e-mail and fax. Our solutions replace traditional communications
channels and processes with convenient, low-cost, personalized interactions,
performing such diverse functions as benefits enrollment and administration,
compensation planning, training registration, time tracking and stock option
administration and trading.
According to The Forrester Report, approximately 79% of large employers
intend to offer some form of Web-based HR self-service application by 2001, up
from 35% in 1998. According to a survey by The Hunter Group of their clients, HR
self-service applications can provide per-task cost savings of approximately 50%
to 100% as compared to traditional paper-based processes. In addition, according
to a survey by Deloitte & Touche, deploying Internet-based solutions is among
the highest priorities for employee benefits specialists in 2000. We believe
organizations are also increasingly looking to third parties to host
applications that would previously have resided at the enterprise. This allows
organizations to pay only for the functionality that they need, cut deployment
time, and shift the burden of installing, maintaining, securing, and managing
the necessary applications and infrastructure to another party.
Our objective is to enhance our position as a leading provider of HR
self-service solutions. Although our solutions can be used by organizations of
any size, we primarily target large organizations with more than 2,500 employees
because our solutions are designed with the flexibility and functionality to
address the complexity of their human resource needs. The primary components of
our strategy include:
o targeting new clients;
o expanding our suite of applications and cross-selling to existing
clients;
1
<PAGE>
o aggressively marketing hosted solutions;
o completing development of a new platform;
o pursuing strategic acquisitions and alliances; and
o enabling eCommerce opportunities.
Our applications have been purchased by clients in a variety of industries,
including high technology, manufacturing, telecommunications, financial services
and pharmaceuticals. Our clients include Applied Materials, Chase Manhattan
Bank, CIGNA, Home Depot, NSI, PricewaterhouseCoopers, 3Com, Tyco International
Ltd. and the U.S. Postal Service. We currently have over 145 clients, with an
aggregate of approximately 4.0 million employees, including clients with an
aggregate of approximately 3.0 million employees which have implemented
Web-based applications.
Our principal executive offices are located at 11911 Freedom Drive,
Suite 220, Reston, Virginia 20190, and our telephone number is (888) 605-9620.
Our Web site address is www.workscape.com. The information on our Web site is
not incorporated by reference into this prospectus. Workscape(R) is our
registered trademark. This prospectus also contains trademarks and trade names
of other companies.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................. shares
Common stock to be outstanding after this offering.... shares
Use of proceeds....................................... To redeem all outstanding shares of our Series C
preferred stock, to make cash payments required upon
conversion of our Series D preferred stock into common
stock upon completion of this offering, to repay
outstanding term bank loans, and to fund working capital
and other general corporate purposes. For more detailed
information, see "Use of Proceeds" on page 20.
Proposed Nasdaq National Market symbol................ WSCP
</TABLE>
The number of shares of common stock to be outstanding after this offering
includes:
o 11,879,000 shares of our common stock outstanding as of March 21,
2000;
o shares of our common stock to be sold in this offering;
and
o 37,566,666 shares of our common stock issuable upon automatic
conversion of all outstanding shares of our Series A, Series B and
Series D preferred stock upon completion of this offering.
The number of shares of common stock to be outstanding after this offering
excludes:
o 4,368,000 shares of common stock issuable upon exercise of options
that have been granted under our equity participation plans;
o 5,201,330 additional shares of common stock reserved for issuance
under our equity participation plans; and
o 9,783,333 shares of our common stock issuable upon exercise of
warrants that will remain outstanding after this offering.
For a more detailed description of our capitalization, please see
"Capitalization" on page 21. See "Description of Capital Stock" on page 66 for a
more complete description of the terms of our common and preferred stock.
------------------------
Unless we indicate otherwise, all information in this prospectus reflects
the following:
o conversion of all outstanding shares of Class A and Class B common
stock into shares of a single undesignated class of common stock
upon completion of this offering;
o conversion of our outstanding Series A, Series B and Series D
preferred stock on a one-for-one basis into common stock, and the
redemption of our outstanding Series C preferred stock upon
completion of this offering; and
o no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of common stock.
3
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except share and per share data)
You should read the following summary financial data together with
"Selected Financial Data," "Unaudited Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ PRO FORMA
1995 1996 1997 1998 1999 1999(1)
----------- ----------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Hosted services................. $ 2,487 $ 3,432 $ 4,416 $ 7,418 $ 11,087 $ 11,087
Software licensing and
maintenance................... -- -- -- -- 2,306 4,626
Professional services........... -- -- -- -- 3,001 9,167
--------- ------- ------- ------- ---------- ---------
Total net revenues............ 2,487 3,432 4,416 7,418 16,394 24,880
Cost of revenues:
Hosted services................. 1,418 1,591 1,987 3,085 7,819 7,819
Software licensing and
maintenance................... -- -- -- -- 695 1,284
Professional services........... -- -- -- -- 3,880 7,358
Amortization of software
acquired and software license
rights(2)..................... -- -- -- -- 1,656 3,280
--------- ------- ------- ------- ---------- ---------
Total cost of revenues........ 1,418 1,591 1,987 3,085 14,050 19,741
--------- ------- ------- ------- ---------- ---------
Gross profit...................... 1,069 1,841 2,429 4,333 2,344 5,139
Other operating costs (exclusive
of non-cash compensation expense
shown below).................... 1,398 1,568 2,189 3,853 21,510 27,986
Non-cash compensation expense..... -- -- -- -- 502 502
Acquisition-related
amortization(3)................. -- -- -- -- 3,098 6,753
--------- ------- ------- ------- ---------- ---------
Income (loss) from operations..... (329) 273 240 480 (22,766) (30,102)
Other income (expense), net....... (34) (25) (39) (49) (256) (333)
--------- ------- ------- ------- ---------- ---------
Net income (loss)................. $ (363) $ 248 $ 201 $ 431 $ (23,022) $ (30,435)
--------- ------- ------- ------- ---------- ---------
--------- ------- ------- ------- ---------- ---------
Basic and diluted net income
(loss) per share, after giving
effect to pro forma income tax
provision (benefit)(4).......... $ (726.89)(5) $223.20(5) $169.56(5) $404.37(5) $ (88.94)
--------- ------- ------- ------- ----------
--------- ------- ------- ------- ----------
Pro forma basic and diluted net
income (loss) per share(4)...... $ (1.18) $ (29.73)(1)
---------- ---------
---------- ---------
Shares used in calculation of net
income (loss) per share:
Basic and diluted(4)........ 500 500 500 500 312,626
--------- ------- ------- ------- ----------
--------- ------- ------- ------- ----------
Pro forma basic and
diluted(4)................ 20,273,927 1,184,648(1)
---------- ---------
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(6) ADJUSTED(7)
-------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 13,352 $ 13,352 $
Working capital (deficit).............................................. 6,378 (1,542)
Total assets........................................................... 47,150 47,150
Total debt, including current portion.................................. 4,321 4,321
Redeemable convertible Series A, B and D preferred stock............... 39,250 --
Redeemable Series C preferred stock.................................... 15,398 15,398
Total stockholders' equity (deficit)................................... (22,953) 8,378
</TABLE>
4
<PAGE>
(1) The pro forma statement of operations data for the year ended December 31,
1999 gives effect to our acquisitions of assets of the employee self-service
business of Edify Corporation and assets of NOAH Software, Incorporated as
if these acquisitions had occurred on January 1, 1999. The historical
financial information included in the pro forma information for the employee
self-service business of Edify Corporation includes only revenues and direct
operating expenses. Since Edify Corporation did not maintain separate
accounting records for its employee self-service business, there is no
reasonable basis to allocate corporate overhead costs, interest expense and
income taxes to the financial information of the acquired business.
Therefore, the results of operations included in the pro forma financial
information may not be representative of the acquired business had the
corporate overhead expense information been available.
(2) Amortization of software acquired and software license rights is calculated
on a straight-line basis generally over a two- to three-year period. See our
audited financial statements beginning on page F-1 of this prospectus.
(3) Acquisition-related amortization expense is calculated on a straight-line
basis generally over a two- to three-year period. See our audited financial
statements beginning on page F-1 of this prospectus.
(4) Net income (loss) per share and pro forma net income (loss) per share are
calculated on the basis described in note 3 to our audited financial
statements beginning on page F-1 of this prospectus.
(5) The pro forma income tax provision (benefit) assumes that we were taxed as a
C corporation during the years ended December 31, 1995, 1996, 1997 and 1998,
although we had elected to be a Subchapter S corporation for tax reporting
purposes during those periods. Effective January 1, 1999, we became a
C corporation for tax reporting purposes.
(6) Pro forma balance sheet data gives effect to the conversion of the
outstanding Series A, Series B and Series D preferred stock into 37,191,666
shares of common stock.
(7) Pro forma as adjusted balance sheet data gives effect to (A) the sale of
shares of common stock in this offering at an assumed offering price of
$ per share after deducting underwriting discounts and estimated
offering expenses, (B) the redemption of the Series C preferred stock upon
completion of this offering with a portion of the net offering proceeds,
(C) the payment of $7,920,000 in cash associated with the conversion of
Series D preferred stock into common stock, and (D) the repayment of all
outstanding bank term loans.
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones we face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. Our business, financial condition or
results of operations could be materially adversely affected by any of these
risks. The trading price of our common stock could decline due to any of these
risks, and you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us as described below and elsewhere in this
prospectus.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS MODEL IS EVOLVING AND WE HAVE A LIMITED OPERATING HISTORY UNDER OUR
CURRENT MODEL.
Historically, we have engaged in developing customized HR software
applications for large employers on a hosted basis, primarily focused on
benefits enrollment. These applications were not created with a scalable
object-oriented architecture and therefore cannot be effectively hosted for
multiple clients. As a result, although a significant portion of our revenues
are classified as hosted service revenues, they were generated through a more
labor intensive and less leveraged process than that of hosting software
applications that require little, if any, customization or enhancement. In
conjunction with our recapitalization in February 1999, and facilitated by both
our access to capital and the recruitment of our new executive team, we shifted
our focus toward providing a wider range of HR self-service applications and
designing a platform that incorporates re-usable business objects that can more
easily and cost effectively host our solutions. Later in 1999, we purchased
assets of the employee self-service business of Edify Corporation, as well as
assets of NOAH Software. As a result, we began to license employee and manager
self-service solutions for use by clients on-premise and expanded the
applications we offer on a hosted basis. Therefore, you should not view our
historical financial statements as a basis on which to evaluate our current
business or future prospects. In addition, we have a limited operating history
under our current management and are still in the process of fully integrating
the Edify and NOAH acquisitions. This integration requires significant
management resources in order to maintain and transition existing client
relationships. If we are not successful in effectively managing this integration
and timely deploying our solutions for clients while providing a high level of
customer service, our business, financial condition and results of operations
would be materially adversely affected.
Under our new business model, we plan to change to a pricing model based on
the number of employees using our applications or the number of transactions
effected through our applications under multi-year contracts. It may become more
difficult for us to attract new clients under this pricing model. Moreover, the
revenue and income potential of our business and target market are still
unproven. Accordingly, you should consider our prospects in light of the risks
and difficulties frequently encountered by companies with a limited history of
operating in a new and unproven market, especially companies in new, rapidly
evolving and highly competitive markets.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $23.0 million in 1999. As of December 31, 1999,
we had an accumulated deficit of approximately $23.0 million. We expect to
derive substantially all of our revenues for the foreseeable future from our HR
self-service solutions. We may not be successful in generating any revenue
growth, and our revenues could decline. Moreover, we
6
<PAGE>
expect to incur significant sales and marketing, research and development, and
general and administrative expenses and make significant capital expenditures as
we continue to expand our operations. As a result, we expect to incur
significant losses and negative cash flow for the foreseeable future.
OUR BUSINESS WILL SUFFER IF OUR TARGET CLIENTS DO NOT ADOPT OUR SOLUTIONS.
The market for HR self-service solutions is at an early stage of
development. Our ability to increase revenues and achieve profitability depends
on the adoption and acceptance of HR self-service applications by our target
market of large employers. The market for these services has only recently begun
to develop and is evolving rapidly. In addition, companies that have already
invested substantial resources in other methods of automating enterprise
processes may be reluctant to adopt a new strategy that may limit or compete
with their existing investments. If our target clients do not adopt and accept
our solutions, or if we do not timely deploy solutions for our clients or fail
to provide a high level of customer service, our business, financial condition
and results of operations would be materially adversely affected.
THE HR SELF-SERVICE SOLUTIONS INDUSTRY IS COMPETITIVE AND WE FACE COMPETITION
FROM MANY PARTICIPANTS.
The market for our HR self-service solutions is intensely competitive,
evolving and subject to rapid technological change. We expect the intensity of
competition to increase in the future. Increased competition is likely to result
in price reductions, reduced gross margins and loss of market share, any one of
which could seriously harm our business. Competitors vary in size and in the
scope and breadth of the products and services offered. We primarily encounter
competition with respect to different aspects of our product offerings from
Concur Technologies, Decisis, iClick, Interlynx, iTango, Kronos, ProBusiness,
TALX and other benefits administrators and consultants. We also encounter
competition from major enterprise software developers such as PeopleSoft and
SAP. We believe the biggest near-term competitive threat is that these vendors
will actively promote enhanced Web capabilities, which may, at a minimum, delay
clients' purchasing decisions. We expect additional competition from other
established and emerging companies as the HR self-service software market
continues to develop and expand.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed client
base than we do. In addition, many of our competitors have well-established
relationships with our current and potential clients and have extensive
knowledge of our industry. In the past, we have lost potential clients to
competitors for a variety of reasons, including lower prices and other
incentives not matched by us. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address client
needs. Accordingly, new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
will increase as a result of industry consolidations. We may not be able to
compete successfully against our current and future competitors.
OTHERS MAY SEIZE THE MARKET OPPORTUNITIES WE HAVE IDENTIFIED BECAUSE WE MAY NOT
EFFECTIVELY EXECUTE OUR STRATEGY.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the market opportunities we have identified.
Our business strategy requires that we successfully and simultaneously complete
many tasks. In order to be successful, we will need to:
o attract more clients and retain existing clients;
7
<PAGE>
o deploy our new platform currently under development;
o transition existing clients who currently license our on-premise software
applications to a hosted solution;
o respond effectively to competitive pressures;
o continue to upgrade and enhance our existing technology;
o attract, integrate, retain and motivate qualified personnel; and
o successfully integrate acquired companies, if any, into our operations.
We may not be able to successfully execute all elements of our strategy.
FAILURE TO LAUNCH OUR NEW PLATFORM COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our growth plans assume the success of a new platform that we are currently
developing. This new platform will be a key technological element to increasing
the number and performance of the products we offer to our clients. There are
significant risks inherent in introducing a new platform. We may not be able to
achieve the growth or profitability we have planned if (1) we are not able to
deploy this new platform on the schedule we have established without significant
problems or disruption in service to our clients, (2) we experience significant
overruns in the costs we have budgeted for deployment of the new platform or
(3) our platform does not achieve market acceptance. As a result, our stock
price could be materially adversely affected.
In addition, existing clients who have expended the time and money to
implement premise-based solutions which run on the Electronic Workforce platform
we currently license from S-1 Corporation (which acquired Edify Corporation
subsequent to our acquisition of assets of Edify's employee self-service
business) may not recognize the advantages of our new platform. As a result, we
may need to maintain two platforms in order to support both existing and new
clients.
OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD
RESULT IN LOSSES AND NEGATIVE PUBLICITY.
Many of our applications involve information technology solutions that are
critical to the relationship between our clients and their employees. Our
clients rely on our ability to deliver reliable technology according to the
agreed budget and timetable for implementation of the solution. Any defects or
errors in these solutions or our failure to meet clients' specifications or
expectations could result in:
o delayed or lost revenues due to adverse client reaction;
o requirements to provide additional services to a client at no charge;
o refunds of fees for failure to meet service level obligations;
o negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients; and
o claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by the contractual terms
of our engagement.
In particular, if we do not meet client deadlines in deploying solutions or
do not provide high-quality customer service and support, clients may terminate
their arrangements with us, and we will lose the opportunity to sell additional
solutions to these clients in the future.
8
<PAGE>
OUR HOSTED SOLUTIONS DEPEND ON THE STABILITY AND INTEGRITY OF OUR COMPUTER
NETWORK AND TELEPHONE OPERATIONS.
Significant portions of our operations depend on our ability to protect our
computer equipment and the information stored in our data processing center
against damage that may be caused by fire, power loss, telecommunications
failures, unauthorized intrusion and other events. Software and related data
files are backed-up regularly and stored off-site. These measures may not be
sufficient to eliminate the risk of extended interruption in our operations. In
addition, clients will depend on Internet service providers, telecommunications
companies and the efficient operation of their computer networks and other
computer equipment for access to our hosted solutions. Each of these has
experienced significant outages in the past and could experience outages, delays
and other difficulties due to system failures unrelated to our systems. Any
damage to our systems or any third-party system failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and results of operations.
WE DEPEND ON SOFTWARE LICENSED FROM OTHERS FOR OUR CURRENT PRODUCTS.
We must now, and may in the future need to, license or otherwise obtain
access to intellectual property of third parties. For example, our on-premise HR
self-service applications depend on the Electronic Workforce platform we license
from S-1 Corporation. The license for the underlying Electronic Workforce
platform expires in July 2001. We are entitled to a copy of the source code for
that platform if S-1 Corporation is not then supporting the platform, but only
for use in supporting our existing clients that license our on-premise
solutions. We may not be able to obtain this or any other required third party
intellectual property in the future. If we are unable to commercially deploy our
new platform prior to expiration of the license from S-1 Corporation and are
unable to renew the license from S-1 Corporation, our business, results of
operations and financial condition would be materially adversely affected.
WE WILL RELY ON A THIRD PARTY TO MANAGE AND MAINTAIN THE HARDWARE NECESSARY FOR
THE DAY-TO-DAY OPERATION OF OUR DATA CENTER.
We have entered into a contract with Exodus Communications, Inc. to manage
and maintain the computer and communications equipment needed for the day-to-day
operations of our production data center. The services provided by Exodus will
include managing our network server, maintaining communication lines and
managing network data centers and the backup and storage of data tapes.
Historically, we managed and maintained these services and systems internally.
We cannot assure you that Exodus will successfully manage our data center
operations on a timely and cost-effective basis. Our operations depend on
Exodus' ability to protect its own systems and our systems against damage from
fire, power loss, water, telecommunications failures, vandalism and other
malicious acts, and similar unexpected adverse events. Any disruption of service
or loss of stored data due to the fault of Exodus, over whom we have no control,
could have a material adverse effect on our business, financial condition and
results of operations.
THE PLANNED MOVE OF OUR DATA CENTER MAY INTERRUPT SERVICES TO OUR CLIENTS.
We plan to transfer our data hosting facility to new facilities in
Framingham, Massachusetts in the second quarter of 2000, and following the
transition of our production data center operations to Exodus, to use this new
facility for product development testing and staging with the ability to
function as a backup data center. Although we have provided for alternate, as
well as redundant, hosting capacity during this transition, damage to our
equipment, disruption of service or the loss of client data could materially
adversely affect our client relationships and could have a material adverse
effect on our business, financial condition and results of operations.
9
<PAGE>
WE MUST SAFEGUARD THE ACCURACY OF HIGHLY CONFIDENTIAL INFORMATION REGARDING
EMPLOYEES PROVIDED TO US BY EMPLOYERS.
The effectiveness of our solutions depend on safeguarding the accuracy of
highly confidential information regarding an employee's employment and salary
history provided to us by employers for use as part of our HR self-service
applications. Although we have certain protective measures in place, our failure
to maintain the accuracy and confidentiality of such information, whether due to
the unauthorized access to information or otherwise, may give rise to potential
claims against us and adversely affect market acceptance of our solutions. If
any claims should be asserted which are ultimately decided adversely to us, our
business, financial condition and results of operations may be materially
adversely affected.
WE MAY NOT BE ABLE TO SUCCESSFULLY LAUNCH NEW PRODUCTS.
Our future financial performance will depend upon the successful
development, introduction and market acceptance of new and enhanced versions of
our HR self-service products. We may not be successful in upgrading or marketing
our HR self-service products, and any new products we may develop or acquire may
not achieve market acceptance. New products may not be released according to
schedule, or when released may contain defects. If we are unable to develop,
license or acquire new software products or enhancements to existing products on
a timely and cost-effective basis, or if our new products or enhancements do not
achieve market acceptance, our business, results of operations and financial
condition may be materially adversely affected.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL AND ATTRACTING
ADDITIONAL KEY PERSONNEL, PARTICULARLY IN THE AREAS OF DIRECT SALES AND RESEARCH
AND DEVELOPMENT.
Our future performance depends on the continued service of our senior
management, particularly James Carlson, our Chief Executive Officer, Timothy
Clifford, our President and Chief Operating Officer, and Lee Ingram, our Chief
Technology Officer. The loss of the services of one or more of our key personnel
could seriously harm our business. Our future success also depends on our
continuing ability to attract, hire, train and retain a substantial number of
highly skilled managerial, technical, sales, marketing and client support
personnel. We are particularly focused on hiring additional personnel to
increase our direct sales and research and development staff, many of whom may
require extensive training before they achieve desired levels of productivity.
Competition for qualified personnel, particularly technical personnel, is
intense, and we may fail to retain our key employees or to attract or retain
other highly qualified personnel.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT OUR MANAGEMENT AND OPERATIONAL SYSTEMS AND INTERNAL CONTROLS ON A
TIMELY BASIS.
We have expanded our operations rapidly. We are currently working to
complete the integration of businesses we acquired during 1999. As we have grown
our business, our number of employees has also grown very rapidly and we are
working to integrate our workforce and build and maintain a high-quality product
implementation and client services team to meet client expectations. We intend
to continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems, procedures and controls, train
new employees and maintain close coordination among our executive, engineering,
professional services, accounting, finance, sales and marketing organizations.
Unless we are able to put into place effective and efficient internal
controls and accounting procedures and further develop our corporate, legal and
accounting infrastructure, we may not be able to accurately assess the operating
and financial condition of our business on a timely basis or to plan for future
growth. This may have a negative impact on our business and results of
operations.
10
<PAGE>
We will have to make a significant investment in facilities and networks
next year to manage our forecasted growth in providing hosted solutions. If the
volume of traffic from hosted solutions increases, our customers may in the
future experience slower response times or other problems. Any delays in
response time or performance problems could cause users of our hosted solutions
to perceive our solutions as not functioning properly. If we are unable to
expand or outsource our data center operations to meet this projected increase
in volume, our business, results of operations and financial condition could be
materially adversely affected.
IF WE FAIL TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.
The market for our products is characterized by rapid technological change,
evolving industry standards in computer hardware and software technology,
changes in client requirements and frequent new product introductions and
enhancements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. As a result, our future success will depend, in significant part,
upon our ability to develop and introduce new products and to enhance existing
products to keep pace with technological developments, satisfy client
requirements and achieve market acceptance. We may not successfully identify new
product opportunities, develop or bring to market new products, or adopt or
incorporate new technologies in a timely and cost-effective manner. Products,
capabilities or technologies developed by others may render our products or
technologies obsolete or noncompetitive or shorten the life cycles of our
products.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CLIENTS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade secrets
and copyright and trademark laws.
When we license our on-premise software, we require our clients to enter
into license agreements, which impose restrictions on their ability to utilize
the software. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including requiring people with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source codes. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult, and while we are unable
to determine the extent to which unauthorized use of our software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Our means of protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology or duplicate our products.
We have no patents. We may not develop proprietary products or technologies
that are patentable. Future patents, if any, may be successfully challenged or
may not provide us with any competitive advantages.
Our proprietary rights with respect to our solutions may not be viable or
of value in the future because the validity, enforceability and type of
protection of proprietary rights are
11
<PAGE>
uncertain and still evolving. There has been a substantial amount of litigation
in the software industry and the Internet industry regarding intellectual
property rights. There is also uncertainty regarding the applicability of
existing laws to the Internet regarding matters such as property ownership,
copyrights and other intellectual property rights. Most of these laws were
adopted prior to the advent of the Internet and, as a result, do not contemplate
or address the unique issues applicable to the Internet and related
technologies. It is possible that in the future, third parties may claim that we
or our current or potential future products infringe upon their intellectual
property. We expect that software product developers and providers of HR
self-service solutions will increasingly be subject to infringement claims as
the number of products and competitors in our industry grows and the
functionality of products in different industries overlaps. Any claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product deployment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all, which could seriously harm our business.
WE RELY ON THIRD-PARTY CONTRACTORS TO DO A SIGNIFICANT PORTION OF OUR RESEARCH
AND DEVELOPMENT.
We contract with third parties to provide a significant portion of our
research and development. In addition, our business plan calls for increased use
of third-party research and development personnel in the future. With the recent
rapid growth in Internet-based applications, qualified software developers and
programmers are in increasing demand. We may not be able to perform the amount
of research and development required to grow our business as planned if we are
unable to contract with quality, third-party software developers upon
commercially reasonable terms.
OUR QUARTERLY OPERATING RESULTS ARE SEASONAL AND MAY VARY BASED ON OTHER
FACTORS. IF WE FAIL TO MEET THE EXPECTATIONS OF ANALYSTS OR INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Historically, our quarterly operating results have been related to seasonal
HR events such as annual benefits enrollments, and may continue to be seasonal
in the future. Employers generally have "open enrollment" benefit periods in the
fall, and as a result, the majority of our services are provided in the third
and fourth quarters of the year. Accordingly, our quarterly operating results
may fluctuate significantly if revenues related to seasonal benefits enrollment
continue to represent a majority of our revenues or if we experience changes in
the purchasing patterns of significant clients. We believe that period-to-period
comparisons of our results of operations should not be relied upon as indicators
of future performance. Our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock.
Our quarterly operating results may vary depending on a number of factors,
including:
o demand for our HR self-service solutions;
o actions taken by our competitors, including new product introductions and
enhancements;
o our ability to scale our operations to support a large number of clients
and functions;
o our ability to develop, introduce and market new products and
enhancements to our existing products on a timely basis;
o changes in our pricing policies or those of our competitors;
o our ability to expand our sales and marketing operations, including
hiring additional sales personnel;
o the effect of acquisitions;
12
<PAGE>
o changes in our pricing model and sales mix;
o changes in our revenue recognition policies;
o purchasing patterns of our clients;
o size and timing of sales of our products;
o success in maintaining and enhancing existing relationships and
developing new relationships with strategic partners, including marketing
and implementation partners;
o our ability to control costs;
o technological changes in our markets;
o deferrals of client orders in anticipation of product enhancements or new
products;
o client budget cycles and changes in these budget cycles; and
o general economic factors.
We plan to increase our operating expenses to expand our sales and
marketing operations, fund greater levels of research and development, develop
strategic alliances, increase our professional services and support capabilities
and improve our operational and financial systems. If our revenues do not
increase along with these expenses, our business, operating results and
financial condition could be seriously harmed and net losses in a given quarter
could be larger than expected.
THE SUCCESSFUL DEVELOPMENT AND LAUNCH OF OUR EMPLOYEE.COM PORTAL WILL AFFECT OUR
ABILITY TO MEET OUR PLANS FOR GROWTH.
An important element of our business strategy is to develop and introduce
Employee.com, a worksite portal for eCommerce transactions. We have no
experience promoting the sale of products or services through an eCommerce
portal site and the revenue model we envision for Employee.com will differ from
the pricing model used for our on-premise and hosted solutions. Our efforts to
develop this portal may divert management time and attention and may require
substantial investment. We may not be able to develop and launch Employee.com on
a timely basis, if at all. At this time, we have not begun actual development of
this portal, nor have we begun sales activity to attract clients. We do not yet
have any agreements with vendors to offer products and services through this
portal.
Our ability to develop Employee.com will depend entirely on the success of
our planned transition to a new platform. The new platform may not be released
according to schedule, or may not meet client needs or expectations or be free
of defects. In addition, ongoing developments in consumer privacy protection
laws may limit our ability to capitalize on our permission-based access to
employee-specific data for our Employee.com portal. Furthermore, our target
market of large employers may not recognize the benefits of our Employee.com
portal and this concept may not be readily adopted and accepted. Any problems
associated with the development, launch and marketing of Employee.com would
affect our ability to meet our plans for growth and would cause our stock price
to decline.
WE RELY ON A SMALL NUMBER OF CLIENTS FOR A SIGNIFICANT PORTION OF OUR REVENUES;
OUR REVENUES WILL DECLINE SIGNIFICANTLY IF WE CANNOT KEEP OR REPLACE THESE
CLIENTS.
In 1999, revenues from a single client accounted for approximately 20% of
our total revenues, and revenues from our 10 largest clients accounted for
approximately 55% of our total revenues. If these clients do not need or want to
continue to purchase our solutions and we are not able to sell our solutions to
new clients at comparable or greater levels, our revenues may decline
significantly.
13
<PAGE>
IN THE FUTURE, WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO REMAIN
COMPETITIVE. THIS CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We expect the net proceeds from this offering, together with cash on hand,
will be sufficient to meet our day-to-day working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to
raise additional funds and we cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. In addition, if we decide to
pursue acquisitions for cash consideration, we may need to raise additional
capital. If we cannot raise funds on acceptable terms, if and when needed, we
may not be able to develop or enhance our products and services, take advantage
of future opportunities, grow our business or respond to competitive pressures
or unanticipated requirements, each of which could seriously harm our business.
WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET.
OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF ANY FUTURE ACQUISITIONS.
A substantial portion of our recent growth has been the result of
acquisitions. In order to remain competitive, we may find it necessary to
acquire additional businesses, products or technologies. If we identify an
appropriate acquisition candidate, we may not be able to negotiate the terms of
the acquisition successfully, finance the acquisition, or integrate the acquired
business, products or technologies into our existing business and operations. If
we consummate one or more significant acquisitions in which the consideration
consists of stock or other securities, your equity could be significantly
diluted. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would adversely impact our results of operations.
IF WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS WILL
BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We intend to expand our international operations. Therefore, we expect to
commit significant resources to expand our international sales and marketing
activities. We will be subject to a number of risks associated with
international business activities. These risks generally include:
o currency exchange rate fluctuations;
o unexpected changes in regulatory requirements;
o tariffs, export controls and other trade barriers;
o longer accounts receivable payment cycles and difficulties in
collections;
o difficulties in managing and staffing international operations;
o potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
o the burdens of complying with a wide variety of foreign laws;
o the risks related to the recent global economic turbulence and adverse
economic circumstances in various countries; and
o political instability.
14
<PAGE>
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE GROWTH DEPENDS ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF
HOSTED SOLUTIONS. IF THE USE OF INTERNET TECHNOLOGY AND HOSTED SOLUTIONS DOES
NOT GROW AS ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Rapid growth in the use of the Internet is a recent phenomenon. As a
result, acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of our target clients may not adopt or continue to use
Internet technology to administer their HR self-service solutions. Demand and
market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty, and there exist few proven
services and products.
Our business would be seriously harmed if:
o use of the Internet does not continue to increase or increases more
slowly than expected; or
o the technological infrastructure underlying the Internet does not
effectively support any expansion that may occur.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR HOSTING HR
SOLUTIONS AND WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other Web sites and the inability to protect proprietary
information. If any well-publicized compromises of security were to occur, it
could have the effect of substantially reducing the use of the Web for commerce
and communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
clients or their employees, which could disrupt our hosting services or make it
inaccessible to clients or their employees. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that our activities may involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Our security measures may be
inadequate to prevent security breaches, and our business would be harmed if we
do not prevent them.
Our Internet and corporate Intranet applications may result in unauthorized
access and similar disruptive problems caused by Internet or other users. Such
unauthorized access and other disruptions could jeopardize the security of
information stored in and transmitted through the computer systems of our
clients, which may result in significant liability to us and deter potential
clients from purchasing our products.
Our license agreements with our clients typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of some jurisdictions.
Although we have not experienced any product liability claims to date, the sale
and support of our products or services may entail the risk of such claims.
While we maintain insurance for product liability risks, our insurance may not
be adequate in the event of a material product liability claim. A successful
product liability claim in excess of our insured limits
15
<PAGE>
brought against us could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LEGAL
UNCERTAINTIES.
Due to the increasing popularity and use of the Internet, state and federal
regulators could adopt laws and regulations which could impose additional
burdens on companies that use Internet technologies. The adoption of any
additional laws or regulations regarding Internet commerce and communications
may decrease the growth of the Internet, which could, in turn, decrease the
demand for our product and services and increase our cost of doing business,
leading to further losses. Few existing laws or regulations specifically apply
to the Internet. However, it is likely that a number of laws and regulations may
be adopted in the United States and other countries with respect to the
Internet. These laws may relate to areas such as copyright and other
intellectual property rights, encryption, use of key escrow data, caching of
content by server products, electronic authentication or "digital signatures,"
personal privacy, advertising, taxation, electronic commerce liability, e-mail,
network and information security and the convergence of traditional
communication services with Internet communications. Other countries and
political organizations may impose or favor more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity of regulation.
The adoption of these laws or regulations, and uncertainties associated
with their validity and enforcement, may harm our business.
Changes to, or the interpretation of, existing laws governing issues such
as property ownership, copyright and other intellectual property issues,
taxation, illegal content, retransmission of media and personal privacy and data
protection as they relate to the Internet could:
o limit the growth of the Internet;
o create uncertainty in the marketplace that could reduce demand for our
products and services;
o increase our cost of doing business;
o expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
o lead to increased product development costs, or otherwise harm our
business.
RISKS RELATED TO THIS OFFERING
WE HAVE NOT DESIGNATED A SPECIFIC USE FOR MOST OF THE PROCEEDS OF THIS OFFERING
AND HAVE BROAD DISCRETION OVER THEIR USE.
We have not designated any specific uses for the net proceeds to be
received by us in this offering, other than the redemption of our Series C
preferred stock, cash payments required upon conversion of our Series D
preferred stock and repayment of outstanding bank term loans. We intend to use
the remaining net proceeds primarily for general corporate purposes, including
working capital. A portion of the net proceeds of the offering may also be used
to acquire or invest in products, technologies or businesses which broaden or
enhance our current product offerings. Currently, there are no binding
agreements with respect to any acquisitions, investments or other transactions.
We have no specific plans as to the use of the remaining net proceeds from this
offering, and our senior management will have broad discretion in the
application of the proceeds. Our failure to apply these funds effectively could
have a material adverse effect on our business, results of operations and
financial condition.
16
<PAGE>
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. We cannot predict the extent to which investor
interest will lead to the development of an active trading market or how liquid
that market might become. We will negotiate and determine the initial public
offering price with the representatives of the underwriters based on several
factors. This price may vary from the market price of the common stock after the
offering. You may be unable to sell your shares of common stock at or above the
offering price. The market price of the common stock may fluctuate significantly
in response to factors, some of which are beyond our control, such as:
o variations in our quarterly operating results;
o changes in securities analysts' estimates of our financial performance;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major client;
o additions or departures of key personnel; and
o fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation, regardless of the outcome, could result in substantial costs and
divert management's attention and resources.
OUR STOCK PRICE COULD BE AFFECTED BY SHARES OF OUR COMMON STOCK BECOMING
AVAILABLE FOR SALE IN THE FUTURE.
Sales of a substantial amount of our common stock in the public market
after this offering, or the perception that these sales may occur, could
adversely affect the prevailing market price of our common stock. This could
also impair our ability to raise additional capital through the sale of
additional equity securities.
Immediately after the completion of this offering, we will have shares
of common stock outstanding, or shares if the underwriters exercise their
over-allotment option in full. Of these shares, the shares sold in this offering
will be immediately transferable without restriction in the public market,
except for shares purchased by any of our affiliates, which will be subject to
the limitations of Rule 144 under the Securities Act. The remaining shares are
"restricted securities," and will become eligible for sale in the public market
at various times after the date of this prospectus, subject to the limitations
and other conditions of Rule 144 under the Securities Act. In addition, under
the terms of a registration rights agreement, we are obligated under certain
circumstances to register outstanding shares of our common stock. In connection
with this offering, holders of a substantial number of shares of restricted
securities and options to purchase our common stock have agreed not to sell the
shares of common stock they now own or acquire upon exercise of their options
without the prior written consent of Deutsche Bank Securities Inc. for a period
of 180 days from the date of this prospectus. Deutsche Bank Securities Inc. may,
however, in its sole discretion and without notice, release all or any portion
of the shares from the restrictions in the lock-up agreements. After these
agreements expire, these shares will be eligible for sale in the public market.
17
<PAGE>
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the tangible
book value per share of our outstanding common stock. If you purchase common
stock in this offering, the shares you buy will experience an immediate and
substantial dilution in tangible book value per share, and the shares of common
stock owned by the existing stockholders will experience a material increase in
the tangible book value per share. As a result, if we were to distribute our
tangible assets to our stockholders immediately following this offering,
purchasers of shares of common stock in this offering would receive less than
the amount paid for such shares. In the past, we issued options and warrants to
acquire common stock at prices significantly below the initial public offering
price. To the extent these outstanding options or warrants are ultimately
exercised, there will be further dilution to investors in this offering.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could, together or separately:
o discourage potential acquisition proposals;
o delay or prevent a change in control; and
o limit the price that investors may be willing to pay in the future for
shares of our common stock.
In particular, our amended and restated certificate of incorporation and
bylaws provide, among other things, that our directors be divided into three
classes with only one class standing for election at each annual meeting,
stockholders may not take actions by written consent, and special meetings of
stockholders may only be called by a majority of our board of directors. We are
also subject to Section 203 of the Delaware General Corporation Law which
generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with any interested stockholder, as defined in the
statute, for a period of three years following the date on which the stockholder
became an interested stockholder. These anti-takeover provisions could
substantially impede the ability of public stockholders to change our management
and board of directors, which may reduce the trading price of our common stock.
OUR EXISTING PRINCIPAL STOCKHOLDERS WILL CONTINUE TO CONTROL US AFTER THIS
OFFERING AND COULD LIMIT THE ABILITY OF OUR OTHER STOCKHOLDERS TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR
STOCKHOLDERS AND COULD DEPRESS OUR STOCK PRICE BECAUSE PURCHASERS CANNOT ACQUIRE
A CONTROLLING INTEREST.
Upon completion of this offering, our existing principal stockholders will
beneficially own, in the aggregate, approximately % of our outstanding common
stock. As a result, these persons, acting together, will be able to control all
matters submitted to our stockholders for approval and to control our management
and affairs. For example, these persons, acting together, will control the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. Furthermore, as long as affiliates of
Warburg, Pincus Equity Partners, L.P. maintain a specified percentage ownership
of our stock, the terms of our stockholders agreement require us to nominate
persons designated by Warburg Pincus for election to our board. This control
could have the effect of delaying or preventing a change of control of our
company that stockholders may believe would result in better management. This
control could depress our stock price because purchasers will not be able to
publicly acquire a controlling interest in our company.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. These statements are found in the
sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "anticipate," "believe," "continue,"
"predict," "estimate," "expect," "intend," "plan," "potential," "projected,"
"forecasted," "may," "could," "should" or "will" or the negative of such terms
or other comparable terminology. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
risks, uncertainties and other factors include, among other things, those listed
under "Risk Factors," as well as those included elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update or revise any of the forward-looking statements
after the date of this prospectus or to conform these statements to actual
results.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the
shares of common stock, at an assumed initial public offering
price of $ per share, will be approximately $ , or
approximately $ if the underwriters exercise the over-allotment
option in full, after deducting the estimated underwriting discounts and
offering expenses payable by us.
We intend to use approximately $ of the net proceeds of this
offering to redeem all outstanding shares of our Series C preferred stock,
approximately $7,920,000 for cash payments required upon conversion of our
Series D preferred stock into common stock, approximately $ to repay
outstanding term bank loans, and the remainder for working capital and other
general corporate purposes. In addition, we may, if appropriate opportunities
arise, use a portion of the net proceeds to acquire or invest in other
businesses, although we currently have no present understandings, commitments or
agreements with respect to any acquisitions or investments. Pending these uses,
we will invest the net proceeds in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We did not declare or pay any dividends in 1998 or 1999. We anticipate that
we will retain all of our future earnings, if any, for use in the expansion and
operation of our business and do not anticipate paying cash dividends in the
foreseeable future.
20
<PAGE>
CAPITALIZATION
The table on the following page sets forth our cash, cash equivalents and
capitalization as of December 31, 1999. The pro forma information reflects the
conversion of all shares of Series A, Series B and Series D preferred stock
outstanding as of December 31, 1999 into 37,191,666 shares of common stock, and
the redesignation of Class A common stock and Class B common stock as a single
class of common stock, upon completion of this offering. The pro forma as
adjusted information reflects the foregoing as well as the sale of shares of
common stock in this offering and our application of the net proceeds, including
the redemption of all outstanding shares of Series C preferred stock and
payment of accrued dividends, the cash payment to holders of Series D preferred
stock, and repayment of outstanding bank term loans.
The outstanding share information as of December 31, 1999 excludes:
o 2,115,000 shares of common stock and 375,000 shares of Series D
preferred stock issued subsequent to December 31, 1999;
o 1,062,500 shares of common stock issuable on exercise of outstanding
options as of December 31, 1999, and 3,305,500 shares of common
stock issuable on exercise of outstanding options granted subsequent
to December 31, 1999;
o 106,830 shares of stock available for issuance under our equity
participation plan as of December 31, 1999; and
o 9,783,333 shares of common stock issuable upon exercise of warrants
that will remain outstanding after the offering.
21
<PAGE>
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents............................................... $ 13,352 $ 13,352 $
--------- --------- ---------
--------- --------- ---------
Total debt, less current portion........................................ $ 1,213 $ 1,213 $
Redeemable convertible Series A, B and D preferred stock, $0.01 par
value, 37,200,000 shares authorized on an actual basis, 37,191,666
shares issued and outstanding on an actual basis, and no shares issued
and outstanding on a pro forma and pro forma as adjusted basis........ 39,250 -- --
Redeemable Series C preferred stock, $0.01 par value, 14,583,333 shares
authorized on an actual basis, 14,583,333 shares issued and
outstanding on an actual and pro forma basis, and no shares issued and
outstanding on a pro forma as adjusted basis.......................... 15,398 15,398 --
Stockholders' equity (deficit):
Class A common stock, $0.01 par value, 98,500,000 shares authorized on
an actual basis, 9,764,000 shares issued and outstanding on an
actual basis; no shares issued and outstanding on a pro forma and
pro forma as adjusted basis........................................ 98 -- --
Class B common stock, $0.01 par value, 1,500,000 shares authorized on
an actual basis, no shares issued and outstanding on an actual, pro
forma and pro forma as adjusted basis.............................. -- -- --
Common Stock, $0.01 par value, 100,000,000 shares authorized on a pro
forma and pro forma as adjusted basis; 46,955,666 and shares
issued and outstanding on a pro forma and pro forma as adjusted
basis, respectively................................................ -- 470
Additional paid-in capital............................................ 2,263 33,222
Deferred stock compensation........................................... (2,321) (2,321)
Stock subscription receivable......................................... (92) (92)
Accumulated deficit................................................... (22,901) (22,901)
--------- --------- ---------
Total stockholders' equity (deficit)............................... (22,953) 8,378
--------- --------- ---------
Total capitalization............................................. $ 32,908 $ 24,989 $
--------- --------- ---------
--------- --------- ---------
</TABLE>
22
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on December 31,
1999 was $(13.7) million, or approximately $(0.29) per share. Pro forma net
tangible book value per share represents the amount of our total stockholders'
deficit, less goodwill and intangible assets, divided by 46,955,666 shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of Series A, Series B and Series D preferred stock into
shares of common stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to the sale by us of shares of common stock in this offering,
after deducting the underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds, including
the redemption of all outstanding shares of Series C preferred stock, a cash
payment in connection with the conversion of the Series D preferred stock, and
repayment of outstanding bank term loans, our pro forma net tangible book value
as of December 31, 1999 would have been $ million, or
$ per share. This represents an immediate increase in net tangible
book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to purchasers of
common stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................................................... $
-------
Pro forma net tangible book value per share as of December 31, 1999....................... $(0.29)
Increase per share attributable to new investors..........................................
------
Pro forma net tangible book value per share after this offering.............................
-------
Net tangible book value dilution per share to new investors................................. $
-------
-------
</TABLE>
The following table sets forth, on a pro forma basis, as of December 31,
1999, the number of shares of common stock purchased from us, the total
consideration paid or to be paid, and the average price per share paid or to be
paid by existing stockholders and by new investors, before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 46,955,666 % $50,385,100 % $1.07
New investors................................
---------- --- ----------- --- -----
Total...................................... 100% $ 100% $
---------- --- ----------- --- -----
---------- --- ----------- --- -----
</TABLE>
As of December 31, 1999, options to purchase a total of 1,062,500 shares of
common stock, at a weighted average exercise price of $0.24 per share, and
8,164,000 shares of restricted common stock, at a weighted average price of
$0.05 per share, were outstanding under our 1999 Equity Participation Plan. In
addition, as of December 31, 1999, there were outstanding warrants to purchase a
total of 16,083,333 shares of common stock at a weighted average exercise price
of $1.18 per share. After we redeem all outstanding shares of Series C preferred
stock upon completion of this offering, the number of shares eligible for
purchase under outstanding warrants will be reduced to 9,783,333 shares. After
December 31, 1999, we increased the total number of shares reserved for issuance
under our equity participation plans to 17,333,330 shares and granted options to
purchase an additional 3,305,500 shares of common stock. After December 31,
1999, we sold 2,115,000 shares of common stock and 375,000 shares of preferred
stock. To the extent outstanding options or warrants are exercised, there will
be further dilution to new investors. See our audited financial statements
included in this prospectus.
23
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except share and per share data)
The following tables contain selected financial data as of and for each of
the five fiscal years ended December 31, 1995, 1996, 1997, 1998 and 1999. The
balance sheet data as of December 31, 1998 and 1999 and the statement of
operations data for the years ended December 31, 1997, 1998 and 1999 have been
derived from audited financial statements included elsewhere in this prospectus.
The balance sheet data as of December 31, 1995, 1996, and 1997 and the statement
of operations data for the years ended December 31, 1995 and 1996 have been
derived from unaudited financial statements. You should read this selected
financial data together with our audited financial statements and the notes to
those financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Hosted services........................... $ 2,487 $ 3,432 $ 4,416 $ 7,418 $ 11,087
Software licensing and maintenance........ -- -- -- -- 2,306
Professional services..................... -- -- -- -- 3,001
--------- ------- ------- ------- -----------
Total net revenues...................... 2,487 3,432 4,416 7,418 16,394
Cost of revenues:
Hosted services........................... 1,418 1,591 1,987 3,085 7,819
Software licensing and maintenance........ -- -- -- -- 695
Professional services..................... -- -- -- -- 3,880
Amortization of software acquired and
software license rights(1).............. -- -- -- -- 1,656
--------- ------- ------- ------- -----------
Total cost of revenues.................. 1,418 1,591 1,987 3,085 14,050
--------- ------- ------- ------- -----------
Gross profit................................ 1,069 1,841 2,429 4,333 2,344
Other operating costs:
Sales and marketing....................... 822 888 1,373 1,896 8,002
Research and development.................. -- -- -- -- 5,256
General and administrative (exclusive of
non-cash compensation expense shown
below).................................. 576 680 816 1,957 8,252
Non-cash compensation expense............. -- -- -- -- 502
Acquisition-related amortization(2)....... -- -- -- -- 3,098
--------- ------- ------- ------- -----------
Total other operating costs............. 1,398 1,568 2,189 3,853 25,110
--------- ------- ------- ------- -----------
Income (loss) from operations............... (329) 273 240 480 (22,766)
Other income (expense), net................. (34) (25) (39) (49) (256)
--------- ------- ------- ------- -----------
Net income (loss)........................... $ (363) $ 248 $ 201 $ 431 $ (23,022)
--------- ------- ------- ------- -----------
--------- ------- ------- ------- -----------
Basic and diluted net income (loss) per
share, after giving effect to pro forma
income tax provision (benefit)(3)(4)...... $ (726.89) $223.20 $169.56 $404.37 $ (88.94)
--------- ------- ------- ------- -----------
--------- ------- ------- ------- -----------
Pro forma basic and diluted net income
(loss) per share(3)....................... $ (1.18)
-----------
-----------
Shares used in the calculation of net income
(loss) per share:
Basic and diluted(3)...................... 500 500 500 500 312,626
--------- ------- ------- ------- -----------
--------- ------- ------- ------- -----------
Pro forma basic and diluted(3)............ 20,273,927
-----------
-----------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 216 $ 186 $ 8 $ 218 $ 13,352
Working capital (deficit).......................................... (114) 73 164 (986) 6,378
Total assets....................................................... 1,467 1,375 2,290 3,059 47,150
Total debt, including current portion.............................. 314 234 404 809 4,321
Redeemable convertible Series A, B and D preferred stock........... -- -- -- -- 39,250
Redeemable Series C preferred stock................................ -- -- -- -- 15,398
Total stockholders' equity (deficit)............................... 69 317 517 121 (22,953)
</TABLE>
- ------------
(1) Amortization of software acquired and software license rights is calculated
on a straight-line basis generally over a two- to three-year period. See our
audited financial statements beginning on page F-1 of this prospectus.
(2) Acquisition-related amortization expense is calculated on a straight-line
basis generally over a two- to three-year period. See our audited financial
statements beginning on page F-1 of this prospectus.
(3) Net income (loss) per share and pro forma net income (loss) per share are
calculated on the basis described in note 3 to our audited financial
statements beginning on page F-1 of this prospectus.
(4) The pro forma income tax provision (benefit) assumes that we were taxed as a
C corporation during the years ended December 31, 1995, 1996, 1997 and 1998,
although we had elected to be a Subchapter S corporation for tax reporting
purposes, during those periods. Effective January 1, 1999, we became a
C corporation for tax reporting purposes.
25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma statement of operations gives effect to
our acquisitions of the assets of the employee self-service business of Edify
Corporation and assets of NOAH Software, Incorporated as if these acquisitions
had occurred on January 1, 1999. The pro forma adjustments are based on
estimates, available information and various assumptions. The unaudited pro
forma financial data does not necessarily represent what our results of
operations would actually have been if these transactions in fact had occurred
on that date or the results of operations for any future period. The unaudited
pro forma financial data should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our audited
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
EMPLOYEE SELF
SERVICE
BUSINESS OF NOAH
WORKSCAPE, EDIFY SOFTWARE, PRO FORMA
INC. CORPORATION (1) INCORPORATED (2) COMBINED ADJUSTMENTS
------------ ---------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Hosted services.................... $ 11,087,299 $ -- $ -- $ 11,087,299 $ --
Software licensing and maintenance 2,305,903 2,320,327 -- 4,626,230 --
Professional services.............. 3,000,905 5,021,933 1,143,629 9,166,467 --
------------ ------------ ---------- ------------ -----------
Total net revenues............. 16,394,107 7,342,260 1,143,629 24,879,996 --
Cost of revenues:
Hosted services.................... 7,819,345 -- -- 7,819,345 --
Software licensing and
maintenance...................... 695,323 588,348 -- 1,283,671 --
Professional services.............. 3,879,503 2,969,671 509,279 7,358,453 --
Amortization of software acquired
and software license rights...... 1,655,692 -- -- 1,655,692 1,624,080 (3)
------------ ------------ ---------- ------------ -----------
Total cost of revenues......... 14,049,863 3,558,019 509,279 18,117,161 1,624,080
------------ ------------ ---------- ------------ -----------
Gross profit......................... 2,344,244 3,784,241 634,350 6,762,835 (1,624,080)
Other operating costs:
Sales and marketing................ 8,001,653 4,098,483 377,668 12,477,804 --
Research and development........... 5,256,316 844,666 -- 6,100,982 --
General and administrative
(exclusive of non-cash
compensation expense shown
below)........................... 8,251,773 822,888 332,813 9,407,474 --
Non-cash compensation expense...... 501,700 -- -- 501,700 --
Acquisition-related amortization... 3,098,381 -- -- 3,098,381 3,654,295 (3)
------------ ------------ ---------- ------------ -----------
Total other operating costs...... 25,109,823 5,766,037 710,481 31,586,341 3,654,295
------------ ------------ ---------- ------------ -----------
Income (loss) from operations........ (22,765,579) (1,981,796) (76,131) (24,823,506) (5,278,375)
Other income (expense):
Interest expense................... (340,648) -- (6,800) (347,448) (70,588)(4)
Interest income.................... 84,606 -- -- 84,606 --
------------ ------------ ---------- ------------ -----------
Net income (loss).................... $(23,021,621) $ (1,981,796) $ (82,931) $(25,086,348) $(5,348,963)
------------ ------------ ---------- ------------ -----------
------------ ------------ ---------- ------------ -----------
Accretion of preferred stock,
dividends and warrants............. (4,782,608)
------------
Net income (loss) available to common
stockholders....................... $(27,804,229)
------------
------------
Basic and diluted net income (loss)
per share.......................... $ (88.94)
------------
------------
Shares used in calculation of basic
and diluted net income (loss) per
share.............................. 312,626
------------
------------
<CAPTION>
PRO FORMA
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Hosted services.................... $ 11,087,299
Software licensing and maintenance 4,626,230
Professional services.............. 9,166,467
------------
Total net revenues............. 24,879,996
Cost of revenues:
Hosted services.................... 7,819,345
Software licensing and
maintenance...................... 1,283,671
Professional services.............. 7,358,453
Amortization of software acquired
and software license rights...... 3,279,772
------------
Total cost of revenues......... 19,741,241
------------
Gross profit......................... 5,138,755
Other operating costs:
Sales and marketing................ 12,477,804
Research and development........... 6,100,982
General and administrative
(exclusive of non-cash
compensation expense shown
below)........................... 9,407,474
Non-cash compensation expense...... 501,700
Acquisition-related amortization... 6,752,676
------------
Total other operating costs...... 35,240,636
------------
Income (loss) from operations........ (30,101,881)
Other income (expense):
Interest expense................... (418,036)
Interest income.................... 84,606
------------
Net income (loss).................... $(30,435,311)
------------
------------
Accretion of preferred stock,
dividends and warrants............. (4,782,608)
------------
Net income (loss) available to common
stockholders....................... $(35,217,919)
------------
------------
Basic and diluted net income (loss)
per share.......................... $ (29.73)(5)
------------
------------
Shares used in calculation of basic
and diluted net income (loss) per
share.............................. 1,184,648 (5)
------------
------------
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) Statement of operations of the employee self-service business of Edify
Corporation from January 1, 1999 through June 30, 1999. Although the
acquisition occurred on July 15, 1999, the results of operations between
July 1, 1999 through July 15, 1999 are considered immaterial to the pro
forma financial presentation. The historical financial information included
in the pro forma information for the employee self-service business of Edify
Corporation only includes revenues and identifiable direct operating
expenses. Since Edify Corporation did not maintain separate accounting
records for its employee self-service business, these is no reasonable basis
to allocate corporate overhead costs, interest expense and income taxes to
the financial information of the acquired business. Therefore, the results
of operations included in the pro forma financial information may not be
representative of the acquired business had the corporate overhead expense
information been included.
(2) Statement of operations of NOAH Software, Incorporated from January 1, 1999
through September 30, 1999. Although the acquisition occurred on October 12,
1999, the results of operations between October 1, 1999 and October 12, 1999
are considered immaterial to the pro forma financial presentation.
(3) Represents amortization expense of $1,624,080 related to software and
software license rights and amortization expense of $3,654,295 related to
goodwill, customer lists and workforce acquired in the acquisitions.
Amortization expense is calculated on a straight-line basis generally over a
two- to three-year period. See our audited financial statements beginning on
page F-1 of this prospectus.
(4) Represents interest expense of $70,588 to reflect a full year of interest
expense for the software license obligation in connection with the software
license rights acquired from Edify Corporation.
(5) Pro forma weighted average shares includes 1,116,800 shares assumed
outstanding for the year ended December 31, 1999 issued in connection with
the acquisition of assets of NOAH Software. Stock options and warrants have
been excluded from the calculation because their effect is antidilutive.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements based upon
current expectations and related to future events and our future financial
performance that involve risks and uncertainties. Our actual results and timing
of events could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth under "Risk Factors," "Business" and elsewhere in this prospectus.
ORGANIZATION AND BUSINESS OVERVIEW
We are a leading provider of Web-enabled HR self-service solutions to large
organizations. We offer a suite of software solutions that enable employers to
improve service to employees, enhance employee communications and increase
overall organizational effectiveness, thereby freeing management to focus on
strategic HR initiatives. Our employee self-service solutions interface directly
with employees, providing them with interactive access to HR information and
services. We also offer manager self-service solutions which enable managers to
manage their workforce more effectively by automating many tasks and providing
up-to-date HR-related information. We provide our clients with the option to
have our solutions hosted at our data center, licensed for use on their
premises, or a combination of both hosted and on-premise deployment methods.
We were incorporated in Massachusetts in 1972 under the name Employee
Communications Services. We recapitalized our company in February 1999, with
affiliates of Warburg Pincus contributing capital to fund our growth
initiatives. At the same time, we added a new executive team. We changed our
name to Workscape in May 1999 and reincorporated in Delaware in August 1999.
Historically, we have engaged in developing customized HR software
applications for large employers on a hosted basis, primarily focused on
benefits enrollment. With the acquisitions of assets of Edify Corporation and
NOAH Software in 1999, we began to license employee and manager self-service
solutions for on-premise use by clients. During 1999, we also began to focus on
developing and expanding customer relationships through multi-year contracts,
broadening the functionality of our applications, developing a scalable object-
oriented platform, and developing the necessary infrastructure to support our
future growth objectives. These developments collectively represent a
fundamental change in our business model and strategy. Accordingly, our
historical financial data may not be indicative of our financial position,
results of operations or cash flows in the future nor is it necessarily
indicative of what our financial position, results of operations or cash flows
would have been had we operated under our current business model for the periods
presented.
ACCOUNTING POLICIES
Revenues
Our revenues are derived from (1) hosted services, (2) software licensing
and related maintenance services, and (3) professional services.
Hosted service revenues have historically been generated primarily through
time and material arrangements and, to a lesser extent, fixed fee arrangements,
related to developing and integrating customized software. Hosted service
revenues are recognized as services are provided in accordance with Statement of
Position 97-2, "Software Revenue Recognition." Provisions for estimated losses
are recognized in the period in which such losses are incurred. There is
seasonality associated with hosted service revenues because these services are
provided in conjunction with employee benefit enrollment activities which
typically occur in the third or fourth quarters of the year. While historically
we entered into new hosting arrangements each year with both new and existing
clients, we are currently focused on transitioning these clients to multi-year,
fixed fee contracts, under which revenues will be recognized as earned over the
contract period. We expect that, as we expand our product
28
<PAGE>
offerings beyond primarily benefits enrollment applications, we will reduce
seasonality, and our new pricing model will contribute to increased
period-to-period predictability and stability in our revenues.
Software licensing and maintenance revenues generally represent sales of
software licenses which do not require significant modification and
customization services, and maintenance services originating from our
acquisition of assets of the employee self-service business of Edify Corporation
in the third quarter of 1999.
Professional service revenues generally consist of (1) consulting services
to support the premise-based software products purchased in connection with our
acquisition of the assets of the employee self-service business of Edify
Corporation, and (2) customization and installation services associated with the
sale of software purchased in connection with our acquisition of assets of NOAH
Software, Incorporated.
For software licensing sales not requiring significant modification and
customization services and where services are not essential to the functionality
of the software, we generally recognize revenues when all the following criteria
are met: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred, (3) the fee is fixed and determinable, and (4) collectibility is
probable. In addition, for arrangements with multiple obligations to provide
existing and future products, maintenance and professional services, revenues
must be allocated to each component of the arrangement based on evidence of fair
value which is specific to our company, or for products not yet being sold
separately, the price established by management. Once fair value is determined,
we recognize revenues from maintenance fees ratably over the term of the service
period, which is typically 12 to 15 months. We recognize professional service
revenues from consulting activities under these arrangements as the services are
provided.
When we enter into a license agreement with a customer requiring
significant modification and customization of the software, as in the case of
software purchased in connection with our acquisition of assets of NOAH, we
recognize revenues under the arrangement using contract accounting, as
prescribed by SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." For these arrangements, we have applied the
completed contract method under SOP 81-1 as the contracts contain specified
acceptance criteria and cancellation provisions that lapse at the completion of
the services. Under the completed contract method, we recognize the revenues and
direct costs upon the lapse of the cancellation and acceptance periods.
Cost of Revenues
Cost of revenues includes all direct materials, direct labor and indirect
costs related to generating revenue. These indirect costs include indirect
labor, materials and supplies, equipment rental, depreciation, facility costs
and amortization of software acquired and software license rights.
The cost of our hosted service revenues includes costs of hosting solutions
for clients. In connection with our hosted solutions we have historically
incurred significant custom development costs for each new client and lesser,
but still significant, costs to customize applications for clients as their
business needs evolve. We expect the cost of hosted service revenues to decline
as a percentage of revenues in the future with the deployment of our new
platform currently in development. We expect this platform will reduce the cost
of hosted service revenues by replacing expensive customer-specific applications
with an easily configurable standard platform. Further, we anticipate that we
will be required to pay license fees to third parties in connection with
licensed software integrated into our new platform.
Our cost of software licensing revenues primarily includes license fees or
royalties to third parties for software used in our solutions. Our cost of
maintenance revenue consists of technical support and enhancements, as they
become available.
29
<PAGE>
The cost of professional service revenues includes the costs associated
with providing professional services in conjunction with our premise-based
software. We have incurred significant expenses, including the cost of third-
party consultants to complete new contracts and time-and-material contracts
acquired from Edify, while building our professional service organization. We
expect the cost of professional service revenues to decline over time due
largely to reduced reliance on these contractors to provide services.
In addition, cost of revenues includes the amortization of acquired and
licensed software resulting from our acquisition of assets from Edify
Corporation and NOAH Software. We expect to continue to amortize these costs in
2000 and 2001.
Operating Costs
Operating costs consist of sales and marketing expenses, research and
development expenses, general and administrative expenses, non-cash compensation
expenses and acquisition-related amortization.
Sales and marketing expenses include salaries, sales commissions, benefits
and travel and related expenses for our direct sales force, sales support and
marketing functions. We expanded our sales and marketing organization
substantially in 1999 from four persons at December 31, 1998 to 37 persons at
December 31, 1999. Sales and marketing expenses also include costs associated
with supporting the value-added resellers that we utilize as an additional
distribution channel for our premise-based products. We expect that sales and
marketing expenses will continue to increase in the future as we continue to
increase brand awareness and introduce new products.
Research and development costs include expenses for the development of new
and evolving technologies and products. These expenses include salaries and
related expenses for our software engineers and development personnel, the cost
of contract development personnel and services, and related costs. Research and
development costs have been expensed as incurred because the products under
development have not yet proven technologically feasible. Costs related to the
acquisition of hardware used in product development are capitalized and
depreciated over the estimated useful life. Costs related to the acquisition of
software licenses used in product development are capitalized and amortized over
the term of the license agreement. We expect to increase spending on research
and development in order to develop our new software platform and to continue to
develop new applications. Prior to 1999, we did not have research and
development expenses because we provided customized software applications and
billed our clients for all software we developed or enhanced for them.
General and administrative expenses include salaries, benefits and expenses
for our executive, finance, legal, human resources and internal systems support
personnel. In addition, general and administrative expenses include occupancy
costs, fees for professional services and depreciation. We expect general and
administrative expenses to increase as we continue to expand our administrative
infrastructure to support the anticipated growth of our business, including
costs associated with being a public company.
Stock-based Compensation
In connection with grants of stock options to employees and issuances of
common stock to employees and consultants (for past services rendered) in 1999,
we recorded deferred stock compensation totaling $2,822,365 representing the
difference between the exercise price of these options and purchase price of
these shares issued and the deemed fair value of our common stock on the date of
grant or issuance. In addition, we granted options in January 2000 for which we
will record deferred stock compensation totaling $6,291,000. These shares and
options generally vest over a four-year period. Upon an employee's termination
of employment, unvested options are forfeited, and unvested shares are subject
to repurchase by us at their original issue price. Deferred stock compensation
is presented as a reduction of
30
<PAGE>
total stockholders' equity (deficit) and will be amortized over the vesting
period of the stock or options. Of these amounts, we recognized $501,700 in
1999, and we expect to recognize $2,164,826 in 2000, $2,217,943 in 2001,
$2,217,943 in 2002, $1,879,891 in 2003 and $131,062 in 2004. The non-cash
compensation expense is classified as a separate component of operating costs in
our statement of operations data.
Acquisitions
On July 15, 1999, we acquired assets of Edify Corporation's employee
self-service business for approximately $16.0 million in cash. In connection
with this acquisition, we committed to pay up to $1.6 million in retention
bonuses to employees recruited from Edify on the first anniversary of the
acquisition. We expensed and accrued the amount of $456,000 as of December 31,
1999 for the portion of services rendered during 1999. In connection with this
acquisition, we obtained a two-year license to use, copy and distribute Edify's
Electronic Workforce software at a cost of $625,000 per quarter over the license
period for an aggregate of $5,000,000. We are also required to pay a bonus
license to Edify Corporation of an additional $625,000 per quarter upon the
achievement of certain stipulated revenue goals during the first four quarters
of the agreement, of which $425,000 has been accrued as of December 31, 1999. On
October 12, 1999, we acquired substantially all of the assets of NOAH Software
for approximately $3.3 million in cash and 1,116,800 shares of our common stock.
In connection with the NOAH acquisition, we are required to pay retention
bonuses of up to $249,000 to employees still employed by us on October 12, 2000.
We expensed and accrued the amount of $52,000 as of December 31, 1999 for the
portion of services rendered during 1999. We accounted for these acquisitions
using the purchase method of accounting. Accordingly, the operations of the
acquired businesses are included in our statements of operations as of the
respective dates of acquisition. We recorded assets and liabilities acquired in
connection with these acquisitions at their estimated fair market values,
including intangibles and goodwill of $26.8 million.
We plan to continue to expand our business by selectively acquiring
additional businesses, technologies, product lines, or service offerings from
third parties. We regularly investigate and evaluate potential acquisitions, and
at any time we may execute a letter of intent or binding acquisition agreement.
However, we may be unable to identify acquisition targets and may be unable to
complete future acquisitions. Even if we complete an acquisition, we may have
difficulty in integrating it with our current operations, and any acquired
features, functions or services may not achieve market acceptance. Integrating
newly acquired organizations and products and services could be expensive, time
consuming and a strain on our resources.
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items included in our results of
operations for the three years ended December 31, 1997, 1998 and 1999 expressed
as a percentage of our total net revenues for these periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL NET REVENUES:
Revenues:
Hosted services........................................................... 100.0% 100.0% 67.6%
Software licensing and maintenance........................................ -- -- 14.1
Professional services..................................................... -- -- 18.3
----- ----- ------
Total net revenues..................................................... 100.0 100.0 100.0
Cost of revenues:
Hosted services........................................................... 45.0 41.6 47.7
Software licensing and maintenance........................................ -- -- 4.2
Professional services..................................................... -- -- 23.7
Amortization of software acquired and software license rights............. -- -- 10.1
----- ----- ------
Total cost of revenues................................................. 45.0 41.6 85.7
----- ----- ------
Gross profit................................................................ 55.0 58.4 14.3
Other operating costs:
Sales and marketing....................................................... 31.1 25.6 48.8
Research and development.................................................. -- -- 32.1
General and administrative (exclusive of non-cash compensation expense
shown below)........................................................... 18.5 26.4 50.3
Non-cash compensation expense............................................. -- -- 3.1
Acquisition-related amortization.......................................... -- -- 18.9
----- ----- ------
Total other operating costs............................................ 49.6 52.0 153.2
Other income (expense), net................................................. (0.9) (0.6) (1.5)
----- ----- ------
Net income (loss)........................................................... 4.5% 5.8% (140.4)%
----- ----- ------
----- ----- ------
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenues
Our total revenues were $4.4 million for fiscal 1997, $7.4 million for
fiscal 1998, and $16.4 million for fiscal 1999, representing increases of
$3.0 million, or 68%, from fiscal 1997 to fiscal 1998 and $9.0 million, or 122%,
from fiscal 1998 to fiscal 1999.
Hosted Service Revenues. Our hosted service revenues were $4.4 million for
fiscal 1997, $7.4 million for fiscal 1998, and $11.1 million for fiscal 1999,
representing increases of $3.0 million, or 68%, from fiscal 1997 to fiscal 1998
and $3.7 million, or 50%, from fiscal 1998 to fiscal 1999. The increase in our
hosted service revenues for each of these years was primarily due to larger
average revenues per customer as a result of the increased complexity and scope
of the services as well as additional customer accounts.
Software Licensing and Maintenance Revenues. Software licensing and
maintenance revenues were $2.3 million for fiscal 1999 and include license
revenues from software applications acquired from Edify Corporation and the
associated maintenance revenues.
Professional Service Revenues. Professional service revenues were
$3.0 million for fiscal 1999. These activities commenced in the third and fourth
quarters of 1999 in conjunction with our acquisitions of assets of Edify
Corporation and NOAH Software.
Cost of Revenues
Hosted Service Revenues. Our cost of hosted service revenues was $2.0
million for fiscal 1997, $3.1 million for fiscal 1998, and $7.8 million for
fiscal 1999, representing increases of $1.1 million, or 55%, from fiscal 1997 to
fiscal 1998 and $4.7 million, or 152%, from fiscal 1998
32
<PAGE>
to fiscal 1999. Gross margin on hosted service revenues was 55% for fiscal 1997,
58% for fiscal 1998, and 30% for fiscal 1999. Cost of hosted services revenues
increased from fiscal 1997 to 1998 and from fiscal 1998 to fiscal 1999 due to
increased sales activity. Gross margin on hosted service revenues increased from
fiscal 1997 to fiscal 1998 due to higher margins on certain significant customer
engagements and increased utilization of our production personnel. Gross margin
on hosted service revenues decreased from 1998 to 1999 due to the increased
recruiting, training, and salaries associated with the hiring of a substantial
number of production employees in order to support the anticipated future growth
of our business.
Software Licensing and Maintenance Revenues. Our cost of software
licensing and maintenance revenues was $0.7 million for fiscal 1999. Gross
margin on our software licensing and maintenance revenues was 70% and is higher
than our gross margins on our other revenue streams primarily because it is less
labor intensive.
Professional Service Revenues. Our cost of professional service revenues
was $3.9 million for fiscal 1999. Gross margin on professional service revenues
was (29)% for fiscal 1999 principally due to our use of a significant amount of
contract labor.
Amortization of Software Acquired and License Rights. During fiscal 1999,
we capitalized $7.2 million of intangible assets related to software acquired
and licensed in connection with our acquisitions of assets of Edify Corporation
and NOAH Software. We recognized $1.7 million in amortization related to these
intangible assets during fiscal 1999 and we expect to amortize the balance
between 2000 and 2002.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $1.4 million for
fiscal 1997, $1.9 million for fiscal 1998, and $8.0 million for fiscal 1999.
Sales and marketing expenses as a percentage of total revenues were 31% for
fiscal 1997, 26% for fiscal 1998 and 49% for fiscal 1999. The increase in sales
and marketing expenses from fiscal 1997 to fiscal 1998 was due to an increase in
sales commissions and bonuses earned as a result of higher revenues. The
increase in sales and marketing expenses from fiscal 1998 to fiscal 1999 was due
to an increase in sales personnel resulting from hiring and acquisitions, and
the associated recruiting, training, travel, commissions, and office space
necessary to support a larger sales organization.
Research and Development. Our research and development expenses were
$5.3 million for 1999, compared to zero in prior years. Research and development
expenses as a percentage of total revenues were 32%. The increase in research
and development expenses from fiscal 1998 to fiscal 1999 was due to the
employment of software developers, quality assurance personnel and outside
contractors to support development of our new operating platform and
enhancements to our employee self-service applications.
General and Administrative. General and administrative expenses were
$0.8 million for fiscal 1997, $2.0 million for fiscal 1998 and $8.3 million for
fiscal 1999, representing an increase of $1.2 million, or 150%, from fiscal 1997
to 1998 and an increase of $6.3 million, or 315%, from fiscal 1998 to 1999.
General and administrative expenses as a percentage of total revenues were 19%
for fiscal 1997, 26% for fiscal 1998, and 50% for fiscal 1999. General and
administrative expenses increased from fiscal 1997 to fiscal 1998 due to the
addition of administrative personnel to support the growth of our business and a
non-recurring charge of $0.6 million to terminate our stock appreciation
incentive plan. General and administrative expenses increased from fiscal 1998
to fiscal 1999, due to additional rent, telecommunications, utilities and
overhead associated with the opening of multiple offices in Virginia,
Massachusetts, and California, the hiring of additional finance, executive and
administrative personnel to support the growth of our business, and several
non-recurring expenses such as $0.5 million of employee retention bonuses
resulting from our acquisitions of assets of Edify Corporation and NOAH
Software, and an accrual of $1.0 million as a bonus to the founding stockholders
in connection with the achievement of certain revenue goals.
33
<PAGE>
Non-cash Compensation Expense. During fiscal 1999, we recorded a total of
approximately $2.8 million of deferred stock compensation, resulting from the
difference between the deemed fair market value of common stock and the purchase
price of the restricted common stock and the exercise price of stock options
granted. We recognized non-cash compensation expense of $0.5 million in fiscal
1999 representing the vested portion of those options and restricted common
stock.
Acquisition-related Amortization. During fiscal 1999, we recorded
$19.6 million of intangible assets related to customer lists, contracts,
acquired workforce, and goodwill acquired in connection with our acquisitions of
assets of Edify Corporation and NOAH Software. We recognized $3.1 million in
amortization related to these intangible assets in 1999 and we expect to
amortize the balance between 2000 and 2002.
Interest Expense. Interest expense was approximately $39,000 in fiscal
1997, $49,000 in fiscal 1998 and $341,000 in fiscal 1999. In fiscal 1999, we
issued a $250,000 term note payable to a bank and additionally we expensed
approximately $150,000 of interest expense in connection with the $10.0 million
aggregate principal amount of notes payable issued in October and November 1999
to one of our principal stockholders. The $10.0 million of notes payable were
subsequently repaid in December 1999 through the issuance of preferred stock.
Interest Income. Interest income was approximately $85,000 in 1999. In
fiscal 1999, we earned interest on cash balances resulting from the infusions of
equity capital in 1999.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth a summary of our unaudited quarterly
operating results for each of the four quarters ended December 31, 1999. This
data has been derived from our unaudited interim financial statements which, in
our opinion, have been prepared on substantially the same basis as the audited
financial statements contained elsewhere in this prospectus and include all
normal recurring adjustments necessary for a fair presentation of the financial
information for the periods presented. These unaudited quarterly results should
be read in conjunction with our financial statements and related notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
-------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total net revenues........................................................ $1,950 $ 2,005 $ 6,031 $ 6,408
Total cost of revenues.................................................... 1,122 1,798 4,803 6,327
------ -------- ------- --------
Gross profit.............................................................. 828 207 1,228 81
Total other operating costs............................................... 1,393 2,586 8,856 12,275
------ -------- ------- --------
Income (loss) from operations............................................. (565) (2,379) (7,628) (12,194)
Other income (expense), net............................................... (6) -- (30) (220)
------ -------- ------- --------
Net income (loss)......................................................... $ (571) $(2,379) $(7,658) $(12,414)
------ -------- ------- --------
------ -------- ------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, we funded our operations
primarily through cash provided by operations and a line of credit. In 1999, we
funded our operations primarily through the issuance of our preferred stock. In
February 1999, we issued 4,000,000 shares of Series A preferred stock in
exchange for $3.8 million in cash, a promissory note of $125,000 and outstanding
stock of a corporation owned by some of our executive officers. In July 1999, we
issued 7,500,000 shares of Series B preferred stock for $7.5 million and
14,583,333 shares of Series C preferred stock for $17.5 million. We used the
proceeds from these issuances to fund our operations and for acquisitions. In
December 1999, we issued 12,000,000 shares of Series D preferred stock for
$24.0 million and used the proceeds to retire two $5.0 million
34
<PAGE>
short-term loans and to fund ongoing operations. In February 2000, we issued
375,000 shares of Series D preferred stock for $0.8 million. In addition, during
1999 we issued 9,764,000 shares of common stock for an aggregate of
$0.3 million.
Cash provided by operating activities was $0.1 million in 1997 and $1.4
million in 1998. Cash used in operating activities was $16.3 million in 1999,
primarily due to costs we incurred in order to hire a new management team, build
our sales organization and corporate infrastructure, expand our marketplace
visibility and develop new applications. We expect that we will continue to use
significant cash to develop and introduce new products and support our growth
initiatives.
We used cash for capital expenditures, other than acquisitions, of
$0.5 million in 1997, $0.7 million in 1998 and $3.4 million in 1999. These
expenditures were primarily for computer equipment, telecommunication equipment
and furniture and fixtures to support our growth. We expect that our capital
expenditures will continue to increase significantly, particularly as we expand
and improve our hosting capabilities.
We have occasionally utilized bank term debt arrangements to finance the
acquisition of capital equipment. There are three term notes outstanding, with
balances totaling $0.8 million at December 31, 1999 and remaining terms that
range from 24 to 46 months. Interest is payable in monthly installments at an
average blended rate of 8.32%. The term notes are secured by all of our assets
and guaranteed by two of our stockholders. These notes are currently in default
due to non-compliance with a specified financial ratio in one of the notes. We
intend to repay all of these outstanding term notes with a portion of the net
proceeds from this offering.
In October and November 1999, we borrowed an aggregate of $10.0 million
from Warburg Pincus and issued promissory notes for $10.0 million bearing
interest at 8% per annum. We used the proceeds to help finance operations. These
promissory notes were repaid in December 1999 through the issuance of shares of
Series D preferred stock. See "Certain Transactions--Preferred Stock Issuances."
As of December 31, 1999, our commitments consisted of various leases,
licenses and contractually required bonus payments. Future cash payments under
these non-cancelable commitments are $14.6 million, of which approximately $8.7
million is due through 2001. Additionally, we are committed to pay to Exodus
Communications, Inc. approximately $415,000 through February 2001 in connection
with the management and maintenance of our data center. In connection with our
acquisition of the employee self-service business of Edify Corporation, we are
required to pay a bonus license of $625,000 per quarter for the first year of
the license agreement based on certain revenue goals. As of December 31, 1999,
we have accrued $425,000 based on revenues during the two quarters ended
December 31, 1999. Based on the amount earned at December 31, 1999, and the
maximum amount that could be earned in the two quarters ended June 30, 2000, we
may be required to pay up to $1.7 million. In addition, in January 2000 we paid
$400,000 to BEA Systems, Inc. as prepayment of license and support fees under
the terms of a software license agreement. We may be required to make additional
royalty payments to BEA Systems under this agreement based on sales where the
licensed software is integrated in our products. We expect that our capital
expenditures will increase as our employee base continues to grow. We do not
have any material commitments for capital expenditures.
As of December 31, 1999, we had $13.4 million in cash and cash equivalents.
Subsequent to December 31, 1999, we generated an additional $11.3 million of
cash from sales of our stock. We currently anticipate that our existing cash and
cash equivalents, the net proceeds from this offering and any cash generated
from operations will be sufficient to fund our operating activities, capital
expenditures and other obligations through at least the next 12 months. However,
we may need to raise additional funds in order to fund more rapid expansion, to
expand our marketing activities, to develop new or enhance existing products, to
respond to competitive pressures or to acquire complementary businesses or
technologies. If we are not successful in generating sufficient cash flow from
operations, we may need to raise additional capital through public or private
financing, strategic relationships or other arrangements. This additional
funding, if needed, might not be available on terms acceptable to us, or at all.
Our failure to raise sufficient capital when needed could have a material
35
<PAGE>
adverse effect on our business, results of operations and financial condition.
If we raise additional funds through the issuance of equity securities, the
percentage of our stock owned by our then-current stockholders would be reduced.
Furthermore, any such equity securities might have rights, preferences or
privileges senior to those of our common and preferred stock.
INCOME TAXES
Prior to fiscal 1999, we made an election under Subchapter S of the
Internal Revenue Code not to be subject to income taxes at the corporate level
and, accordingly, no provision of income taxes has been recorded in fiscal 1997
or fiscal 1998. On January 1, 1999, we made an election to be taxed as a C
corporation under the Internal Revenue Code, which subjected us to income taxes
at the corporate level. No provision of income taxes has been recorded in fiscal
1999 because we incurred a net loss. As of December 31, 1999, we had net
operating loss carryforwards for federal and state income tax reporting purposes
of $18.2 million that expire in 2019, if unused. Although we had deferred tax
assets, including our net operating loss carryforwards and tax credits of
approximately $9.7 million, a valuation allowance has been recorded for the
entire deferred tax asset as a result of uncertainties regarding the realization
of the asset balance.
YEAR 2000 COMPLIANCE
We have not experienced any Year 2000-related disruption in the operation
of our systems or received notice of any Year 2000-related problems in our
applications from any of our clients. Although most Year 2000 problems should
have become evident on January 1, 2000, additional Year 2000-related problems
may only become evident in the future.
MARKET RISK
We are exposed to market risk related to changes in interest rates. We
invest excess cash balances in cash equivalents that are subject to minimal
credit and market risk. In addition, our borrowing arrangements are generally on
fixed rate terms of varying maturities, with less than $400,000 of debt on
variable rate terms. We believe that the effect, if any, of reasonably possible
near-term changes in interest rates on our financial position, results of
operations and cash flows is not material.
Our operations are currently conducted exclusively in U.S. dollars and
there is no current exposure to foreign currency exchange risk.
36
<PAGE>
BUSINESS
OVERVIEW
We are a leading provider of Web-enabled HR self-service solutions to large
organizations. We offer a suite of software solutions that enable employers to
improve service to employees, enhance employee communications and increase
overall organizational effectiveness, thereby freeing management to focus on
strategic HR initiatives. Our solutions leverage technology to increase
productivity by streamlining traditionally paper-based processes while enhancing
employer-employee relationships and creating administrative savings. Our
employee self-service solutions interface directly with employees, providing
interactive access to HR information and services. We also offer manager
self-service solutions which enable managers to manage their workforce more
effectively by automating many tasks and providing up-to-date HR-related
information. Our solutions are highly flexible and can be deployed in a variety
of ways depending on our client's preferences. We deliver our solutions by
hosting our proprietary software for our clients at our data center, licensing
our software applications to employers for use on their premises or creating a
hybrid of hosted/on-premise solutions. Our applications can be integrated with
legacy enterprise resource planning and other technology systems.
Our self-service solutions can provide employees with "anytime, anywhere"
access via the Internet and employer Intranets, IVR, kiosk, e-mail and fax. Our
solutions replace traditional communications channels and processes with
convenient, low-cost, personalized interactions, performing such diverse
functions as benefits enrollment and administration, compensation planning,
training registration, time tracking and stock option administration and
trading.
Our objective is to enhance our position as a leading provider of HR
self-service solutions. Although our solutions can be utilized by organizations
of any size, we primarily target large organizations with more than 2,500
employees because our solutions are designed with the flexibility and
functionality to address the complexity of their human resource needs. Our
applications have been purchased by clients in a variety of industries including
high technology, manufacturing, telecommunications, financial services and
pharmaceuticals. Our clients include Applied Materials, Chase Manhattan Bank,
CIGNA, Home Depot, NSI, PricewaterhouseCoopers, 3Com, Tyco International Ltd.
and the U.S. Postal Service. We currently have over 145 clients, with an
aggregate of approximately 4.0 million employees, including clients with an
aggregate of approximately 3.0 million employees which have implemented
Web-based applications.
INDUSTRY BACKGROUND
Current Human Resources Management Environment
HR departments have historically depended on paper-based processes, which
can be cumbersome, costly and time-consuming. According to The Hackett Group, on
average it costs a company approximately $1,600 per employee annually to
administer HR services. As companies seek new ways to increase profitability and
productivity and attract and retain qualified personnel, HR professionals face a
number of challenges.
o Increased Complexity of Workforce Management. Administering
employer-sponsored programs has grown more burdensome as benefit programs
have become progressively more complex due to changing government
regulation and expanded product offerings. In addition, other HR tasks,
such as compensation planning and recruiting, have become more
challenging due to management time constraints.
o Pressure to Reduce Administrative and Staffing Costs. Despite this
increasing complexity of workforce management, HR departments, often
perceived as cost centers
37
<PAGE>
by upper management, have been required to aggressively reduce program
budgets. With fewer resources, HR departments are finding it increasingly
difficult to handle their daily processing responsibilities, as well as
handling critical strategic initiatives.
o Increasing Employee Mobility and Leverage. In the past decade, employee
mobility has dramatically increased. This trend has accelerated recently
with the robust U.S. economy and tight labor market. In addition,
technology, globalization and employee preferences have led to the rise
in telecommuting and alternative work arrangements. As a result, HR
professionals spend more time and energy attracting, managing and
retaining qualified personnel. To attract and retain key people,
companies are seeking to deliver superior services to employees.
LIMITATIONS OF CURRENT THIRD-PARTY HR SOLUTIONS
Employers and employees are increasingly seeking cost-effective HR
solutions that seamlessly integrate with installed enterprise systems and call
centers, provide "anytime, anywhere" access through multiple media, automate
workforce management, improve worker productivity and satisfaction, and provide
broad Web-based functionality.
Although a number of third-party HR solutions exist, we believe none of
them alone effectively address all the needs of the market. Examples of current
HR solutions include:
o Interactive Voice Response. IVR allows callers with touch-tone
telephones to access computer systems directly and communicate
interactively with the computer's database at any time. IVR solutions
have limited functionality when used alone, but can be an important
component in a broader suite of HR self-service products.
o Enterprise Resource Planning. ERP software vendors typically offer
premise-based solutions. These solutions are often expensive and
complicated to deploy so that their use is limited to specially trained
personnel. In addition, these systems are not built to efficiently use
the Web and often make it difficult for managers and employees to access
and use up-to-date information. While ERP systems serve a vital role for
employers, their premise-based HR solutions often lack the necessary
functionality and flexibility to meet the self-service needs of
employees.
o Point Solutions. Point solutions typically address one specific HR task,
such as performance appraisals or expense processing. However, point
solutions typically do not seamlessly interface with enterprise software
or with each other, only address one finite task, and cannot be accessed
through multiple media on an "anytime, anywhere" basis.
OPPORTUNITIES FOR WEB-BASED HR SOLUTIONS
The emergence and acceptance of the Internet has fundamentally changed the
way that consumers and businesses communicate, obtain information, purchase
goods and transact business. IDC estimates that the number of Internet users
worldwide will grow from approximately 196 million in 1999 to 502 million in
2003. In addition, Nielsen/Net Ratings estimates that approximately
30.6 million people have access to the Internet at their jobs. As the Internet
has become more accessible, functional and widely used, it has emerged as a
primary business and communication channel along with the telephone, paper-based
communication and face-to-face interaction.
Intranets have become commonplace and have emerged as integral parts of
organizations' information technology infrastructures. IDC estimates that over
500,000 U.S. organizations had Intranets in 1998. An Intranet provides an
efficient, user-friendly medium for an organization to improve communications
with its employees, many of whom may be dispersed due to globalization and the
development of alternative workplaces. Employees are increasingly utilizing
Intranets to access personal and employment-related information.
38
<PAGE>
Organizations are also increasingly looking to third parties to host
applications that would previously have resided at the enterprise. This allows
organizations to pay only for the functionality that they need, cut deployment
time, and shift the burden of installing, maintaining, securing, and managing
the necessary applications and infrastructure to another party.
While organizations and consumers alike have embraced the Internet and many
HR tasks and communications events are logical targets for Web solutions, few
organizations have designed their own Intranets with robust HR functionality. We
believe that the lack of internally developed Internet-based HR applications can
be explained by the following:
o Insufficient IT Budgets Dedicated to HR. Because management often views
HR departments as cost centers rather than revenue generators, IT
projects proposed by HR departments often receive lower priority than
those proposed by profit centers when companies prioritize IT projects
and allocate resources.
o Sizable, Ongoing Business and Financial Commitment. Constructing an HR
Web site that incorporates the level of functionality required to handle
the frequency and complexity of many HR transactions involves a sizable
and ongoing resource commitment. Many organizations simply do not have
the time or resources necessary to implement and maintain such a
solution.
According to a survey by Deloitte & Touche, deploying Internet-based
solutions is among the highest priorities for employee benefits specialists in
2000. According to The Forrester Report, approximately 79% of large employers
intend to offer some form of Web-based HR self-service application by 2001, up
from 35% in 1998. Implementing HR self-service solutions may reduce the need for
HR staff that processes routine transactions. According to a survey by The
Hunter Group of its clients, HR self-service applications can provide per-task
cost savings of approximately 50% to 100% as compared to traditional paper-based
processes. We believe that companies prefer to have one provider rather than
multiple vendors with individual solutions that must be integrated with each
other.
THE WORKSCAPE SOLUTION
We are a leading provider of Web-enabled HR self-service solutions that
enable employers to provide better services to employees, administer
employer-sponsored programs more effectively, manage day-to-day tasks involving
their workforce more easily, and make our clients' managers and employees more
efficient. Our HR self-service solutions are designed to leverage technology to
improve employer-employee relationships, create administrative savings and
increase productivity. Our solutions are designed so that each of our
applications works with, and shares information with, each other application.
Our solutions offer clients the following:
o Multi-media Access. Our solutions support a range of media access
options, including Web, IVR, kiosk, e-mail and fax. Because
our solutions integrate media from all of these different channels,
our applications can automatically update our clients' back-end data
systems.
o Broad Application of Suites from a Single Vendor. Our employee
self-service applications include benefits enrollment and administration,
stock option administration and trading, training registration, direct
deposit, new hire processing and retiree self-service products. Our
manager self-service applications include compensation planning, time and
attendance tracking and call center management. Our broad suite of
applications provides our clients with the capabilities to deploy
multiple applications with a single source.
o Deployment Options. We deploy our solutions in three ways, depending
on our clients' preferences. We host our proprietary software that has
been designed to specifically meet the demands of large employers. We
also deploy our software
39
<PAGE>
solutions on-premise at our client's site, working within the client's
existing IT infrastructure. In addition, some of our clients prefer to
store employee data on their premises, but also want the additional
flexibility, functionality and capacity that can be provided by hosted
solutions. We provide a combined on-premise/hosted solution to meet these
client needs.
o Technology Platform. Our self-service applications operate on an
application platform that incorporates an application server, workflow
and a relationship database. This platform also provides development
tools for configuration, deployment and maintenance. The platform
integrates with multiple back-office enterprise resource planning,
payroll and human resource information systems.
o Professional Services. Our professional services consultants work
closely with client HR and IT staffs to deploy our applications
on-premise or on a hosted basis. Based on our experience with
large employers, we have refined an end-to-end approach that guides each
project from the initial assessment and definition of the scope of work,
through development, implementation, ongoing support and relationship
management.
o Communications Support. We help clients assess, produce and distribute
electronic and print publications needed to deploy our HR self-service
solutions.
OUR VALUE TO OUR CLIENTS
We provide technological solutions to our clients which are designed to
streamline traditional paper-based processes, reduce administrative and
processing costs and provide enhanced service to employees. Through our
self-service solutions, our clients' employees receive personalized
functionality and increased flexibility while saving time, which may enhance
their overall productivity and general job satisfaction. Additionally, our
solutions are designed to reduce our clients' administrative costs, processing
time and error rate, which provides the ability for the HR department to focus
its resources on strategic initiatives.
We believe clients can gain value from our solutions in four principal
areas:
o Improving Service to Employees. Our applications empower employees to
access payroll, benefits and other personal information directly via the
Internet and employer Intranets, IVR, kiosk, fax and e-mail 24 hours a
day, seven days a week, depending on client preferences. We believe our
flexible, personalized functionality generates greater employee
productivity and satisfaction.
o Enhancing Employee Communications. Our solutions create a convenient,
easy-to-learn and user-friendly medium for employers and employees to
communicate. Unlike static Web pages, our hosted Web-enabled applications
continually update information, which allows employers to disseminate
information rapidly to employees. Additionally, employees are able to
access personalized information and engage in transactions on an
"anytime, anywhere" basis.
o Improving Organizational Effectiveness. Our solutions are designed to
replace time-intensive, paper-based processes and reporting requirements
with efficient, reliable, automated processes that increase productivity
while reducing administrative costs and the potential for error inherent
in paper-based processes. For example, our benefits enrollment software
application reduces the need to print and distribute benefits information
packages to all employees and the redundant step of transcribing each
individual's choices into a computer. In addition, our manager
self-service products give managers immediate access to information and
enable them to evaluate rapidly the impact of their decisions.
o Focusing Resources on Strategic HR Initiatives. Our solutions save time
for HR professionals, enabling them to focus on strategic initiatives,
such as workforce
40
<PAGE>
recruiting and retention. Our broad suite of applications allows
organizations to have one HR application provider rather than multiple
vendors, which significantly simplifies application deployment,
integration and maintenance.
THE WORKSCAPE STRATEGY
Our objective is to enhance our position as a leading provider of HR
self-service software solutions. To achieve this goal, we are pursuing the
following strategies.
Targeting New Clients. With approximately 5,000 large employers in North
America alone, there are ample opportunities for us to expand our existing
client base. We intend to aggressively market ourselves to new clients by taking
advantage of our focused HR functional expertise, leading market position and
early entry into this industry. With our broad suite of applications, we believe
we are well positioned to win a significant share of new business. While the
majority of our current clients are based in the U.S., we are also targeting
international companies as a source of new business. We also believe that
strategic alliances will be a valuable source of new business.
Expanding Our Suite of Applications and Cross-selling to Existing
Clients. We are continually expanding our suite of applications through
internal development and strategic acquisitions in order to introduce new
applications. To date, most of our clients have implemented only some of our
available solutions. We believe that there is a significant opportunity to sell
additional solutions to our existing clients as these clients continue to
realize the advantages of our solutions over traditional paper-based processes.
Aggressively Marketing Hosted Solutions. A key component of our strategy
is to focus on hosting our solutions for multiple customers over the Internet.
Although we currently host a number of solutions, these are primarily customized
software applications created on a per customer basis. We believe that the
Internet provides a significant opportunity for us to cost-effectively host all
of our applications on the new platform we are developing. We intend to
aggressively market our hosted solutions to new and existing clients on a
multi-year contract basis which is designed to increase recurring revenue for
us. Hosted solutions are designed to reduce application implementation time and
simplify software upgrades for our clients.
Completing Development of a New Platform. We are currently developing a
new proprietary platform that will be built with industry leading components in
an open architecture format. This next-generation platform is designed to
support more robust hosted applications and eCommerce opportunities, increase
the scalability and functionality of our applications, reduce the need for
customization of our solutions, reduce project implementation times, support
more flexible pricing models and streamline integration of our solutions. For
our premise-based clients who choose not to purchase solutions utilizing the new
platform, we plan to support applications utilizing our existing platform.
Pursuing Strategic Acquisitions and Alliances. Acquisitions have been an
important aspect of our growth strategy. In 1999, we acquired assets of Edify
Corporation's employee self-service business, and assets of NOAH Software, a
vendor of manager self-service applications. We continually evaluate acquisition
opportunities that may expand our client list, provide us with new products that
complement our existing applications, or provide us with functional expertise in
additional areas of HR self-service. We believe these types of acquisitions may
help us to grow significantly faster and at a lower cost than we otherwise
could. We are regularly involved in the investigation and evaluation of
potential acquisitions and at any time we may execute a letter of intent or
binding acquisition agreement. We are not currently a party to any such letters
of intent or agreements. We have also formed and plan to continue to pursue
strategic alliances with technology partners and implementation partners to
assist us in gaining broader market acceptance as well as to enhance our
existing marketing, sales and distribution capabilities.
41
<PAGE>
Enabling eCommerce Opportunities. In the future, following completion and
implementation of our new platform, we believe we can leverage our HR functional
expertise and permission-based access to employee-specific data to create
Employee.com, a portal which will be designed to enable employers to provide
their employees with "anytime, anywhere" access to employer-approved benefits
providers, financial services companies and other vendors. We believe that
Employee.com will be a natural extension of our HR self-service applications and
that employees will appreciate its ability to connect them to businesses with
timely, relevant product offerings that their employer may not otherwise be able
to provide. We also believe that benefits providers, financial services
companies and other businesses will be eager to participate, understanding the
value of being able to offer their products and services directly to millions of
employees who will have access to the portal.
PRODUCTS AND SERVICES
We market HR self-service software applications that are designed to
leverage technology to improve employer-employee relationships, create
administrative savings and increase productivity. Employees and managers can
access our applications 24 hours a day, seven days a week through multiple media
including Internet/Intranet, IVR, kiosk, e-mail and fax interfaces, depending on
the client's preferences. We build interfaces with our clients' installed
enterprise resource planning, human resource information systems software and
call centers. Our self-service applications are designed to make it easy for our
clients to implement additional applications.
42
<PAGE>
Employee Self-service Products
Our employee self-service solutions are designed to save organizations the
time and expense typically involved in routine HR tasks relating to benefits
enrollment, employee information profiles, life events, tax forms, payroll and
related compensation issues. These products are designed to permit clients to
offer their workforce various employer-sponsored programs without incurring
significant costs in administering them. Our employee self-service applications
give employees direct access to data in back-office enterprise and legacy
systems and allow them to control transactions in a way that eliminates paper
processes. Historically, our hosted clients have purchased health benefits and
work and life benefits solutions, while our premise-based employee self-service
clients have purchased compensation and payroll solutions. However, we currently
offer all the applications set forth below, on either a hosted or on-premise
basis.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRODUCT CATEGORIES PRODUCT APPLICATIONS PRODUCT CAPABILITIES
<S> <C> <C>
Health Benefits Allows employees to review and enroll o Medical
in available medical, dental and other o Pharmacy
health benefit programs. o Behavioral health
o Dental
o Vision
Voluntary Benefits Facilitates the offering of a broad o Life insurance
portfolio of voluntary benefits for o Long-term disability
both employees and managers. o Short-term disability
o Accidental death and dismemberment
Flexible Spending Accounts Allows employees to review, calculate o Healthcare
and change their flexible spending o Dependent care
account through the use of an online
worksheet.
Compensation and Payroll Allows employees to track time and o Time and attendance tracking
attendance, review direct deposit o Vacation tracking
elections and receive electronic o Direct deposit
payroll and tax statements. o Electronic paystub
o W-4 administration
o Total compensation statements
o Employment and wage verification
Employee Profile Allows quick and easy automatic o Dependent maintenance
collection and updates of employee o Emergency contact
profiles. o Corporate directory
o Personal information
Training and Recruiting Allows employees to review and register o Class registration
for training classes or to apply for o Training enrollment
posted job opportunities. o Job posting
Help Desk Allows employees to access company o Policies and procedures
policies and procedures online, obtain o Call center integration
a new password or transfer o Organizational handbooks
automatically to a call center.
</TABLE>
43
<PAGE>
Manager Self-service Products
Our integrated suite of manager self-service applications automate and
enable virtually every aspect of the manager-to-employee relationship. These
applications can be purchased and implemented individually or in combination.
Historically, our manager self-service clients have primarily purchased
premise-based compensation planning solutions. We currently offer all the
following manager self-service solutions. These solutions were initially
developed as premise-based solutions, although we also have the capability to
deliver these products as hosted solutions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRODUCT CATEGORIES PRODUCT APPLICATIONS PRODUCT CAPABILITIES
<S> <C> <C>
Compensation Planning Supports the preparation and analysis o Performance rating capture
of salary plans for the entire o Merit increases (percent and/or lump
organization. amounts)
o Equity adjustments
o Promotion increases
o Bonus and variable pay
o Stock option awards
Policy/Resource Guide Provides resource information o Electronic manuals
electronically on HR pay guidelines, o Work event road maps
policies, procedures and legal o Resource guide
requirements.
Organization Chart/Headcount An online, electronic organization o Organizational charting
Tracking chart that provides managers with an o Summary headcount reports
up-to-date list of employees and group o Transfers in
headcount totals. o Transfers out
Reporting/Analysis Provides clients with an array of o Rollup summary reports
stand-alone, online electronic o Employee detail and group averages
reporting capabilities. o Sorting and analysis
o Charting
o Printing
Manager Change Forms Provides a collection of the standard o Transfers
employee change forms associated with o Leave
various work events. o Job change
o Pay actions (salary, bonus, stock)
o Termination
Development Supports line manager's staff o Performance appraisal
development activities including o Employee training histories
performance appraisals, training and o Course catalog
development and succession/competency o Training registration form
planning. o Succession planning and competencies
</TABLE>
44
<PAGE>
Hosted Application for Benefits Providers
We have also developed an Internet-based software application that provides
real-time insurance enrollment and rate quotations by linking employers,
employees, insurers, health maintenance organizations (HMOs) and insurance
brokers. We are just beginning to market this application. This application can
provide coverage and rate information from participating insurers and generates
online proposals and price quotations to qualified brokers who have input
employer-specific data and other information. If one of the proposals generated
is accepted, the employer and its employees can then complete enrollment
applications and make coverage elections over the Internet. Currently, we are
focusing on a "private label" version of this application which is customized to
display by a single insurer or HMO. We have signed a two-year agreement to
provide a private label version to an HMO. Although this application could be
used by employers of any size, we are initially targeting small to medium-sized
employers and their brokers.
Professional Services
Our professional services operation is located throughout the country and
is designed to support the IT infrastructure of our clients. Our service
offerings include needs analysis, project management, requirements definition,
system design, development and customization, installation and training and
ongoing check-ups.
To complement our on-premise software solutions, we also provide our
clients with technical support, communications support and training. We provide
our clients with educational services courses through which we provide the
necessary training to allow them to develop new applications on their own. As
part of our maintenance agreements, we offer technical support, including
telephone support, remote problem diagnosis and new software enhancement
releases, as they become available.
CLIENTS
Our target market segment is large employers, which we define as
organizations with more than 2,500 employees. We focus on these clients because
our solutions are specifically designed to address the complexity of their HR
needs. Our applications have been purchased by clients in a variety of
industries including high technology, manufacturing, telecommunications,
financial services and pharmaceuticals.
A representative list of our clients includes:
<TABLE>
<S> <C> <C>
3Com Corporation Mattel, Inc. PricewaterhouseCoopers
AEGON Millipore Corporation* Quest Diagnostics Incorporated*
Bass Hotels & Resorts National Services Industries Sanders, a Lockheed Martin Company*
Bausch & Lomb* New England Electric System* Seagate Technologies
The Chase Manhattan Bank The New York Times Company Shell Services International
ChoicePoint Inc.* Nordstrom Inc SPX Corporation*
CIGNA Corporation* Norrell Corporation Sunglass Hut International*
Continental Casualty Company Partners HealthCare System, Inc* Travelers Property Casualty Corp.*
FleetBoston Financial* Phoenix Home Life Mutual Tyco International Ltd.*
Hoffman-LaRoche Inc. Insurance Company* US WEST*
</TABLE>
- ------------
*Hosted clients
In 1999, revenues from a single client, Tyco International Ltd., accounted
for approximately 20% of our total revenues, and revenues from our 10 largest
clients accounted for approximately 55% of our total revenues.
45
<PAGE>
REPRESENTATIVE CLIENT ENGAGEMENTS
The following case studies illustrate how clients have deployed our
solutions.
Tyco International Ltd.
Tyco International Ltd. is a diversified manufacturing and service company
with over 70,000 employees. In 1996, Tyco initiated a project to automate and
outsource benefits administration for over 500 business locations, involving
nearly 150 union contracts and numerous different benefits programs. We built a
database consolidating information from hundreds of Tyco's different benefits
plans that now serve as a conversion platform for Tyco's integrated HR
information system. We will host Web and IVR-based employee self-service
applications for Tyco's annual and ongoing enrollment in various benefits plans,
including employee stock purchase plans and other voluntary benefits programs.
PricewaterhouseCoopers
PricewaterhouseCoopers is one of the largest accounting and consulting
firms in the world and a leader in the benefits and HR outsourcing market. In
late 1999, PricewaterhouseCoopers Strategic Human Resources Outsourcing division
selected us to deploy premise-based solutions via Internet, Intranet and IVR for
PricewaterhouseCoopers' 155,000 employees. The solutions currently deployed
include federal Form W-4 filing, direct deposit, electronic paystub, employee
demographic and census information and skills assessment. These solutions are
designed to integrate the client's PeopleSoft 7.5 software with an Oracle
database.
U.S. Postal Service
The U.S. Postal Service is one of the largest employers in the United
States with over 700,000 employees. The employees of the U.S. Postal Service use
our employee self-service applications to enroll in, access and manage their
retirement savings accounts. The shift from a manual, paper-based process to a
premise-based Intranet/IVR system has eliminated paperwork and data entry and
reduced the cost per retirement account transaction by an estimated 87%, from
approximately four dollars per transaction to approximately fifty cents per
transaction. In operation since May 1999, our applications processed almost
75,000 transactions in their first months of operation. Litton PRC, one of our
value-added resellers, customized this application for the U.S. Postal Service.
CIGNA
CIGNA Corporation is a leading provider of employee benefits across the
United States and throughout the world. In 1998, CIGNA implemented our
self-service hosted solutions for annual and on-going benefits enrollment.
CIGNA's 40,000 employees are able to link directly to our data center via the
Internet, or use the telephone and a call center to review benefits information
and enroll in new plans. CIGNA's HR call center staff accesses the same secure,
high performance connection to make real-time updates. Since deployment of our
hosted solutions, CIGNA employee use of the Web for accessing and updating
benefits information has increased from 30% in 1998 to over 70% in 1999. Last
fall, more than 95% of CIGNA's employees reported that the annual enrollment
system was "easy" to use.
Applied Materials
Applied Materials is a leader in the semi-conductor manufacturing equipment
business with a worldwide workforce of 12,000 employees. Applied Materials
selected us in 1998 to deploy on-premise employee and manager self-service
solutions on a global basis via the Web and IVR. Employee self-service
applications include an application that educates employees about Applied
Materials' stock option and purchase plan and models the tax
46
<PAGE>
consequences of stock sales in the employees' local currency. More than 80% of
the company's employees have used the application. The manager information
solutions support strategic activities like wage and salary planning.
3Com
3Com's HR staff must manage an annual compensation planning process for the
company's 13,000 employees located in 48 countries and 200 offices. 3Com
selected us in late 1999 to build an on-premise Web-based compensation planning
system that gives 3Com managers a complete view of the total compensation
information for their direct reports. We have deployed this application which
consists of the following modules: mid-year review, out-of-cycle increases,
spot bonuses, incentive rewards, equity incentives and sales force compensation.
SALES AND MARKETING
Our sales organization is comprised of two regional sales teams which
include national account managers as well as territory sales managers. We assign
a national account manager to ensure client satisfaction and relationship
development with our largest accounts. Territory sales managers develop new
business with target account and existing customers throughout a geographic
region. To generate leads, we combine marketing efforts with the efforts of a
team of sales development representatives who proactively telemarket target
accounts and prospective clients who may have expressed interest in our company
as a result of a trade show, advertisement or seminar marketing.
We sell our products through both direct and indirect sales channels. Our
direct sales infrastructure consists of 10 sales representatives based in each
of the following locations: Boston, New York, Washington, D.C., Atlanta,
Cleveland, Chicago, Minneapolis, Denver, San Francisco and Portland. In addition
to our growing direct sales effort in the United States, we now serve a small
client base in Australia, Canada and the United Kingdom. As part of our future
expansion, we plan to launch initiatives to better serve our multinational
client base and attract new international clients.
Our indirect sales channel is comprised of value-added resellers, such as
Litton PRC, Talisman, Voice Integrators, Voicenet Interactive and WorkForce
Technologies. In addition, our implementation partners, such as The Hunter
Group, deploy our technology working independently of, or in collaboration with,
our professional services organization and often serve as a source of new
business leads. We believe that these alliances will assist us in gaining
broader market acceptance as well as enhance our existing marketing, sales and
distribution capabilities. We participate in joint selling efforts with these
companies to develop new markets and broaden our client base.
47
<PAGE>
TECHNOLOGY AND OPERATIONS
Application Framework
Our application framework incorporates components and features required to
create, deploy and manage scalable and reliable HR self-service solutions. The
fundamental components of the application framework are shown below.
[GRAPHIC APPEARS HERE]
[GRAPHIC: Graphic contains three stacked boxes with two-way arrows between the
top and middle box and the middle and bottom box. The top box, representing the
Presentation Layer, contains the heading "Multi-Media Integration" and beneath
the heading from left to right reads "Kiosk," "IVR," "Internet/Intranet," "Fax,"
"E-mail" and "Call Center." The middle box, representing the Business Logic
Layer, contains the heading "Applications" and beneath the heading lists
"Employee Self-Service" and "Manager Self-Service." Within the middle box is a
second box with the heading "Transaction Engine" and beneath the heading from
left to right reads "Workflow," "Rules" and "Relationships." The bottom box,
representing the Data Access Layer, contains the heading "Back-Office
Integration" and beneath the heading from left to right reads "ERP," "HRIS,"
"Legacy Data Base" and "Payroll."]
Presentation Layer. Presentation refers to the user interface layer of an
application. Employees and managers can access the system through a number of
media channels including Internet/Intranet, IVR, fax, kiosk and e-mail.
Presentation layers are unique to the media selected, but media are integrated
and access the same business rules in the business logic layer.
Users interact with Web-based applications by entering data, using menus
and hyperlinks, and viewing dynamically generated pages containing data rich
content. Applications for browser-based clients run on versions of Microsoft
Internet Explorer 4.0 and above and Netscape Navigator 4.0 and above, utilizing
primarily HTML and JavaScript.
Business Logic Layer. Business logic is the set of rules that an
application follows, based on the client's business requirements. For example,
in an HR self-service application, business logic defines the benefits an
employee can select in open enrollment, the applications an employee can access
based on his or her position within an organization and the process for routing
information for manager approval. In self-service applications, it is usually
desirable to separate the business logic from the user interface. This makes it
easier to change the business logic and maintain the application.
Data Access Layer. The data integration layer provides connectivity to
multiple disparate data sources. Our application framework enables reliable
integration with existing ERP and human resources information systems from
PeopleSoft, SAP and others. Information can also be accessed through DLL, ODBC,
COM and other traditional methods. Clients can write data source objects to
connect to a wide range of data sources. To simplify the creation of data
48
<PAGE>
source objects, we offer Application Program Interfaces that allow clients to
create data source objects with leading enterprise applications.
Data Center Operations
Our solutions, when hosted through our data center, are Internet/Intranet
and IVR-based and require no hardware or software support from the client. In
our data center, our database maintains and updates client and employee data
along with plan rules and elections. Employees, HR staff and call center
representatives can access the database through secure connections. The database
updates the client's HR information systems and payroll systems.
[GRAPHIC APPEARS HERE]
[GRAPHIC: Illustration depicts the Workscape Data Center, consisting of the
Workscape Data Base containing company data, employee and family data, plan
rules, calculations and plan elections, in the center of a circle with an arrow
in each the three o'clock, six o'clock, nine o'clock and twelve o'clock
positions. The arrow in the three o'clock position is labeled "Data Exchange"
and points to the heading "HRIS/Payroll/Vender" and the subheading "Transaction
Files." The arrow in the six o'clock position is labeled "Via Internet" and
points to the heading "Call Center." The arrow in the nine o'clock position is
labeled "Via Internet/Intranet" and points to the heading "HR/Benefits Staff"
and the subheading "HR Management/Administrative View." The arrow in the twelve
o'clock position is labeled "Via Internet/Intranet" and points to the heading
"Employees" and the subheading "Interactive Voice Response," "Employee View Via
Web" and "Personalized Traditional Print."]
The technical infrastructure is designed for
optimal performance, stability and security. We maintain a redundant environment
of Oracle's 8i database running on Microsoft Windows NT, UNIX and VMS platforms.
o Capacity. Production databases run in an environment of 328 Gigabytes,
of which 20% is always reserved and less than 60% is currently in use.
Deployed using a clustered environment, any database instance that
exceeds its individual server's capacity is routed to another server.
Capacity requirements are calculated and reviewed on a monthly basis to
ensure that upcoming client activity does not threaten available
capacity.
o Access. Access to our applications and databases can be provided through
Internet, Intranet or IVR using a high-capacity PBX phone system.
Depending on performance requirements and client preferences, secure
dedicated access can be provided through T1, fractional T1 or standard
Internet connections.
o Security. We use commercially available and supported firewall products.
We are able to detect intrusion attempts, security probes and other
malicious activities. Our firewall configuration provides for highly
redundant security. In addition, Web applications are
49
<PAGE>
protected by the Secure Sockets Layer (SSL) protocol, developed by
Netscape Communications Corporation. SSL provides server authentication,
client authentication and data integrity measures. An individual can
typically access his own employee-specific data by providing his social
security number and a personal identification number.
o Performance. We use a clustered Oracle database environment to ensure
database stability and application performance. Since the perception of
performance is largely dependent on connection speeds, we give careful
consideration to the various communications options available to each
client.
Our data center facilities are designed with special temperature control
systems, seismically braced racks and security features, including smoke
detection and fire suppression systems, motion sensors, secured access and
security alarms.
To prepare for expected growth and the launch of our new platform, we are
undertaking an expansion of our data center operations. We believe that this
expansion will provide increased capacity and further levels of redundancy. In
addition, we have entered into a contract with a third-party service provider,
Exodus Communications, Inc., to manage and maintain most of the computer and
communications equipment needed for the day-to-day operations of our production
data center. The services provided by Exodus will include managing our network
server, maintaining communication lines, managing network data centers and the
backup and storage of data tapes. Historically, we managed and maintained these
services and systems internally. We also plan to transfer our data hosting
facility to a new location in Framingham, Massachusetts in the second quarter of
2000, and following the transition of primary data center operations to Exodus,
to use this new facility as our backup data center.
PRODUCT RESEARCH AND DEVELOPMENT
Starting in 1999, we have made substantial investments in research and
development through internal development activities and the acquisition of the
assets of complementary businesses. We expect that we will develop internally
most enhancements to our existing and new solutions. In addition, we will
continue to evaluate opportunities to integrate externally developed
technologies into the applications we market.
Expanded Suite of Applications. The majority of our software development
activity has been focused on feature extensions to our applications and
solutions. These efforts have consisted primarily of enhancing existing
applications and developing new solutions as we have sought to expand our client
base. We intend to continue to commit significant resources to research and
development efforts with a continued focus on employee self-service and manager
self-service. We have developed customized retiree self-service solutions for a
limited number of clients and we intend to invest resources to develop a retiree
self-service suite of applications that can be marketed to all clients as part
of our standard product releases. These applications will be an extension of our
employee self-service suite and focus on the administration of benefits and
retirement programs.
New Platform Under Development. We are currently developing a new platform
that we believe will have the capacity to support more standardized hosted
applications and provide for eCommerce functionality. We believe the strength of
the new platform will be its utilization of key technologies and best-of-breed
components.
o Applications. Enterprise Java Beans will provide the core self-service
and eCommerce functionality in addition to the appropriate supporting
functionality for personalization, security and navigation.
o Middleware. BEA WebLogic Server will be the foundation for our new
platform. The middleware layer will also consist of a knowledge base
component containing rich personalized content, workflow for routing
requests within the enterprise, and a rules engine for calculating
complex business policies and procedures.
50
<PAGE>
o Integration and Infrastructure. Our solutions are designed to have the
capacity to integrate with third-party ERP systems, such as PeopleSoft
and SAP, and with key relational database technologies, such as Oracle
databases. In addition, our solutions must have the capacity to
inter-operate with custom-built applications via our application program
interface and exchange key data via an XML gateway.
In the future, following completion and implementation of our new platform,
we believe we can develop Employee.com, a portal through which employers will be
able to provide their employees access to employer-approved benefits providers,
financial services companies and other vendors. We intend to deliver
Employee.com as a hosted solution.
Our new platform will be developed in connection with a secure database
that will have the ability to store client-specific information as well as
information about employees' benefits and compensation elections. This database
will be a central data repository that will be updated regularly as part of our
routine administration of our clients' programs. We believe that our ability to
capture key employee data while leveraging the Internet to serve as a gateway
between employees and company-sponsored/employee-approved vendors creates a
significant eCommerce opportunity that can be targeted and personalized for
employees based on their life events.
COMPETITION
The market for our solution is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Competitors vary in size and in the scope
and breadth of the products and services offered. We encounter competition with
respect to different aspects of our solution from a variety of vendors of
employee self-service and manager self-service applications, from Web-based
technology companies whose products include HR solutions and from major
enterprise software developers. We expect additional competition from other
established and emerging companies as the HR self-service market continues to
develop and expand.
Our major competitors among software vendors focus on specific applications
within the employee self-service or manager self-service categories. Our major
competitors among Web-based companies that offer HR products focus on Internet
technology and employ an acquisition strategy that encompasses acquiring
functional expertise in HR, as well as other areas in which the Internet may
offer efficiencies and savings. Our major competitors among ERP providers are
often capable of delivering some HR solutions through Web-only extensions of
their proprietary back-office systems. Most of the major ERP providers have a
significant installed client base and have the opportunity to offer additional
products to those clients as additional components of their respective ERP
application suites. We believe the biggest near-term competitive threat is that
ERP vendors will actively promote enhanced Web capabilities, which may, at a
minimum, delay clients' purchasing decisions. Additionally, we increasingly face
competition from other benefits administrators and consultants, small human
resource information systems vendors, payroll administrators, and small employer
benefits enrollment firms. Many of these companies have Web-based benefits
enrollment functionality.
We believe that the principal competitive factors considered in selecting
HR self-service solutions are cost, breadth of HR solutions offered, seamless
integration with current enterprise systems and call centers, "anytime,
anywhere" access through multiple media, scalability, easier workforce
management through automation, improved worker productivity and satisfaction and
broad Web-based functionality. Although we believe that our broad suite of
products currently competes favorably with respect to these factors and that no
one competitor offers comparable breadth and depth of solutions, our market is
relatively new and evolving rapidly. We may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
51
<PAGE>
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success depends heavily upon the development and protection of
proprietary technology. We rely primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to establish and to protect our proprietary rights. Such laws and
operating procedures provide only limited protection. We also enter into
confidentiality agreements with our employees and consultants, and attempt to
restrict access to proprietary information on a need-to-know basis. Despite
these contractual precautions, unauthorized third parties may be able to copy
aspects of our current or future products or obtain and use information that we
regard as proprietary. In addition, our current and future competitors may
independently develop similar or superior technology.
Litigation may be necessary in the future to enforce our intellectual
property rights, protect our trade secrets, or determine the validity and scope
of the proprietary rights of others. Litigation could entail substantial costs,
the diversion of management attention, and other resources. Accordingly, such
litigation could materially adversely affect our business, operating results,
and financial condition.
We are not aware of any instance in which we are infringing upon the
proprietary rights of others. However, we cannot be sure that third parties will
not bring infringement claims of their intellectual property rights against us.
We expect infringement claims to arise as the number of products and competitors
in our industry segment grows and the functionality of products in different
industry segments overlap. As a result, any such claims, whether with or without
merit, could be time consuming and costly to defend, could cause product delays,
and could force us to enter into unfavorable royalty or license agreements with
third parties. Even if required, we may not be able to negotiate needed license
or royalty agreements or to obtain them on terms acceptable to us. If a third
party brings a successful claim of product infringement against us, we must
either license the infringed or similar technology or develop alternative
technology on a timely basis. Because we cannot be sure of successfully finding
an acceptable alternative, a successful product infringement claim against us
could materially adversely affect our business, operating results, and financial
condition.
There is also uncertainty regarding the applicability to the Internet of
existing laws regarding matters such as property ownership, copyrights and other
intellectual property rights. The vast majority of these laws were adopted prior
to the advent of the Internet and, as a result, do not contemplate or address
the unique issues of the Internet and related technologies.
EMPLOYEES
As of February 29, 2000, we had 221 full-time employees, 59 of whom were
engaged in technical strategy and product development, 87 in integration and
professional services, 42 in sales, marketing and business development, and 33
in administration and finance. None of our employees is represented by a
collective bargaining agreement and we believe that we have good relations with
our employees.
FACILITIES
Our principal executive offices currently occupy approximately 5,200 square
feet of leased space in Reston, Virginia. We also lease an aggregate of
approximately 25,250 square feet of office space in Natick and Framingham,
Massachusetts, an aggregate of approximately 16,790 square feet in San Jose,
Half Moon Bay and Davis, California, and approximately 1,600 square feet in
Wauwatosa, Wisconsin. We have entered into a lease for approximately
56,000 square feet of office space in Framingham, Massachusetts, which will
replace our current operations in Natick and Framingham, and we anticipate
moving into these facilities during the second quarter of 2000.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
52
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and certain key employees and their ages
as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -------------------------------------------------------------
<S> <C> <C>
James G. Carlson................. 47 Chairman and Chief Executive Officer
Timothy T. Clifford.............. 44 President, Chief Operating Officer, Director
George W. Bickerstaff, III....... 44 Chief Financial Officer, Secretary
A. Lee Ingram.................... 36 Chief Technology Officer
Susanne M. Bundy................. 38 Executive Vice President, Sales and Professional Services
Donald R. Fitch.................. 42 Executive Vice President, Finance
Sidney W. Stolz.................. 38 Executive Vice President, Business Development
Patrick T. Hackett(2)............ 38 Director
David J. Wenstrup(1)............. 35 Director
Timothy T. Weglicki(1)........... 48 Director
F. Selby Wellman(1)(2)........... 58 Director
KEY EMPLOYEES:
David G. Arella.................. 51 Senior Vice President, Manager Self-service
Timothy F. McDonald.............. 38 Senior Vice President, Marketing
Kenneth F. Phillips.............. 54 Principal
</TABLE>
- ------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
James G. Carlson. Mr. Carlson has been our Chairman and Chief Executive
Officer since February 1999. From September 1995 to October 1998, Mr. Carlson
was the President of United HealthCare, a division of United HealthGroup. He
previously was an Executive Vice President with MetraHealth from March 1995 to
September 1995. Prior to that time, he founded and was Chief Executive Officer
of HealthSpring, a physician practice management company which was acquired by
MetraHealth, and was with Prudential's employee benefits division.
Timothy T. Clifford. Mr. Clifford has been our President and Chief
Operating Officer since February 1999. From July 1996 to December 1997,
Mr. Clifford was the President and Chief Operating Officer of Small Group
Business of Health Plan Services. From April 1990 to December 1997, he was Chief
Executive Officer of Consolidated Group, which was acquired by Health Plan
Services. Prior to that time, Mr. Clifford was in sales with Prudential's Large
Employer Group Benefits operations.
George W. Bickerstaff, III. Mr. Bickerstaff joined us in December 1999 as
Chief Financial Officer and Secretary. From July 1999 to December 1999, he was
the Executive Vice President and Chief Financial Officer of Uniscribe
Professional Services, Inc., and from January 1998 to June 1999, the Executive
Vice President and Chief Financial Officer of Intellisource Group, Inc. Prior to
that time, Mr. Bickerstaff was the Vice President of Finance of Cognizant
Corporation from July 1997 to December 1997, and the Chief Financial Officer of
IMS Healthcare from January 1996 to June 1997. He also worked in finance,
management and audit positions at The Dun & Bradstreet Corporation and General
Electric Company.
53
<PAGE>
A. Lee Ingram. Mr. Ingram joined us as Chief Technology Officer in August
1999 from Gresham Computing, a developer of Java-based middleware technologies,
where he had been the Vice President of E-Business from November 1998 to July
1999. From January 1994 to October 1998, he was Director of Technology and
Systems Integration with MCI Systemhouse.
Susanne M. Bundy. Ms. Bundy joined us in September 1999 as Executive Vice
President, Sales and Professional Services. From November 1998 to May 1999, she
was Senior Vice President of ENTEX Information Services, Inc.'s technology
acquisition services division. From September 1993 to November 1998, she was the
Area Vice President and Senior Vice President, respectively, of the southern
region for ENTEX Information Services Inc. Prior to that time, Ms. Bundy held
various regional and general management positions for JWP Information Services,
which was acquired by ENTEX Information Services Inc. in a management buy-out.
Donald R. Fitch. Mr. Fitch became our Executive Vice President, Finance,
in March 1999. Mr. Fitch was Executive Vice President and Treasurer of Health
Plan Services from July 1996 to February 1999. Prior to that time, he was Chief
Financial Officer of Consolidated Group from May 1981 to June 1996.
Sidney W. Stolz. Mr. Stolz joined us in July 1999 as our Executive Vice
President, Business Development. From October 1995 to July 1999, Mr. Stolz was
the Chief Executive Officer of United HealthGroup's Global Consulting Practice.
Prior to that time Mr. Stolz was the Senior Vice President, Delivery Systems
Management of MetraHealth from February 1995 to October 1995, and a healthcare
consulting partner at Towers Perrin from February 1989 to February 1995.
Patrick T. Hackett. Mr. Hackett has served as one of our directors since
February 1999. Mr. Hackett is a partner of Warburg, Pincus & Co., Inc., the
general partner of Warburg, Pincus Equity Partners, L.P., one of our principal
stockholders. Prior to joining Warburg, Pincus in 1990, he was Vice President
and Treasurer of Cove Capital Associates, Inc., a private merchant banking
organization. Mr. Hackett is also a director of Eclipsys Corporation.
David J. Wenstrup. Mr. Wenstrup has served as one of our directors since
February 1999. Since 1997, Mr. Wenstrup has been employed by E.M. Warburg,
Pincus & Co., LLC, an affiliate of Warburg, Pincus Equity Partners, L.P., one of
our principal stockholders. Prior to joining Warburg, Pincus, he was with the
Boston Consulting Group from 1991 to 1997. Mr. Wenstrup is also a director of
Sonus Corp.
Timothy T. Weglicki. Mr. Weglicki has served as one of our directors since
December 1999. Mr. Weglicki has been a general partner of ABS Partners, L.P.
since December 1993, a managing member of ABS Partners II, LLC since July 1996
and a managing member of ABS Partners III, LLC, the general partner of ABS
Capital Partners III, L.P., one of our principal stockholders, since December
1998. Mr. Weglicki is also a director of SciQuest.com and Vitalcom, Inc.
F. Selby Wellman. Mr. Wellman has served as one of our directors since
February 2000. Mr. Wellman has been Senior Vice President and General Manager of
the InterWorks Business Division and the Research Triangle Park, N.C. Corporate
Site Executive for Cisco Systems Inc. since May 1997, Senior Vice President of
Business Units at Cisco since March 1996 and Vice President and General Manager
of the InterWorks Business Unit since April 1995. Prior to joining Cisco,
Mr. Wellman was Corporate Vice President of Sales, Marketing and Operations at
FiberCom Inc. from 1988 to 1994. Mr. Wellman is also a Director of MCNC, the
University of North Carolina Board of Visitors and the North Carolina State
University College of Management Advisory Board.
David G. Arella. Mr. Arella became our Senior Vice President, Manager
Self-service in October 1999 following our acquisition of NOAH Software. He
founded NOAH Software in 1991 and was its Chief Executive Officer until 1999.
During the eight years prior to that time,
54
<PAGE>
Mr. Arella held various management positions, including manager of the HR
systems, technology and innovation group, at Apple Computer.
Timothy F. McDonald. Mr. McDonald became our Senior Vice President,
Marketing, in March 1999. Prior to that time, he was the Vice President of
Marketing at United HealthCare from January 1996 to February 1999, and has held
similar positions with MetraHealth, HealthSpring, Inc. and Value Health, Inc.
Kenneth F. Phillips. Mr. Phillips founded our company in 1972 under the
name Employee Communications Services, Inc. and served as its President until
1999. He has spent his career creating innovative solutions in the areas of
employee benefits, compensation and human resources. He is the former president
and current director of The New England Benefits Council.
BOARD OF DIRECTORS
Our board currently consists of six directors. In accordance with our
proposed amended and restated certificate of incorporation, immediately upon
completion of this offering, our board of directors will be divided into three
classes of directors serving staggered, three-year terms. As a result,
approximately one-third of the members of our board of directors will be elected
each year.
We have established an audit committee and a compensation committee. The
audit committee consists of Messrs. Wellman, Wenstrup and Weglicki. The audit
committee makes recommendations to the board of directors regarding the
selection of independent auditors, reviews the scope of audit and other services
by our independent auditors, reviews the accounting principles and auditing
practices and procedures to be used for our financial statements and reviews the
results of those audits.
The compensation committee consists of Mr. Hackett and Mr. Wellman. The
compensation committee makes recommendations to the board of directors regarding
our stock and compensation plans, approves compensation of executive officers
and administers our equity participation plans. Prior to establishing the
compensation committee, our board of directors determined compensation for
executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees. No
interlocking relationship exists between our board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past.
DIRECTOR COMPENSATION
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings, but do not receive other
cash compensation for their services as board or committee members. Our
directors are eligible to participate in our equity participation plans.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during 1999 to
our chief executive officer and to the four other most highly compensated
executive officers who received salary and bonus compensation of more than
$100,000 during 1999.
55
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
AWARDS
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------- STOCK UNDERLYING
NAME AND POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS
- -------------------------------------------------- ---- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
James G. Carlson
Chief Executive Officer......................... 1999 $ 41,654 $100,000 $ 0.0 --
Timothy T. Clifford
President and Chief Operating Officer........... 1999 $238,832 $100,000 $ 0.0 --
Donald R. Fitch
Executive Vice President, Finance............... 1999 $146,993 $ 68,000 $ 0.0 --
A. Lee Ingram
Chief Technology Officer........................ 1999 $ 68,295 $ 29,167 $ 0.0 --
Susanne M. Bundy
Executive Vice President, Sales and Professional
Services........................................ 1999 $ 54,205 $ 42,075 -- 210,000
</TABLE>
- ------------
(1) Messrs. Carlson, Clifford, Fitch and Ingram were issued 2,250,000,
2,250,000, 260,000 and 500,000 shares, respectively, of restricted common
stock issued under our 1999 Equity Participation Plan, for which they paid
between $0.02 and $0.50 per share These shares of common stock vest annually
over four years and are subject to repurchase by us upon the officer's
termination of employment at the original price paid for each share by that
officer. These shares of common stock are eligible to receive dividends.
The following table sets forth information with respect to stock options
granted during the year ended December 31, 1999 to each of the named executive
officers. All options were granted under our 1999 Equity Participation Plan.
Options granted under the plan generally vest over a four-year period with 25%
vesting at the first anniversary of the grant date and the remaining shares
vesting in annual installments over the following three years. The compensation
committee of our board of directors retains discretion to modify the terms of
the options, including the price of outstanding options.
The potential realizable value amounts in the last two columns of the
following chart represent hypothetical gains or "option spread" that could be
achieved for the respective options if exercised at the end of the option term.
The assumed 5% and 10% annual rates of stock price appreciation from the date of
grant to the end of the option term are provided in accordance with rules of the
SEC and do not represent our estimate or projection of the future common stock
price. We do not necessarily agree that this method can properly determine the
value of an option. Actual gains, if any, on stock option exercises are
dependent upon numerous factors, including, but not limited to, the future
performance of the common stock, overall market conditions and the option
holder's continued employment through the vesting
56
<PAGE>
period, which factors are not reflected in this table. This table does not take
into account any actual appreciation in the price of the common stock from the
date of grant to the present.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERMS
OPTIONS EMPLOYEES IN $/PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- --------------------------------- ---------- ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
James G. Carlson
Chief Executive Officer........ -- -- -- -- -- --
Timothy T. Clifford
President and Chief
Operating Officer.............. -- -- -- -- -- --
Donald R. Fitch
Executive Vice
President, Finance............. -- -- -- -- -- --
A. Lee Ingram
Chief Technology Officer....... -- -- -- -- -- --
Susanne M. Bundy
Executive Vice President, Sales
and Professional Services...... 210,000 19.8% $ 0.10 9/23/2009 $13,207 $33,469
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding exercised stock
options during the year ended December 31, 1999 and unexercised options held as
of December 31, 1999 by each of the named executive officers. All options were
granted under our 1999 Equity Participation Plan. The values for "in-the-money"
options represent the positive spread, if any, between the respective exercise
prices of each outstanding stock option and the fair market value of our common
stock as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES VALUE YEAR-END(#) YEAR-END($)
ACQUIRED ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James G. Carlson
Chief Executive Officer... -- -- -- -- -- --
Timothy T. Clifford
President and Chief
Operating Officer......... -- -- -- -- -- --
Donald R. Fitch
Executive Vice President,
Finance................... -- -- -- -- -- --
A. Lee Ingram
Chief Technology
Officer................... -- -- -- -- -- --
Susanne M. Bundy
Executive Vice President,
Sales and Professional
Services.................. -- -- -- 210,000 -- $ 273,000
</TABLE>
57
<PAGE>
1999 EQUITY PARTICIPATION PLAN
During 1999, we adopted our 1999 Equity Participation Plan (the "1999
Plan"). As of February 29, 2000, 17,733,330 shares of common stock were reserved
for issuance under the 1999 Plan. Of these shares, 12,532,000 shares were
subject to outstanding option or restricted stock grants and 5,201,330 shares
were available for future grants. Under the 1999 Plan, the eligible participants
consist of our officers, key employees, directors and consultants. The 1999 Plan
permits us to grant options to purchase shares of common stock, stock
appreciation rights, restricted stock and performance shares, or any combination
of the foregoing. Options may be "incentive stock options" that qualify for
favorable tax treatment for the optionee under Section 422 of the Internal
Revenue Code of 1986 or nonstatutory stock options not designed to qualify for
that tax treatment. With limited restrictions, if shares awarded under the 1999
Plan cease to be outstanding, then those shares will again become available for
issuance under the 1999 Plan. The 1999 Plan expires in 2009.
The compensation committee of our board of directors administers the 1999
Plan. That committee has the complete discretion to make all decisions relating
to the interpretation and operation of the 1999 Plan, including the discretion
to determine which eligible individuals are to receive any award, and to
determine the type, number, vesting requirements and other features and
conditions of each award.
The compensation committee may amend or terminate the 1999 Plan at any
time. If the committee amends the 1999 Plan, stockholder approval of the
amendment will be sought if the amendment will materially increase the number of
shares under the 1999 Plan, materially reduce the minimum purchase price of
common shares which may be subject to benefits under the 1999 Plan, or
materially modify the eligibility requirements.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with James Carlson, Timothy
Clifford, George Bickerstaff, Lee Ingram, Donald Fitch and Sidney Stolz, under
which they will serve as our Chief Executive Officer, President and Chief
Operating Officer, Chief Financial Officer, Chief Technology Officer, Executive
Vice President-Finance and Executive Vice President-Business Development,
respectively. The initial term of Mr. Carlson's, Mr. Clifford's and Mr.
Bickerstaff's agreements expires on January 1, 2003. The initial term of each
other agreement expires on January 1, 2002. The term of each employment
agreement extends automatically for consecutive one-year periods unless
terminated by either us or the executive upon 60 days' notice. Messrs. Carlson,
Clifford, Bickerstaff, Ingram, Fitch and Stolz receive annual base salaries of
$300,000, $300,000, $225,000, $175,000, $170,000 and $190,000, respectively,
subject to increases as approved by our board of directors, and each is eligible
to receive an annual cash bonus targeted at 50% of his annual base salary. These
executives are also entitled to participate in such group welfare benefit plans
as we may make available to our other senior executives. If we terminate any of
these executives' employment without cause or the executive resigns for good
reason following a substantial breach by us, the executive will continue to
receive his base salary, bonus and benefits, subject to set-off for amounts
received pursuant to new employment or business activities, for a specified
period after the termination date. If the executive's employment is terminated
within 18 months following a change of control, a specified portion of the
executive's unvested options or restricted shares will immediately vest and
become exercisable. Each executive has the right to terminate his employment at
any time. In addition, these agreements provide that the executive will not
disclose any of our confidential information for a period of five years after
his term of employment and will not compete with us or solicit our business,
clients or employees for a period of two years after his term of employment. We
have entered into a similar agreement with Susanne Bundy, our Executive Vice
President, Sales and Professional Services, under which her base salary is
$198,000 and her bonus is determined by a formula relating to sales goals.
58
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that we shall indemnify our
directors and officers to the fullest extent permitted by Delaware law. Our
certificate of incorporation further provides that any liability of our
directors for monetary damages to us shall be eliminated to the fullest extent
permissable under Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:
o breach of their duty of loyalty to the corporation or its stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our bylaws require us to indemnify our directors and officers to the
fullest extent permitted by law. Our bylaws also permit us to purchase and
maintain insurance on behalf of any officer, director, employee or agent of our
company for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws permit such indemnification.
We intend to enter into agreements to indemnify our directors, in addition
to the indemnification provided for in our bylaws. These agreements, among other
things, will indemnify each of our directors for expenses (including attorneys'
fees), judgments and settlement amounts incurred by that director in any action
or proceeding, including any action by or in the right of us arising out of that
person's services as one of our directors, any of our subsidiaries or any other
company or enterprise to which that person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors. We have also obtained director and officer
liability insurance that insures our officers and directors against certain
liabilities.
There is no pending litigation or proceeding involving any of our directors
or officers in which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim for
indemnification.
SECTION 401(K) PLAN
We adopted a 401(k) tax-deferred savings plan for the benefit of our
employees. The 401(k) plan is intended to be a qualified retirement plan under
section 401 of the Internal Revenue Code so that contributions by our employees
to the 401(k) plan, and income earned on plan contribution, are not taxable to
our employees until withdrawn. All of our employees who have attained the age of
21 are eligible to participate in our 401(k) plan. The annual maximum
contribution, including any matching contribution and profit sharing, is the
lesser of 15% of an employee's annual compensation or the statutory limit of
$10,500. We make matching contributions to the 401(k) plan at $0.50 per dollar
of salary deferral contributed by a plan participant up to 6% of the
participant's gross pay. Our contributions are subject to a five-year vesting
schedule. The 401(k) plan is administered through Massachusetts Mutual Life. We
may amend or terminate the 401(k) plan at any time, subject to conditions and
restrictions imposed by the plan adoption agreement, the Internal Revenue Code
and ERISA.
59
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS RELATED TO THE RECAPITALIZATION AND REINCORPORATION OF OUR COMPANY
On February 2, 1999, we completed the recapitalization of our company. In
the recapitalization, Kenneth F. Phillips and Salvatore C. Percia, our founding
stockholders, (1) exchanged their pre-recapitalization shares for 13,500,000
shares of our Series A preferred stock and warrants to purchase 1,500,000 shares
of common stock at $1.00 per share and (2) each purchased 125,000 shares of our
common stock for $0.02 per share. Under the recapitalization agreement, we are
required to pay an amount to Mr. Phillips and Mr. Percia based on a formula
determined by the revenues earned during 1999. This amount ranges from $0 to
$1,500,000 and will be payable, at the option of Mr. Phillips and Mr. Percia, in
either cash or up to 1,500,000 shares of common stock. Any payments in stock
proportionately reduce the number of shares for which the warrants are
exercisable. We have estimated that based on our 1999 operating results, Mr.
Phillips and Mr. Percia have earned, and we have accrued, $1,000,000, at
December 31, 1999.
In connection with the foregoing recapitalization transactions, we entered
into two-year employment agreements with Mr. Phillips and Mr. Percia, under
which they each serve as an employee with duties assigned by our board. We may
terminate Mr. Phillips' or Mr. Percia's employment with or without cause at any
time during the term of the agreement. In addition, these agreements provide
that Mr. Phillips and Mr. Percia will not disclose any of our confidential
information for a period of five years after the term of employment and,
provided Mr. Phillips or Mr. Percia is not terminated without cause, will not
compete with us for a period of two years after the term of employment. In
addition, Mr. Phillips and Mr. Percia will not solicit our business, clients or
employees for a period of three years after the term of employment.
Upon completion of the recapitalization, Warburg, Pincus Equity Partners,
L.P. and four limited partnerships affiliated with Warburg, Pincus Equity
Partners, L.P. (collectively, "Warburg Pincus") purchased 9,500,000 shares of
our Series A preferred stock from Mr. Phillips and Mr. Percia and 3,250,000
shares of Series A preferred stock from us. Simultaneously, James G. Carlson,
Timothy T. Clifford, and three other individuals purchased an aggregate of
750,000 shares of our Series A preferred stock and 4,720,000 shares of common
stock in exchange for $594,400 of cash and secured promissory notes for
$125,000, and all of the outstanding shares of a corporation owned by those
investors. We sold an additional 435,000 shares of common stock to various
employees for $0.02 per share upon completion of the recapitalization.
Our company changed its name from Employee Communications Services, Inc. to
Workscape, Inc. in May 1999 and reincorporated in Delaware in August 1999.
PREFERRED STOCK FINANCINGS
In addition to the shares of Series A preferred stock issued in the
transactions described above, between July 15, 1999 and December 17, 1999,
pursuant to a series of private financings, we sold 7,691,666 shares of our
Series B preferred stock at prices of $1.00 to $1.20 per share, 14,583,333
shares of our Series C preferred stock at a price of $1.20 per share and
12,000,000 shares of our Series D preferred stock at a price of $2.00 per share.
We sold these securities pursuant to preferred stock purchase agreements, under
which we made customary representations, warranties and covenants. In connection
with these preferred stock financings, we and each purchaser of preferred stock
executed the stockholders agreement and registration rights agreement described
below. We will use a portion of the net proceeds from this offering to redeem
all outstanding shares of our Series C preferred stock, as required by its
terms, and to make required cash payments to the holders of Series D preferred
stock upon conversion of those shares into common stock upon completion of this
offering. Except for the Series C preferred stock, each outstanding share of
preferred stock will convert into one share of common stock upon the completion
of this offering. The purchasers of the preferred stock included, among others,
the holders of 5% or more of our common stock, officers, directors and entities
associated with directors as set forth below. For more detail on shares held by
these purchasers, see "Principal Stockholders."
60
<PAGE>
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK PURCHASED
------------------------------------
INVESTOR SERIES B SERIES C SERIES D
- ----------------------------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
ABS Capital Partners III, L.P.(1)...................................... -- -- 7,000,000
Warburg, Pincus Equity Partners, L.P.(2)............................... 7,500,000 14,583,333 5,000,000
Timothy F. McDonald.................................................... 50,000* -- --
Donald R. Fitch........................................................ 50,000* -- --
A. Lee Ingram.......................................................... 50,000* -- --
Susanne M. Bundy....................................................... 41,666* -- --
</TABLE>
- ------------
* Pledged to us to secure a loan from us to purchase shares of our stock.
(1) Timothy T. Weglicki, who serves as one of our directors, is a managing
member of ABS Partners III, LLC, the general partner of ABS Capital Partners
III, L.P. which owns these shares. Mr. Weglicki may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by ABS Capital Partners III, L.P. Mr. Weglicki disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(2) The stockholder is Warburg, Pincus Equity Partners, L.P. (including three
affiliated partnerships) ("WPEP"). Warburg, Pincus & Co. ("WP") is the sole
general partner of WPEP. WPEP is managed by E.M. Warburg, Pincus & Co., LLC
("EMWP"). Lionel I. Pincus is the managing partner of WP and the managing
member of EMWP and may be deemed to control both entities. Patrick T.
Hackett, a director of our company, is a general partner of WP and a
managing director and member of EMWP. Mr. Hackett may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934) in an indeterminate portion of the shares
beneficially owned by WPEP. Mr. Hackett disclaims beneficial ownership of
all shares owned by the Warburg Pincus entities. David J. Wenstrup, one of
our directors, is a Vice President of EMWP, the manager of WPEP.
In addition, Warburg, Pincus Equity Partners, L.P. and related partnerships
hold warrants to purchase 14,583,333 shares of common stock that were granted in
connection with the sale of the Series C preferred stock. After the redemption
of all outstanding shares of Series C preferred stock upon completion of this
offering, the number of shares eligible for purchase under these warrants will
be reduced to 8,283,333.
During October and November 1999, we issued $10 million aggregate
principal amount of 8% promissory notes to Warburg, Pincus Equity Partners, L.P.
In December 1999, we issued 5,000,000 shares of our Series D preferred stock to
Warburg Pincus, as described above, in exchange for these notes. On January 14,
2000, we made a payment of $116,667 to Warburg Pincus to repay interest due on
these notes. For more information with respect to the 8% notes, see Note 7 of
our audited financial statements beginning on page F-1 of this prospectus.
OTHER STOCK ISSUANCES
Pursuant to our 1999 Equity Participation Plan, we sold 8,164,000 shares of
our common stock to various employees and consultants, including the named
executive officers, between February 1999 and November 1999 at prices from $0.02
to $0.50 per share. These shares of common stock vest annually over four years
and the unvested portion is subject to repurchase by us at the price paid for
each share by the employee. If we do not repurchase those unvested shares, they
will automatically vest.
On February 24, 2000, we sold 200,000 shares of our common stock to F.
Selby Wellman, one of our directors, and 40,000 shares of our common stock to
George Bickerstaff, our Chief Financial Officer, each at a price of $5.00 per
share.
On March 6, 2000 we sold 30,000 shares of our common stock to Sidney Stolz,
our Executive Vice President, Business Development, at a price of $5.00 per
share.
ACQUISITIONS
Edify Corporation. On July 15, 1999, we completed the purchase of assets
related to the employee self-service business of Edify Corporation. The purchase
price for the acquired assets was $16,029,555 in cash plus the assumption of
liabilities related to ongoing contracts of Edify. The acquired assets included
Edify's employee self-service product and related tangible and intangible
assets, inventory, technology, books and records, contracts and goodwill
including Edify's HR client list, its proprietary employee self-service
software, a license for Edify's Employee Workforce application server platform
and the opportunity to recruit employee self-service domain experts.
61
<PAGE>
NOAH Software. On October 12, 1999, we purchased substantially all the
assets of NOAH Software, Incorporated under an Asset Acquisition Agreement with
NOAH and David G. Arella, the majority shareholder of NOAH and currently our
Senior Vice President, Manager Self Service. The purchase price for the NOAH
assets consisted of $3,273,960 in cash and 1,116,800 shares of our common stock
and the assumption of specified liabilities related to ongoing contracts of
NOAH. Concurrently with the execution and delivery of this agreement, we offered
employment to all of NOAH's employees. In addition, we issued an aggregate of
483,200 shares of restricted stock to seven NOAH employees pursuant to
restricted stock agreements. In connection with this transaction, we entered
into a two-year employment agreement with David Arella, under which he will
serve as our Senior Vice President, Manager Self-service.
STOCKHOLDERS AGREEMENT
Under the Amended and Restated Stockholders Agreement among us, Warburg
Pincus and other stockholders holding a majority of our stock, following this
offering we must nominate and use our best efforts to have two people designated
by Warburg Pincus elected to our board of directors as long as Warburg Pincus is
the beneficial owner of at least 20% of our common stock. As long as Warburg
Pincus beneficially owns at least 10% but less than 20% of our common stock, we
must nominate and use our best efforts to have one person designated by Warburg
Pincus elected to our board of directors. All other rights and obligations under
this stockholders agreement will terminate upon completion of this offering.
REGISTRATION RIGHTS
Under a registration rights agreement entered into between us and certain
holders of our securities, we must register those shares of common stock, which
we refer to as "registrable shares," if any of the following occurs:
o after December 17, 2000, we receive written notice from the holders of
30% or more of the shares issued upon conversion of the Series D
preferred stock issued in December 1999, or at any time we receive
written notice from any other holder of registrable shares, requesting
registration with respect to registrable shares having an aggregate price
to the public of at least $10,000,000;
o if we register our equity securities for our own account or for any other
stockholder; or
o if we receive written notice from either Warburg Pincus or ABS requesting
that we effect a registration on Form S-3 (a shortened form of
registration statement) with respect to registrable shares having an
aggregate price to the public of at least $5,000,000 and we are then
eligible to use Form S-3, which at the earliest could occur 12 months
after the closing of this offering.
We will not be required to effect any registration within 180 days of the
effective date of this offering or of the most recent Form S-3 registration.
In addition to other conditions and limitations, if requested by the
underwriters to decrease the number of shares registered, we can limit the
number of shares included in the registration statement. The underwriters have
requested that no registrable shares be registered in this offering. In
addition, the holders of these registration rights have entered into lockup
agreements and waived their registration rights until 180 days following this
offering.
OTHER TRANSACTIONS
We paid an aggregate of $383,245 to BEA Systems, Inc. in 1999 as rent for
the sublease of our San Jose, California facilities. This sublease obligates us
to pay $48,000 a month in rent until April 30, 2000. In addition, we also paid
$16,000 in 1999 to BEA Systems for consulting services. In 2000, we paid
$400,000 to WebXpress, Inc., an affiliate of BEA Systems, as prepayment of
license and support fees under the terms of a software license agreement. Under
this license agreement, additional payments may be made to WebXpress in the
future. BEA Systems is an affiliate of Warburg Pincus.
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of March 21, 2000 by:
o each person or entity who is known by us to beneficially own more than 5%
of our common stock;
o each of the named executive officers and each of our directors; and
o all of our officers and directors as a group.
Percentage of ownership before the offering is based on 64,028,999 shares
outstanding as of March 21, 2000. Percentage of ownership after the offering
gives effect to the assumptions stated above under the heading "Prospectus
Summary--The Offering."
Beneficial ownership is calculated in accordance with SEC requirements.
Under those requirements, we consider all shares of common stock subject to
options or warrants currently exercisable or exercisable within 60 days after
March 21, 2000 to be outstanding for the purpose of computing the ownership
percentage of the person holding those options or warrants, but we do not
consider them to be outstanding for computing the ownership percentage of any
other person.
Unless otherwise indicated in the footnotes, each stockholder named in the
table has sole or shared voting and investment power with respect to all shares
beneficially owned, subject to applicable community property laws.
Unless otherwise indicated below, the address of each individual listed in
the table is Workscape, Inc., 11911 Freedom Drive, Suite 220, Reston, Virginia
21190.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------- ------------------------
BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER OFFERING OFFERING(5) OFFERING OFFERING
- ---------------------------------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Warburg, Pincus Equity Partners, L.P.(1)............ 54,416,666 33,533,333 69.2% %
ABS Capital Partners III, L.P.(4)................... 7,000,000 7,000,000 10.9
James G. Carlson.................................... 2,487,500 2,487,500 3.9
Timothy T. Clifford................................. 2,457,500 2,457,500 3.9
George W. Bickerstaff, III.......................... 40,000 40,000 * *
A. Lee Ingram....................................... 460,000 460,000 *
Susanne M. Bundy.................................... 0 0 * *
Donald R. Fitch..................................... 260,000 260,000 * *
Sidney W. Stolz..................................... 280,000 280,000 * *
Patrick T. Hackett(1) (2)........................... 54,416,666 33,533,333 69.2
David J. Wenstrup(3)................................ 0 0 * *
Timothy T. Weglicki(4).............................. 7,000,000 7,000,000 10.9
F. Selby Wellman.................................... 250,000 250,000 * *
All directors and executive officers as a group
(11 persons)...................................... 67,651,666 46,768,333 82.3
</TABLE>
- ------------
* Less than 1% of our outstanding common stock.
(1) The stockholder is Warburg, Pincus Equity Partners, L.P. (including three
affiliated partnerships) ("WPEP"). Warburg, Pincus & Co. ("WP") is the sole
general partner of WPEP. WPEP is managed by E.M. Warburg, Pincus & Co., LLC
("EMWP"). Lionel I. Pincus is the managing partner of WP and the managing
member of EMWP and may be deemed to control both entities. The address of
the Warburg Pincus entities is 466 Lexington Avenue, New York, NY 10017.
63
<PAGE>
(2) Patrick T. Hackett, a director of our company, is a general partner of WP
and a managing director and member of EMWP. Mr. Hackett may be deemed to
have an indirect pecuniary interest (within the meaning of Rule 16a-1 under
the Securities Exchange Act of 1934) in an indeterminate portion of the
shares beneficially owned by WPEP. All shares indicated as owned by
Mr. Hackett are included because of his affiliation with the Warburg Pincus
entities. Mr. Hackett disclaims beneficial ownership of all shares owned by
the Warburg Pincus entities.
(3) Excludes shares held by WPEP. David J. Wenstrup, a director of our company,
is a Vice President of EMWP, the manager of WPEP.
(4) Timothy T. Weglicki, who serves as one of our directors, is a managing
member of ABS Partners III, LLC, the general partner of ABS Capital Partners
III, L.P. which owns these shares. Mr. Weglicki may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934) in an indeterminate portion of the shares
beneficiary owned by ABS Capital Partners III, L.P. Mr. Weglicki disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein. The address of ABS Capital Partners III is One South
Street, Baltimore, MD 21202.
(5) Gives effect to the redemption of all shares of Series C preferred stock and
a reduction of 6,300,000 shares eligible for purchase under outstanding
warrants upon completion of the offering.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our amended and restated certificate of incorporation that will become
effective upon the closing of this offering authorizes the issuance of up to
400,000,000 shares of common stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share, the rights and preferences
of which may be established from time to time by our board of directors. As of
March 21, 2000, after giving effect to the conversion of all shares of Series A,
Series B and Series D preferred stock into common stock and the redemption of
our Series C preferred stock, 49,445,666 shares of common stock were
outstanding.
The following description provides a summary of the material rights and
limitations relating to ownership of our capital stock. For a complete legal
description of our capital stock, you should refer to our proposed amended and
restated certificate of incorporation and bylaws, copies of which are included
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Each holder of common stock will be entitled to one vote for each share on
all matters to be voted upon by the stockholders. There are no cumulative voting
rights.
Subject to preferences to which holders of preferred stock may be entitled,
holders of common stock will be entitled to receive ratably any dividends which
our board of directors may declare from time to time out of funds legally
available for dividends. If we liquidate, dissolve or wind up our operations,
holders of common stock will be entitled to share ratably in our assets
remaining after we pay our liabilities and satisfy any liquidation preference
granted to the holders of any outstanding shares of preferred stock.
Holders of common stock will have no preemptive or conversion rights or
other subscription rights, and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered in this offering, when issued
and paid for, will be, fully paid and nonassessable. The rights, preferences and
privileges of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock, which we may designate in the future.
PREFERRED STOCK
Under our proposed amended and restated certificate of incorporation, our
board of directors will be authorized, subject to any limitations prescribed by
law, without stockholder approval, from time to time to issue up to an aggregate
of 10,000,000 shares of preferred stock, $0.01 par value per share, in one or
more series, which may have such rights and preferences, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences as determined by our board of directors. The rights of
the holders of common stock will be subject to, and may be adversely affected
by, the rights of holders of any preferred stock that we may issue in the
future. Issuances of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire, or could discourage a third
party from attempting to acquire, a majority of our outstanding voting stock. We
have no present plans to issue any shares of preferred stock.
65
<PAGE>
WARRANTS
As of March 21, 2000, affiliates of Warburg Pincus held warrants to
purchase 14,583,333 shares of common stock with a weighted average exercise
price of $1.20. After the redemption of all outstanding shares of Series C
preferred stock upon completion of this offering, the number of shares which can
be purchased under these warrants will be reduced by 6,300,000 shares. Taking
into account this reduction in shares, warrants to purchase 8,283,333 shares
will expire in July 2009.
In addition, in connection with our recapitalization in February 1999, we
issued warrants to purchase up to 1,500,000 shares of common stock at $1.00
per share to Kenneth Phillips and Salvatore Percia. See "Certain
Transactions--Transactions Related to the Recapitalization and Reincorporation
of our Company."
EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS AND
THE DELAWARE ANTI-TAKEOVER STATUTE
Delaware Anti-takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law. This
law prohibits a Delaware corporation from engaging in any "business combination"
with any "interested stockholder," unless any of the following conditions are
met:
o before the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
o upon completion of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
o on or after the date of the transaction, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not
owned by the interested stockholder.
Section 203 defines "business combination" to include:
o any merger or consolidation involving the corporation and the interested
stockholder;
o any sale, lease, exchange, mortgage, transfer, pledge or other
disposition of 10% or more of the corporation's assets involving the
interested stockholder;
o subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any of its stock to the
interested stockholder;
o any transaction involving the corporation that has the effect of
increasing the proportionate share of any class or series of the
corporation's stock beneficially owned by the interested stockholder; or
o the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as an entity or
person beneficially owning 15% or more of the corporation's outstanding voting
stock and any entity or person affiliated with or controlling or controlled by
that entity or person.
These provisions are designed to discourage coercive takeover practices and
encourage persons or entities seeking to acquire control of a corporation to
first negotiate with that corporation. However, these and other provisions could
have the effect of making it more
66
<PAGE>
difficult to acquire our company by means of a tender offer, proxy contest or to
remove our incumbent officers and directors.
Certificate of Incorporation and Bylaws
In addition, our amended and restated certificate of incorporation and
bylaws that will be in effect after the closing of this offering, as summarized
below, may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider to be in its best interest, including those attempts
that might result in a premium over the market price for our common stock.
Classified Board of Directors
In accordance with our proposed amended and restated certificate of
incorporation, immediately after the closing of this offering our board of
directors will be divided into three classes of directors serving staggered,
three-year terms. As a result, approximately one-third of the members of our
board of directors will be elected each year. When coupled with the provision of
our amended and restated certificate of incorporation authorizing our board of
directors to fill vacant directorships and increase the size of the board of
directors, these provisions may prevent stockholders from removing incumbent
directors and simultaneously gaining control of our board of directors by
filling the vacancies created by such removals with their own nominees.
Directors may be removed by stockholders only for cause and only by the
affirmative vote of at least 66 2/3% of the combined voting power of our
outstanding voting stock, voting together as a single class.
No Stockholder Action by Written Consent
In accordance with our proposed amended and restated certificate of
incorporation, our stockholders will be able to take action only at a duly
called annual or special meeting of stockholders. Accordingly, our stockholders
will not be able to take action by written consent in lieu of a meeting. This
provision may have the effect of deterring hostile takeovers or delaying changes
in control or management of our company.
Amendments
In accordance with our proposed amended and restated certificate of
incorporation, the provisions described above can be amended only with the vote
of at least 66 2/3% of our outstanding voting stock, voting together as a single
class.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
In accordance with our proposed amended and restated bylaws, timely notice
in writing must be provided by stockholders seeking to bring business before, or
to nominate candidates for election as directors at, the annual meeting of
stockholders. To be timely, stockholder's notice must be delivered to or mailed
and received at our principal executive offices not less than 90 days nor more
than 120 days prior to the first anniversary of the date of our notice of annual
meeting provided with respect to the previous year's annual meeting of
stockholders.
If the date of the annual meeting of stockholders has been changed to be
more than 30 days before or 70 days after that anniversary date, notice will be
timely if received not later than the close of business on the tenth day
following the date on which notice of the date of the meeting is made public.
Our proposed amended and restated bylaws will also specify requirements as
to the form and content of a stockholder's notice. These provisions may limit
the ability of stockholders to
67
<PAGE>
bring matters before, or make nominations for directors at, an annual meeting of
stockholders.
Special Meetings of Stockholders
In accordance with our proposed amended and restated bylaws, following the
closing of this offering, special meetings of our stockholders can be called
only by our board of directors, a majority of the members of our board of
directors or a committee designated by our board of directors.
Amendments to our Bylaws
In accordance with our proposed amended and restated certificate of
incorporation, our bylaws may be amended, altered or repealed only with the vote
of at least 66 2/3% of our outstanding voting stock, voting together as a single
class, or by our board of directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we expect to have outstanding an
aggregate of shares of common stock, assuming the issuance of
shares of common stock in this offering (assuming no exercise of the
underwriters' over allotment option) and no exercise of options and warrants
after January 31, 2000. Of these shares, the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by our "affiliates" as that term
is defined in Rule 144 under the Securities Act. Shares purchased by affiliates
may generally only be sold pursuant to an effective registration statement under
the Securities Act or in compliance with the limitations of Rule 144 as
described below.
SALES OF RESTRICTED SHARES
The remaining 11,879,000 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted securities"
as that term is defined in Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144, 144(k) or 701 under the Securities Act as
summarized below. A substantial number of these shares will be subject to
"lock-up" agreements providing that the stockholder will not offer, sell or
otherwise dispose of any of the shares of common stock owned by that stockholder
for a period of 180 days after the date of this offering. Deutsche Bank
Securities Inc., however, may in its sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
<TABLE>
<CAPTION>
DAYS AFTER DATE SHARES
OF THIS PROSPECTUS ELIGIBLE FOR SALE COMMENT
- ----------------------------------------------- ----------------- -----------------------------------------------
<S> <C> <C>
Upon effectiveness............................. Freely tradable shares eligible for sale under
Rule 144(k) and not locked-up
90 days........................................ Shares not locked-up and saleable under
Rules 144 and 701
180 days....................................... Lock-up released; shares saleable under
Rules 144 and 701
Various dates thereafter....................... Restricted securities held for one year or less
as of 180 days following effectiveness
</TABLE>
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all of the shares of
common stock issued or reserved for future issuance under our equity
participation plans. Based upon the number of outstanding restricted shares and
shares subject to outstanding options as of January 31, 2000 and currently
reserved for issuance under these plans, this registration statement would cover
approximately 17,733,330 shares. Shares registered under the registration
statement will generally be available for sale in the open market immediately
after the 180-day lock-up agreements expire.
Also beginning 180 days after the date of this offering, holders of a
majority of our common stock, including all shares issuable upon conversion of
preferred stock, will be entitled to contractual rights with respect to
registration of these shares for sale in the public market. These registration
rights are described above under "Certain Transactions--Registration Rights."
Registration of these shares under the Securities Act would result in these
shares becoming freely tradable without restriction under the Securities Act
immediately upon effectiveness of the registration.
69
<PAGE>
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell in "broker's
transactions" or to market makers, within any three-month period, a number of
shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding (which will
equal approximately shares immediately after this offering); or
o the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current
public information about our company.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice filing provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a written
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell such shares 90 days after
the effective date of this Prospectus in reliance on Rule 144 without having to
comply with the holding period restrictions of Rule 144 and, in the case of
non-affiliates, without having to comply with the holding period, public
information, volume limitation or notice filing provisions of Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates" (as defined in Rule 144) subject only to the manner of sale
provisions of Rule 144 and by "affiliates" under Rule 144 without compliance
with its one year minimum holding period requirements.
70
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., FleetBoston Robertson Stephens Inc. and Warburg Dillon Read LLC, have
severally agreed to purchase from us the following respective number of shares
of common stock at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Deutsche Bank Securities Inc.........................................................
FleetBoston Robertson Stephens Inc...................................................
Warburg Dillon Read LLC..............................................................
---------
Total.........................................................................
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $ per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above tables bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same terms as those on
which the shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is currently expected to be approximately % of
the initial public offering price. We have agreed to pay the underwriters the
following fees, assuming either no exercise or full exercise by the underwriters
of the underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
WITH FULL EXERCISE OF
WITHOUT EXERCISE OF OVER-ALLOTMENT
FEE PER SHARE OVER-ALLOTMENT OPTION OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Workscape............................ $ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,750,000.
71
<PAGE>
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and certain holders of our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any shares of common stock or other securities convertible into
or exchangeable or exercisable for shares of our common stock or derivatives of
our common stock owned by these persons prior to this offering or common stock
issuable upon exercise of options or warrants held by these persons for a period
of 180 days after the effective date of the registration statement of which this
prospectus is a part without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without public notice. We
have entered into a similar agreement with the representatives of the
underwriters, except that we may grant options and issue shares under our equity
participation plans. In addition, we can sell up to an aggregate of shares
to strategic and corporate partners without such consent. There are no
agreements between the representatives and any of our stockholders or affiliates
releasing them from these lock-up agreements prior to the expiration of the
180-day period.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "WSCP."
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for our vendors, customers and other
third parties. The number of shares of our common stock available for sale to
the general public will be reduced to the extent these reserved shares are
purchased. Any reserved shares that are not purchased by these persons will be
offered by the underwriters to the general public on the same basis as the other
shares in this offering.
On January 18, 2000, ABS Employees Venture Fund, L.P., an affiliate of
Deutsche Bank Securities Inc., purchased 375,000 shares of our Series D
preferred stock at $2.00 per share.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:
o prevailing market conditions;
o our results of operations in recent periods;
o the present stage of our development;
72
<PAGE>
o the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
o estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Latham & Watkins, Los Angeles, California. Certain legal matters will be
passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements and schedule in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited a statement of assets
acquired and liabilities assumed as of July 15, 1999 and statements of revenues
and direct operating costs for the three years in the period ended December 31,
1998, of the Employee Self Service business of Edify Corporation, as set forth
in their report. We have included those financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the financial
statements of NOAH Software, Incorporated at December 31, 1997 and 1998 and for
each of the three years in the period ended December 31, 1998, as set forth in
their report. We have included those financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the shares of common stock to be sold in
this offering. This prospectus does not contain all the information set forth in
the registration statement. For further information regarding our company and
the shares of common stock to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. In each case you should read the contract, agreement or
other document, a copy of which is filed as an exhibit to the registration
statement.
You may read and copy all or any portion of the registration statement or
any other information that we file with the SEC at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's Web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act of 1934, and,
accordingly, will file periodic reports, proxy statements and other information
with the SEC.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WORKSCAPE, INC. (FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
Report of Ernst & Young LLP, 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
EMPLOYEE SELF-SERVICE BUSINESS OF EDIFY CORPORATION
Report of Ernst & Young LLP, Independent Auditors......................................................... F-25
Statement of Assets Acquired and Liabilities Assumed...................................................... F-26
Statements of Revenues and Direct Operating Expenses...................................................... F-27
Notes to Financial Statements............................................................................. F-28
NOAH SOFTWARE, INCORPORATED
Report of Ernst & Young LLP, Independent Auditors......................................................... F-31
Balance Sheets............................................................................................ F-32
Statements of Operations.................................................................................. F-33
Statements of Stockholder's (Deficit)..................................................................... F-34
Statements of Cash Flows.................................................................................. F-35
Notes to Financial Statements............................................................................. F-36
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Workscape, Inc.
We have audited the accompanying balance sheets of Workscape, Inc.
(formerly Employee Communications Services, Inc.) as of December 31, 1998 and
1999 and the related statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Workscape, Inc. (formerly
Employee Communications Services, Inc.) at December 31, 1998 and 1999 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, VA
February 18, 2000, except for Note 15, as to which the
date is March 20, 2000
F-2
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
DECEMBER 31, 1999
-------------------------- (SEE NOTE 15)
1998 1999
---------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 218,026 $ 13,352,023 $ 13,352,023
Accounts receivable, less allowance for doubtful accounts of $0 and
$214,000 at December 31, 1998 and 1999, respectively.................... 1,619,664 6,788,260 6,788,260
Advances to employees..................................................... 32,437 -- --
Prepaid expenses and other current assets................................. 81,282 479,531 479,531
---------- ------------ ------------
Total current assets........................................................ 1,951,409 20,619,814 20,619,814
Property and equipment, net................................................. 1,107,128 3,943,850 3,943,850
Goodwill and intangible assets, net......................................... -- 22,060,377 22,060,377
Other assets................................................................ -- 526,145 526,145
---------- ------------ ------------
Total assets................................................................ $3,058,537 $ 47,150,186 $ 47,150,186
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................................... $ 479,740 $ 1,317,585 $ 1,317,585
Accrued expenses.......................................................... 384,317 2,937,154 2,937,154
Accrued phantom stock liability........................................... 586,200 -- --
Accrued compensation...................................................... 262,293 4,262,560 4,262,560
Unearned revenues......................................................... 416,550 2,191,856 2,191,856
Notes payable in default.................................................. 808,559 819,776 819,776
Software license obligation, current portion.............................. -- 2,287,419 2,287,419
Due to Edify Corporation.................................................. -- 425,000 425,000
Due to holders of Series D Preferred Stock................................ -- -- 7,920,000
---------- ------------ ------------
Total current liabilities................................................... 2,937,659 14,241,350 22,161,350
Software license obligation, net of current portion......................... -- 1,213,475 1,213,475
Redeemable convertible Series A, B and D Preferred Stock, $0.01 par value,
37,200,000 shares authorized, 37,191,666 shares issued and outstanding at
December 31, 1999, and no shares issued and outstanding at December 31,
1999 on a pro forma basis; liquidation preference of $49,265,309 at
December 31, 1999......................................................... -- 39,250,141 --
Redeemable Series C Preferred Stock, $0.01 par value, 14,583,333 shares
authorized, at December 31, 1999, 14,583,333 shares issued and outstanding
at December 31, 1999 and at December 31, 1999 on a pro forma basis,
respectively; liquidation preference of $17,500,000 at December 31,
1999...................................................................... -- 15,397,800 15,397,800
Stockholders' equity (deficit):
Common Stock, $1 par value, 150,000 shares authorized at December 31,
1998, 500 shares issued and outstanding at December 31, 1998............ 500 -- --
Class A Common Stock, $0.01 par value, 98,500,000 shares authorized at
December 31, 1999, 9,764,000 and 0 shares issued and outstanding at
December 31, 1999 and at December 31, 1999 on a pro forma basis,
respectively............................................................ -- 97,640 --
Class B Common Stock, $0.01 par value, 1,500,000 shares authorized at
December 31, 1999, no shares issued and outstanding at December 31,
1999 and at December 31, 1999 on a pro forma basis...................... -- -- --
Common Stock, $0.01 par value, 100,000,000 shares authorized at
December 31, 1999 on a pro forma basis, 46,955,666 shares issued and
outstanding at December 31, 1999 on a pro forma basis................... -- -- 469,557
Additional paid-in capital................................................ -- 2,263,588 33,221,812
Deferred stock compensation............................................... -- (2,320,665) (2,320,665)
Stock subscription receivable............................................. -- (91,900) (91,900)
Retained earnings (accumulated deficit)................................... 120,378 (22,901,243) (22,901,243)
---------- ------------ ------------
Total stockholders' equity (deficit)........................................ 120,878 (22,952,580) 8,377,561
---------- ------------ ------------
Total liabilities and stockholders' equity (deficit)........................ $3,058,537 $ 47,150,186 $ 47,150,186
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Hosted services................................................. $4,415,779 $7,418,263 $ 11,087,299
Software licensing and maintenance.............................. -- -- 2,305,903
Professional services........................................... -- -- 3,000,905
---------- ---------- ------------
Total net revenues......................................... 4,415,779 7,418,263 16,394,107
Cost of revenues:
Hosted services................................................. 1,987,233 3,085,257 7,819,345
Software licensing and maintenance.............................. -- -- 695,323
Professional services........................................... -- -- 3,879,503
Amortization of software acquired and software license rights... -- -- 1,655,692
---------- ---------- ------------
Total cost of revenues..................................... 1,987,233 3,085,257 14,049,863
Gross profit...................................................... 2,428,546 4,333,006 2,344,244
Other operating costs:
Sales and marketing............................................. 1,372,603 1,895,699 8,001,653
Research and development........................................ -- -- 5,256,316
General and administrative (exclusive of non-cash compensation
expense shown below)......................................... 815,983 1,957,638 8,251,773
Non-cash compensation expense................................... -- -- 501,700
Acquisition-related amortization................................ -- -- 3,098,381
---------- ---------- ------------
Income (loss) from operations..................................... 239,960 479,669 (22,765,579)
Other income (expense):
Interest expense................................................ (39,418) (49,096) (340,648)
Interest income................................................. -- -- 84,606
---------- ---------- ------------
Income (loss) before provision for (benefit from) taxes........... 200,542 430,573 (23,021,621)
Provision for (benefit from) income taxes......................... -- -- --
---------- ---------- ------------
Net income (loss)................................................. 200,542 430,573 (23,021,621)
Accretion of Preferred Stock, dividends and warrants.............. -- -- (4,782,608)
---------- ---------- ------------
Net income (loss) available to common stockholders................ 200,542 430,573 (27,804,229)
Pro forma provision for (benefit from) income taxes............... 115,761 228,388 --
---------- ---------- ------------
Pro forma net income (loss) available to common stockholders...... $ 84,781 $ 202,185 $(27,804,229)
---------- ---------- ------------
---------- ---------- ------------
Basic and diluted net income (loss) per share, after giving effect
to pro forma income tax provision (benefit)..................... $ 169.56 $ 404.37 $ (88.94)
---------- ---------- ------------
---------- ---------- ------------
Pro forma basic and diluted net income (loss) per share........... $ (1.18)
------------
------------
Shares used in calculation of net income (loss) per share:
Basic and diluted............................................... 500 500 312,626
---------- ---------- ------------
---------- ---------- ------------
Proforma basic and diluted...................................... 20,273,927
------------
------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK CLASS A DEFERRED RETAINED
COMMON STOCK COMMON STOCK ADDITIONAL STOCK STOCK EARNINGS
-------------- ------------------ -------------- PAID-IN COMPEN- SUBSCRIPTION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL SATION RECEIVABLE DEFICIT)
------ ------ --------- ------- ------ ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................. 500 $ 500 -- $ -- -- $-- $ -- $ -- $ -- $ 316,263
Net income........... -- -- -- -- -- -- -- -- -- 200,542
---- ------ --------- ------- -- -- ----------- ----------- -------- ------------
Balance at December 31,
1997................. 500 500 -- -- -- -- -- -- -- 516,805
Net income........... -- -- -- -- -- -- -- -- -- 430,573
Distributions........ -- -- -- -- -- -- -- -- -- (827,000)
---- ------ --------- ------- -- -- ----------- ----------- -------- ------------
Balance at December 31,
1998................. 500 500 -- -- -- -- -- -- -- 120,378
Recapitalization of
the Company........ (500) (500) 250,000 2,500 -- -- 2,500 -- -- --
Issuance of Common
Stock to new
management and
other investors in
connection with
recapitalization... -- -- 4,720,000 47,200 -- -- 47,200 -- -- --
Issuance of Common
Stock to employees
and consultants.... -- -- 3,677,200 36,772 -- -- 491,028 -- (91,900) --
Issuance of Common
Stock in connection
with acquisition of
NOAH Software,
Incorporated....... -- -- 1,116,800 11,168 -- -- 547,232 -- -- --
Accretion of
Preferred Stock and
related
dividends.......... -- -- -- -- -- -- (4,648,116) -- -- --
Allocation of fair
value of
warrants........... -- -- -- -- -- -- 2,916,667 -- -- --
Accretion of fair
value of
warrants........... -- -- -- -- -- -- (134,493) -- -- --
Issuance of
compensatory stock
options............ -- -- -- -- -- -- 2,580,765 (2,822,365) -- --
Amortization of
deferred stock
compensation....... -- -- -- -- -- -- -- 501,700 -- --
Contribution to
capital by founding
stockholders....... -- -- -- -- -- -- 460,805 -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (23,021,621)
---- ------ --------- ------- -- -- ----------- ----------- -------- ------------
Balance at December 31,
1999................. -- $ -- 9,764,000 $97,640 -- $-- $ 2,263,588 $(2,320,665) $(91,900) $(22,901,243)
---- ------ --------- ------- -- -- ----------- ----------- -------- ------------
---- ------ --------- ------- -- -- ----------- ----------- -------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31,
1996................. $ 316,763
Net income........... 200,542
-------------
Balance at December 31,
1997................. 517,305
Net income........... 430,573
Distributions........ (827,000)
-------------
Balance at December 31,
1998................. 120,878
Recapitalization of
the Company........ 4,500
Issuance of Common
Stock to new
management and
other investors in
connection with
recapitalization... 94,400
Issuance of Common
Stock to employees
and consultants.... 435,900
Issuance of Common
Stock in connection
with acquisition of
NOAH Software,
Incorporated....... 558,400
Accretion of
Preferred Stock and
related
dividends.......... (4,648,116)
Allocation of fair
value of
warrants........... 2,916,667
Accretion of fair
value of
warrants........... (134,493)
Issuance of
compensatory stock
options............ (241,600)
Amortization of
deferred stock
compensation....... 501,700
Contribution to
capital by founding
stockholders....... 460,805
Net loss............. (23,021,621)
-------------
Balance at December 31,
1999................. $ (22,952,580)
-------------
-------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................... $200,542 $ 430,573 $(23,021,621)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Loss on disposal of equipment.................................. -- 8,903 --
Depreciation on property and equipment......................... 207,703 295,406 746,288
Amortization on goodwill and intangible assets................. -- -- 4,754,074
Non-cash stock compensation.................................... -- -- 501,700
Allowance for doubtful accounts (45,000) -- 214,000
Changes in assets and liabilities:
Accounts receivable.......................................... (786,142) (128,819) (5,670,348)
Advances to employees........................................ (2,007) (14,625) 32,437
Prepaid expenses and other current assets.................... 8,189 17,776 (582,138)
Accounts payable............................................. 11,476 265,976 491,197
Accrued expenses............................................. 35,461 230,670 2,552,437
Accrued phantom stock liability.............................. 30,900 555,300 (586,200)
Accrued compensation......................................... 73,476 188,817 4,000,267
Unearned revenues............................................ 392,469 (480,791) 265,679
-------- ---------- ------------
Net cash provided by (used in) operating activities................. 127,067 1,369,186 (16,302,228)
INVESTING ACTIVITIES
Purchases of property and equipment................................. (475,499) (736,741) (3,371,943)
Acquisitions of businesses, net of cash acquired.................... -- -- (19,469,953)
-------- ---------- ------------
Net cash used in investing activities............................... (475,499) (736,741) (22,841,896)
FINANCING ACTIVITIES
Proceeds from line of credit........................................ -- 600,000 400,000
Principal repayments of line of credit.............................. -- (600,000) (400,000)
Proceeds from issuance of notes payable............................. 238,333 500,000 10,250,000
Principal repayments of notes payable............................... (67,955) (95,152) (238,783)
Payments of software license obligation............................. -- -- (1,169,100)
Stockholder distributions........................................... -- (827,000) --
Proceeds from sale of Common Stock.................................. -- -- 293,700
Contribution to capital by founding stockholders.................... 460,804
Proceeds from sale of redeemable convertible Preferred Stock........ -- -- 25,203,250
Proceeds from sale of redeemable Preferred Stock.................... -- -- 17,478,250
-------- ---------- ------------
Net cash provided by (used in) financing activities................. 170,378 (422,152) 52,278,121
Net increase (decrease) in cash and cash equivalents................ (178,054) 210,293 13,133,997
Cash and cash equivalents at beginning of year...................... 185,787 7,733 218,026
-------- ---------- ------------
Cash and cash equivalents at end of year............................ $ 7,733 $ 218,026 $ 13,352,023
-------- ---------- ------------
-------- ---------- ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
-------- ---------- -----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 40,000 $ 51,000 $ 216,000
-------- ---------- -----------
-------- ---------- -----------
Schedule of noncash investing and financing activities:
Acquisitions of businesses:
Fair value of assets acquired................................... $26,628,843
Cash paid....................................................... (19,443,465)
Fair value of stock issued...................................... (658,400)
Software license obligation due to Edify Corporation............ (4,669,994)
-----------
Liabilities assumed............................................. $ 1,856,984
-----------
-----------
Issuance of stock subscription receivable to officers
and employees for common stock..................................... $ 91,900
-----------
-----------
Issuance of stock subscription receivable to officers and employees
for preferred stock................................................ $ 325,000
-----------
-----------
Deferred stock compensation related to options granted
and stock issued................................................... $ 2,822,365
-----------
-----------
Allocation of fair value of warrants................................. $ 2,916,667
-----------
-----------
Accretion for fair value of warrants................................. $ 134,493
-----------
-----------
Accretion of Preferred Stock and related dividends................... $ 4,648,116
-----------
-----------
Conversion of debt to Preferred Stock................................ $10,000,000
-----------
-----------
Accrual associated with earnout due to Edify Corporation............. $ 425,000
-----------
-----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Workscape, Inc. (the "Company"), formerly named Employee Communications
Services, Inc., was originally incorporated on March 1, 1972 under the laws of
Massachusetts and reincorporated in August 1999 as a Delaware corporation.
The Company is a provider of Web-enabled human resource ("HR") self-service
solutions to large organizations. The Company offers a suite of software
solutions that enable employers to improve service to employees, enhance
employee communications and increase overall organizational effectiveness. The
Company's "employee self-service" solutions interface directly with employees,
providing interactive access to HR information and services. The Company also
offers "manager self-service" solutions which enable managers to manage their
workforce more effectively by automating many tasks and providing up-to-date
HR-related information. The Company delivers its solutions by hosting its
proprietary software for clients at its data center, licensing software
applications to employers for use on premises or creating a hybrid
hosted/on-premise solution.
2. MANAGEMENT'S PLANS FOR FINANCING OPERATIONS
The Company has incurred operating losses in 1999 and had an accumulated
deficit of $22,901,243 at December 31, 1999. Activities during 1999 have been
primarily financed through the private placements of equity securities. Cash and
cash equivalents totaled $13,352,023 at December 31, 1999. The Company has
raised $11,325,000 in cash through the sale of stock subsequent to year end. The
Company is planning to file a registration statement with the Securities and
Exchange Commission ("SEC") to raise approximately $100 million in an initial
public offering ("IPO") of its common stock. If this IPO is not consummated, the
Company will need to raise additional capital through the issuance of equity
securities from current investors or other private and public investors to
support planned operations. If the Company is unable to raise additional
capital, the Company will have to significantly reduce its planned research and
development and sales and marketing expenses, including employment reductions,
or generate sufficient revenues to cover its operating expenses. There can be no
assurance that the Company will be able to raise additional financing and that
if such financing is available, that the terms of the financing will be
satisfactory to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are considered to be available for sale.
F-8
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Financial Instruments
The carrying value of the Company's financial instruments including cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable approximates fair value.
Concentration of Credit Risk
Financial instruments, that potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents
and accounts receivable. The Company deposits its cash with financial
institutions that the Company considers to be of high credit quality. With
respect to accounts receivable, the Company performs ongoing credit evaluations
of its customers, generally does not require collateral, and maintains an
allowance for doubtful accounts based on historical experience and management's
expectations.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are calculated on the straight-line method over the following estimated useful
lives of the assets:
Computer and office equipment Three to five years
Furniture and fixtures Seven years
Leasehold improvements Shorter of lease term or useful life
Goodwill and Intangible Assets
Goodwill and intangible assets, including customer lists, contracts,
workforce and software, are amortized on a straight-line basis over two to three
years.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of any asset to future net undiscounted cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the future discounted cash flows compared to the
carrying amount of the asset. In addition, the Company continually evaluates the
recoverability of enterprise goodwill by assessing whether the book value can be
recovered through the expected and undiscounted cash flows.
Revenue Recognition
The Company's revenues are derived from the following sources: (1) hosted
services, (2) software licensing and maintenance and (3) professional services.
Hosted service revenues pursuant to time and material and, to a lesser
extent, fixed fee arrangements are recognized proportionately as services are
provided. The Company invoices customers monthly and payment terms are generally
30-45 days. Payments received in excess of revenues recognized are classified as
Unearned Revenues in the Balance Sheets. Provisions
F-9
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
for estimated losses are made on an individual basis and are recognized in the
period in which such losses are incurred.
Software licensing and maintenance revenues generally represent sales of
software licenses, not requiring significant modification and customization
services, and maintenance services originating from the Company's acquisition of
assets of the Employee Self-Service Business of Edify Corporation. Professional
service revenues generally consist of (1) consulting services to support the
premise-based software products purchased in connection with the Company's
acquisition of the assets of the Employee Self-Service Business of Edify
Corporation, and (2) customization and installation services associated with the
sale of software purchased in connection with the Company's acquisition of
assets of NOAH Software, Incorporated.
For software licensing sales not requiring significant modification and
customization services and where services are not essential to the functionality
of the software, the Company generally recognizes software licensing revenues
when all the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the fee is fixed and
determinable, and (4) collectibility is probable. In addition, for arrangements
with multiple obligations to provide existing and future products, maintenance
and professional services, revenues must be allocated to each component of the
arrangement based on evidence of fair value which is specific to the Company, or
for products not yet being sold separately, the price established by management.
The Company determines vendor-specific objective evidence of fair value
("VSOEFV") for maintenance by reference to the renewal maintenance prices paid
by customers. The Company determines VSOEFV for its professional services by
reference to the price charged when the professional services are sold to
customers, absent any other products and services. Once fair value is
determined, the Company recognizes revenues from maintenance fees ratably over
the term of the service period, which is typically 12-15 months. Payments for
maintenance fees are generally made in advance. The Company recognizes
professional service revenues from consulting activities under these
arrangements as the services are provided.
When the Company enters into a license agreement with a customer requiring
significant modification and customization of the software, as in the case of
software purchased in connection with the Company's acquisition of the assets of
NOAH Software, Incorporated, the Company recognizes revenues under the
arrangement using contract accounting, as prescribed by SOP 81-1, "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts." For
these arrangements the Company has applied the completed contract method under
SOP 81-1 as the contracts contain certain acceptance criteria and cancellation
provisions that lapse at the completion of the services. Under the completed
contract method, the Company recognizes the revenues and direct costs upon the
lapse of the cancellation and acceptance periods. The Company capitalizes direct
labor costs associated with these contracts and expenses such costs upon
recognition of revenues.
Unearned revenues represent the difference between amounts invoiced and
amounts recognized as revenues and generally consist of deferred maintenance
fees and deferred software licensing fees and installation services for
arrangements requiring significant modification and customization services. The
Company generally doesn't offer specified upgrades or incrementally significant,
as defined by SOP 97-2, discounts; if such elements
F-10
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
were offered and VSOEFV could not be determined for such elements, the Company
would defer all revenues until the element is delivered or VSOEFV is
established.
During 1998 and 1999, the Company recognized revenues in accordance with
Statement of Position No. 97-2, "Software Revenue Recognition." Prior to 1998,
the Company recognized revenues in accordance with Statement of Position
No. 91-1, "Software Revenue Recognition."
In December 1998, Statement of Position No. 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" was
issued. The provisions of SOP 98-9 were adopted in 1999, and the adoption did
not have a material impact on the Company's financial statements.
Cost of Revenues
Cost of revenues include all direct materials, direct labor and those
indirect costs related to revenues such as indirect labor, materials and
supplies, equipment rent, depreciation, facility costs, and amortization of
software acquired and software license rights.
Significant Customer
For the year ended December 31, 1999, one customer accounted for 20% of net
revenues. The Company operates solely within one business segment, the provision
of software application products through both hosted and premise-based solutions
and related installation, consulting, training, and maintenance services.
Through December 31, 1999, the Company had no export sales.
Software Development Costs
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility (in the form of a working model) of the product has
been established, at which time such costs are capitalized, subject to expected
recoverability. During the years ended December 31, 1997, 1998, and 1999, the
Company has not capitalized any development costs related to software products
since technological feasibility (in the form of a working model) has not been
reached.
Stock Options
The Company accounts for its stock-based compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value
method. Stock-based compensation related to options granted to non-employees is
accounted for using the fair value method in accordance with the Statement of
Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation."
The Company has made pro forma disclosures required by FAS 123 for all options
granted.
Advertising Costs
The Company expenses advertising as incurred. Advertising expense was
$27,900, $102,300, and $1,506,617 for the years ended December 31, 1997, 1998,
and 1999, respectively.
F-11
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income Taxes
The Company, with the consent of its stockholders, made an election under
Subchapter S of the Internal Revenue Code, effective as of January 1, 1997, not
to be subject to income taxes at the corporate level. As a result, the income or
loss of the Company is included in the current taxable income of the individual
stockholders, and accordingly, the statements of operations contain no provision
for income taxes for the years ended December 31, 1997 and 1998.
On January 1, 1999, the Company, together with its stockholders, made an
election to be taxed as a C corporation, pursuant to the Internal Revenue Code.
Accordingly, the Company accounted for its income taxes in 1999 using the
liability method required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
For periods prior to January 1, 1999, the unaudited pro forma income tax
information included in the Statements of Operations and Note 11 is presented in
accordance with FAS 109, as if the Company had been subject to Federal and State
income taxes for the years ended December 31, 1997 and 1998.
Comprehensive Income (Loss)
For the years ended December 31, 1997, 1998 and 1999, the Company's net
income (loss) reflects comprehensive income (loss) and accordingly, no
additional disclosure is presented.
Net Income (Loss) Per Share and Pro Forma Net Income (Loss) Per Share
Basic net income (loss) per share is based on the weighted average shares
outstanding during the period. Diluted net income (loss) per share increases the
shares used in the basic net income (loss) per share calculation by the dilutive
effects of options, unvested common stock, warrants, and convertible securities.
The Company's common stock equivalent shares outstanding from stock options,
unvested common stock, warrants and convertible securities are excluded from the
diluted net income (loss) per share computation as their effect is antidilutive.
Pro forma net income (loss) per share for the year ended December 31, 1999
is computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
Series A, B, and D Preferred Stock into shares of the Company's Common Stock
("Common Stock") as if such conversion occurred at the date of original
issuance. The resulting pro forma adjustment includes an increase in the
weighted average shares used to compute basic and diluted net income (loss) per
share of 19,961,301 shares for the year ended December 31, 1999.
F-12
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net income (loss) per common share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
------- -------- ------------
<S> <C> <C> <C>
Net income (loss) available to common stockholders, after giving effect
to the pro forma income tax provision (benefit)...................... $84,781 $202,185 $(27,804,229)
------- -------- ------------
------- -------- ------------
Basic and diluted:
Weighted average shares of common stock outstanding.................. 500 500 6,246,882
Less: Weighted average shares subject to repurchase.................. -- -- (5,934,256)
------- -------- ------------
Weighted average shares used in computing basic and diluted net income
(loss) per common share.............................................. 500 500 312,626
------- -------- ------------
------- -------- ------------
Basic and diluted net income (loss) per share, after giving effect to
the pro forma income tax provision (benefit)......................... $169.56 $ 404.37 $ (88.94)
------- -------- ------------
------- -------- ------------
Pro forma:
Net income (loss) available to common stockholders................... $(27,804,229)
Add: Accretion of Preferred Stock and dividends (unaudited).......... 3,946,391
------------
Pro forma net income (loss) available to common stockholders
(unaudited)....................................................... $(23,857,838)
------------
------------
Shares used above.................................................... 312,626
Adjustment to reflect weighted effect of assumed conversion of
convertible Preferred Stock (unaudited)........................... 19,961,301
------------
Shares used in computing pro forma basic and diluted net income
(loss) per share (unaudited)...................................... 20,273,927
------------
------------
Pro forma basic and diluted net income (loss) per share
(unaudited)....................................................... $ (1.18)
------------
------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computer and office equipment............................................ $2,048,450 $4,473,280
Furniture and fixtures................................................... 376,147 899,909
Leasehold improvements................................................... 42,496 364,307
Software................................................................. -- 312,607
---------- ----------
2,467,093 6,050,103
Less: accumulated depreciation........................................... (1,359,965) (2,106,253)
---------- ----------
$1,107,128 $3,943,850
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. GOODWILL AND INTANGIBLES
Goodwill and intangible assets arising from the Company's acquisitions in
1999 (see Note 6) are summarized as follows at December 31, 1999:
<TABLE>
<CAPTION>
CARRYING AMORTIZATION
AMOUNT PERIOD
----------- --------------
<S> <C> <C>
Goodwill.............................................................. $ 8,739,381 3 years
Software acquired..................................................... 2,511,675 3 years
Software license rights............................................... 4,669,994 2 years
Customer lists........................................................ 10,025,000 3 years
Contracts............................................................. 686,250 Contract life
Workforce............................................................. 182,151 2 years
-----------
Total.......................................................... 26,814,451
-----------
Less: accumulated amortization........................................ (4,754,074)
-----------
$22,060,377
-----------
-----------
</TABLE>
6. ACQUISITIONS
On July 15, 1999, the Company acquired certain assets of Edify
Corporation's Employee Self-Service Business for $16,029,555 in cash. In
connection with this acquisition, the Company entered into a Value Added
Reseller Agreement ("VAR agreement") in which the Company obtained a two-year
license to use, copy, and distribute Edify's Electronic WorkForce software
product ("EWF"). As part of the VAR agreement, the Company agreed to pay eight
quarterly payments of $625,000 for the two-year period ($5,000,000) plus a bonus
license of an additional $625,000 per quarter upon the achievement of certain
stipulated revenue goals during the first four quarters of the agreement. The
Company has capitalized the present value of the amounts due to Edify
Corporation under the VAR agreement as an intangible asset ("software license
rights") and is amortizing such asset over the two-year term of the VAR
agreement. The Company has recorded the bonus license of $425,000, the amount
earned as of December 31, 1999, as additional purchase price and is amortizing
such asset over the remaining period of the VAR agreement. Pursuant to the
acquisition agreement, the Company is required to pay retention bonuses to
employees still employed by the Company on the anniversary date of the
acquisition. The Company has expensed and accrued the amount as of December 31,
1999 for the portion of services rendered during 1999. This amount is not part
of the purchase price allocation.
On October 12, 1999, the Company acquired substantially all the assets of
NOAH Software, Incorporated for $3,273,960 in cash and 1,116,800 shares of the
Company's Class A Common Stock. The Company valued the shares of the Company's
Class A Common Stock at $558,400, which the Company estimates as the fair market
value of its Common Stock on the acquisition date. Pursuant to the acquisition
agreement, the Company is required to pay retention bonuses to employees still
employed by the Company on the anniversary date of the acquisition. The Company
has expensed and accrued the amount as of December 31, 1999 for the portion of
the services rendered during 1999. This amount is not part of the purchase price
allocation.
All these acquisitions were accounted for using the purchase method of
accounting. Accordingly, the operations of the acquired businesses were included
in the Company's Statements of Operations after the respective dates of
acquisitions. Assets and liabilities acquired in connection with these
acquisitions were recorded at their estimated fair market values.
F-14
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACQUISITIONS--(CONTINUED)
The following pro forma information gives effect to the aforementioned
acquisitions as if such acquisitions had occurred on January 1, 1998 and 1999,
respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $28,633,600 $ 24,879,996
----------- ------------
----------- ------------
Net loss available to common stockholders................... $(7,425,231) $(30,435,311)
----------- ------------
----------- ------------
Basic and diluted net loss per share........................ $ (6.65) $ (29.73)
----------- ------------
----------- ------------
</TABLE>
The historical financial information included in the above pro forma
information for the Employee Self Service business of Edify Corporation only
includes revenues and identifiable direct operating expenses. Since Edify
Corporation did not maintain separate accounting records for the Employee Self
Service business, there is no reasonable basis to allocate corporate overhead
costs, interest expense and income taxes to the financial information of the
acquired business. Therefore, the results of operations may not be
representative of the acquired business had the corporate overhead expense
information been available.
7. NOTES PAYABLE
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Bank note payable; original principal of $460,000; payable in
monthly installments of $9,500 including interest at 8.78% per
annum through March 2002, secured by the Company's assets, and
personally guaranteed by the Company's two founding
stockholders...................................................... $322,553 $233,228
Bank note payable; original principal of $500,000; payable in
monthly installments of $9,846 including interest at a variable
rate (6.77% and 7.38% per annum at December 31, 1998 and 1999,
respectively) through October 2003, secured by the Company's
assets and personally guaranteed by the Company's two founding
stockholders...................................................... 486,006 398,049
Bank note payable; original principal amount of $250,000; payable in
32 monthly installments of $8,508 and one final balloon
installment including interest at 8.38% per annum through
December 15, 2001, secured by the Company's assets, and
personally guaranteed by the Company's two founding
stockholders...................................................... -- 188,499
-------- --------
808,559 819,776
Less: current portion............................................... (808,559) (819,776)
-------- --------
$ -- $ --
-------- --------
-------- --------
</TABLE>
F-15
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE--(CONTINUED)
Provisions of the loan agreements require the Company to maintain minimum
financial ratios and limit the Company's ability to make distributions and incur
additional debt. At December 31, 1998 and 1999, the Company was not in
compliance with certain provisions of one of the notes payable. Therefore, all
the notes payable with the bank are in default and the balance of the notes
payable in default of $808,559 and $819,776 at December 31, 1998 and 1999,
respectively, is classified as a current liability.
During October and November 1999, the Company received $10 million from an
investor in exchange for notes payable. The notes bore interest at 8%. During
December 1999, the outstanding $10 million notes payable were repaid through the
issuance of 5,000,000 shares of Series D Preferred Stock. See Note 8. Accrued
interest was paid subsequent to December 31, 1999.
8. STOCKHOLDERS' EQUITY (DEFICIT)
During 1999, the Company amended its Articles of Organization to create new
classes of capital stock: Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Preferred Stock, Series D Convertible
Preferred Stock, Class A Common Stock, and Class B Common Stock.
PREFERRED STOCK
The following table summarizes the significant terms of the Company's
Series A Convertible Preferred Stock ("Series A Preferred Stock"), Series B
Convertible Preferred Stock ("Series B Preferred Stock"), Series C Preferred
Stock ("Series C Preferred Stock") and Series D Convertible Preferred Stock
("Series D Preferred Stock") as of December 31, 1999:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
AUTHORIZED OUTSTANDING LIQUIDATION PREFERENCE DIVIDEND RIGHTS REDEMPTION PRICE
---------- ----------- ------------------------ --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Series A........ 17,500,000 17,500,000 $17,500,000 $0.08 per share $1.00 per share,
($1.00 per share, cumulative plus accrued dividends
plus accrued dividends)
Series B........ 7,700,000 7,691,666 $7,691,666 $0.08 per share $1.00 per share,
($1.00 per share, cumulative plus accrued dividends
plus accrued dividends)
Series C........ 14,583,333 14,583,333 $17,500,000 $0.08 per share $1.20 per share,
($1.20 per share, cumulative plus accrued dividends
plus accrued dividends)
Series D........ 12,000,000 12,000,000 $24,073,643 $0.08 per share (see below)
(see below) non-cumulative
</TABLE>
The holders of Series A Preferred Stock and Series B Preferred Stock are
entitled to receive, when declared by the Board of Directors, dividends, payable
annually on or before December 31 of each year; provided, however, that the
Board of Directors may elect to defer such payments until such time as it
determines dividends shall be paid. The holders of Series C Preferred Stock are
entitled to receive, when declared by the Board of Directors, dividends, payable
quarterly on or before, December 31, March 31, June 30, and September 30 of each
year (beginning September 30, 1999); provided, however, that the Board of
Directors may elect to defer such payments until such time as it determines the
dividends shall be paid. Each share of Series A Preferred Stock, Series B
Preferred Stock, and Series D Preferred Stock
F-16
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
is convertible into one share of Class A Common Stock at any time (voluntary
conversion) subject to adjustment under certain dilutive circumstances.
Conversion is automatic in the event of a public offering of Common Stock in
which the aggregate net proceeds to the Company are not less than $40 million.
In an automatic conversion, the conversion rights for Series A Preferred Stock
and Series B Preferred Stock remain the same as in a voluntary conversion, and
for holders of Series D Preferred Stock, each share of Series D Preferred Stock
will convert into one share of common stock, plus $0.66 in cash. The holders of
Series A, Series B and Series D Preferred Stock are entitled to one vote per
share. In the event of liquidation or winding up of the Company, holders of
Series D Preferred Stock shall receive a liquidation preference of $2.00 per
share plus an additional amount calculated as 8% per annum, compounded annually,
on $2.00 per share from the issuance date to the payment date, plus any accrued
dividends. After payment of the liquidation preference to holders of Preferred
Stock, the remaining assets of the Company shall be distributed between holders
of Preferred Stock and Common Stock. The mandatory redemption dates for all
series of Preferred Stock is the fifth, sixth, and seventh anniversaries of the
initial issuance date of the Series D Preferred Stock at a rate of 33.33% for
each anniversary date. The Series C Preferred Stock is also mandatorily
redeemable upon a qualified public offering. Series C Preferred Stock may be
redeemed at the Company's option at any time. Series D Preferred Stock shall be
redeemed by the Company at a price of $2.00 per share, plus an additional amount
calculated as 8% per annum, compounded annually, on $2.00 per share from the
issuance date to the redemption date, plus any accrued dividends.
The difference between the redemption price of the Preferred Stock and the
carrying value of the Preferred Stock is being accreted over the period from the
issuance date to the redemption date using the effective interest method.
COMMON STOCK
The Company authorized 100,000,000 shares of Common Stock, $0.01 par value,
of which 98,500,000 and 1,500,000 has been designated as Class A Common Stock
("Class A Common Stock") and Class B Common Stock ("Class B Common Stock"),
respectively. Dividends may be declared and paid on the Common Stock, subject in
all cases to the rights and preferences of the holders of Preferred Stock and to
authorization by the Board of Directors. In the event of liquidation or winding
up of the Company and after the payment of all preferential amounts required to
be paid to the holders of any series of Preferred Stock, the holders of the
Class B Common Stock shall receive a liquidation preference of $1.00 (subject to
any adjustment in the event of a stock dividend or stock split) per share before
any liquidation distributions are made to the holders of Class A Common Stock.
When such liquidation preference is paid in full to the holders of issued and
outstanding Class B Common Stock, a liquidation preference of $0.20 per share
shall be paid to the holders of the Class A Common Stock. Any remaining funds
shall be distributed among the holders of the issued and outstanding Class A
Common Stock and Class B Common Stock as if they were then a single class of
stock.
In accordance with the Company's Amended and Restated Certificate of
Incorporation, if the Series A, Series B and Series D Preferred Stock shall be
converted to Common Stock upon consummation of a qualified offering, then each
share of Class A Common Stock and Class B Common Stock shall be automatically
re-designated as a single class of stock known as Common Stock.
F-17
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
EQUITY TRANSACTIONS
On February 2, 1999, the Company, the founding stockholders, certain new
management investors ("Management Investors"), and a group of investment funds
managed by Warburg, Pincus & Co. ("Warburg") entered into an Agreement and Plan
of Recapitalization and Sale ("Recapitalization Agreement"). Pursuant to the
Recapitalization Agreement, the founding stockholders of the Company exchanged
their outstanding capital stock for an aggregate 13,500,000 shares of Series A
Preferred Stock and warrants to purchase 1,500,000 shares of Class B Common
Stock at $1.00 per share. The Company did not allocate any value to the warrants
as the fair value of the warrants on the issuance date was deemed immaterial to
the financial statements. In addition, the Company would pay an additional
amount to the founding stockholders/employees based on a formula determined by
the revenues earned during 1999. The additional amount ranges from $0 to
$1,500,000 and will be payable, at the option of the stockholders, in either
cash or up to 1,500,000 shares of the Company's Class B Common Stock (which
would effectively be the exercise of the warrants for which the founding
stockholders would give no cash). The Company has estimated that based on the
Company's 1999 operating results, the founding stockholders/employees have
earned $1,000,000, and the Company has accrued $1,000,000 at December 31, 1999.
Also, the founding stockholders purchased an aggregate 250,000 shares of
Class A Common Stock for $5,000. Warburg then purchased an aggregate 9,500,000
shares of Series A Preferred Stock from the founding stockholders at a purchase
price of $1.00 per share, and purchased an additional 3,250,000 shares of Series
A Preferred Stock at a purchase price of $1.00 per share from the Company for
$3,250,000.
On February 2, 1999 and in connection with the Recapitalization Agreement,
the Management Investors and other individuals purchased an aggregate 750,000
shares of Series A Preferred Stock and 4,720,000 shares of Class A Common Stock
(subject to terms and conditions discussed in Note 9) in exchange for
consideration consisting of cash ($594,400), secured promissory notes
($125,000), and all of the outstanding shares of MCO2, Inc. ($125,000), a
holding company owned by the Management Investors. The full recourse promissory
notes for $125,000 bear interest at 4.71% per annum, are secured by shares
purchased, and are due in five years, or the investor's earlier termination of
employment with the Company.
On July 12, 1999, the Board of Directors declared and approved a stock
dividend of nine shares for every one share of the Company's Common Stock and
Preferred Stock for each stockholder of record as of July 9, 1999. All
references in the accompanying financial statements to the number of shares and
per share amounts have been restated for the stock dividend.
On July 15, 1999, the Company entered into a Securities Purchase Agreement
with certain partnerships affiliated with Warburg. In accordance with this
agreement, the Company sold 7,500,000 shares of Series B Preferred Stock ($1.00
per share, the price which was established in the Recapitalization Agreement in
February 1999), 14,583,333 shares of Series C Preferred Stock ($1.20 per share),
and warrants to purchase 14,583,333 shares of Class A Common Stock for
$25,000,000 in cash. Each of these warrants entitles the holder to purchase one
share of Class A Common Stock for $1.20 per share from the time of issuance
until July 13, 2009. The Company allocated $2,916,667 to the value of the
warrants based on their estimated fair value on the date of issuance. The
$2,916,667 will be accounted for as additional
F-18
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
dividends over the redemption period of the Series C Preferred Stock. Pursuant
to the Securities Purchase Agreement, the number of warrants outstanding will be
reduced by 6,300,000 warrants upon redemption of the Series C Preferred Stock
(upon completion of a qualified public offering by the Company).
On December 17, 1999, the Company entered into a Securities Purchase
Agreement with certain partnerships affiliated with Warburg and a new investor,
ABS Capital Partners III, L.P. In accordance with this agreement, the Company
sold 12,000,000 shares of Series D Preferred Stock in exchange for $10,000,000
in notes payable (see Note 7) and $14,000,000 in cash.
During 1999, the Company sold to various employees 191,666 shares of Series
B Preferred Stock at purchase prices ranging from $1.00 to $1.20 per share in
exchange for secured promissory notes of $200,000. The full recourse promissory
notes bear interest at 4.71% per annum, are secured by the shares purchased, and
are due in five years or earlier termination of employment.
9. INCENTIVE STOCK PROGRAM
In 1999, the Company adopted the Workscape, Inc. Amended and Restated
Incentive Stock Program ("the Program") to provide for the granting of stock
awards, such as stock options, restricted common stock, and stock appreciation
rights (no stock appreciation rights granted during 1999) to employees,
directors and other individuals as determined by the Board of Directors. The
Company has reserved 9,333,330, subsequently increased to 17,733,330 shares in
January 2000, of Class A Common Stock under the Program.
Stock options granted under the Program may be either incentive stock
options ("ISOs"), as defined by the Internal Revenue Code, or nonqualified stock
options. The Board of Directors determines who will receive options under the
Program and sets the terms, including vesting dates. Options may have a maximum
term of no more than ten years. The exercise price of ISOs granted under the
Program must be at least equal to the fair market value of the common stock on
the date of grant. The exercise price of nonqualified options is determined by
the Board of Directors.
In connection with the granting of stock options to employees, the Company
recorded deferred stock compensation totaling $503,045 in the year ended
December 31, 1999, of which $16,939 for the vested portion of the options was
recorded as non-cash stock compensation during the year ended December 31, 1999.
The total amount represents the difference between the exercise price and the
deemed fair value of the Company's Common Stock for accounting purposes on the
date these stock options were granted. The amortization of the remaining
deferred stock compensation will result in additional charges to operations
through fiscal 2003. The amortization of deferred stock compensation is
classified as a separate component of operating expenses in the Statements of
Operations.
During 1999, the Company sold or issued to various employees and
consultants (for past services rendered) 3,677,200 shares of restricted Class A
Common Stock at purchase prices ranging from $0.02 to $0.50 for $435,900 in cash
and $91,900 in stock subscription receivables, of which $91,900 was paid
subsequent to December 31, 1999. The shares of restricted Class A Common Stock
issued under the Program generally vest over a four-year period or as defined in
the subscription agreement, and the unvested shares are subject to repurchase by
the Company upon termination of employment at the original purchase price. The
Company has 90 days to notify the employee of its intent to repurchase. Should
the Company elect not to
F-19
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCENTIVE STOCK PROGRAM--(CONTINUED)
repurchase, the unvested shares of Class A Common Stock will automatically
accelerate. For all issuances of Class A Common Stock whose purchase prices were
below the deemed fair market value of the Class A Common Stock, the Company
recorded deferred stock compensation of $2,319,320, of which $484,761 was
recognized as stock compensation expense during the year ended December 31, 1999
for the vested portion of the Class A Common Stock. The balance of the deferred
stock compensation will be amortized to expense over the remaining vesting
period of the Class A Common Stock. The amortization of deferred stock
compensation is classified as a separate component of operating expenses in the
Statements of Operations.
The exercise price of stock options may be paid in cash or by issuance of a
full recourse promissory note. If an option expires, terminates or is canceled,
the shares not purchased by the option holder, or in the case of restricted
Common Stock the shares repurchased by the Company, may become available for
additional awards under the Program.
Option and restricted common stock activity are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
SHARES SHARES AVERAGE RESTRICTED AVERAGE
AVAILABLE OUTSTANDING PRICE COMMON PRICE
UNDER UNDER STOCK PER SHARES PER
PROGRAM OPTIONS SHARE OUTSTANDING SHARE
--------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998............. -- -- $ -- $ -- $ --
Granted/Issued......................... 106,830 1,062,500 0.24 8,164,000 $ 0.05
Exercised.............................. -- -- -- -- --
Canceled/Repurchased................... -- -- -- -- --
--------- --------- ------ ----------- ------
Balance at December 31, 1999............. 106,830 1,062,500 $ 0.24 8,164,000 $ 0.05
--------- --------- ------ ----------- ------
--------- --------- ------ ----------- ------
Exercisable/Vested....................... -- -- $ -- $ -- $ --
--------- --------- ------ ----------- ------
--------- --------- ------ ----------- ------
</TABLE>
The weighted average fair value of options granted in 1999 was $0.62 per
share. The options are exercisable over a four-year vesting period and expire at
various dates through 2009. Exercise prices for options outstanding as of
December 31, 1999, ranged from $0.10 to $0.50. The weighted average remaining
contractual life of those options at December 31, 1999 was 9.8 years.
Pro forma information regarding net loss and loss per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options and unvested shares of restricted common stock under the
fair value method of FAS 123. The fair value for these options and unvested
shares of restricted common stock was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1999: risk free interest rate of 5.5%, dividend yield of 0%,
volatility of .7, and a weighted average expected life of the option and
unvested stock of four years.
F-20
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCENTIVE STOCK PROGRAM--(CONTINUED)
Had the Company recorded compensation expense in accordance with FAS 123,
the net loss and net loss per share would have been:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Pro forma net loss........................................................... $(23,311,291)
------------
------------
Pro forma basic and diluted net loss per share............................... $ (74.57)
------------
------------
</TABLE>
10. STOCK APPRECIATION INCENTIVE PLAN
The Company terminated its Stock Appreciation Incentive Plan (the "Plan")
for selected key employees. In 1998, the Company agreed to pay approximately
$586,200 to the holders of Stock Units under the Plan in exchange for the Stock
Units and in connection with the termination of the Plan. As the Company had
accrued $30,900 relating to the Plan as of December 31, 1997, the remaining
$555,300 was expensed in 1998.
11. COMMITMENTS
The Company leases office facilities, office equipment and vehicles under
various noncancelable operating leases. The leases contain various renewal
options. Rent expense for the years ended December 31, 1997, 1998, and 1999 was
approximately $232,000, $269,000, and $899,000, respectively.
Future minimum lease payments as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................................... $ 1,914,833
2001........................................................................... 2,049,601
2002........................................................................... 1,968,185
2003........................................................................... 1,681,670
2004 and thereafter............................................................ 2,238,861
-------------
$ 9,853,150
-------------
-------------
</TABLE>
During February 1999, the Company entered into two-year term employment
agreements with certain executives under which the Company is obligated to pay
base salaries of $1,205,000 for each of the two-year periods under the contract.
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts
F-21
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
used for income tax purposes. Significant components of the Company's net
deferred income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................................ $ 7,274,265
Unearned revenues........................................................... 260,487
Accrued expenses............................................................ 576,995
Amortization................................................................ 1,600,275
------------
9,712,022
Deferred tax liabilities...................................................... --
Valuation allowance......................................................... (9,712,022)
------------
Total deferred tax assets..................................................... $ --
------------
------------
</TABLE>
FAS 109 requires a valuation allowance to reduce the deferred tax assets
reported, if based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, management has determined that a $9,712,022
valuation allowance at December 31, 1999 is necessary to reduce the deferred tax
assets to the amount that will more likely than not be realized. At December 31,
1999, the Company has available net operating loss carryforwards of $18,212,981
that expire in 2019, if unused.
The provision for (benefit from) income taxes can be reconciled to the
income tax that would result from applying the statutory rate to the net income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Tax at statutory rates........................................................ $ (7,997,676)
Nondeductible expenses for income tax purposes................................ 46,611
States taxes, net of federal benefit.......................................... (1,760,957)
Valuation allowance........................................................... 9,712,022
------------
Provision for (benefit from) income taxes................................... $ --
------------
------------
</TABLE>
Pro forma income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
Pro forma current expense.................................... $ 215,998 $ 336,367
Pro forma deferred tax expense (benefit)..................... (100,237) (107,979)
--------- ---------
Pro forma income tax provision (benefit)..................... $ 115,761 $ 228,388
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
Significant components of the Company's pro forma net deferred income taxes
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
Pro forma deferred tax assets:
Accrued expenses........................................... $ 141,908 $ 249,887
--------- ---------
141,908 249,887
Pro forma deferred tax liabilities........................... -- --
--------- ---------
Total pro forma deferred tax assets.......................... $ 141,908 $ 249,887
--------- ---------
--------- ---------
</TABLE>
A reconciliation between the pro forma amount of income taxes and the pro
forma amount computed by multiplying the applicable statutory tax rate times the
net income (loss) before income taxes is as follows.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
Pro forma tax at statutory rates....................................... $ 68,184 $ 146,395
Nondeductible expenses for pro forma income tax purposes............... 35,665 47,870
Pro forma state taxes, net of federal benefit.......................... 11,912 25,576
Other.................................................................. -- 8,547
--------- ---------
Pro forma provision for (benefit from) income taxes.................... $ 115,761 $ 228,388
--------- ---------
--------- ---------
</TABLE>
13. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan for all
eligible employees. Under this 401(k) retirement plan, employees who have met
certain eligibility requirements may make voluntary contributions to the
retirement program in the form of salary reductions. The Company, at the
discretion of the Board of Directors, may make contributions to the retirement
plan equal to a percentage of each employee's wages. Company contributions for
the years ended December 31, 1997, 1998, and 1999 were approximately $73,000,
$135,000 and $211,000, respectively.
14. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company paid approximately
$415,000 for management services to a company affiliated by common ownership.
During the year ended December 31, 1999, the Company received approximately
$10,400 from the same company for services performed by Company employees.
In addition, during 1999, the Company paid $383,245 for rent and $16,000
for consulting services to another entity affiliated by common ownership with
the Company.
F-23
<PAGE>
WORKSCAPE, INC.
(FORMERLY EMPLOYEE COMMUNICATIONS SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS
In January 2000, the Company increased its authorized Series D Preferred
Stock to 12,375,000 shares and subsequently sold 375,000 shares of Series D
Preferred Stock to a new investor for $750,000 of cash ($2.00 per share).
In January 2000, the Company paid $400,000 to an affiliate of an investor
("Licensor") as prepayment of license and support fees under the terms of a
software license agreement. Under this software license agreement, the Company
may be required to make additional royalty payments to the licensor based on
sales where the licensed software is integrated in the Company's products.
During January and February 2000, the Company granted options to purchase
3,295,500 shares of Class A Common Stock at prices ranging from $3.00-$5.00 per
share. During 2000, the Company will record a deferred stock compensation charge
of $6,291,000 that will be amortized over the vesting period of the options.
In February 2000, the Company's Board of Directors approved to increase the
authorized number of shares of common stock to 400,000,000 and authorized number
of shares of preferred stock to 10,000,000.
On February 9, 2000, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its Common Stock in an
initial public offering.
On February 15, 2000, the Company sold 800,000 shares of Common Stock to a
new investor, affiliated by common ownership with the Company, for $4,000,000 in
cash ($5.00 per share).
On February 24, 2000, the Company sold an aggregate of 285,000 shares of
Common Stock to two employees and a Board of Directors member for $1,425,000 in
cash ($5.00 per share).
On March 6, 2000, the Company executed an agreement with Exodus
Communications, Inc. ("Exodus") under which Exodus agreed to provide data center
management services to the Company for a monthly fee of approximately $35,000
through February 2001.
On March 6, 2000, the Company sold 30,000 shares of Common Stock to an
employee for $150,000 in cash ($5.00 per share).
On March 20, 2000, the Company sold 1,000,000 shares of Common Stock to a
new investor for $5,000,000 in cash ($5.00 per share).
Immediately upon completion of the initial public offering, all outstanding
shares of Series A, Series B and Series D Preferred Stock will convert into
37,191,666 shares of Common Stock and the holders of Series D Preferred Stock
will be paid $7,920,000 upon the mandatory conversion to Common Stock.
Additionally, Class A Common Stock and Class B Common Stock will be redesignated
as a single class of Common Stock. The balance sheets include pro forma
information as of December 31, 1999 to reflect such events upon consummation of
the Company's initial public offering.
F-24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Workscape, Inc.
We have audited the accompanying statement of assets acquired and liabilities
assumed in connection with Workcape, Inc.'s purchase of the Employee
Self-Service Business of Edify Corporation and the accompanying statements of
revenues and direct operating costs of the Employee Self-Service Business of
Edify Corporation for the years ended December 31, 1996, 1997, and 1998. These
statements are the responsibility of Workscape, Inc.'s management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the 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.
The accompanying financial statements were prepared for inclusion in the Form
S-1 of Workscape, Inc., on the basis of presentation as described in Note 2, and
are not intended to be a complete presentation of the financial position and
results of operations of Edify Corporation's Employee Self-Service Business. As
more fully described in Note 2 to the financial statements, the statements of
revenues and direct operating costs have been prepared based upon management's
estimates, and therefore may not be indicative of the results of operations that
would have occurred had the Employee Self-Service Business operated as an
unaffiliated entity.
In our opinion, such statements present fairly, in all material respects, the
assets acquired and liabilities assumed by Workscape, Inc. and the statements of
revenues and direct operating costs of the Employee Self-Service Business of
Edify Corporation for the years ended December 31, 1996, 1997, and 1998, on the
basis of presentation as described in Note 2, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
January 28, 2000
F-25
<PAGE>
EMPLOYEE SELF-SERVICE BUSINESS OF EDIFY CORPORATION
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
<TABLE>
<CAPTION>
AS OF
JULY 15, 1999
-------------
<S> <C>
Property and equipment, net........................................................................ $ 121,039
Other assets....................................................................................... 28,000
---------
Total assets acquired............................................................................ $ 149,039
---------
---------
Unearned revenues.................................................................................. $ 897,346
---------
Total liabilities assumed........................................................................ $ 897,346
---------
---------
Excess of liabilities assumed over assets acquired................................................. $(748,307)
---------
---------
</TABLE>
See accompanying notes.
F-26
<PAGE>
EMPLOYEE SELF-SERVICE BUSINESS OF EDIFY CORPORATION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $9,639,588 $14,313,634 $20,449,399 $10,455,361 $ 7,342,260
---------- ----------- ----------- ----------- -----------
Direct operating expenses:
Cost of revenues.............. 1,470,710 2,478,952 6,220,467 3,150,177 3,558,019
Sales and marketing........... 3,023,500 4,211,961 7,334,501 3,712,637 4,098,483
Research and development...... 773,168 832,967 1,642,352 831,500 844,666
General and administrative.... 730,329 715,176 1,428,018 724,922 822,888
---------- ----------- ----------- ----------- -----------
Excess (deficiency) of revenues
over direct operating
expenses...................... $3,641,881 $ 6,074,578 $ 3,824,061 $ 2,036,125 $(1,981,796)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
EDIFY CORPORATION'S EMPLOYEE SELF-SERVICE BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND
The Employee Self-Service Business of Edify Corporation supplied enterprise
self service software solutions that enabled organizations to automate,
integrate and personalize interactions with employees through multiple channels,
including the Internet, corporate intranets and the telephone.
On July 15, 1999, Edify Corporation ("Edify") sold its Employee
Self-Service Business ("Acquired Business") to Workscape, Inc. ("Workscape") for
approximately $16 million in cash plus $5 million in connection with a software
license of Edify's EWF software. The Acquired Business was not tracked as a
separate business unit of Edify Corporation, and as such, no financial
statements of the Acquired Business were available.
2. BASIS OF PRESENTATION
The Acquired Business was not a "stand-alone" division or subsidiary of
Edify and was not accounted for separately. The Acquired Business did not
maintain its own stand-alone treasury, legal, financial, information systems,
and other similar corporate support functions. As a result, the distinct and
separate accounts necessary to present an individual balance sheet, statement of
operations, and cash flow statement of the Acquired Business have not been
maintained. Therefore, the financial information presented is limited to
statement of assets acquired and liabilities assumed by Workscape and the
statements of revenues and direct operating expenses for the years ended
December 31, 1996, 1997, and 1998, and it is not intended to present the
financial position or results of operations of the Acquired Business had it been
a "stand alone" entity.
Statement of Assets Acquired and Liabilities Assumed
The statement of assets acquired and liabilities assumed includes property
and equipment, other assets and unearned revenues, consistent with the terms of
the Asset Acquisition Agreement between Workscape and Edify.
Statements of Revenues and Direct Operating Expenses
For purposes of preparing the statements of revenues and direct operating
expenses, revenues of the Acquired Business were specifically identified and
accumulated from the general ledger and other supporting schedules. Management
allocated direct operating expenses (other than salaries and commissions) to the
Acquired Business based on the proportion that the Employee Self-Service
Business revenues bear to total revenues of Edify. Salaries and commissions
associated with the Acquired Business were specifically identified and
accumulated based upon payroll records.
These allocations are believed to be reasonable under the circumstances.
However, the Acquired Business may not be indicative of conditions that would
have existed or results that would have occurred had the Acquired Business
operated as an unaffiliated entity.
The same allocation methodologies were used for each of the financial years
and periods presented in these statements.
A statement of cash flow is not presented because the Acquired Business did
not maintain its own cash accounts and components, such as the changes in
working capital, are not available to prepare the cash flow information.
F-28
<PAGE>
EDIFY CORPORATION'S EMPLOYEE SELF-SERVICE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment consists of computer and office equipment and is
recorded at cost. Depreciation is calculated using the straight-line method over
the useful life, which ranges from three to five years. Accumulated depreciation
was approximately $80,000 at July 15, 1999.
Unearned Revenues
Unearned revenues consists of amounts received in advance of amounts
recognized as revenues. Unearned revenues specifically consists of amounts
related to post-contract support and service contracts for which revenue was
recognized ratably over the contract period by Edify and whose performance was
assumed by Workscape upon the acquisition of the Acquired Business.
Revenue Recognition
The Acquired Business generally recognizes software licensing revenues when
all the following criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred, (3) the fee is fixed and determinable, and
(4) collectibility is probable. In addition, for arrangements with multiple
obligations to provide existing and future products, maintenance and
professional services, revenues must be allocated to each component of the
arrangement based on evidence of fair value which is specific to the Acquired
Business, or for products not yet being sold separately, the price established
by management. The Acquired Business determines vendor-specific objective
evidence of fair value for its maintenance and professional services by
reference to the price charged when the maintenance and professional services
are sold separately to customers, absent any other products and services. Once
fair value is determined, the Company recognizes revenues from maintenance fees
ratably over the term of the service period, which is typically 12-15 months.
Payments for maintenance fees are generally made in advance. The Company
recognizes professional service revenues from consulting activities under these
arrangements as the services are provided.
Revenues from fixed-price consulting contracts are recognized using the
percentage of completion method. Estimated losses are recorded in the period in
which they are incurred. Revenues from time and materials contracts are
recognized as services are performed.
During 1998, the Company recognized revenues in accordance with Statement
of Position No. 97-2, "Software Revenue Recognition." Prior to 1998, the Company
recognized revenues in accordance with Statement of Position No. 91-1, "Software
Revenue Recognition."
In December 1998, Statement of Position No. 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
was issued. The provisions of SOP 98-9 were adopted in 1999, and the adoption
did not have a material impact on the Company's financial statements.
Interim Financial Statements
The accompanying unaudited interim financial statements for June 30, 1998
and 1999 have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended June 30, 1999 are not necessarily indicative
F-29
<PAGE>
EDIFY CORPORATION'S EMPLOYEE SELF-SERVICE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of the results that may be expected for the year ended December 31, 1999. See
basis of presentation in Note 2.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
4. INCOME TAXES
The accompanying statements of revenues and direct operating expenses do
not include charges for income taxes because income taxes are considered to be
corporate expenses of Edify Corporation.
F-30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
NOAH Software, Incorporated
We have audited the accompanying balance sheets of NOAH Software, Incorporated
as of December 31, 1996, 1997 and 1998 and the related statements of operations,
stockholder's deficit, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NOAH Software, Incorporated at
December 31, 1996, 1997, and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
September 21, 1999
F-31
<PAGE>
NOAH SOFTWARE, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ -- $ 2,864 $ 19,454
Accounts receivable................................................ 13,125 70,570 --
Prepaid expenses................................................... -- 9,583 2,500
--------- --------- ---------
Total current assets................................................. 13,125 83,017 21,954
Property and equipment, net.......................................... 14,963 76,124 60,038
--------- --------- ---------
Total assets.................................................... $ 28,088 $ 159,141 $ 81,992
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................................... $ 89,254 $ 91,661 $ 36,107
Accrued compensation............................................... -- 140,366 --
Line of credit..................................................... 30,192 51,550 29,814
Unearned revenues.................................................. 104,867 536,206 465,000
--------- --------- ---------
Total current liabilities............................................ 224,313 819,783 530,921
Stockholder's deficit:
Common stock, $0.01 par value, 10,000,000 shares authorized,
1,000,000 shares issued and outstanding......................... 10,000 10,000 10,000
Additional paid-in capital......................................... -- -- 308,166
Accumulated deficit................................................ (206,225) (670,642) (767,095)
--------- --------- ---------
Total stockholder's deficit..................................... (196,225) (660,642) (448,929)
--------- --------- ---------
Total liabilities and stockholder's deficit..................... $ 28,088 $ 159,141 $ 81,992
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-32
<PAGE>
NOAH SOFTWARE, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $329,222 $690,805 $ 765,938 $ 712,939 $1,143,629
Operating costs:
Cost of revenues.......................... 234,449 369,470 607,847 498,482 509,279
Sales and marketing....................... 39,980 111,371 359,761 253,418 377,668
General and administrative................ 29,747 81,993 242,319 164,683 332,813
-------- -------- --------- --------- ----------
Income (loss) from operations............... 25,046 127,971 (443,989) (203,644) (76,131)
Interest expense............................ -- (30) (4,164) (3,248) (6,800)
-------- -------- --------- --------- ----------
Net income (loss)........................... $ 25,046 $127,941 $(448,153) $(206,892) $ (82,931)
-------- -------- --------- --------- ----------
-------- -------- --------- --------- ----------
</TABLE>
See accompanying notes.
F-33
<PAGE>
NOAH SOFTWARE, INCORPORATED
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT PAID-IN CAPITAL DEFICIT DEFICIT
---------- ------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... -- $ -- $ -- $(141,998) $ (141,998)
Issuance of common stock........... 1,000,000 10,000 -- (10,000) --
Net income......................... -- -- -- 25,046 25,046
Distributions...................... -- -- -- (101,665) (101,665)
---------- ------- --------- --------- ----------
Balance at December 31, 1996......... 1,000,000 10,000 -- (228,617) (218,617)
Net income......................... -- -- -- 127,941 127,941
Distributions...................... -- -- -- (105,549) (105,549)
---------- ------- --------- --------- ----------
Balance at December 31, 1997......... 1,000,000 10,000 -- (206,225) (196,225)
Net loss........................... -- -- -- (448,153) (448,153)
Distributions...................... -- -- -- (16,264) (16,264)
---------- ------- --------- --------- ----------
Balance at December 31, 1998......... 1,000,000 10,000 -- (670,642) (660,642)
Net loss (unaudited)............... -- -- -- (82,931) (82,931)
Distributions (unaudited).......... -- -- -- (13,522) (13,522)
Issuance of compensatory stock
options and amortization
(unaudited)..................... -- -- 308,166 -- 308,166
---------- ------- --------- --------- ----------
Balance at September 30, 1999
(unaudited)........................ 1,000,000 $10,000 $ 308,166 $(767,095) $ (448,929)
---------- ------- --------- --------- ----------
---------- ------- --------- --------- ----------
</TABLE>
See accompanying notes.
F-34
<PAGE>
NOAH SOFTWARE, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 25,046 $ 127,941 $(448,153) $(206,892) $ (82,931)
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation............................. 400 4,888 9,276 6,997 25,239
Non-cash compensation expense............ -- -- -- -- 308,166
Changes in assets and liabilities:
Accounts receivable................... (5,869) (7,256) (57,445) 13,125 70,570
Prepaid expenses...................... -- -- (9,583) -- 7,083
Accounts payable and accrued
compensation........................ 53,957 4,001 142,773 135,087 (195,920)
Unearned revenues..................... 36,378 (42,212) 431,339 70,003 (71,206)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities............................... 109,912 87,362 68,207 18,320 61,001
INVESTING ACTIVITIES
Purchase of property and equipment......... (8,247) (12,005) (70,437) (18,432) (9,153)
--------- --------- --------- --------- ---------
Net cash used in investing activities...... (8,247) (12,005) (70,437) (18,432) (9,153)
FINANCING ACTIVITIES
Proceeds from line of credit............... -- 30,192 43,668 16,365 --
Repayment of line of credit................ -- -- (22,310) -- (21,736)
Stockholder distributions.................. (101,665) (105,549) (16,264) (16,253) (13,522)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................... (101,665) (75,357) 5,094 112 (35,258)
Net increase in cash....................... -- -- 2,864 -- 16,590
Cash, beginning of period.................. -- -- -- -- 2,864
--------- --------- --------- --------- ---------
Cash, end of period........................ $ -- $ -- $ 2,864 $ -- $ 19,454
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-35
<PAGE>
NOAH SOFTWARE, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
NOAH Software, Incorporated (the "Company") provides software applications
and consulting services to the human resource departments of companies in the
United States. The Company's products include solutions for hiring, training,
benefits, service center, and salary administration.
The Company was incorporated under the laws of California on March 13,
1995. On April 1, 1996, the Company issued its first shares of stock to the sole
proprietor in exchange for the net assets of NOAH Software, Incorporated which
were estimated to be approximately $10,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Financial Instruments and Concentration of Credit Risk
Financial instruments, that potentially subject the Company to
concentrations of credit risk, consist primarily of cash and accounts
receivable. The Company deposits its cash with high credit quality financial
institutions, which at times, may be in excess of the FDIC insurance limits.
With respect to accounts receivable, the Company performs ongoing credit
evaluations of its customers and generally does not require collateral. Based on
historical experience and management's expectations, the Company does not
maintain an allowance for doubtful accounts.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are calculated on the straight-line method over the estimated useful lives of
the assets, which range from three to seven years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121, Accounting
for Impairment of Long-Lived Assets to Dispose of. The Company has determined
there has been no impairment to the carrying values of such assets since
inception.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 97-2, "Software Revenue Recognition." Effective January 1, 1998, the Company
adopted SOP 97-2. In accordance with SOP 97-2, since the Company's software
requires significant modification and customization by the Company, revenue is
recognized pursuant to the relevant guidance in SOP 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts."
The Company recognizes contract revenues from fixed fee arrangements using
the completed contract method. Contracts are considered complete upon expiration
of the
F-36
<PAGE>
NOAH SOFTWARE, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
customer acceptance period and cancellation provisions. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
become known. Amounts collected in excess of revenues recognized to date are
classified as unearned revenues.
Revenues under time and materials contracts are recognized as services are
performed, assuming no cancellation or acceptance provisions are applicable.
Contracts costs include direct materials, direct labor and those indirect
costs related to contract performance such as indirect labor, materials and
supplies, equipment rent, depreciation, and facility costs.
Three customers approximated 44% of net revenues for the year ended
December 31, 1996, three customers approximated 55% of net revenues for the year
ended December 31, 1997 and two customers approximated 59% of net revenues for
the year ended December 31, 1998.
Income Taxes
Since its inception in 1991, the Company was a sole proprietorship and its
income or loss was reported on the personal tax return of its sole stockholder.
Effective April 1, 1997, the Company, with the consent of its stockholder, made
an election under Subchapter S of the Internal Revenue Code, not to be subject
to income taxes at the corporate level. As a result, the income or loss of the
Company is included in the current taxable income of the individual stockholder
and accordingly, the statements of operations contain no provision for income
taxes for the years ended December 31, 1996, 1997 and 1998.
The unaudited pro forma income tax information in Note 6 is presented in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, as if the Company had been subject to Federal and state income
taxes for the years ended December 31, 1996, 1997 and 1998.
Advertising Costs
The Company expenses advertising as incurred. Advertising expenses were
$823, $743 and $5,111 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Interim Financial Statements
The accompanying unaudited interim financial statements for September 30,
1998 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer and office equipment........................................ $ 20,251 $ 90,688
Less: accumulated depreciation....................................... (5,288) (14,564)
-------- --------
$ 14,963 $ 76,124
-------- --------
-------- --------
</TABLE>
F-37
<PAGE>
NOAH SOFTWARE, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE
The Company maintains a bank line of credit of up to $50,000, with interest
payable in monthly installments at the prime rate plus 2.75% (10.5% per annum at
December 31, 1998). The bank line of credit is secured by substantially all the
assets of the Company and is personally guaranteed by the Company's sole
stockholder. The bank line of credit agreement specifies that the amount
borrowed may exceed the line limit from time to time and the bank reserves the
right to call the line. Since there is no specified maturity date, and principal
is payable on demand, the balance outstanding of $30,192 and $51,550 at
December 31, 1997 and 1998 respectively, has been classified as current.
During the year ended December 31, 1998, the Company paid approximately
$4,000 for interest.
5. LEASE COMMITMENTS
The Company leases office facilities under various noncancelable operating
leases expiring in 1999. Rent expense for the years ended December 31, 1996,
1997 and 1998 was $3,117 $3,673 and $8,151, respectively.
6. PRO FORMA INCOME TAXES
The pro forma income tax provision presented below assumes that the Company
had been subject to Federal and state income taxes during the years ended
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
--------- -------- ---------
<S> <C> <C> <C>
Pro forma current expense...................................... $ 81,303 $ 18,019 $ 16,184
Pro forma deferred tax expense (benefit)....................... (70,905) 35,502 (115,506)
--------- -------- ---------
Pro forma income tax provision (benefit)....................... $ 10,398 $ 53,521 $ (99,322)
--------- -------- ---------
--------- -------- ---------
</TABLE>
A reconciliation between the pro forma amount of income taxes and the pro
forma amount computed by multiplying the applicable statutory tax rate by the
pre-tax net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Pro forma tax provision (benefit) at statutory rate.......... $ 8,516 $ 43,500 $ (152,372)
Pro forma state tax provision (benefit)...................... 1,481 3,435 (2,972)
Change in valuation allowance................................ -- -- 73,046
Tax credits.................................................. -- -- (22,599)
Other........................................................ 401 6,586 5,575
-------- -------- -----------
Pro forma provision for (benefit from) income taxes.......... $ 10,398 $ 53,521 $ (99,322)
-------- -------- -----------
-------- -------- -----------
</TABLE>
7. SUBSEQUENT EVENTS
On March 19, 1999, the Company adopted the NOAH Software, Incorporated 1999
Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides that
each option will vest at a rate of 20% per year over a period of five years and
shall expire on the tenth anniversary of the date of grant. The Company's Board
of Directors granted 270,000 options to various key employees at grant prices
ranging from $1.00 to $1.50 per share with the vesting period commencing on the
employee's hire date. The difference between the fair
F-38
<PAGE>
NOAH SOFTWARE, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. SUBSEQUENT EVENTS--(CONTINUED)
market value of the Company's stock and the grant price of these options
resulted in approximately, $362,000 of compensation expense that will be
amortized over the vesting period of the option.
On May 10, 1999, the Company entered into a line of credit agreement with
the bank allowing the Company to increase its line of credit to $100,000, with
interest payable in monthly installments at the prime rate plus 2.0% per annum.
The bank line of credit has no specified maturity date, and principal is payable
on demand. The line of credit is secured by substantially all the assets of the
Company and is guaranteed by the sole stockholder of the Company.
8. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS' REPORT
On October 12, 1999 the Company consummated an agreement to sell
substantially all of its assets to Workscape, Inc. for approximately $3,273,960
in cash and 1,116,800 shares of Workscape, Inc.'s common stock.
F-39
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 1
Risk Factors...................................... 6
Special Note Regarding Forward-Looking Statements. 19
Use of Proceeds................................... 20
Dividend Policy................................... 20
Capitalization.................................... 21
Dilution.......................................... 23
Selected Financial Data........................... 24
Unaudited Pro Forma Financial Data................ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................... 28
Business.......................................... 37
Management........................................ 53
Certain Transactions.............................. 60
Principal Stockholders............................ 64
Description of Capital Stock...................... 66
Shares Eligible for Future Sale................... 70
Underwriting...................................... 72
Legal Matters..................................... 74
Experts........................................... 74
Additional Information............................ 74
Index to Financial Statements..................... F-1
</TABLE>
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS
ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
WARBURG DILLON READ LLC
PROSPECTUS
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses to be paid by us, other than
the underwriting discounts and commissions payable by us in connection with the
sale of the common stock being registered. All amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee................................... $ 30,360
NASD filing fee........................................ 12,000
Nasdaq National Market fee............................. 82,000
Blue sky qualification fees and expenses............... 10,000
Printing and engraving expenses........................ 250,000
Legal fees and expenses................................ 600,000
Accounting fees and expenses........................... 500,000
Director and officer liability insurance............... 250,000
Transfer agent and registrar fees...................... 8,500
Miscellaneous expenses................................. 7,140
-----------
Total............................................. $ 1,750,000
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Workscape is incorporated under the laws of the State of Delaware. Section
145 of the Delaware General Corporation Law permits indemnification of officers,
directors and other corporate agents under certain circumstances and subject to
certain limitations. Our certificate of incorporation and bylaws provide that we
will indemnify our directors and officers to the fullest extent permitted by
law, including in circumstances in which indemnification is otherwise
discretionary under Delaware law. In addition, we intend to enter into separate
indemnification agreements with our directors that would require us, among other
things, to indemnify our directors against certain liabilities which may arise
by reason of their status or service. The indemnification provisions in our
certificate of incorporation and bylaws and the indemnification agreements to be
entered into between us and our directors may be sufficiently broad to permit
indemnification of our officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of 1933. We
also intend to maintain director and officer liability insurance, if available
on reasonable terms, to insure our directors and officers against the cost of
defense, settlement or payment of a judgment under certain circumstances. In
addition, the form of underwriting agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification by the underwriters of us
and our officers and directors for certain liabilities arising under the
Securities Act of 1933, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to a series of private financings, we sold:
o 13,500,000 shares of our Series A preferred stock in exchange for 500
pre-recapitalization shares of our common stock held by our founding
stockholders on February 2, 1999;
o 4,000,000 shares of our Series A preferred stock at a price of $1.00 per
share on February 2, 1999;
o 7,500,000 shares of our Series B preferred stock at a price of $1.00 per
share, and 14,583,333 shares of our Series C preferred stock at a price
of $1.20 per share on July 15, 1999;
o 12,000,000 shares of our Series D preferred stock at a price of $2.00 per
share on December 17, 1999; and
o 375,000 shares of our Series D preferred stock at a price of $2.00 per
share on January 18, 2000.
II-1
<PAGE>
We sold these securities pursuant to preferred stock purchase agreements,
under which we made customary representations, warranties and covenants. Upon
completion of this offering, each outstanding share of Series A and Series B
preferred stock will convert into one share of common stock, and each
outstanding share of Series D preferred stock will convert into one share of
common stock and the right to receive $0.66 in cash. We will use a portion of
the net proceeds from this offering to redeem all outstanding shares of our
Series C preferred stock, as required by its terms, and to make required cash
payments upon conversion of the Series D preferred stock into common stock upon
the closing of this offering.
On February 2, 1999, we sold an aggregate of 750,000 shares to James G.
Carlson, Timothy T. Clifford, Richard P. Gallagher, Robert T. Barry and Arthur
T. Schultz in exchange for $594,400 in cash, $125,000 in secured promissory
notes and all of the outstanding shares of MCO2, Inc. Corporation, a holding
company owned by Mr. Carlson, Mr. Clifford and Mr. Schultz.
Pursuant to management subscription agreements, we sold shares of our
Series B preferred stock, at prices of $1.00 to $1.20 per share, to the
following officers as follows:
<TABLE>
<CAPTION>
OFFICER SHARES SERIES DATE
- ------------------------------ -------- --------- -------------------
<S> <C> <C> <C>
Timothy McDonald 50,000 Series B March 15, 1999
Donald R. Fitch 50,000 Series B March 24, 1999
A. Lee Ingram 50,000 Series B July 1, 1999
Susanne Bundy 41,666 Series B September 23, 1999
</TABLE>
In connection with our acquisition of assets of NOAH Software, we issued
1,116,800 shares of our common stock to NOAH Software. Additionally, we issued
483,200 shares of our common stock to seven former employees of NOAH Software
who became our employees in 1999.
Pursuant to our 1999 Equity Participation Plan, we sold 8,164,000 shares of
our common stock to various employees and consultants between February 1999 and
November 1999 at prices from $0.02 to $0.50 per share. These shares of common
stock vest annually over four years and are subject to repurchase by us at the
price paid for each share by the employee.
On February 15, 2000, we sold 800,000 shares of our common stock to BEA
Systems, Inc. at a price of $5.00 per share.
On February 24, 2000, we sold 200,000 shares of our common stock to F.
Selby Wellman, one of our directors, 45,000 shares of our common stock to
Richard Zoretic and 40,000 shares of our common stock to George Bickerstaff, our
Chief Financial Officer, each at a price of $5.00 per share.
On March 6, 2000, we sold 30,000 shares of our common stock to Sidney
Stolz, our Executive Vice President, Business Development, at a price of $5.00
per share.
On March 20, 2000, we sold 1,000,000 shares of our common stock to
Employers Health Insurance Company at a price of $5.00 per share.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances of securities described in Items 15 were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of, or
Rule 701 under, the Securities Act. The recipients of securities in each such
transaction represented their intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received adequate
information about us or had access, through employment or other relationships,
to such information.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
*1.1 -- Form of Underwriting Agreement
3.1 -- Form of Amended and Restated Certificate of Incorporation to be in effect upon completion of the
offering
3.2 -- Form of Amended and Restated Bylaws to be in effect upon completion of the offering
4.1 -- Common Stock Purchase Warrant dated July 15, 1999 between Workscape, Inc. and Warburg, Pincus
Equity Partners, L.P.
4.2 -- Common Stock Purchase Warrant dated July 15, 1999 between Workscape, Inc. and Warburg, Pincus
Netherlands Equity Partners I, C.V.
4.3 -- Common Stock Purchase Warrant dated July 15, 1999 between Workscape, Inc. and Warburg Pincus
Netherlands Equity Partners II, C.V.
4.4 -- Common Stock Purchase Warrant dated July 15, 1999 between Workscape, Inc. and Warburg Pincus
Netherlands Equity Partners III, C.V.
4.5 -- Common Stock Purchase Warrant dated February 2, 1999 between Workscape, Inc. and Kenneth F.
Phillips
4.6 -- Common Stock Purchase Warrant dated February 2, 1999 between Workscape, Inc. and Salvatore Percia
*5.1 -- Opinion of Latham & Watkins
10.1 -- Amended and Restated Registration Rights Agreement dated December 17, 1999
*10.2 -- Employment Agreement between Workscape, Inc. and James G. Carlson
*10.3 -- Employment Agreement between Workscape, Inc. and Timothy T. Clifford
*10.4 -- Employment Agreement between Workscape, Inc. and George W. Bickerstaff III
*10.5 -- Employment Agreement between Workscape, Inc. and A. Lee Ingram
*10.6 -- Employment Agreement between Workscape, Inc. and Donald R. Fitch
*10.7 -- Employment Agreement between Workscape, Inc. and Sidney W. Stolz
*10.8 -- Employment Agreement between Workscape, Inc. and Susanne M. Bundy
*10.9 -- Employment Agreement between Workscape, Inc. and Richard C. Zoretic
*10.10 -- 1999 Equity Participation Plan, as amended
10.11 -- Amended and Restated Stockholders Agreement dated as of December 17, 1999
*10.12 -- Value Added Reseller Agreement dated as of July 15, 1999 between Workscape, Inc. and Edify
Corporation.
10.13 -- Form of Indemnification Agreement
21.1 -- Subsidiaries of Workscape, Inc.
23.1 -- Consent of Ernst & Young LLP, independent auditors
23.2 -- Consent of Ernst & Young LLP, independent auditors
23.3 -- Consent of Ernst & Young LLP, independent auditors
*23.4 -- Consent of Latham & Watkins (included in Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule
</TABLE>
- ------------------
* to be filed by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Account and Reserve
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
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 by the registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referenced in
Item 14 of this registration statement or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities 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, 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; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Reston, Virginia, on the 21st day of
March 2000.
WORKSCAPE, INC.
By: /s/ JAMES G. CARLSON
----------------------------------
James G. Carlson
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints James G. Carlson, Timothy T.
Clifford and George W. Bickerstaff, and each of them acting individually, as his
true and lawful attorneys-in-fact and agents, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this registration statement (including post-effective amendments or any
abbreviated registration statement and any amendments thereto filed pursuant to
Rule 462(b) increasing the number of securities for which registration is
sought), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, with full power of each to act alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------- ----------------------
<C> <S> <C>
/s/ JAMES G. CARLSON Chairman and Chief Executive Officer
- ------------------------------------------ (Principal Executive Officer)
James G. Carlson March 21, 2000
/s/ TIMOTHY T. CLIFFORD President and Chief Operating Officer,
- ------------------------------------------ Director
Timothy T. Clifford March 21, 2000
/s/ GEORGE W. BICKERSTAFF Chief Financial Officer (Principal
- ------------------------------------------ Financial and Accounting Officer)
George W. Bickerstaff March 21, 2000
/s/ PATRICK T. HACKETT Director
- ------------------------------------------
Patrick T. Hackett March 21, 2000
/s/ DAVID J. WENSTRUP Director
- ------------------------------------------
David J. Wenstrup March 21, 2000
/s/ TIMOTHY T. WEGLICKI Director
- ------------------------------------------
Timothy T. Weglicki March 21, 2000
/s/ F. SELBY WELLMAN Director
- ------------------------------------------
F. Selby Wellman March 21, 2000
</TABLE>
II-5
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Workscape, Inc.
We have audited the financial statements of Workscape, Inc. as of
December 31, 1998 and 1999, and for each of the three years in the period ended
December 31, 1999 and have issued our report thereon dated February 18, 2000,
except for Note 15, as to which the date is March 20, 2000. Our audits also
included the financial statement schedule listed in Item 16 of this Registration
Statement. The 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
McLean, VA
February 18, except for Note 15, as to which the
date is March 20, 2000
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNT AND RESERVE
WORKSCAPE, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS(A) END OF PERIOD
- ------------------------------------------------------------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997.............................. $ 45,000 $ -- $ (45,000) $ --
Year ended December 31, 1998.............................. -- -- -- --
Year ended December 31, 1999.............................. -- 214,000 -- 214,000
</TABLE>
- ------------------
(a) Write-off of receivables
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WORKSCAPE, INC.
Workscape, Inc., a corporation existing under the laws of the State
of Delaware which was originally incorporated on August 24, 1999, does hereby
certify:
FIRST: The Certificate of Incorporation of the Corporation is
hereby amended and restated to in its entirety as follows:
ARTICLE I
The name of the corporation is Workscape, Inc. (the "Corporation").
ARTICLE II
The address of its registered office in the State of Delaware is 9
East Loockerman Street, in the City of Dover, County of Kent, 19901. The name of
its registered agent at such address is National Registered Agents, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
(a) The Corporation is authorized to issue two classes of shares to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation shall have authority to issue is Four
Hundred Ten Million (410,000,000) shares. The total number of shares of Common
Stock which the Corporation shall have authority to issue is Four Hundred
Million (400,000,000) shares, and the par value of each share of Common Stock is
one cent ($.01). The total number of shares of Preferred Stock which the
Corporation shall have authority to issue is Ten Million (10,000,000) shares,
and the par value of each share of Preferred Stock is one cent ($.01). The
Preferred Stock may be issued in one or more series, each series to be
appropriately designated by a distinguishing letter or title, prior to the issue
of any shares thereof.
(b) The Board of Directors is hereby authorized to fix the dividend
rights, dividend rate, conversion rights, voting powers (if any), rights and
terms of redemption (including sinking fund provisions, if any), the redemption
price or prices, the liquidation preference, any other designations, preferences
and relative, participating, optional or other special rights, and any
qualifications, limitations or restrictions thereof, of any wholly unissued
series of Preferred Stock, and the number of shares constituting any such
unissued series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any
<PAGE>
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding.
(c) In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, repeal, alter,
amend and rescind Bylaws of the Corporation.
ARTICLE VI
Notwithstanding Article V hereof, the Bylaws may be rescinded,
altered, amended or repealed in any respect by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the combined
voting power of the outstanding shares of capital stock of the Corporation
entitled to vote in the election of directors, voting together as a single
class.
ARTICLE VII
(a) Except as otherwise provided for or fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation relating to the
rights of the holders of any series of Preferred Stock to elect additional
directors, the total number of directors constituting the entire Board shall be
fixed from time to time by or pursuant to a resolution passed by the Board.
(b) The Board, other than those directors elected by the holders of
any series of Preferred Stock as provided for or fixed pursuant to the
provisions of Article IV of this Certificate of Incorporation, shall be divided
into three classes, as nearly equal in number as the then-authorized number of
directors constituting the Board permits, with the term of one class expiring
each year and with each director serving for a term ending at the third annual
meeting of stockholders of the Corporation following the annual meeting at which
such director was elected. The directors, other than those who may be elected by
the holders of any series of Preferred Stock as set forth in the Certificate of
Incorporation, shall be divided into three classes, as nearly equal in number as
possible. One class of directors shall be initially elected for a term expiring
at the annual meeting of stockholders to be held in 2001, another class shall be
initially elected for a term expiring at the annual meeting of stockholders to
be held in 2002, and another class shall be initially elected for a term
expiring at the annual meeting of stockholders to be held in 2003. Members of
each class shall hold office until their successors are elected and qualified.
At each succeeding annual meeting of the stockholders of the Corporation, the
successors of the class of directors whose term expires at that meeting shall be
elected by a plurality vote of all votes cast at such meeting to hold office for
a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
(c) Except as otherwise provided for or fixed pursuant to the
provisions of Article IV of this Certificate of Incorporation relating to the
rights of the holders of any series of Preferred Stock to elect additional
directors, and subject to the provisions hereof, newly created
2
<PAGE>
directorships resulting from any increase in the authorized number of directors,
and any vacancies on the Board resulting from death, resignation,
disqualification, removal or other cause may be filled only by the majority vote
of the remaining directors in office, even though less than a quorum of the
Board. Any director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in which the
new directorship was created or in which the vacancy occurred, and until such
director's successor shall have been duly elected and qualified, subject to his
earlier death, disqualification, resignation or removal. Subject to the
provisions of this Certificate of Incorporation, no decrease in the number of
directors constituting the Board shall shorten the term of any incumbent
director.
(d) During any period when the holders of any series of Preferred
Stock have the right to elect additional directors as provided for or fixed
pursuant to the provisions of Article IV of this Certificate of Incorporation,
then upon commencement and for the duration of the period which such right
continues (i) the then otherwise total authorized number of directors of the
Corporation shall automatically be increased by such specified number of
directors, and the holders of such Preferred Stock shall be entitled to elect
the additional directors so provided for or fixed pursuant to said provisions,
and (ii) each such additional director shall serve until such director's
successor shall have been duly elected and qualified, or until such director's
right to hold such office terminates pursuant to said provisions, whichever
occurs earlier, subject to his death, disqualification, resignation or removal.
Except as otherwise provided by the Board in the resolutions or resolutions
establishing such series, whenever the holders of any series of Preferred Stock
having such right to elect additional directors are divested of such right
pursuant to the provisions of such stock, the terms of office of all such
additional directors elected by the holders of such stock, or elected to fill
any vacancies resulting from death, disqualification, resignation or removal of
such additional directors, shall forthwith terminate and the total and
authorized number of directors of the Corporation shall be reduced accordingly.
Notwithstanding the foregoing, whenever the holders of any one or more series
of Preferred Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of the Certificate of Incorporation and any certificate of designations
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this paragraph unless expressly provided by such terms.
(e) Except for such additional directors, if any, as are elected by
the holders of any series of Preferred Stock as provided for or fixed pursuant
to the provisions of Article IV of this Certificate of Incorporation, any
director may be removed from office only for cause and only by the affirmative
vote of the holders of at least sixty-six and two thirds percent (66 2/3%)
of the combined voting power of the then-outstanding shares of capital stock of
the Corporation entitled to vote in the election of directors, voting together
as a single class.
ARTICLE VIII
Elections of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall so provide.
3
<PAGE>
ARTICLE IX
Except as otherwise provided for or fixed pursuant to the provisions
of Article IV of this Certificate of Incorporation relating to the rights of
holders of any series of Preferred Stock, no action that is required or
permitted to be taken by the stockholders of the Corporation at any annual or
special meeting of stockholders may be effected by written consent of
stockholders in lieu of a meeting of stockholders.
ARTICLE X
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors, or by a
majority of the members of the Board of Directors, or by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose powers and authority, as provided in a resolution of the Board of
Directors or in the Bylaws of the Corporation, including the power to call such
meetings, but such special meetings may not be called by any other person or
persons; provided, however, that if and to the extent that any special meeting
of stockholders may be called by any other person or persons specified in any
provisions of the Certificate of Incorporation or any amendment thereto or any
certificate filed under Section 151(g) of the General Corporation Law of the
State of Delaware, then such special meeting may also be called by the person or
persons, in the manner, at the times and for the purposes so specified.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation; provided, however, that no
amendment, alternation, change or repeal may be made to Article VI, VII, IX, X,
or XI without the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding voting stock of the Corporation,
voting together as a single class.
ARTICLE XII
Each reference in this Certificate of Incorporation to any provision
of the General Corporation Law of the State of Delaware refers to the specified
provision of the General Corporation Law of the State of Delaware as the same
now exists or as it may hereafter be amended or superseded.
ARTICLE XIII
(a) To the fullest extent permitted by the General Corporation Law
of the State of Delaware, the Corporation shall indemnify and advance
indemnification expenses on behalf of all directors and officers of the
Corporation. The Corporation may indemnify such other persons as may be required
by statute or by the Bylaws of the Corporation. The Corporation may, to the full
extent permitted by Delaware law, purchase and maintain insurance on behalf of
any director or officer, or such other person as may be permitted by statute or
the Bylaws of the Corporation, against any liability which may be asserted
against any director,
4
<PAGE>
officer or such other person and may enter into contracts providing for the
indemnification of any director, officer or such other person to the full extent
permitted by Delaware law.
(b) The liability of directors of the Corporation (for actions or
inactions taken by them as directors) for monetary damages shall be eliminated
to the fullest extent permissible under Delaware law. If the General Corporation
Law of the State of Delaware is hereafter amended to authorize corporate action
further limiting or eliminating the personal liability of directors, then the
liability of the director to the Corporation shall be limited or eliminated to
the fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended from time to time. Any repeal or modification of this
Article by the stockholders of the Corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
SECOND: Thereafter, by written consent of the holders of ___% of the
issued and outstanding shares of Common Stock, holders of ___% of the issued and
outstanding shares of ___% of the issued and outstanding shares of Series A
Convertible Preferred Stock, holders of ___% of the issued and outstanding
shares of Series B Convertible Preferred Stock, holder of ___% of the issued and
outstanding shares of Series C Preferred Stock, and holders of ___% of the
issued and outstanding shares of Series D Convertible Preferred Stock, in
accordance with Section 228 of the General Corporation Law of the State of
Delaware, the necessary number of shares required by statute were voted in favor
of the Certificate of Incorporation and prompt written notice in accordance with
Section 228(d) of the General Corporation Law of the State of Delaware has been
given to those stockholders of the Corporation who have not consented in
writing.
THIRD: This Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation of the State of Delaware.
5
<PAGE>
IN WITNESS WHEREOF, Workscape, Inc. has caused this certificate to
be signed by James G. Carlson, its Chief Executive Officer, as of ___________
___ , 2000.
WORKSCAPE, INC.
By:
----------------------------
James G. Carlson
Chief Executive Officer
S-1
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
WORKSCAPE, INC.
<PAGE>
TABLE OF CONTENTS
Page
Article I. Offices........................................................1
Section 1. Registered Offices..........................................1
Section 2. Other Offices...............................................1
Article II. Meetings Of Stockholders.......................................1
Section 1. Place Of Meetings...........................................1
Section 2. Annual Meeting Of Stockholders..............................1
Section 3. Quorum; Adjourned Meetings And Notice Thereof...............1
Section 4. Voting......................................................2
Section 5. Proxies.....................................................2
Section 6. Special Meetings............................................2
Section 7. Notice Of Stockholders' Meetings............................2
Section 8. Maintenance And Inspection Of Stockholder List..............2
Section 9. Notice Of Stockholder Business And Nominations..............3
Article III. Directors......................................................5
Section 1. The Number Of Directors.....................................5
Section 2. Vacancies...................................................6
Section 3. Powers......................................................6
Section 4. Place Of Directors' Meetings................................6
Section 5. Regular Meetings............................................6
Section 6. Special Meetings............................................6
Section 7. Quorum......................................................6
Section 8. Action Without Meeting......................................6
Section 9. Telephonic Meetings.........................................7
Section 10. Committees Of Directors.....................................7
Section 11. Minutes Of Committee Meetings...............................7
Section 12. Compensation Of Directors...................................7
Article IV. Officers.......................................................7
Section 1. Officers....................................................7
Section 2. Election Of Officers........................................8
Section 3. Subordinate Officers........................................8
Section 4. Compensation Of Officers....................................8
Section 5. Term Of Office; Removal And Vacancies.......................8
Section 6. Chairman Of The Board.......................................8
Section 7. President...................................................8
i
<PAGE>
Section 8. Vice Presidents.............................................8
Section 9. Secretary...................................................9
Section 10. Assistant Secretary.........................................9
Section 11. Treasurer...................................................9
Section 12. Assistant Treasurer.........................................9
Article V. Indemnification...............................................10
Article VI. Certificates Of Stock.........................................13
Section 1. Certificates...............................................13
Section 2. Signatures On Certificates.................................13
Section 3. Statement Of Stock Rights, Preferences, Privileges.........13
Section 4. Lost Certificates..........................................14
Section 5. Transfers Of Stock.........................................14
Section 6. Fixed Record Date..........................................14
Section 7. Registered Stockholders....................................14
Article VII. General Provisions............................................14
Section 1. Dividends..................................................14
Section 2. Payment Of Dividends; Directors' Duties....................15
Section 3. Checks.....................................................15
Section 4. Fiscal Year................................................15
Section 5. Corporate Seal.............................................15
Section 6. Manner Of Giving Notice....................................15
Section 7. Waiver Of Notice...........................................15
Section 8. Annual Statement...........................................15
Article VIII. Amendments....................................................15
Section 1. Amendment By Directors Or Stockholders.....................15
ii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
WORKSCAPE, INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICES. The registered office shall be the
National Registered Agents, Inc., 9 East Loockerman, in the City of Dover,
County of Kent, State of Delaware.
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held at
any place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the Corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors. At each annual meeting directors shall be elected and any
other proper business may be transacted.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority of
the voting power of the stock issued and outstanding and entitled to vote at any
meeting of stockholders, the holders of which are present in person or
represented by proxy, shall constitute a quorum for the transaction of business
except as otherwise provided by law, by the Certificate of Incorporation, or by
these Bylaws. A quorum, once established, shall not be broken by the withdrawal
of enough votes to leave less than a quorum and the votes present may continue
to transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
voting stock represented in person or by proxy may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat.
<PAGE>
Section 4. VOTING. When a quorum is present at any meeting, in all
matters other than the election of directors, the vote of the holders of a
majority of the voting power of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these Bylaws or any rule or regulation
applicable to the Corporation or its securities, a different vote is required in
which case such express provision shall govern and control the decision of such
question. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
Section 5. PROXIES. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy appointed by such stockholder and
bearing a date not more than three years prior to said meeting, unless said
instrument provides for a longer period. All proxies must be filed with the
Secretary of the Corporation at the beginning of each meeting in order to be
counted in any vote at the meeting. Unless otherwise provided for in Certificate
of Incorporation of the Corporation, each stockholder shall have one vote for
each share of stock having voting power, registered in his name on the books of
the Corporation on the record date set by the Board of Directors as provided in
Article VII, Section 6 hereof.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Board of Directors, or by a
majority of the members of the Board of Directors, or a by a committee of the
Board of Directors which has been duly designated by the Board of Directors and
whose power and authority, including the power to call such meetings, but such
special meetings may not be called by any other person or persons; provided,
however, that if and to the extent that any special meeting of stockholders may
be called by any other person or persons specified in any provisions of the
Certificate of Incorporation or any amendment thereto or any certificate filed
under Section 151(g) of the Delaware General Corporation Law, then such special
meeting may also be called by the person or persons, in the manner, at the times
and for the purposes so specified.
Section 7. NOTICE OF STOCKHOLDERS' MEETINGS. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given which notice shall state the place, date and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting. If mailed, notice is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation.
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The officer
who has charge of the stock ledger of the Corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
2
<PAGE>
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 9. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS
(a) Annual Meetings of Stockholders
(1) Nominations of persons for election to the Board of the Corporation
and the proposal of business to be considered by the stockholders may be made at
an annual meeting of stockholders only (a) pursuant to the Corporation's notice
of meeting (or any supplement hereto), (b) by or at the direction of the Board
or (c) by any stockholder of the Corporation who was a stockholder of record of
the Corporation at the time the notice provided for in this Section 9 is
delivered to the Secretary of the Corporation, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section 9.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (a)(1) of
this Section 9, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the ninetieth (90th) day nor
earlier than the close of business on the one hundred twentieth (120th) day
prior to the first anniversary of the preceding year's annual meeting (provided,
however, that in the event that the date of the annual meeting is more than
thirty (30) days before or more than seventy (70) days after such anniversary
date, notice by the stockholder must be so delivered not earlier than the close
of business on the one hundred twentieth (120th) day prior to such annual
meeting and not later than the close of business on the later of the ninetieth
(90th) day prior to such annual meeting or the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the Corporation). In no event shall the public announcement of an adjournment or
postponement of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth: (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (and such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made, and in the event that such business includes a proposal to amend the
Bylaws of the Corporation, the language of the proposed amendment; and (iii) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (A) the name and address of such
stockholder, as they appear on
3
<PAGE>
the Corporation's books, and of such beneficial owner, (B) the class and number
of shares of capital stock of the Corporation which are owned beneficially and
of record by such stockholder and such beneficial owner, (C) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to propose such business or nomination, and (D) a representation whether
the stockholder or the beneficial owner, if any, intends or is part of a group
which intends to (a) deliver a proxy statement and/or form of proxy to holders
of at least the percentage of the Corporation's outstanding capital stock
required to approve or adopt the proposal or elect the nominee and/or (b)
otherwise solicit proxies from stockholders in support of such proposal or
nomination. The Corporation may require any proposed nominee to furnish such
other information as it may reasonably require to determine the eligibility of
such proposed nominee to serve as a director of the Corporation.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2)
of this Section 9 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation at an annual meeting is
increased and there is no public announcement by the Corporation naming all of
the nominees for director or specifying the size of the increased Board at least
one hundred (100) days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice required by this Section 9 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
(4) If the Corporation did not hold an annual meeting of stockholders
in the preceding year, the Board shall, in good faith, fix by resolution a date
which shall be deemd to be the "first anniversary of the preceding year's annual
meeting" for purposes of this Section 9.
(b) Special Meetings of Stockholders
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board may be made at a special meeting of stockholders at which directors are to
be elected pursuant to the Corporation's notice of meeting (1) by or at the
direction of the Board or (2) provided that the Board has determined that the
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time the notice provided for
in this Section 9 is delivered to the Secretary of the Corporation, who shall be
entitled to vote at the meeting and upon such election and who complies with the
notice procedures set forth in this Section 9. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board, any such stockholder entitled to vote in such election
of directors may nominate a person or persons (as the case may be) for election
to such position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (a)(2) of this Section 9 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such special meeting, or the tenth
(10th) day following the day on which public
4
<PAGE>
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board to be elected at such meeting. In no event shall
the public announcement of an adjournment or postponement of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
(c) General
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 9 shall be eligible to be elected at an
annual or special meeting of stockholders of the Corporation to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 9. Except as otherwise provided by law or the
Certificate of Incorporation, the chairman of the meeting shall have the power
and duty to (a) determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 9 and (b) if any
proposed nomination or business is not in compliance with this Section 9
(including whether the stockholder or beneficial owner, if any, on whose behalf
the nomination or proposal is made solicits (or is part of a group which
solicits), or fails to so solicit (as the case may be), proxies in support of
such stockholder's proposal in compliance with such stockholder's representation
required by clause (iii)(D) of Section (a)(2) of this Section 9), to declare
that such defective nomination shall be disregarded or that such proposed
business shall not be transacted.
(2) For purposes of this Section 9, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 9, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 9. Nothing in this Section 9 shall be deemed to affect any
rights (a) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(b) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
ARTICLE III
DIRECTORS
Section 1. THE NUMBER OF DIRECTORS. The number of authorized directors
constituting the whole Board shall be determined as set forth in the Certificate
of Incorporation. The exact number of directors shall be fixed, within the
limits specified, by resolution duly adopted by the Board. The initial number of
directors shall be five (5), until changed pursuant to this Section 1 of Article
III. The directors need not be stockholders. The directors shall be elected at
the annual meeting of the stockholders, except as provided in Section 2 of this
Article, and each director elected shall hold office until his successor is
elected and qualified; provided, however, that unless otherwise restricted by
the Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed from the Board of Directors at any meeting of
stockholders only for cause.
5
<PAGE>
Section 2. VACANCIES. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled only by a majority of the directors
then in office, although less than a quorum. Any director elected in accordance
with the preceding sentence shall hold office for the remainder of the full term
of the class of directors in which the new directorship was created or in which
the vacancy occurred, and until such director's successor shall have been duly
elected and qualified, subject to his earlier death, disqualification,
resignation or removal. Subject to the provisions of the Certificate of
Incorporation, no decrease in the number of directors constituting the Board
shall shorten the term of any incumbent director.
Section 3. POWERS. The property and business of the Corporation shall
be managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by these Bylaws expressly conferred upon them, the
Board may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 4. PLACE OF DIRECTORS' MEETINGS. The directors may hold their
meetings and have one or more offices, and keep the books of the Corporation
outside of the State of Delaware.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President on forty-eight (48)
hours' notice to each director, either personally or by telephone, telecopier or
other means of electronic communication; special meetings shall be called by the
President or the Secretary in like manner and on like notice on the written
request of two directors unless the Board consists of only one director; in
which case special meetings shall be called by the President or Secretary in
like manner or on like notice on the written request of the sole director.
Section 7. QUORUM. At all meetings of the Board of Directors a majority
of the authorized number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which there is a quorum, shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present. If only one
director is authorized, such sole director shall constitute a quorum.
Section 8. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting,
6
<PAGE>
if all members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
Section 9. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 10. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the Board, designate one or more committees,
each such committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to (i) approving, adopting, or recommending to the stockholders, any action or
matter expressly required by the Delaware General Corporation Law to be
submitted to stockholders for approval, or (ii) adopting, amending or repealing
the Bylaws of the Corporation.
Section 11. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
Section 12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of this Corporation shall be chosen
by the Board of Directors and shall include a Chairman of the Board of Directors
or a President, or both, and a Secretary. The Corporation may also have at the
discretion of the Board of Directors
7
<PAGE>
such other officers as are desired, including a Vice-Chairman of the Board of
Directors, a Chief Executive Officer, a Treasurer, one or more Vice Presidents,
one or more Assistant Secretaries and Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3
hereof. In the event there are two or more Vice Presidents, then one or more may
be designated as Executive Vice President, Senior Vice President, or other
similar or dissimilar title. At the time of the election of officers, the
directors may by resolution determine the order of their rank. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these Bylaws otherwise provide.
Section 2. ELECTION OF OFFICERS. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers of
the Corporation.
Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4. COMPENSATION OF OFFICERS. The salaries of all officers and
agents of the Corporation shall be fixed by the Board of Directors.
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the
Corporation shall hold office until their successors are chosen and qualify in
their stead. Any officer elected or appointed by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by these
Bylaws. If there is no President, the Chairman of the Board shall in addition be
the Chief Executive Officer of the Corporation and shall have the powers and
duties prescribed in Section 7 of this Article IV.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the Chief Executive Officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President,
8
<PAGE>
and when so acting shall have all the powers of and be subject to all the
restrictions upon the President. The Vice Presidents shall have such other
duties as from time to time may be prescribed for them, respectively, by the
Board of Directors.
Section 9. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep in
safe custody the seal of the Corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by his signature.
Section 10. ASSISTANT SECRETARY. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors, or if there be no such determination, the Assistant Secretary
designated by the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys, and other valuable effects in the name and to the credit of
the Corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the Corporation. If required by the Board of
Directors, he shall give the Corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors, for the
faithful performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 12. ASSISTANT TREASURER. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
9
<PAGE>
ARTICLE V
INDEMNIFICATION
(a) The Corporation shall to the fullest extent permitted by law
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a director
or officer of the Corporation, or is or was serving at the written request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall to the fullest extent permitted by law
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director or officer of the Corporation, or is or was serving at the
written request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no such indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only to the extent
that the Court of Chancery of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director or officer of the Corporation shall
be successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b), or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director or officer is
proper in the circumstances because he has met the applicable standard of
conduct set forth in paragraphs (a) and (b). Such determination shall be made
(1) by a majority vote of the directors who are not parties to such
10
<PAGE>
action, suit or proceeding, even though less than a quorum, (2) by a committee
of such directors designated by majority vote of such directors, even though
less than a quorum, or (3) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (4) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article V. Such expenses (including
attorneys' fees) incurred by other employees or agents may be so paid upon such
terms and conditions, if any, as the Board deems appropriate.
(f) The Board of Directors may authorize the Corporation to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article V.
(g) For the purposes of this Article V, references to "the Corporation"
shall include, in addition to the resulting corporation or entity, any
constituent corporation or entity (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors or
officers, employee or agent, so that any person who is or was a director,
officer, employee or agent of such constituent corporation or entity, or is or
was serving at the request of such constituent corporation or entity as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this Article V with respect to the resulting or surviving
corporation or entity as he would have with respect to such constituent
corporation or entity if its separate existence had continued.
(h) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include service
as a director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this section.
(i) In addition to the foregoing, the Corporation shall, to the
broadest and maximum extent permitted by Delaware law, as the same exists from
time to time (but, in case of any amendment to or change in Delaware law, only
to the extent that such amendment or change
11
<PAGE>
permits the Corporation to provide broader rights of indemnification than is
permitted to the Corporation prior to such amendment or change), indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director or officer of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding. In addition, the Corporation shall, to the
broadest and maximum extent permitted by Delaware law, as the same may exist
from time to time (but, in case of any amendment to or change in Delaware law,
only to the extent that such amendment or change permits the Corporation to
provide broader rights of payment of expenses incurred in advance of the final
disposition of an action, suit or proceeding than is permitted to the
Corporation prior to such amendment or change), pay to such person any and all
expenses (including attorneys' fees) incurred in defending or settling any such
action, suit or proceeding in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer, to repay such amount if it shall ultimately be determined
by a final judgment or other final adjudication that he is not entitled to be
indemnified by the Corporation as authorized in this Section (i). The first
sentence of this Section (i) to the contrary notwithstanding, the Corporation
shall not indemnify any such person with respect to any of the following
matters: (i) remuneration paid to such person if it shall be determined by a
final judgment or other final adjudication that such remuneration was in
violation of law; or (ii) any accounting of profits made from the purchase or
sale by such person of the Corporation's securities within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law; or (iii)
actions brought about or contributed to by the dishonesty of such person, if a
final judgment or other final adjudication adverse to such person establishes
that acts of active and deliberate dishonesty were committed or attempted by
such person with actual dishonest purpose and intent and were material to the
adjudication; or (iv) actions based on or attributable to such person having
gained any personal profit or advantage to which he was not entitled, in the
fact gained such personal profit or other advantage to which he was not
entitled; or (v) any matter in respect of which a final decision by a court with
competent jurisdiction shall determine that indemnification is unlawful;
provided, however, that the Corporation shall perform its obligations under the
second sentence of this Section (i) on behalf of such person until such time as
it shall be ultimately determined by a final judgment or other final
adjudication that he is not entitled to be indemnified by the Corporation as
authorized by the first sentence of this Section by virtue of any of the
preceding clauses (i), (ii), (iii), (iv) or (v).
(j) The indemnification provided by this Article V shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
(k) If any part of this Article V shall be found, in any action, suit
or proceeding or appeal therefrom or in any other circumstances or as to any
particular officer,
12
<PAGE>
director, employee or agent to be unenforceable, ineffective or invalid for any
reason, the enforceability, effect and validity of the remaining parts or of
such parts in other circumstances shall not be affected, except as otherwise
required by applicable law.
(l) The foregoing provisions of this Article V shall be deemed to
constitute an agreement between the Corporation and each of the persons entitled
to indemnification hereunder, for as long as such provisions remain in effect.
Any amendment to the foregoing provisions of this Article V which limits or
otherwise adversely affects the scope of indemnification or rights of any such
persons hereunder shall, as to such persons, apply only to claims arising, or
causes of action based on actions or events occurring, after such amendment and
delivery of notice of such amendment is given to the person or persons whose
rights hereunder are adversely affected, such amendment shall have no effect on
such rights of such persons hereunder. Any person entitled to indemnification
under the foregoing provisions of this Article V shall, as to any act or
omission occurring prior to the date of receipt of such notice, be entitled to
indemnification to the same extent as had such provisions continued as Bylaws of
the Corporation without such amendment.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. CERTIFICATES. Every holder of stock of the Corporation shall
be entitled to have a certificate signed by, or in the name of the Corporation
by, the Chairman or Vice Chairman of the Board of Directors, or the President or
a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer of the Corporation, certifying the number of
shares represented by the certificate owned by such stockholder in the
Corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating,
13
<PAGE>
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. TRANSFERS OF STOCK. Upon surrender to the Corporation, or
the transfer agent of the Corporation, of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. FIXED RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than sixty nor less than ten days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting. In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date which shall not be more than ten days after the
date upon which the resolution fixing the record date is adopted by the Board of
Directors.
Section 7. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly provided
by the laws of the State of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash,
14
<PAGE>
in property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before payment of
anty dividend there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve fund to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive to
the interests of the Corporation, and the directors may abolish any such
reserve.
Section 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6. MANNER OF GIVING NOTICE. Whenever, under the provisions of
the statutes or of the Certificate of Incorporation or of these Bylaws, notice
is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram.
Section 7. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
Section 8. ANNUAL STATEMENT. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders when called
for by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS. Subject to the
provisions of the Certificate of Incorporation, these Bylaws may be altered,
amended or repealed or new Bylaws may be adopted by the stockholders or by the
Board of Directors, when such power is conferred upon the Board of Directors by
the Certificate of Incorporation, at any
15
<PAGE>
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal Bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal Bylaws.
16
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of Workscape,
Inc., a Delaware corporation; and
(2) That the foregoing Bylaws constitute the bylaws of said
corporation as duly adopted by Board of Directors of said
corporation as of February __, 2000.
IN WITNESS WHEREOF I have hereunto subscribed my name this __ day of
________ ___, 2000.
--------------------------------------------
George W. Bickerstaff, Secretary
<PAGE>
EXHIBIT 4.1
WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO WORKSCAPE, INC., QUALIFIES AS AN EXEMPT TRANSACTION
UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
WORKSCAPE, INC.
Common Stock Purchase Warrant
WORKSCAPE, INC., a Massachusetts corporation (the "Company"), hereby
certifies that, for value received, Warburg, Pincus Equity Partners L.P. (the
"Holder"), or assigns, is entitled, subject to the terms set forth below, to
purchase from the Company, at any time and from time to time during the period
beginning on the date hereof and ending on July 15, 2009 in whole or in part, an
aggregate of 13,781,250 fully paid and non-assessable shares (the "Aggregate
Number") of the Class A Common Stock of the Company at a purchase price, subject
to the provisions of Paragraph 3 hereof, of $1.20 per share (the "Purchase
Price"). The Purchase Price and the number and character of such shares are
subject to adjustment as provided below, and the term "Common Stock" shall mean,
unless the context otherwise requires, the Class A Common Stock or other
securities or property at the time deliverable upon the exercise of this
Warrant. This Warrant is herein called the "Warrant."
1. EXERCISE OF WARRANT. The purchase rights evidenced by this Warrant
shall be exercised by the holder surrendering this Warrant, with the form of
subscription at the end hereof duly executed by such holder, to the Company at
its office in Natick, Massachusetts, accompanied by payment, of an amount (the
"Exercise Payment") equal to the Purchase Price multiplied by the number of
shares being purchased pursuant to such exercise, payable as follows: (a) by
payment to the Company in cash, by certified or official bank check, or by wire
transfer of the Exercise Amount, (b) by surrender to the Company for
cancellation of Series C Preferred Stock, par value $0.01 per share (the "Series
C Preferred Stock"), of the Company or, in the event there are no such shares of
Series C Preferred Stock outstanding, any other securities of the Company, in
each case
<PAGE>
having a Market Price (as hereinafter defined) on the date of exercise equal to
the Exercise Amount; or (c) by a combination of the methods described in clauses
(a) and (b) above. In lieu of exercising the Warrant, the holder may elect to
receive a payment equal to the difference between (i) the Market Price
multiplied by the number of shares as to which the payment is then being elected
and (ii) the Exercise Payment with respect to such shares, payable by the
Company to the Holder only in shares of Common Stock valued at the Market Price
on the date of exercise. For purposes hereof, the term "Market Price" with
respect to the Series C Preferred Stock shall mean $1.20 per share plus accrued
but unpaid dividends and, with respect to Common Stock or other securities of
the Company, shall mean the average closing price of a share of Common Stock for
the 15 consecutive trading days preceding such day on the principal national
securities exchange on which the shares of Common Stock or other securities are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the reported bid and asked prices
during such 15 trading day period in the over-the-counter market as furnished by
the National Quotation Bureau, Inc., or, if such firm is not then engaged in the
business of reporting such prices, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company or, if the
shares of Common Stock or other securities are not publicly traded, the Market
Price for such day shall be the fair market value thereof determined jointly by
the Company and the holder of this Warrant; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by the independent investment
banking firm selected jointly by the Company and the holder of this Warrant or,
if that selection cannot be made within 15 days, by an independent investment
banking firm selected by the American Arbitration Association in accordance with
its rules.
1.1 Partial Exercise. This Warrant may be exercised for less than the
full number of shares of Common Stock, in which case the number of shares
receivable upon the exercise of this Warrant as a whole, and the sum payable
upon the exercise of this Warrant as a whole, shall be proportionately reduced.
Upon any such partial exercise, the Company at its expense will forthwith issue
to the holder hereof a new Warrant or Warrants of like tenor calling for the
number of shares of Common Stock as to which rights have not been exercised,
such Warrant or Warrants to be issued in the name of the holder hereof or his
nominee (upon payment by such holder of any applicable transfer taxes).
1.2 Reduction in the Aggregate Number. In the event the Company
exercises its option to redeem all, but not a part of, the Series C Preferred
Stock pursuant to the terms of Article III, Section 8 of the Company's Articles
of Organization on or before July 15, 2000 the Aggregate Number shall be reduced
by 5,953,500 (subject to the adjustments as provided below).
-2-
<PAGE>
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Purchase Price, and in any
event within ten (10) days thereafter, the Company, at its expense, will cause
to be issued in the name of and delivered to the holder hereof a certificate or
certificates for the number of fully paid and non-assessable shares or other
securities or property to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount determined in accordance with Paragraph
3.9 hereof. The Company agrees that the shares so purchased shall be deemed to
be issued to the holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares as aforesaid.
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to prevent
dilution of the right granted hereunder, the Purchase Price shall be subject to
adjustment from time to time in accordance with this Paragraph 3. Upon each
adjustment of the Purchase Price pursuant to this Paragraph 3, the registered
Holder of this Warrant shall thereafter be entitled to acquire upon exercise, at
the Purchase Price resulting from such adjustment, the number of shares of the
Company's Common Stock obtainable by multiplying the Purchase Price in effect
immediately prior to such adjustment by the number of shares of the Company's
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Purchase Price resulting from such adjustment.
3.1 Adjustment for Issue or Sale of Common Stock at Less than Purchase
Price. Except as provided in Paragraph 3.2 or 3.5 below, if and whenever on or
after the date of issuance hereof the Company shall issue or sell, or shall in
accordance with subparagraphs 3.1(1) to (9), inclusive, be deemed to have issued
or sold, any shares of its Common Stock for a consideration per share less than
the Purchase Price in effect immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the
Purchase Price shall, subject to subparagraphs (1) to (9) of this Paragraph 3.1,
be reduced to the Purchase Price (calculated to the nearest tenth of a cent)
determined by dividing:
(i) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Purchase Price then in effect,
plus (y) the consideration, if any, received by the Company upon
consummation of such Triggering Transaction, by
(ii) an amount equal to the sum of (x) the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering Transaction
plus (y) the number of shares of Common Stock issued (or deemed to be
issued in accordance
-3-
<PAGE>
with subparagraphs 3.1(1) to (9)) in connection with the Triggering
Transaction.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
shares of Common Stock outstanding at such time, (ii) the number of shares of
Common Stock issuable assuming conversion at such time of the Convertible
Preferred Stock (as defined in the Company's Articles of Organization) and (iii)
the number of shares of the Company's Common Stock deemed to be outstanding
under subparagraphs 3.1(1) to (9), inclusive, at such time.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights
to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable and the price per
share for which the Common Stock is issuable upon exercise, conversion
or exchange (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the granting
of such options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
options, plus, in the case of such options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities)
shall be less than the Purchase Price in effect immediately prior to
the time of the granting of such Option, then the total maximum amount
of Common Stock issuable upon the exercise of such Options, or, in the
case of Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such options) be deemed to be outstanding and to have been
issued and sold by the company for such price per share. No adjustment
of the Purchase Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible
-4-
<PAGE>
Securities upon the exercise of such Options, except as otherwise
provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then the total maximum number
of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No
adjustment of the Purchase Price shall be made upon the actual issue of
such Common Stock upon exercise of the rights to exchange or convert
under such Convertible Securities, except as otherwise provided in
subparagraph (3) below.
(3) If the purchase price provided for in any options referred
to in subparagraph (1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred
to in subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Stock shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in Paragraph 3.1 or 3.3), the Purchase Price in
effect at the time of such change shall forthwith be readjusted to the
Purchase Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for
Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to
-5-
<PAGE>
protect against dilution, then in case of the delivery of Common Stock
upon the exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Purchase Price then in effect
hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never
been issued as to such Common Stock and had adjustments been made upon
the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Purchase Price then in
effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase
Price then in effect hereunder shall forthwith be increased to the
Purchase Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or
termination, never been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such options shall be
deemed to have been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be the fair value of such
consideration as determined in good faith by the Board of Directors of
the Company. In case any shares of Common Stock, Options or Convertible
Securities shall be issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the
net assets and business of the non-surviving corporation as shall be
attributed by the Board of Directors of the Company in good faith to
such Common Stock, Options or Convertible Securities, as the case may
be.
-6-
<PAGE>
(7) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the disposition of any shares so owned or held
shall be considered an issue or sale of Common Stock for the purpose of
this Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the stock of the Company payable in Options or
Convertible Securities, then in such case any Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(9) For purposes of this Paragraph 3.1, in case the Company
shall take a record of the holders of its Common Stock for the purpose
of entitling them (x) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities, or (y)
to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Stock (other than a
dividend payable in Common Stock) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Stock which would have been issued at
the time of such earlier exercise and all other securities which would have been
issued with respect to such Common Stock by reason of stock splits, stock
dividends, mergers or reorganizations, or for any other reason). For the
purposes of this Paragraph 3.2, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.3 Subdivisions and Combinations. In case the Corporation shall at any
time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend
on its outstanding
-7-
<PAGE>
Common Stock, the Purchase Price in effect immediately prior to such subdivision
or dividend shall be proportionately reduced by the same ratio as the
subdivision or dividend. In case the Corporation shall at any time combine its
outstanding Common Stock, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased by the same ratio as the
combination.
3.4 Reorganization, Reclassification, Consolidation, Merger or Sale of
Assets. If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or other property with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall have the right to acquire
and receive upon exercise of this Warrant such shares of stock, securities, cash
or other property issuable or payable (as part of the reorganization,
reclassification, consolidation, merger or sale) with respect to or in exchange
for such number of outstanding shares of the Company's Common Stock as would
have been received upon exercise of this Warrant at the Purchase Price then in
effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument mailed or delivered to
the holder of this Warrant at the last address of such holder appearing on the
books of the Company, the obligation to deliver to such holder such shares of
stock, securities, cash or other property as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall not effect
any consolidation, merger or sale with the person having made such offer or with
any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holder of this Warrant shall have been given a
reasonable opportunity to then elect to receive upon the exercise of this
Warrant either the stock, securities, cash or other property then issuable with
respect to the Common Stock of the Company or the stock, securities, cash or
other property, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer. For purposes hereof the term "Affiliate"
with respect to any given person shall mean any person controlling, controlled
by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 3 shall not apply
-8-
<PAGE>
to any Common Stock issued, issuable or deemed outstanding under subparagraphs
3.1(1) to (9) inclusive: (i) to any person pursuant to any stock option, stock
purchase or similar plan or arrangement for the benefit of employees,
consultants or directors of the Company or its subsidiaries in effect on the
date of issuance hereof or thereafter adopted by the Board of Directors, or (ii)
pursuant to options, warrants and conversion rights in existence on the date of
issuance hereof or (iii) upon conversion of the Convertible Preferred Stock or
(iv) the sale of any additional shares of Convertible Preferred Stock.
3.6 Notices of Record Date, Etc. In the event that:
(1) the Company shall declare any cash dividend upon its Common Stock,
or
(2) the Company shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to
the holders of its Common Stock, or
(3) the Company shall offer for subscription pro rata to the holders of
its Common Stock any additional shares of stock of any class or other
rights, or
(4) there shall be any capital reorganization or reclassification of
the capital stock of the Company, including any subdivision or
combination of its outstanding shares of Common Stock, or consolidation
or merger of the Company with, or sale of all or substantially all of
its assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then, in connection with such event, the Company shall give to the
holder of this Warrant:
(i) at least twenty (20) days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty (20) days, prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (i)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the
-9-
<PAGE>
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written notice
shall be given by first class mail, postage prepaid, addressed to the
holder of this Warrant at the address of such holder as shown on the books
of the Company.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of issuance hereof, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of Common Stock of the Company and such grants, issuances or sales do
not result in an adjustment of the Purchase Price under Paragraph 3.1 hereof,
then the holder of this Warrant shall be entitled to acquire (within thirty (30)
days after the later to occur of the initial exercise date of such Purchase
Rights or receipt by such holder of the notice concerning Purchase Rights to
which such holder shall be entitled under Paragraph 3.6) and upon the terms
applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon exercise of this Warrant immediately before the grant, issuance or
sale of such Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights shall be
distributed to the exercising holder of this Warrant as soon as possible
after such exercise and it shall not be necessary for the exercising
holder of this Warrant specifically to request delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of shares of Common Stock or the amount of property which such
holder could have acquired upon such exercise at the time or times at
which the Company granted, issued or sold such expired Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to which,
in the opinion of the Board of Directors of the Company, the provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the rights of the holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the
-10-
<PAGE>
Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Purchase Price as otherwise determined pursuant to any
of the provisions of this Section 3 except in the case of a combination of
shares of a type contemplated in Paragraph 3.3 and then in no event to an amount
larger than the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of shares
of Common Stock upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
Paragraph 3.9, be issuable upon exercise of this Warrant, the Company shall in
lieu thereof pay to the person entitled thereto an amount in cash equal to the
current value of such fraction, calculated to the nearest one-hundredth (1/100)
of a share, to be computed (i) if the Common Stock is listed on any national
securities exchange on the basis of the last sales price of the Common Stock on
such exchange (or the quoted closing bid price if there shall have been no
sales) on the date of conversion, or (ii) if the Common Stock shall not be
listed, on the basis of the mean between the closing bid and asked prices for
the Common Stock on the date of conversion as reported by NASDAQ, or its
successor, and if there are not such closing bid and asked prices, on the basis
of the fair market value per share as determined by the Board of Directors of
the Company.
3.10 Officers' Statement as to Adjustments. Whenever the Purchase Price
shall be adjusted as provided in Section 3 hereof, the Company shall forthwith
file at each office designated for the exercise of this Warrant, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Company, showing in reasonable detail the facts requiring such
adjustment and the Purchase Price that will be effective after such adjustment.
The Company shall also cause a notice setting forth any such adjustments to be
sent by mail, first class, postage prepaid, to the record holder of this Warrant
at his or its address appearing on the stock register. If such notice relates to
an adjustment resulting from an event referred to in Paragraph 3.6, such notice
shall be included as part of the notice required to be mailed and published
under the provisions of Paragraph 3.6 hereof.
4. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder hereof against dilution or other impairment. Without limiting the
-11-
<PAGE>
generality of the foregoing, the Company will not increase the par value of any
shares of stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and at all times will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable stock upon the exercise of this
Warrant.
5. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company shall at all times reserve and keep available out of its authorized but
unissued stock, solely for the issuance and delivery upon the exercise of this
Warrant and other similar Warrants, such number of its duly authorized shares of
Common Stock as from time to time shall be issuable upon the exercise of this
Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms,
to all of which each taker or owner hereof consents and agrees:
(a) Subject to the legend appearing on the first page hereof,
title to this Warrant may be transferred by endorsement (by
the holder hereof executing the form of assignment at the end
hereof including guaranty of signature) and delivery in the
same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) Any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and
is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser
hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in
favor of every such bona fide purchaser, and every such bona
fide purchaser
-12-
<PAGE>
shall acquire title hereto and to all rights represented
hereby.
(c) Until this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as
the absolute owner hereof for all purposes without being
affected by any notice to the contrary.
(d) Prior to the exercise of this Warrant, the holder hereof shall
not be entitled to any rights of a shareholder of the Company
with respect to shares for which this Warrant shall be
exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided
herein.
(e) The Company shall not be required to pay any Federal or state
transfer tax or charge that may be payable in respect of any
transfer involved in the transfer or delivery of this Warrant
or the issuance or conversion or delivery of certificates for
Common Stock in a name other than that of the registered
holder of this Warrant or to issue or deliver any certificates
for Common Stock upon the exercise of this Warrant until any
and all such taxes and charges shall have been paid by the
holder of this Warrant or until it has been established to the
Company's satisfaction that no such tax or charge is due.
9. SUBDIVISION OF RIGHTS. This Warrant (as well as any new Warrants
issued pursuant to the provisions of this paragraph) is exchangeable, upon the
surrender hereof by the holder hereof, at the principal office of the Company
for any number of new Warrants of like tenor and date representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock of the Company which may be subscribed for and purchased hereunder.
10. MAILING OF NOTICES, ETC. All notices and other communications from
the Company to the holder of this Warrant shall be mailed by first-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
11. HEADINGS, ETC. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect the meaning hereof.
-13-
<PAGE>
12. CHANGE, WAIVER, ETC. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
WORKSCAPE, INC.
By /s/ James G. Carlson
------------------------------
Dated: July __, 1999
Attest:
/s/ Mary Lee Praetz
- -----------------------------
<PAGE>
[To be signed only upon exercise of Warrant]
To Workscape, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ________ shares of Common Stock of Workscape Inc. and
herewith makes payment of $________ therefor, and requests that the certificates
for such shares be issued in the name of, and be delivered to _______________,
whose address is _________________.
Dated:
- --------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase the __________ shares of the Common Stock of Workscape, Inc.
to which the within Warrant relates, and appoints
_________________________________ attorney to transfer said right on the books
of [Name of Company] with full power of substitution in the premises.
Dated:
- ---------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
In the presence of
- ---------------------
<PAGE>
EXHIBIT 4.2
WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO WORKSCAPE, INC., QUALIFIES AS AN EXEMPT TRANSACTION
UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
WORKSCAPE, INC.
Common Stock Purchase Warrant
WORKSCAPE, INC., a Massachusetts corporation (the "Company"), hereby
certifies that, for value received, Warburg, Pincus Netherlands Equity Partners
I, C.V. (the "Holder"), or assigns, is entitled, subject to the terms set forth
below, to purchase from the Company, at any time and from time to time during
the period beginning on the date hereof and ending on July 15, 2009 in whole or
in part, an aggregate of 437,500 fully paid and non-assessable shares (the
"Aggregate Number") of the Class A Common Stock of the Company at a purchase
price, subject to the provisions of Paragraph 3 hereof, of $1.20 per share (the
"Purchase Price"). The Purchase Price and the number and character of such
shares are subject to adjustment as provided below, and the term "Common Stock"
shall mean, unless the context otherwise requires, the Class A Common Stock or
other securities or property at the time deliverable upon the exercise of this
Warrant. This Warrant is herein called the "Warrant."
1. EXERCISE OF WARRANT. The purchase rights evidenced by this Warrant
shall be exercised by the holder surrendering this Warrant, with the form of
subscription at the end hereof duly executed by such holder, to the Company at
its office in Natick, Massachusetts, accompanied by payment, of an amount (the
"Exercise Payment") equal to the Purchase Price multiplied by the number of
shares being purchased pursuant to such exercise, payable as follows: (a) by
payment to the Company in cash, by certified or official bank check, or by wire
transfer of the Exercise Amount, (b) by surrender to the Company for
cancellation of Series C Preferred Stock, par value $0.01 per share (the "Series
C Preferred Stock"), of the Company or, in the event there are no such shares of
Series C Preferred Stock outstanding, any other securities of the Company, in
each case having a Market Price (as hereinafter defined) on the date of
<PAGE>
exercise equal to the Exercise Amount; or (c) by a combination of the methods
described in clauses (a) and (b) above. In lieu of exercising the Warrant, the
holder may elect to receive a payment equal to the difference between (i) the
Market Price multiplied by the number of shares as to which the payment is then
being elected and (ii) the Exercise Payment with respect to such shares, payable
by the Company to the Holder only in shares of Common Stock valued at the Market
Price on the date of exercise. For purposes hereof, the term "Market Price" with
respect to the Series C Preferred Stock shall mean $1.20 per share plus accrued
but unpaid dividends and, with respect to Common Stock or other securities of
the Company, shall mean the average closing price of a share of Common Stock for
the 15 consecutive trading days preceding such day on the principal national
securities exchange on which the shares of Common Stock or other securities are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the reported bid and asked prices
during such 15 trading day period in the over-the-counter market as furnished by
the National Quotation Bureau, Inc., or, if such firm is not then engaged in the
business of reporting such prices, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company or, if the
shares of Common Stock or other securities are not publicly traded, the Market
Price for such day shall be the fair market value thereof determined jointly by
the Company and the holder of this Warrant; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by the independent investment
banking firm selected jointly by the Company and the holder of this Warrant or,
if that selection cannot be made within 15 days, by an independent investment
banking firm selected by the American Arbitration Association in accordance with
its rules.
1.1 Partial Exercise. This Warrant may be exercised for less than the
full number of shares of Common Stock, in which case the number of shares
receivable upon the exercise of this Warrant as a whole, and the sum payable
upon the exercise of this Warrant as a whole, shall be proportionately reduced.
Upon any such partial exercise, the Company at its expense will forthwith issue
to the holder hereof a new Warrant or Warrants of like tenor calling for the
number of shares of Common Stock as to which rights have not been exercised,
such Warrant or Warrants to be issued in the name of the holder hereof or his
nominee (upon payment by such holder of any applicable transfer taxes).
1.2 Reduction in the Aggregate Number. In the event the Company
exercises its option to redeem all, but not a part of, the Series C Preferred
Stock pursuant to the terms of Article III, Section 8 of the Company's Articles
of Organization on or before July 15, 2000 the Aggregate Number shall be reduced
by 189,000 (subject to the adjustments as provided below).
-2-
<PAGE>
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Purchase Price, and in any
event within ten (10) days thereafter, the Company, at its expense, will cause
to be issued in the name of and delivered to the holder hereof a certificate or
certificates for the number of fully paid and non-assessable shares or other
securities or property to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount determined in accordance with Paragraph
3.9 hereof. The Company agrees that the shares so purchased shall be deemed to
be issued to the holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares as aforesaid.
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to prevent
dilution of the right granted hereunder, the Purchase Price shall be subject to
adjustment from time to time in accordance with this Paragraph 3. Upon each
adjustment of the Purchase Price pursuant to this Paragraph 3, the registered
Holder of this Warrant shall thereafter be entitled to acquire upon exercise, at
the Purchase Price resulting from such adjustment, the number of shares of the
Company's Common Stock obtainable by multiplying the Purchase Price in effect
immediately prior to such adjustment by the number of shares of the Company's
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Purchase Price resulting from such adjustment.
3.1 Adjustment for Issue or Sale of Common Stock at Less than Purchase
Price. Except as provided in Paragraph 3.2 or 3.5 below, if and whenever on or
after the date of issuance hereof the Company shall issue or sell, or shall in
accordance with subparagraphs 3.1(1) to (9), inclusive, be deemed to have issued
or sold, any shares of its Common Stock for a consideration per share less than
the Purchase Price in effect immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the
Purchase Price shall, subject to subparagraphs (1) to (9) of this Paragraph 3.1,
be reduced to the Purchase Price (calculated to the nearest tenth of a cent)
determined by dividing:
(i) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Purchase Price then in effect,
plus (y) the consideration, if any, received by the Company upon
consummation of such Triggering Transaction, by
(ii) an amount equal to the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction plus
(y) the number of shares of Common Stock issued (or deemed to be issued in
accordance
-3-
<PAGE>
with subparagraphs 3.1(1) to (9)) in connection with the Triggering
Transaction.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
shares of Common Stock outstanding at such time, (ii) the number of shares of
Common Stock issuable assuming conversion at such time of the Convertible
Preferred Stock (as defined in the Company's Articles of Organization) and (iii)
the number of shares of the Company's Common Stock deemed to be outstanding
under subparagraphs 3.1(1) to (9), inclusive, at such time.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights
to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable and the price per
share for which the Common Stock is issuable upon exercise, conversion
or exchange (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the granting
of such options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
options, plus, in the case of such options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities)
shall be less than the Purchase Price in effect immediately prior to
the time of the granting of such Option, then the total maximum amount
of Common Stock issuable upon the exercise of such Options, or, in the
case of Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such options) be deemed to be outstanding and to have been
issued and sold by the company for such price per share. No adjustment
of the Purchase Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible
-4-
<PAGE>
Securities upon the exercise of such Options, except as otherwise
provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then the total maximum number
of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No
adjustment of the Purchase Price shall be made upon the actual issue of
such Common Stock upon exercise of the rights to exchange or convert
under such Convertible Securities, except as otherwise provided in
subparagraph (3) below.
(3) If the purchase price provided for in any options referred
to in subparagraph (1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred
to in subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Stock shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in Paragraph 3.1 or 3.3), the Purchase Price in
effect at the time of such change shall forthwith be readjusted to the
Purchase Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for
Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to
-5-
<PAGE>
protect against dilution, then in case of the delivery of Common Stock
upon the exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Purchase Price then in effect
hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never
been issued as to such Common Stock and had adjustments been made upon
the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Purchase Price then in
effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase
Price then in effect hereunder shall forthwith be increased to the
Purchase Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or
termination, never been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such options shall be
deemed to have been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be the fair value of such
consideration as determined in good faith by the Board of Directors of
the Company. In case any shares of Common Stock, Options or Convertible
Securities shall be issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the
net assets and business of the non-surviving corporation as shall be
attributed by the Board of Directors of the Company in good faith to
such Common Stock, Options or Convertible Securities, as the case may
be.
-6-
<PAGE>
(7) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the disposition of any shares so owned or held
shall be considered an issue or sale of Common Stock for the purpose of
this Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the stock of the Company payable in Options or
Convertible Securities, then in such case any Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(9) For purposes of this Paragraph 3.1, in case the Company
shall take a record of the holders of its Common Stock for the purpose
of entitling them (x) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities, or (y)
to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Stock (other than a
dividend payable in Common Stock) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Stock which would have been issued at
the time of such earlier exercise and all other securities which would have been
issued with respect to such Common Stock by reason of stock splits, stock
dividends, mergers or reorganizations, or for any other reason). For the
purposes of this Paragraph 3.2, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.3 Subdivisions and Combinations. In case the Corporation shall at any
time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend
on its outstanding
-7-
<PAGE>
Common Stock, the Purchase Price in effect immediately prior to such subdivision
or dividend shall be proportionately reduced by the same ratio as the
subdivision or dividend. In case the Corporation shall at any time combine its
outstanding Common Stock, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased by the same ratio as the
combination.
3.4 Reorganization, Reclassification, Consolidation, Merger or Sale of
Assets. If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or other property with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall have the right to acquire
and receive upon exercise of this Warrant such shares of stock, securities, cash
or other property issuable or payable (as part of the reorganization,
reclassification, consolidation, merger or sale) with respect to or in exchange
for such number of outstanding shares of the Company's Common Stock as would
have been received upon exercise of this Warrant at the Purchase Price then in
effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument mailed or delivered to
the holder of this Warrant at the last address of such holder appearing on the
books of the Company, the obligation to deliver to such holder such shares of
stock, securities, cash or other property as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall not effect
any consolidation, merger or sale with the person having made such offer or with
any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holder of this Warrant shall have been given a
reasonable opportunity to then elect to receive upon the exercise of this
Warrant either the stock, securities, cash or other property then issuable with
respect to the Common Stock of the Company or the stock, securities, cash or
other property, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer. For purposes hereof the term "Affiliate"
with respect to any given person shall mean any person controlling, controlled
by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 3 shall not apply
-8-
<PAGE>
to any Common Stock issued, issuable or deemed outstanding under subparagraphs
3.1(1) to (9) inclusive: (i) to any person pursuant to any stock option, stock
purchase or similar plan or arrangement for the benefit of employees,
consultants or directors of the Company or its subsidiaries in effect on the
date of issuance hereof or thereafter adopted by the Board of Directors, or (ii)
pursuant to Options, Warrants and conversion rights in existence on the date of
issuance hereof or (iii) upon conversion of the Convertible Preferred Stock or
(iv) the sale of any additional shares of Convertible Preferred Stock.
3.6 Notices of Record Date, Etc. In the event that:
(1) the Company shall declare any cash dividend upon its
Common Stock, or
(2) the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock, or
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights, or
(4) there shall be any capital reorganization or
reclassification of the capital stock of the Company, including any
subdivision or combination of its outstanding shares of Common Stock,
or consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in connection with such event, the Company shall give to the holder of
this Warrant:
(i) at least twenty (20) days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty (20) days, prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (i)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the
-9-
<PAGE>
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written notice
shall be given by first class mail, postage prepaid, addressed to the
holder of this Warrant at the address of such holder as shown on the books
of the Company.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of issuance hereof, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of Common Stock of the Company and such grants, issuances or sales do
not result in an adjustment of the Purchase Price under Paragraph 3.1 hereof,
then the holder of this Warrant shall be entitled to acquire (within thirty (30)
days after the later to occur of the initial exercise date of such Purchase
Rights or receipt by such holder of the notice concerning Purchase Rights to
which such holder shall be entitled under Paragraph 3.6) and upon the terms
applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon exercise of this Warrant immediately before the grant, issuance or
sale of such Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights shall be
distributed to the exercising holder of this Warrant as soon as possible
after such exercise and it shall not be necessary for the exercising
holder of this Warrant specifically to request delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of shares of Common Stock or the amount of property which such
holder could have acquired upon such exercise at the time or times at
which the Company granted, issued or sold such expired Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to which,
in the opinion of the Board of Directors of the Company, the provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the rights of the holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the
-10-
<PAGE>
Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Purchase Price as otherwise determined pursuant to any
of the provisions of this Section 3 except in the case of a combination of
shares of a type contemplated in Paragraph 3.3 and then in no event to an amount
larger than the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of shares
of Common Stock upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
Paragraph 3.9, be issuable upon exercise of this Warrant, the Company shall in
lieu thereof pay to the person entitled thereto an amount in cash equal to the
current value of such fraction, calculated to the nearest one-hundredth (1/100)
of a share, to be computed (i) if the Common Stock is listed on any national
securities exchange on the basis of the last sales price of the Common Stock on
such exchange (or the quoted closing bid price if there shall have been no
sales) on the date of conversion, or (ii) if the Common Stock shall not be
listed, on the basis of the mean between the closing bid and asked prices for
the Common Stock on the date of conversion as reported by NASDAQ, or its
successor, and if there are not such closing bid and asked prices, on the basis
of the fair market value per share as determined by the Board of Directors of
the Company.
3.10 Officers' Statement as to Adjustments. Whenever the Purchase Price
shall be adjusted as provided in Section 3 hereof, the Company shall forthwith
file at each office designated for the exercise of this Warrant, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Company, showing in reasonable detail the facts requiring such
adjustment and the Purchase Price that will be effective after such adjustment.
The Company shall also cause a notice setting forth any such adjustments to be
sent by mail, first class, postage prepaid, to the record holder of this Warrant
at his or its address appearing on the stock register. If such notice relates to
an adjustment resulting from an event referred to in Paragraph 3.6, such notice
shall be included as part of the notice required to be mailed and published
under the provisions of Paragraph 3.6 hereof.
4. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder hereof against dilution or other impairment. Without limiting the
-11-
<PAGE>
generality of the foregoing, the Company will not increase the par value of any
shares of stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and at all times will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable stock upon the exercise of this
Warrant.
5. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company shall at all times reserve and keep available out of its authorized but
unissued stock, solely for the issuance and delivery upon the exercise of this
Warrant and other similar Warrants, such number of its duly authorized shares of
Common Stock as from time to time shall be issuable upon the exercise of this
Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms,
to all of which each taker or owner hereof consents and agrees:
(a) Subject to the legend appearing on the first page hereof,
title to this Warrant may be transferred by endorsement (by
the holder hereof executing the form of assignment at the end
hereof including guaranty of signature) and delivery in the
same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) Any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and
is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser
hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in
favor of every such bona fide purchaser, and every such bona
fide purchaser
-12-
<PAGE>
shall acquire title hereto and to all rights represented
hereby.
(c) Until this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as
the absolute owner hereof for all purposes without being
affected by any notice to the contrary.
(d) Prior to the exercise of this Warrant, the holder hereof shall
not be entitled to any rights of a shareholder of the Company
with respect to shares for which this Warrant shall be
exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided
herein.
(e) The Company shall not be required to pay any Federal or state
transfer tax or charge that may be payable in respect of any
transfer involved in the transfer or delivery of this Warrant
or the issuance or conversion or delivery of certificates for
Common Stock in a name other than that of the registered
holder of this Warrant or to issue or deliver any certificates
for Common Stock upon the exercise of this Warrant until any
and all such taxes and charges shall have been paid by the
holder of this Warrant or until it has been established to the
Company's satisfaction that no such tax or charge is due.
9. SUBDIVISION OF RIGHTS. This Warrant (as well as any new Warrants
issued pursuant to the provisions of this paragraph) is exchangeable, upon the
surrender hereof by the holder hereof, at the principal office of the Company
for any number of new Warrants of like tenor and date representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock of the Company which may be subscribed for and purchased hereunder.
10. MAILING OF NOTICES, ETC. All notices and other communications from
the Company to the holder of this Warrant shall be mailed by first-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
11. HEADINGS, ETC. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect the meaning hereof.
<PAGE>
12. CHANGE, WAIVER, ETC. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
WORKSCAPE, INC.
By /s/ James G. Carlson
------------------------------
Dated: July __, 1999
Attest:
/s/ Mary Lee Praetz
- -----------------------------
<PAGE>
[To be signed only upon exercise of Warrant]
To Workscape, Inc.
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, ________ shares of Common Stock of Workscape
Inc. and herewith makes payment of $________ therefor, and requests that the
certificates for such shares be issued in the name of, and be delivered to
_______________, whose address is _________________.
Dated:
- --------------------
----------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase the __________ shares of the Common Stock of Workscape, Inc.
to which the within Warrant relates, and appoints
_________________________________ attorney to transfer said right on the books
of [Name of Company] with full power of substitution in the premises.
Dated:
- ---------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
In the presence of
- ---------------------
<PAGE>
EXHIBIT 4.3
WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO WORKSCAPE, INC., QUALIFIES AS AN EXEMPT TRANSACTION
UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
WORKSCAPE, INC.
Common Stock Purchase Warrant
WORKSCAPE, INC., a Massachusetts corporation (the "Company"), hereby
certifies that, for value received, Warburg, Pincus Netherlands Equity Partners
II, C.V. (the "Holder"), or assigns, is entitled, subject to the terms set forth
below, to purchase from the Company, at any time and from time to time during
the period beginning on the date hereof and ending on July 15, 2009 in whole or
in part, an aggregate of 291,667 fully paid and non-assessable shares (the
"Aggregate Number") of the Class A Common Stock of the Company at a purchase
price, subject to the provisions of Paragraph 3 hereof, of $1.20 per share (the
"Purchase Price"). The Purchase Price and the number and character of such
shares are subject to adjustment as provided below, and the term "Common Stock"
shall mean, unless the context otherwise requires, the Class A Common Stock or
other securities or property at the time deliverable upon the exercise of this
Warrant. This Warrant is herein called the "Warrant."
1. EXERCISE OF WARRANT. The purchase rights evidenced by this Warrant
shall be exercised by the holder surrendering this Warrant, with the form of
subscription at the end hereof duly executed by such holder, to the Company at
its office in Natick, Massachusetts, accompanied by payment, of an amount (the
"Exercise Payment") equal to the Purchase Price multiplied by the number of
shares being purchased pursuant to such exercise, payable as follows: (a) by
payment to the Company in cash, by certified or official bank check, or by wire
transfer of the Exercise Amount, (b) by surrender to the Company for
cancellation of Series C Preferred Stock, par value $0.01 per share (the "Series
C Preferred Stock"), of the Company or, in the event there are no such shares of
Series C Preferred Stock outstanding, any other securities of the Company, in
each case
<PAGE>
having a Market Price (as hereinafter defined) on the date of exercise equal to
the Exercise Amount; or (c) by a combination of the methods described in clauses
(a) and (b) above. In lieu of exercising the Warrant, the holder may elect to
receive a payment equal to the difference between (i) the Market Price
multiplied by the number of shares as to which the payment is then being elected
and (ii) the Exercise Payment with respect to such shares, payable by the
Company to the Holder only in shares of Common Stock valued at the Market Price
on the date of exercise. For purposes hereof, the term "Market Price" with
respect to the Series C Preferred Stock shall mean $1.20 per share plus accrued
but unpaid dividends and, with respect to Common Stock or other securities of
the Company, shall mean the average closing price of a share of Common Stock for
the 15 consecutive trading days preceding such day on the principal national
securities exchange on which the shares of Common Stock or other securities are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the reported bid and asked prices
during such 15 trading day period in the over-the-counter market as furnished by
the National Quotation Bureau, Inc., or, if such firm is not then engaged in the
business of reporting such prices, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company or, if the
shares of Common Stock or other securities are not publicly traded, the Market
Price for such day shall be the fair market value thereof determined jointly by
the Company and the holder of this Warrant; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by the independent investment
banking firm selected jointly by the Company and the holder of this Warrant or,
if that selection cannot be made within 15 days, by an independent investment
banking firm selected by the American Arbitration Association in accordance with
its rules.
1.1 Partial Exercise. This Warrant may be exercised for less than the
full number of shares of Common Stock, in which case the number of shares
receivable upon the exercise of this Warrant as a whole, and the sum payable
upon the exercise of this Warrant as a whole, shall be proportionately reduced.
Upon any such partial exercise, the Company at its expense will forthwith issue
to the holder hereof a new Warrant or Warrants of like tenor calling for the
number of shares of Common Stock as to which rights have not been exercised,
such Warrant or Warrants to be issued in the name of the holder hereof or his
nominee (upon payment by such holder of any applicable transfer taxes).
1.2 Reduction in the Aggregate Number. In the event the Company
exercises its option to redeem all, but not a part of, the Series C Preferred
Stock pursuant to the terms of Article III, Section 8 of the Company's Articles
of Organization on or before July 15, 2000 the Aggregate Number shall be reduced
by 126,000 (subject to the adjustments as provided below).
-2-
<PAGE>
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Purchase Price, and in any
event within ten (10) days thereafter, the Company, at its expense, will cause
to be issued in the name of and delivered to the holder hereof a certificate or
certificates for the number of fully paid and non-assessable shares or other
securities or property to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount determined in accordance with Paragraph
3.9 hereof. The Company agrees that the shares so purchased shall be deemed to
be issued to the holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares as aforesaid.
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to prevent
dilution of the right granted hereunder, the Purchase Price shall be subject to
adjustment from time to time in accordance with this Paragraph 3. Upon each
adjustment of the Purchase Price pursuant to this Paragraph 3, the registered
Holder of this Warrant shall thereafter be entitled to acquire upon exercise, at
the Purchase Price resulting from such adjustment, the number of shares of the
Company's Common Stock obtainable by multiplying the Purchase Price in effect
immediately prior to such adjustment by the number of shares of the Company's
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Purchase Price resulting from such adjustment.
3.1 Adjustment for Issue or Sale of Common Stock at Less than Purchase
Price. Except as provided in Paragraph 3.2 or 3.5 below, if and whenever on or
after the date of issuance hereof the Company shall issue or sell, or shall in
accordance with subparagraphs 3.1(1) to (9), inclusive, be deemed to have issued
or sold, any shares of its Common Stock for a consideration per share less than
the Purchase Price in effect immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the
Purchase Price shall, subject to subparagraphs (1) to (9) of this Paragraph 3.1,
be reduced to the Purchase Price (calculated to the nearest tenth of a cent)
determined by dividing:
(i) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Purchase Price then in effect,
plus (y) the consideration, if any, received by the Company upon
consummation of such Triggering Transaction, by
(ii) an amount equal to the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction plus
(y) the number of shares of Common Stock issued (or deemed to be issued in
accordance
-3-
<PAGE>
with subparagraphs 3.1(1) to (9)) in connection with the Triggering
Transaction.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
shares of Common Stock outstanding at such time, (ii) the number of shares of
Common Stock issuable assuming conversion at such time of the Convertible
Preferred Stock (as defined in the Company's Articles of Organization) and (iii)
the number of shares of the Company's Common Stock deemed to be outstanding
under subparagraphs 3.1(1) to (9), inclusive, at such time.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights
to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable and the price per
share for which the Common Stock is issuable upon exercise, conversion
or exchange (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the granting
of such options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
options, plus, in the case of such options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities)
shall be less than the Purchase Price in effect immediately prior to
the time of the granting of such Option, then the total maximum amount
of Common Stock issuable upon the exercise of such Options, or, in the
case of Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such options) be deemed to be outstanding and to have been
issued and sold by the company for such price per share. No adjustment
of the Purchase Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible
-4-
<PAGE>
Securities upon the exercise of such Options, except as otherwise
provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then the total maximum number
of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No
adjustment of the Purchase Price shall be made upon the actual issue of
such Common Stock upon exercise of the rights to exchange or convert
under such Convertible Securities, except as otherwise provided in
subparagraph (3) below.
(3) If the purchase price provided for in any options referred
to in subparagraph (1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred
to in subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Stock shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in Paragraph 3.1 or 3.3), the Purchase Price in
effect at the time of such change shall forthwith be readjusted to the
Purchase Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for
Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to
-5-
<PAGE>
protect against dilution, then in case of the delivery of Common Stock
upon the exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Purchase Price then in effect
hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never
been issued as to such Common Stock and had adjustments been made upon
the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Purchase Price then in
effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase
Price then in effect hereunder shall forthwith be increased to the
Purchase Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or
termination, never been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such options shall be
deemed to have been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be the fair value of such
consideration as determined in good faith by the Board of Directors of
the Company. In case any shares of Common Stock, Options or Convertible
Securities shall be issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the
net assets and business of the non-surviving corporation as shall be
attributed by the Board of Directors of the Company in good faith to
such Common Stock, Options or Convertible Securities, as the case may
be.
-6-
<PAGE>
(7) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the disposition of any shares so owned or held
shall be considered an issue or sale of Common Stock for the purpose of
this Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the stock of the Company payable in Options or
Convertible Securities, then in such case any Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(9) For purposes of this Paragraph 3.1, in case the Company
shall take a record of the holders of its Common Stock for the purpose
of entitling them (x) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities, or (y)
to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Stock (other than a
dividend payable in Common Stock) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Stock which would have been issued at
the time of such earlier exercise and all other securities which would have been
issued with respect to such Common Stock by reason of stock splits, stock
dividends, mergers or reorganizations, or for any other reason). For the
purposes of this Paragraph 3.2, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.3 Subdivisions and Combinations. In case the Corporation shall at any
time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend
on its outstanding
-7-
<PAGE>
Common Stock, the Purchase Price in effect immediately prior to such subdivision
or dividend shall be proportionately reduced by the same ratio as the
subdivision or dividend. In case the Corporation shall at any time combine its
outstanding Common Stock, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased by the same ratio as the
combination.
3.4 Reorganization, Reclassification, Consolidation, Merger or Sale of
Assets. If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or other property with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall have the right to acquire
and receive upon exercise of this Warrant such shares of stock, securities, cash
or other property issuable or payable (as part of the reorganization,
reclassification, consolidation, merger or sale) with respect to or in exchange
for such number of outstanding shares of the Company's Common Stock as would
have been received upon exercise of this Warrant at the Purchase Price then in
effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument mailed or delivered to
the holder of this Warrant at the last address of such holder appearing on the
books of the Company, the obligation to deliver to such holder such shares of
stock, securities, cash or other property as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall not effect
any consolidation, merger or sale with the person having made such offer or with
any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holder of this Warrant shall have been given a
reasonable opportunity to then elect to receive upon the exercise of this
Warrant either the stock, securities, cash or other property then issuable with
respect to the Common Stock of the Company or the stock, securities, cash or
other property, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer. For purposes hereof the term "Affiliate"
with respect to any given person shall mean any person controlling, controlled
by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 3 shall not apply
-8-
<PAGE>
to any Common Stock issued, issuable or deemed outstanding under subparagraphs
3.1(1) to (9) inclusive: (i) to any person pursuant to any stock option, stock
purchase or similar plan or arrangement for the benefit of employees,
consultants or directors of the Company or its subsidiaries in effect on the
date of issuance hereof or thereafter adopted by the Board of Directors, or (ii)
pursuant to Options, Warrants and conversion rights in existence on the date of
issuance hereof or (iii) upon conversion of the Convertible Preferred Stock or
(iv) the sale of any additional shares of Convertible Preferred Stock.
3.6 Notices of Record Date, Etc. In the event that:
(1) the Company shall declare any cash dividend upon its
Common Stock, or
(2) the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other
distribution to the holders of its Common Stock, or
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights, or
(4) there shall be any capital reorganization or
reclassification of the capital stock of the Company, including any
subdivision or combination of its outstanding shares of Common Stock,
or consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in connection with such event, the Company shall give to the holder of
this Warrant:
(i) at least twenty (20) days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty (20) days, prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (i)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the
-9-
<PAGE>
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written notice
shall be given by first class mail, postage prepaid, addressed to the
holder of this Warrant at the address of such holder as shown on the books
of the Company.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of issuance hereof, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of Common Stock of the Company and such grants, issuances or sales do
not result in an adjustment of the Purchase Price under Paragraph 3.1 hereof,
then the holder of this Warrant shall be entitled to acquire (within thirty (30)
days after the later to occur of the initial exercise date of such Purchase
Rights or receipt by such holder of the notice concerning Purchase Rights to
which such holder shall be entitled under Paragraph 3.6) and upon the terms
applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon exercise of this Warrant immediately before the grant, issuance or
sale of such Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights shall be
distributed to the exercising holder of this Warrant as soon as possible
after such exercise and it shall not be necessary for the exercising
holder of this Warrant specifically to request delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of shares of Common Stock or the amount of property which such
holder could have acquired upon such exercise at the time or times at
which the Company granted, issued or sold such expired Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to which,
in the opinion of the Board of Directors of the Company, the provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the rights of the holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the
-10-
<PAGE>
Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Purchase Price as otherwise determined pursuant to any
of the provisions of this Section 3 except in the case of a combination of
shares of a type contemplated in Paragraph 3.3 and then in no event to an amount
larger than the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of shares
of Common Stock upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
Paragraph 3.9, be issuable upon exercise of this Warrant, the Company shall in
lieu thereof pay to the person entitled thereto an amount in cash equal to the
current value of such fraction, calculated to the nearest one-hundredth (1/100)
of a share, to be computed (i) if the Common Stock is listed on any national
securities exchange on the basis of the last sales price of the Common Stock on
such exchange (or the quoted closing bid price if there shall have been no
sales) on the date of conversion, or (ii) if the Common Stock shall not be
listed, on the basis of the mean between the closing bid and asked prices for
the Common Stock on the date of conversion as reported by NASDAQ, or its
successor, and if there are not such closing bid and asked prices, on the basis
of the fair market value per share as determined by the Board of Directors of
the Company.
3.10 Officers' Statement as to Adjustments. Whenever the Purchase Price
shall be adjusted as provided in Section 3 hereof, the Company shall forthwith
file at each office designated for the exercise of this Warrant, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Company, showing in reasonable detail the facts requiring such
adjustment and the Purchase Price that will be effective after such adjustment.
The Company shall also cause a notice setting forth any such adjustments to be
sent by mail, first class, postage prepaid, to the record holder of this Warrant
at his or its address appearing on the stock register. If such notice relates to
an adjustment resulting from an event referred to in Paragraph 3.6, such notice
shall be included as part of the notice required to be mailed and published
under the provisions of Paragraph 3.6 hereof.
4. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder hereof against dilution or other impairment. Without limiting the
-11-
<PAGE>
generality of the foregoing, the Company will not increase the par value of any
shares of stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and at all times will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable stock upon the exercise of this
Warrant.
5. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company shall at all times reserve and keep available out of its authorized but
unissued stock, solely for the issuance and delivery upon the exercise of this
Warrant and other similar Warrants, such number of its duly authorized shares of
Common Stock as from time to time shall be issuable upon the exercise of this
Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms,
to all of which each taker or owner hereof consents and agrees:
(a) Subject to the legend appearing on the first page hereof,
title to this Warrant may be transferred by endorsement (by
the holder hereof executing the form of assignment at the end
hereof including guaranty of signature) and delivery in the
same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) Any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and
is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser
hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in
favor of every such bona fide purchaser, and every such bona
fide purchaser
-12-
<PAGE>
shall acquire title hereto and to all rights represented
hereby.
(c) Until this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as
the absolute owner hereof for all purposes without being
affected by any notice to the contrary.
(d) Prior to the exercise of this Warrant, the holder hereof shall
not be entitled to any rights of a shareholder of the Company
with respect to shares for which this Warrant shall be
exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided
herein.
(e) The Company shall not be required to pay any Federal or state
transfer tax or charge that may be payable in respect of any
transfer involved in the transfer or delivery of this Warrant
or the issuance or conversion or delivery of certificates for
Common Stock in a name other than that of the registered
holder of this Warrant or to issue or deliver any certificates
for Common Stock upon the exercise of this Warrant until any
and all such taxes and charges shall have been paid by the
holder of this Warrant or until it has been established to the
Company's satisfaction that no such tax or charge is due.
9. SUBDIVISION OF RIGHTS. This Warrant (as well as any new Warrants
issued pursuant to the provisions of this paragraph) is exchangeable, upon the
surrender hereof by the holder hereof, at the principal office of the Company
for any number of new Warrants of like tenor and date representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock of the Company which may be subscribed for and purchased hereunder.
10. MAILING OF NOTICES, ETC. All notices and other communications from
the Company to the holder of this Warrant shall be mailed by first-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
11. HEADINGS, ETC. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect the meaning hereof.
<PAGE>
12. CHANGE, WAIVER, ETC. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
WORKSCAPE, INC.
By /s/ James G. Carlson
---------------------------
Dated: July __, 1999
Attest:
/s/ Mary Lee Praetz
- ---------------------
<PAGE>
[To be signed only upon exercise of Warrant]
To Workscape, Inc.
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, ________ shares of Common Stock of Workscape
Inc. and herewith makes payment of $________ therefor, and requests that the
certificates for such shares be issued in the name of, and be delivered to
_______________, whose address is _________________.
Dated:
- --------------------
---------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
---------------------
Address
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase the __________ shares of the Common Stock of Workscape, Inc.
to which the within Warrant relates, and appoints
_________________________________ attorney to transfer said right on the books
of [Name of Company] with full power of substitution in the premises.
Dated:
- ---------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
---------------------
Address
In the presence of
- ---------------------
<PAGE>
EXHIBIT 4.4
WARRANT
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION UNDER THE ACT OR IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO WORKSCAPE, INC., QUALIFIES AS AN EXEMPT TRANSACTION
UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
WORKSCAPE, INC.
Common Stock Purchase Warrant
WORKSCAPE, INC., a Massachusetts corporation (the "Company"), hereby
certifies that, for value received, Warburg, Pincus Netherlands Equity Partners
III, C.V. (the "Holder"), or assigns, is entitled, subject to the terms set
forth below, to purchase from the Company, at any time and from time to time
during the period beginning on the date hereof and ending on July 15, 2009 in
whole or in part, an aggregate of 72,916 fully paid and non-assessable shares
(the "Aggregate Number") of the Class A Common Stock of the Company at a
purchase price, subject to the provisions of Paragraph 3 hereof, of $1.20 per
share (the "Purchase Price"). The Purchase Price and the number and character of
such shares are subject to adjustment as provided below, and the term "Common
Stock" shall mean, unless the context otherwise requires, the Class A Common
Stock or other securities or property at the time deliverable upon the exercise
of this Warrant. This Warrant is herein called the "Warrant."
1. EXERCISE OF WARRANT. The purchase rights evidenced by this Warrant
shall be exercised by the holder surrendering this Warrant, with the form of
subscription at the end hereof duly executed by such holder, to the Company at
its office in Natick, Massachusetts, accompanied by payment, of an amount (the
"Exercise Payment") equal to the Purchase Price multiplied by the number of
shares being purchased pursuant to such exercise, payable as follows: (a) by
payment to the Company in cash, by certified or official bank check, or by wire
transfer of the Exercise Amount, (b) by surrender to the Company for
cancellation of Series C Preferred Stock, par value $0.01 per share (the "Series
C Preferred Stock"), of the Company or, in the event there are no such shares of
Series C Preferred Stock outstanding, any other securities of the Company, in
each case
<PAGE>
having a Market Price (as hereinafter defined) on the date of exercise equal to
the Exercise Amount; or (c) by a combination of the methods described in clauses
(a) and (b) above. In lieu of exercising the Warrant, the holder may elect to
receive a payment equal to the difference between (i) the Market Price
multiplied by the number of shares as to which the payment is then being elected
and (ii) the Exercise Payment with respect to such shares, payable by the
Company to the Holder only in shares of Common Stock valued at the Market Price
on the date of exercise. For purposes hereof, the term "Market Price" with
respect to the Series C Preferred Stock shall mean $1.20 per share plus accrued
but unpaid dividends and, with respect to Common Stock or other securities of
the Company, shall mean the average closing price of a share of Common Stock for
the 15 consecutive trading days preceding such day on the principal national
securities exchange on which the shares of Common Stock or other securities are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the reported bid and asked prices
during such 15 trading day period in the over-the-counter market as furnished by
the National Quotation Bureau, Inc., or, if such firm is not then engaged in the
business of reporting such prices, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company or, if the
shares of Common Stock or other securities are not publicly traded, the Market
Price for such day shall be the fair market value thereof determined jointly by
the Company and the holder of this Warrant; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by the independent investment
banking firm selected jointly by the Company and the holder of this Warrant or,
if that selection cannot be made within 15 days, by an independent investment
banking firm selected by the American Arbitration Association in accordance with
its rules.
1.1 Partial Exercise. This Warrant may be exercised for less than the
full number of shares of Common Stock, in which case the number of shares
receivable upon the exercise of this Warrant as a whole, and the sum payable
upon the exercise of this Warrant as a whole, shall be proportionately reduced.
Upon any such partial exercise, the Company at its expense will forthwith issue
to the holder hereof a new Warrant or Warrants of like tenor calling for the
number of shares of Common Stock as to which rights have not been exercised,
such Warrant or Warrants to be issued in the name of the holder hereof or his
nominee (upon payment by such holder of any applicable transfer taxes).
1.2 Reduction in the Aggregate Number. In the event the Company
exercises its option to redeem all, but not a part of, the Series C Preferred
Stock pursuant to the terms of Article III, Section 8 of the Company's Articles
of Organization on or before July 15, 2000 the Aggregate Number shall be reduced
by 31,500 (subject to the adjustments as provided below).
-2-
<PAGE>
2. DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as practicable
after the exercise of this Warrant and payment of the Purchase Price, and in any
event within ten (10) days thereafter, the Company, at its expense, will cause
to be issued in the name of and delivered to the holder hereof a certificate or
certificates for the number of fully paid and non-assessable shares or other
securities or property to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash in an amount determined in accordance with Paragraph
3.9 hereof. The Company agrees that the shares so purchased shall be deemed to
be issued to the holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been surrendered
and payment made for such shares as aforesaid.
3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to prevent
dilution of the right granted hereunder, the Purchase Price shall be subject to
adjustment from time to time in accordance with this Paragraph 3. Upon each
adjustment of the Purchase Price pursuant to this Paragraph 3, the registered
Holder of this Warrant shall thereafter be entitled to acquire upon exercise, at
the Purchase Price resulting from such adjustment, the number of shares of the
Company's Common Stock obtainable by multiplying the Purchase Price in effect
immediately prior to such adjustment by the number of shares of the Company's
Common Stock acquirable immediately prior to such adjustment and dividing the
product thereof by the Purchase Price resulting from such adjustment.
3.1 Adjustment for Issue or Sale of Common Stock at Less than Purchase
Price. Except as provided in Paragraph 3.2 or 3.5 below, if and whenever on or
after the date of issuance hereof the Company shall issue or sell, or shall in
accordance with subparagraphs 3.1(1) to (9), inclusive, be deemed to have issued
or sold, any shares of its Common Stock for a consideration per share less than
the Purchase Price in effect immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale (the "Triggering Transaction"), the
Purchase Price shall, subject to subparagraphs (1) to (9) of this Paragraph 3.1,
be reduced to the Purchase Price (calculated to the nearest tenth of a cent)
determined by dividing:
(i) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Purchase Price then in effect,
plus (y) the consideration, if any, received by the Company upon
consummation of such Triggering Transaction, by
(ii) an amount equal to the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction plus
(y) the number of shares of Common Stock issued (or deemed to be issued in
accordance
-3-
<PAGE>
with subparagraphs 3.1(1) to (9)) in connection with the Triggering
Transaction.
For purposes of this Paragraph 3, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
shares of Common Stock outstanding at such time, (ii) the number of shares of
Common Stock issuable assuming conversion at such time of the Convertible
Preferred Stock (as defined in the Company's Articles of Organization) and (iii)
the number of shares of the Company's Common Stock deemed to be outstanding
under subparagraphs 3.1(1) to (9), inclusive, at such time.
For purposes of determining the adjusted Purchase Price under this
Paragraph 3.1, the following subsections (1) to (9), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in a merger or otherwise) any rights
to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable and the price per
share for which the Common Stock is issuable upon exercise, conversion
or exchange (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the granting
of such options, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of all such
options, plus, in the case of such options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities)
shall be less than the Purchase Price in effect immediately prior to
the time of the granting of such Option, then the total maximum amount
of Common Stock issuable upon the exercise of such Options, or, in the
case of Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such options) be deemed to be outstanding and to have been
issued and sold by the company for such price per share. No adjustment
of the Purchase Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible
-4-
<PAGE>
Securities upon the exercise of such Options, except as otherwise
provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then the total maximum number
of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall (as of the date of the issue or sale
of such Convertible Securities) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No
adjustment of the Purchase Price shall be made upon the actual issue of
such Common Stock upon exercise of the rights to exchange or convert
under such Convertible Securities, except as otherwise provided in
subparagraph (3) below.
(3) If the purchase price provided for in any options referred
to in subparagraph (1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred
to in subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Stock shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in Paragraph 3.1 or 3.3), the Purchase Price in
effect at the time of such change shall forthwith be readjusted to the
Purchase Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for
Common Stock, shall be reduced at any time under or by reason of
provisions with respect thereto designed to
-5-
<PAGE>
protect against dilution, then in case of the delivery of Common Stock
upon the exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Purchase Price then in effect
hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never
been issued as to such Common Stock and had adjustments been made upon
the issuance of the shares of Common Stock delivered as aforesaid, but
only if as a result of such adjustment the Purchase Price then in
effect hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Purchase
Price then in effect hereunder shall forthwith be increased to the
Purchase Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration or
termination, never been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such options shall be
deemed to have been issued without consideration.
(6) In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be the fair value of such
consideration as determined in good faith by the Board of Directors of
the Company. In case any shares of Common Stock, Options or Convertible
Securities shall be issued in connection with any merger in which the
Company is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the
net assets and business of the non-surviving corporation as shall be
attributed by the Board of Directors of the Company in good faith to
such Common Stock, Options or Convertible Securities, as the case may
be.
-6-
<PAGE>
(7) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account
of the Company, and the disposition of any shares so owned or held
shall be considered an issue or sale of Common Stock for the purpose of
this Paragraph 3.1.
(8) In case the Company shall declare a dividend or make any
other distribution upon the stock of the Company payable in Options or
Convertible Securities, then in such case any Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(9) For purposes of this Paragraph 3.1, in case the Company
shall take a record of the holders of its Common Stock for the purpose
of entitling them (x) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities, or (y)
to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued
or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
3.2 Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Stock (other than a
dividend payable in Common Stock) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Stock which would have been issued at
the time of such earlier exercise and all other securities which would have been
issued with respect to such Common Stock by reason of stock splits, stock
dividends, mergers or reorganizations, or for any other reason). For the
purposes of this Paragraph 3.2, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
3.3 Subdivisions and Combinations. In case the Corporation shall at any
time (i) subdivide the outstanding Common Stock or (ii) issue a stock dividend
on its outstanding
-7-
<PAGE>
Common Stock, the Purchase Price in effect immediately prior to such subdivision
or dividend shall be proportionately reduced by the same ratio as the
subdivision or dividend. In case the Corporation shall at any time combine its
outstanding Common Stock, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased by the same ratio as the
combination.
3.4 Reorganization, Reclassification, Consolidation, Merger or Sale of
Assets. If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, cash or other property with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder of this Warrant shall have the right to acquire
and receive upon exercise of this Warrant such shares of stock, securities, cash
or other property issuable or payable (as part of the reorganization,
reclassification, consolidation, merger or sale) with respect to or in exchange
for such number of outstanding shares of the Company's Common Stock as would
have been received upon exercise of this Warrant at the Purchase Price then in
effect. The Company will not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if other
than the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument mailed or delivered to
the holder of this Warrant at the last address of such holder appearing on the
books of the Company, the obligation to deliver to such holder such shares of
stock, securities, cash or other property as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. If a purchase, tender or
exchange offer is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall not effect
any consolidation, merger or sale with the person having made such offer or with
any Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holder of this Warrant shall have been given a
reasonable opportunity to then elect to receive upon the exercise of this
Warrant either the stock, securities, cash or other property then issuable with
respect to the Common Stock of the Company or the stock, securities, cash or
other property, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer. For purposes hereof the term "Affiliate"
with respect to any given person shall mean any person controlling, controlled
by or under common control with the given person.
3.5 No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 3 shall not apply
-8-
<PAGE>
to any Common Stock issued, issuable or deemed outstanding under subparagraphs
3.1(1) to (9) inclusive: (i) to any person pursuant to any stock option, stock
purchase or similar plan or arrangement for the benefit of employees,
consultants or directors of the Company or its subsidiaries in effect on the
date of issuance hereof or thereafter adopted by the Board of Directors, or (ii)
pursuant to Options, Warrants and conversion rights in existence on the date of
issuance hereof or (iii) upon conversion of the Convertible Preferred Stock or
(iv) the sale of any additional shares of Convertible Preferred Stock.
3.6 Notices of Record Date, Etc. In the event that:
(1) the Company shall declare any cash dividend upon its Common Stock,
or
(2) the Company shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to the
holders of its Common Stock, or
(3) the Company shall offer for subscription pro rata to the holders of
its Common Stock any additional shares of stock of any class or other rights, or
(4) there shall be any capital reorganization or reclassification of
the capital stock of the Company, including any subdivision or combination of
its outstanding shares of Common Stock, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another
corporation, or
(5) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then, in connection with such event, the Company shall give to the holder of
this Warrant:
(i) at least twenty (20) days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and
(ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty (20) days, prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (i)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the
-9-
<PAGE>
holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Each such written notice
shall be given by first class mail, postage prepaid, addressed to the
holder of this Warrant at the address of such holder as shown on the books
of the Company.
3.7 Grant, Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of issuance hereof, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of Common Stock of the Company and such grants, issuances or sales do
not result in an adjustment of the Purchase Price under Paragraph 3.1 hereof,
then the holder of this Warrant shall be entitled to acquire (within thirty (30)
days after the later to occur of the initial exercise date of such Purchase
Rights or receipt by such holder of the notice concerning Purchase Rights to
which such holder shall be entitled under Paragraph 3.6) and upon the terms
applicable to such Purchase Rights either:
(i) the aggregate Purchase Rights which such holder could have
acquired if it had held the number of shares of Common Stock acquirable
upon exercise of this Warrant immediately before the grant, issuance or
sale of such Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Stock without the payment of additional
consideration by such holders, corresponding Purchase Rights shall be
distributed to the exercising holder of this Warrant as soon as possible
after such exercise and it shall not be necessary for the exercising
holder of this Warrant specifically to request delivery of such rights; or
(ii) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of shares of Common Stock or the amount of property which such
holder could have acquired upon such exercise at the time or times at
which the Company granted, issued or sold such expired Purchase Rights.
3.8 Adjustment by Board of Directors. If any event occurs as to which,
in the opinion of the Board of Directors of the Company, the provisions of this
Section 3 are not strictly applicable or if strictly applicable would not fairly
protect the rights of the holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the
-10-
<PAGE>
Board of Directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Purchase Price as otherwise determined pursuant to any
of the provisions of this Section 3 except in the case of a combination of
shares of a type contemplated in Paragraph 3.3 and then in no event to an amount
larger than the Purchase Price as adjusted pursuant to Paragraph 3.3.
3.9 Fractional Shares. The Company shall not issue fractions of shares
of Common Stock upon exercise of this Warrant or scrip in lieu thereof. If any
fraction of a share of Common Stock would, except for the provisions of this
Paragraph 3.9, be issuable upon exercise of this Warrant, the Company shall in
lieu thereof pay to the person entitled thereto an amount in cash equal to the
current value of such fraction, calculated to the nearest one-hundredth (1/100)
of a share, to be computed (i) if the Common Stock is listed on any national
securities exchange on the basis of the last sales price of the Common Stock on
such exchange (or the quoted closing bid price if there shall have been no
sales) on the date of conversion, or (ii) if the Common Stock shall not be
listed, on the basis of the mean between the closing bid and asked prices for
the Common Stock on the date of conversion as reported by NASDAQ, or its
successor, and if there are not such closing bid and asked prices, on the basis
of the fair market value per share as determined by the Board of Directors of
the Company.
3.10 Officers' Statement as to Adjustments. Whenever the Purchase Price
shall be adjusted as provided in Section 3 hereof, the Company shall forthwith
file at each office designated for the exercise of this Warrant, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Company, showing in reasonable detail the facts requiring such
adjustment and the Purchase Price that will be effective after such adjustment.
The Company shall also cause a notice setting forth any such adjustments to be
sent by mail, first class, postage prepaid, to the record holder of this Warrant
at his or its address appearing on the stock register. If such notice relates to
an adjustment resulting from an event referred to in Paragraph 3.6, such notice
shall be included as part of the notice required to be mailed and published
under the provisions of Paragraph 3.6 hereof.
4. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder hereof against dilution or other impairment. Without limiting the
-11-
<PAGE>
generality of the foregoing, the Company will not increase the par value of any
shares of stock receivable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and at all times will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable stock upon the exercise of this
Warrant.
5. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company shall at all times reserve and keep available out of its authorized but
unissued stock, solely for the issuance and delivery upon the exercise of this
Warrant and other similar Warrants, such number of its duly authorized shares of
Common Stock as from time to time shall be issuable upon the exercise of this
Warrant and all other similar Warrants at the time outstanding.
6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to it, or (in the case of mutilation) upon surrender and
cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of
like tenor.
7. REMEDIES. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
8. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms,
to all of which each taker or owner hereof consents and agrees:
(a) Subject to the legend appearing on the first page hereof,
title to this Warrant may be transferred by endorsement (by
the holder hereof executing the form of assignment at the end
hereof including guaranty of signature) and delivery in the
same manner as in the case of a negotiable instrument
transferable by endorsement and delivery.
(b) Any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and
is granted power to transfer absolute title hereto by
endorsement and delivery hereof to a bona fide purchaser
-12-
<PAGE>
hereof for value; each prior taker or owner waives and
renounces all of his equities or rights in this Warrant in
favor of every such bona fide purchaser, and every such bona
fide purchaser shall acquire title hereto and to all rights
represented hereby.
(c) Until this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as
the absolute owner hereof for all purposes without being
affected by any notice to the contrary.
(d) Prior to the exercise of this Warrant, the holder hereof shall
not be entitled to any rights of a shareholder of the Company
with respect to shares for which this Warrant shall be
exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided
herein.
(e) The Company shall not be required to pay any Federal or state
transfer tax or charge that may be payable in respect of any
transfer involved in the transfer or delivery of this Warrant
or the issuance or conversion or delivery of certificates for
Common Stock in a name other than that of the registered
holder of this Warrant or to issue or deliver any certificates
for Common Stock upon the exercise of this Warrant until any
and all such taxes and charges shall have been paid by the
holder of this Warrant or until it has been established to the
Company's satisfaction that no such tax or charge is due.
9. SUBDIVISION OF RIGHTS. This Warrant (as well as any new Warrants
issued pursuant to the provisions of this paragraph) is exchangeable, upon the
surrender hereof by the holder hereof, at the principal office of the Company
for any number of new Warrants of like tenor and date representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock of the Company which may be subscribed for and purchased hereunder.
10. MAILING OF NOTICES, ETC. All notices and other communications from
the Company to the holder of this Warrant shall be mailed by first-class
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last holder of this Warrant who shall have furnished an address
to the Company in writing.
11. HEADINGS, ETC. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect the meaning hereof.
-13-
<PAGE>
12. CHANGE, WAIVER, ETC. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
WORKSCAPE, INC.
By /s/ James G. Carlson
------------------------------
Dated: July _, 1999
Attest:
/s/ Mary Lee Praetz
- ---------------------
<PAGE>
[To be signed only upon exercise of Warrant]
To Workscape, Inc.
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, ________ shares of Common Stock of Workscape
Inc. and herewith makes payment of $________ therefor, and requests that the
certificates for such shares be issued in the name of, and be delivered to
_______________, whose address is _________________.
Dated:
- --------------------
----------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
<PAGE>
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase the __________ shares of the Common Stock of Workscape, Inc.
to which the within Warrant relates, and appoints
_________________________________ attorney to transfer said right on the books
of [Name of Company] with full power of substitution in the premises.
Dated:
- ---------------------
(Signature must conform in all respects to name of Holder as specified on the
face of the Warrant)
----------------------
Address
In the presence of
- ---------------------
<PAGE>
EXHIBIT 4.5
Employee Communications Services, Inc.
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE LAWS OF ANY STATE
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4
OF THIS WARRANT
As of February 2, 1999 W-1
---
Class B Common Stock Purchase Warrant
Employee Communications Services, Inc. (the "Company"), 16 Tech Circle,
Natick, MA 01760, pursuant to the Agreement and Plan of Recapitalization and
Sale (the "Recapitalization Agreement") of even date herewith between the
Company, its Stockholders and certain investors named therein, for consideration
the adequacy and sufficiency of which are acknowledged by the Company, hereby
certifies that Kenneth Phillips (the "Registered Holder"), is entitled to
purchase from the Company, during the time period specified in Section 1 hereof
and subject to the provisions of this Warrant, up to Seventy-Five Thousand
(75,000) shares of Class B Common Stock, par value $0.01 per share, of the
Company ("Common Stock"), at a purchase price of Ten Dollars ($10.00) per share.
The shares of Common Stock purchasable upon exercise of this Warrant, and the
purchase price per share (each as adjusted from time to time) are hereinafter
referred to as the "Warrant Stock" and the "Purchase Price," respectively.
Terms defined in the Recapitalization Agreement and not otherwise
defined herein are used herein as so defined.
1. Exercise.
(a) This Warrant may only be exercised by the Registered Holder in
accordance with the terms of Section 2.2 of the Recapitalization Agreement. In
the event the Registered Holder is entitled to receive Contingent Consideration,
then at any time, but on only one occasion, prior to thirty days following the
completion of the Audit Report (after final resolution of any disagreements
therewith) (the "Termination Date"), the Registered Holder may elect to purchase
up to a number of shares of Warrant Stock determined by dividing the amount of
Contingent Consideration by the Purchase Price. The portion of this Warrant
representing the Warrant Stock, if any, in excess of the Warrant Stock which may
be purchased pursuant to the foregoing sentence shall terminate effective as of
the date hereof and be of no further force or effect, and the unexercised
portion of the portion of this Warrant which may be exercised pursuant to the
foregoing sentence shall terminate at 5:00 p.m. on the Termination Date.
(b) In the event the Registered Holder wishes to exercise this Warrant,
the Registered Holder shall surrender this Warrant, with the Notice of Exercise
appended hereto as Exhibit I
<PAGE>
duly executed by such Registered Holder or by such Registered Holder's duly
authorized attorney, at the principal office of the Company, or at such other
office or agency as the Company may designate. In lieu of tendering payment of
the Purchase Price, the Purchase Price payable in respect of the number of
shares of Warrant Stock purchased upon such exercise shall be paid by deduction
of an amount equal to the Purchase Price from the Contingent Consideration
payable to the Registered Holder.
(c) The exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which this Warrant
shall have been surrendered to the Company as provided in subsection 1(b) above.
At such time, and upon payment in full, the person or persons in whose name or
names any certificates for Warrant Stock shall be issuable upon such exercise as
provided in subsection 1(d) below shall be deemed to have become the holder or
holders of record of the Warrant Stock represented by such certificates.
(i) As soon as practicable after the exercise of this Warrant in
full or in part, and in any event within five (5) days thereafter, the Company
at its expense will cause to be issued in the name of, and delivered to, the
Registered Holder, or as such Registered Holder (upon payment by such Registered
Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of whole shares of Warrant Stock to which such
Registered Holder shall be entitled upon such exercise.
(d) The Company covenants that all shares which may be issued upon the
exercise of rights represented by this Warrant will, upon exercise of the rights
represented by this Warrant and payment of the Purchase Price, be fully paid and
non-assessable and free for all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
or otherwise specified herein).
2. Adjustments.
(a) Consolidation, Merger, Etc. If there shall occur any consolidation
or merger of the Company with or into another corporation, then, as part of any
such consolidation or merger, lawful provision shall be made so that the
Registered Holder of this Warrant shall have the right thereafter to receive
upon the exercise hereof, during the period specified herein and upon payment of
the Purchase Price then in effect, that amount of cash or the kind and amount of
shares of stock or other securities or property which such Registered Holder
would have been entitled to receive if, immediately prior to any such
consolidation or merger such Registered Holder had held the number of shares of
Common Stock purchasable upon the exercise of this Warrant.
(b) Split, Subdivision or Combination of Shares. If the Company at any
time shall split or subdivide its Common Stock, the Purchase Price shall be
proportionately decreased and the number of shares of Warrant Stock available
under this Warrant shall be proportionately increased. If the Company at any
time shall combine its Common Stock, the Purchase Price shall be proportionately
increased and the number of shares of Warrant Stock available under this Warrant
shall be proportionately decreased.
(c) Stock Dividend. If the Company at any time shall pay a dividend
payable in
2
<PAGE>
Common Stock, then the Purchase Price shall be adjusted, from and after the date
of determination of stockholders entitled to receive such dividend, to that
price determined by multiplying the Purchase Price in effect immediately prior
to such date of determination by a fraction (i) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately prior to such
dividend and (ii) the denominator of which shall be the total number of shares
of Common Stock outstanding immediately after such dividend. The Registered
Holder shall thereafter be entitled to purchase, at the Purchase Price resulting
from such adjustment, the number of shares of Common Stock (calculated to the
nearest whole share) obtained by multiplying (i) the Purchase Price in effect
immediately prior to such adjustment by (ii) the number of shares of Common
Stock issuable upon exercise hereof immediately prior to such adjustment and
dividing the product thereof by the Purchase Price resulting from such
adjustment.
(d) Other Dividends. If the Company shall pay a dividend (other than
ordinary and customary dividends out of retained earnings), or make any other
distribution with respect to the holders of Common Stock payable in stock (other
than Common Stock) or other securities or property, then the Company shall, at
its option, either (i) decrease the per share Purchase Price of this Warrant by
an appropriate amount based upon the value distributed on each share of Common
Stock as determined in good faith by the Company's Board of Directors or (ii)
provide by resolution of the Company's Board of Directors that on exercise of
this Warrant, the holder hereof shall receive, in addition to the shares of
Common Stock otherwise receivable on exercise hereof, the same number and kind
of stock, other securities and property which such holder would have received
had the holder held the shares of Common Stock receivable on exercise hereof on
and before the record date for such dividend or distribution.
(e) Notice of Adjustments; Notices. Whenever the Purchase Price or
number of shares purchasable hereunder shall be adjusted pursuant to Section 2
hereof, the Company shall issue a certificate signed by its Chief Executive
Officer or Chief Financial Officer setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated and the Purchase Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause a
copy of such certificate to be mailed (by first class mail, postage prepaid) to
the holder of this Warrant.
3. Fractional Shares. The Company shall not, upon the exercise of this Warrant,
issue any fractional shares. In lieu of any fractional share to which the
Registered Holder would otherwise be entitled, the Registered Holder shall be
entitled, at its option, to receive a cash payment equal to the Purchase Price
for such fractional share.
4. Limitation on Sales, etc. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Stock have not been registered under the Securities Act
of 1933, as amended (the "Act"), and agrees not to sell, assign, pledge,
hypothecate, distribute, offer for sale, transfer or otherwise dispose of
("Transfer") this Warrant or any Warrant Stock issued upon its exercise in the
absence of (a) an effective registration statement under the Act as to this
Warrant or such Warrant Stock and the registration or qualification of this
Warrant and such Warrant Stock, or (b) a determination by such holder
accompanied by a written opinion of counsel reasonably satisfactory to the
Company that such registration and qualification are not required. Each
certificate or other instrument for Warrant Stock issued upon the exercise of
this Warrant shall
3
<PAGE>
bear a legend substantially to the foregoing effect. In addition, the Registered
Holder may not Transfer this Warrant in whole or part, or of the Warrant Stock,
except in accordance with the terms of that certain Stockholders' Agreement (the
"Stockholders' Agreement") of even date herewith, by and among the Company, the
Registered Holder, and the other persons named therein.
5. No Impairment. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against impairment.
6. Notices of Record Date, etc. In case:
(a) of any consolidation or merger of the Company with or into another
corporation or any transfer of all or substantially all of the assets of the
Company, or
(b) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(c) of a declaration of stock dividends, stock splits, stock
combinations or recapitalizations,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying the effective date on
which such consolidation, merger, transfer, dissolution, liquidation,
winding-up, stock dividend, stock split, stock combination or recapitalization
has taken or is to take place. In the case of (a) and (b), such notice shall be
delivered to each Registered Holder at least ninety (90) days prior to the
earlier of the record date or the effective date for the event specified in such
notice, and in the case of (c), such notice shall be delivered to each
Registered Holder within (30) days after the earlier of the record date or the
effective date for the event specified in such notice.
7. No Stockholder Rights. This warrant shall not entitle the Registered Holder
to any voting rights or other rights as a stockholder of the Company.
8. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Warrant Stock as from time to time shall be issuable upon the
exercise of this Warrant.
9. Exchange of Warrants. Upon the surrender by the Registered Holder of any
Warrant or Warrants, properly endorsed, to the Company at the principal office
of the Company, the Company will, subject to the provisions of Section 4 hereof,
issue and deliver to or upon the order of such Holder, at the Company's expense,
a new Warrant or Warrants of like tenor, in the name of such Registered Holder
or as such Registered Holder (upon payment by such Registered Holder of any
applicable transfer taxes) may direct, calling in the aggregate on the face
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or
4
<PAGE>
Warrants so surrendered.
10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement in a form reasonably satisfactory to the Company, or (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
issue, in lieu thereof, a new Warrant of like tenor.
11. Transfers, etc.
(a) The Company will maintain a register containing the name and
address of the Registered Holder of this Warrant. The Registered Holder may
change his address as shown on the warrant register by written notice to the
Company requesting such change.
(b) Any transfer shall be effected by the Registered Holder in person
by his duly authorized attorney, at the principal office of the Company, or at
such other office or agency as the Company may designate.
(c) Until any transfer of this Warrant is made in the warrant register,
the Company may treat the Registered Holder of this Warrant as the absolute
owner hereof for all purposes; provided, however, that if and when this Warrant
is properly assigned in blank, the Company may (but shall not be obligated to)
treat the bearer hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
12. Mailing of Notices, etc. All notices and other communications from the
Company to the Registered Holder of this Warrant shall be given in person, by
first-class certified or registered mail, postage prepaid, by air freight
delivery, courier or by means of telex or facsimile or other wire transmission
(with request for assurance of receipt in a manner typical with respect to
communications of that type) to the address furnished to the Company in writing
by the last Registered Holder of this Warrant who shall have furnished an
address to the Company in writing. All notices and other communications from the
Registered Holder of this Warrant or in connection herewith to the Company shall
be given in any of the ways set forth above to the Company at its principal
office set forth above. If the Company should at any time change the location of
its principal office to a place other than as set forth below, it shall give
prompt written notice to the Registered Holder of this Warrant and thereafter
all references in this Warrant to the location its principal office at the
particular time shall be as so specified in such notice.
13. No Rights as Stockholder. Until the exercise of this Warrant and payment in
full, the Registered Holder of this Warrant shall not have or exercise any
rights by virtue hereof as a stockholder of the Company.
14. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
15. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
5
<PAGE>
16. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or Sunday or shall be a legal holiday, then such action may
be taken or such right may be exercised on the next succeeding day not a
Saturday or a Sunday or a legal holiday.
17. Attorneys' Fees. In any litigation, arbitration or court proceeding between
the Company and the Registered Holder relating hereto, the prevailing party
shall be entitled to reasonable attorneys' fees and expenses incurred.
18. Governing Law. This Warrant will be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts.
19. Accredited Investor. The Registered Holder hereby represents and warrants
that he is an "Accredited Investor", as such term is defined in Regulation D
under the Securities Act of 1933, as amended.
EMPLOYEE COMMUNICATIONS SERVICES, INC.
/s/ Kenneth Phillips
------------------------------------
By:
Its: President
(Corporate Seal)
ATTEST:
/s/ Jill M. Percia
- -------------------------------
Jill Percia
Clerk
6
<PAGE>
EXHIBIT I
---------
NOTICE OF EXERCISE
To: TREASURER
Employee Communications Services, Inc.
16 Tech Circle
Natick, MA 01760
The undersigned, pursuant to the provisions set forth in the attached Warrant,
hereby irrevocably elects to purchase ________ shares of the Class B Common
Stock, $0.01 par value per share, at a purchase price of Ten Dollars ($10.00)
per share, covered by such Warrant and herewith instructs you to deduct an
amount equal to the aggregate purchase price for the shares covered by this
election notice from the Contingent Consideration (as defined in the Warrant)
due and payable to me by Employee Communications Services, Inc., representing
the full purchase price for such shares at the price per share provided for in
such Warrant.
Signature:
-----------------------
Address:
-------------------------
-------------------------
7
<PAGE>
EXHIBIT 4.6
Employee Communications Services, Inc.
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE LAWS OF ANY STATE
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4
OF THIS WARRANT
As of February 2, 1999 W-2
---
Class B Common Stock Purchase Warrant
-------------------------------------
Employee Communications Services, Inc. (the "Company"), 16 Tech Circle,
Natick, MA 01760, pursuant to the Agreement and Plan of Recapitalization and
Sale (the "Recapitalization Agreement") of even date herewith between the
Company, its Stockholders and certain investors named therein, for consideration
the adequacy and sufficiency of which are acknowledged by the Company, hereby
certifies that Salvatore Percia (the "Registered Holder"), is entitled to
purchase from the Company, during the time period specified in Section 1 hereof
and subject to the provisions of this Warrant, up to Seventy-Five Thousand
(75,000) shares of Class B Common Stock, par value $0.01 per share, of the
Company ("Common Stock"), at a purchase price of Ten Dollar ($1.00) per share.
The shares of Common Stock purchasable upon exercise of this Warrant, and the
purchase price per share (each as adjusted from time to time) are hereinafter
referred to as the "Warrant Stock" and the "Purchase Price," respectively.
Terms defined in the Recapitalization Agreement and not otherwise
defined herein are used herein as so defined.
1. Exercise.
(a) This Warrant may only be exercised by the Registered Holder in
accordance with the terms of Section 2.2 of the Recapitalization Agreement. In
the event the Registered Holder is entitled to receive Contingent Consideration,
then at any time, but on only one occasion, prior to thirty days following the
completion of the Audit Report (after final resolution of any disagreements
therewith) (the "Termination Date"), the Registered Holder may elect to purchase
up to a number of shares of Warrant Stock determined by dividing the amount of
Contingent Consideration by the Purchase Price. The portion of this Warrant
representing the Warrant Stock, if any, in excess of the Warrant Stock which may
be purchased pursuant to the foregoing sentence shall terminate effective as of
the date hereof and be of no further force or effect, and the unexercised
portion of the portion of this Warrant which may be exercised pursuant to the
foregoing sentence shall terminate at 5:00 p.m. on the Termination Date.
(b) In the event the Registered Holder wishes to exercise this Warrant,
the Registered Holder shall surrender this Warrant, with the Notice of Exercise
appended hereto as Exhibit I
<PAGE>
duly executed by such Registered Holder or by such Registered Holder's duly
authorized attorney, at the principal office of the Company, or at such other
office or agency as the Company may designate. In lieu of tendering payment of
the Purchase Price, the Purchase Price payable in respect of the number of
shares of Warrant Stock purchased upon such exercise shall be paid by deduction
of an amount equal to the Purchase Price from the Contingent Consideration
payable to the Registered Holder.
(c) The exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which this Warrant
shall have been surrendered to the Company as provided in subsection 1(b) above.
At such time, and upon payment in full, the person or persons in whose name or
names any certificates for Warrant Stock shall be issuable upon such exercise as
provided in subsection 1(d) below shall be deemed to have become the holder or
holders of record of the Warrant Stock represented by such certificates.
(i) As soon as practicable after the exercise of this Warrant in
full or in part, and in any event within five (5) days thereafter, the Company
at its expense will cause to be issued in the name of, and delivered to, the
Registered Holder, or as such Registered Holder (upon payment by such Registered
Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of whole shares of Warrant Stock to which such
Registered Holder shall be entitled upon such exercise.
(d) The Company covenants that all shares which may be issued upon the
exercise of rights represented by this Warrant will, upon exercise of the rights
represented by this Warrant and payment of the Purchase Price, be fully paid and
non-assessable and free for all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
or otherwise specified herein).
2. Adjustments.
(a) Consolidation, Merger, Etc. If there shall occur any consolidation
or merger of the Company with or into another corporation, then, as part of any
such consolidation or merger, lawful provision shall be made so that the
Registered Holder of this Warrant shall have the right thereafter to receive
upon the exercise hereof, during the period specified herein and upon payment of
the Purchase Price then in effect, that amount of cash or the kind and amount of
shares of stock or other securities or property which such Registered Holder
would have been entitled to receive if, immediately prior to any such
consolidation or merger such Registered Holder had held the number of shares of
Common Stock purchasable upon the exercise of this Warrant.
(b) Split, Subdivision or Combination of Shares. If the Company at any
time shall split or subdivide its Common Stock, the Purchase Price shall be
proportionately decreased and the number of shares of Warrant Stock available
under this Warrant shall be proportionately increased. If the Company at any
time shall combine its Common Stock, the Purchase Price shall be proportionately
increased and the number of shares of Warrant Stock available under this Warrant
shall be proportionately decreased.
(c) Stock Dividends. If the Company at any time shall pay a dividend
payable in
2
<PAGE>
Common Stock, then the Purchase Price shall be adjusted, from and after the date
of determination of stockholders entitled to receive such dividend, to that
price determined by multiplying the Purchase Price in effect immediately prior
to such date of determination by a fraction (i) the numerator of which shall be
the total number of shares of Common Stock outstanding immediately prior to such
dividend and (ii) the denominator of which shall be the total number of shares
of Common Stock outstanding immediately after such dividend. The Registered
Holder shall thereafter be entitled to purchase, at the Purchase Price resulting
from such adjustment, the number of shares of Common Stock (calculated to the
nearest whole share) obtained by multiplying (i) the Purchase Price in effect
immediately prior to such adjustment by (ii) the number of shares of Common
Stock issuable upon exercise hereof immediately prior to such adjustment and
dividing the product thereof by the Purchase Price resulting from such
adjustment.
(d) Other Dividends. If the Company shall pay a dividend (other than
ordinary and customary dividends out of retained earnings), or make any other
distribution with respect to the holders of Common Stock payable in stock (other
than Common Stock) or other securities or property, then the Company shall, at
its option, either (i) decrease the per share Purchase Price of this Warrant by
an appropriate amount based upon the value distributed on each share of Common
Stock as determined in good faith by the Company's Board of Directors or (ii)
provide by resolution of the Company's Board of Directors that on exercise of
this Warrant, the holder hereof shall receive, in addition to the shares of
Common Stock otherwise receivable on exercise hereof, the same number and kind
of stock, other securities and property which such holder would have received
had the holder held the shares of Common Stock receivable on exercise hereof on
and before the record date for such dividend or distribution.
(e) Notice of Adjustments; Notices. Whenever the Purchase Price or
number of shares purchasable hereunder shall be adjusted pursuant to Section 2
hereof, the Company shall issue a certificate signed by its Chief Executive
Officer or Chief Financial Officer setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated and the Purchase Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause a
copy of such certificate to be mailed (by first class mail, postage prepaid) to
the holder of this Warrant.
3. Fractional Shares. The Company shall not, upon the exercise of this Warrant,
issue any fractional shares. In lieu of any fractional share to which the
Registered Holder would otherwise be entitled, the Registered Holder shall be
entitled, at its option, to receive a cash payment equal to the Purchase Price
for such fractional share.
4. Limitation on Sales, etc. Each holder of this Warrant acknowledges that this
Warrant and the Warrant Stock have not been registered under the Securities Act
of 1933, as amended (the "Act"), and agrees not to sell, assign, pledge,
hypothecate, distribute, offer for sale, transfer or otherwise dispose of
("Transfer") this Warrant or any Warrant Stock issued upon its exercise in the
absence of (a) an effective registration statement under the Act as to this
Warrant or such Warrant Stock and the registration or qualification of this
Warrant and such Warrant Stock, or (b) a determination by such holder
accompanied by a written opinion of counsel reasonably satisfactory to the
Company that such registration and qualification are not required. Each
certificate or other instrument for Warrant Stock issued upon the exercise of
this Warrant shall
3
<PAGE>
bear a legend substantially to the foregoing effect. In addition, the Registered
Holder may not Transfer this Warrant in whole or part, or of the Warrant Stock,
except in accordance with the terms of that certain Stockholders' Agreement (the
"Stockholders' Agreement") of even date herewith, by and among the Company, the
Registered Holder, and the other persons named therein.
5. No Impairment. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against impairment.
6. Notices of Record Date, etc. In case:
(a) of any consolidation or merger of the Company with or into another
corporation or any transfer of all or substantially all of the assets of the
Company, or
(b) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(c) of a declaration of stock dividends, stock splits, stock
combinations or recapitalizations,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying the effective date on
which such consolidation, merger, transfer, dissolution, liquidation,
winding-up, stock dividend, stock split, stock combination or recapitalization
has taken or is to take place. In the case of (a) and (b), such notice shall be
delivered to each Registered Holder at least ninety (90) days prior to the
earlier of the record date or the effective date for the event specified in such
notice, and in the case of (c), such notice shall be delivered to each
Registered Holder within (30) days after the earlier of the record date or the
effective date for the event specified in such notice.
7. No Stockholder Rights. This warrant shall not entitle the Registered Holder
to any voting rights or other rights as a stockholder of the Company.
8. Reservation of Stock. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such shares of Warrant Stock as from time to time shall be issuable upon the
exercise of this Warrant.
9. Exchange of Warrants. Upon the surrender by the Registered Holder of any
Warrant or Warrants, properly endorsed, to the Company at the principal office
of the Company, the Company will, subject to the provisions of Section 4 hereof,
issue and deliver to or upon the order of such Holder, at the Company's expense,
a new Warrant or Warrants of like tenor, in the name of such Registered Holder
or as such Registered Holder (upon payment by such Registered Holder of any
applicable transfer taxes) may direct, calling in the aggregate on the face
thereof for the number of shares of Common Stock called for on the face or faces
of the Warrant or
4
<PAGE>
Warrants so surrendered.
10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement in a form reasonably satisfactory to the Company, or (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
issue, in lieu thereof, a new Warrant of like tenor.
11. Transfers, etc.
(a) The Company will maintain a register containing the name and
address of the Registered Holder of this Warrant. The Registered Holder may
change his address as shown on the warrant register by written notice to the
Company requesting such change.
(b) Any transfer shall be effected by the Registered Holder in person
by his duly authorized attorney, at the principal office of the Company, or at
such other office or agency as the Company may designate.
(c) Until any transfer of this Warrant is made in the warrant register,
the Company may treat the Registered Holder of this Warrant as the absolute
owner hereof for all purposes; provided, however, that if and when this Warrant
is properly assigned in blank, the Company may (but shall not be obligated to)
treat the bearer hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
12. Mailing of Notices, etc. All notices and other communications from the
Company to the Registered Holder of this Warrant shall be given in person, by
first-class certified or registered mail, postage prepaid, by air freight
delivery, courier or by means of telex or facsimile or other wire transmission
(with request for assurance of receipt in a manner typical with respect to
communications of that type) to the address furnished to the Company in writing
by the last Registered Holder of this Warrant who shall have furnished an
address to the Company in writing. All notices and other communications from the
Registered Holder of this Warrant or in connection herewith to the Company shall
be given in any of the ways set forth above to the Company at its principal
office set forth above. If the Company should at any time change the location of
its principal office to a place other than as set forth below, it shall give
prompt written notice to the Registered Holder of this Warrant and thereafter
all references in this Warrant to the location its principal office at the
particular time shall be as so specified in such notice.
13. No Rights as Stockholder. Until the exercise of this Warrant and payment in
full, the Registered Holder of this Warrant shall not have or exercise any
rights by virtue hereof as a stockholder of the Company.
14. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against which enforcement of the
change or waiver is sought.
15. Headings. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
5
<PAGE>
16. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or Sunday or shall be a legal holiday, then such action may
be taken or such right may be exercised on the next succeeding day not a
Saturday or a Sunday or a legal holiday.
17. Attorneys' Fees. In any litigation, arbitration or court proceeding between
the Company and the Registered Holder relating hereto, the prevailing party
shall be entitled to reasonable attorneys' fees and expenses incurred.
18. Governing Law. This Warrant will be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts.
19. Accredited Investor. The Registered Holder hereby represents and warrants
that he is an "Accredited Investor", as such term is defined in Regulation D
under the Securities Act of 1933, as amended.
EMPLOYEE COMMUNICATIONS SERVICES, INC.
/s/ Kenneth Phillips
----------------------------------
By:
Its: President
(Corporate Seal)
ATTEST:
/s/ Jill M. Percia
- --------------------------------
Jill Percia
Clerk
6
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE
To: TREASURER
Employee Communications Services, Inc.
16 Tech Circle
Natick, MA 01760
The undersigned, pursuant to the provisions set forth in the attached Warrant,
hereby irrevocably elects to purchase ________ shares of the Class B Common
Stock, $0.01 par value per share, at a purchase price of Ten Dollars ($10.00)
per share, covered by such Warrant and herewith instructs you to deduct an
amount equal to the aggregate purchase price for the shares covered by this
election notice from the Contingent Consideration (as defined in the Warrant)
due and payable to me by Employee Communications Services, Inc., representing
the full purchase price for such shares at the price per share provided for in
such Warrant.
Signature:
-------------------------
Address:
-----------------------
-----------------------
7
<PAGE>
EXHIBIT 10.1
WORKSCAPE, INC.
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of December
17, 1999 among ABS Capital Partners III, L.P. ("ABS"), Warburg, Pincus Equity
Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus Netherlands Equity
Partners III, C.V. (collectively, "Warburg"), the individuals whose names and
addresses appear from time to time on Schedule I hereto (collectively, the
"Other Investors," and together with ABS and Warburg, the "Investors"), and
Workscape, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, Warburg and certain of the Other Investors own shares of Series A
Convertible Preferred Stock of the Company, par value $0.01 per share (the
"Series A Preferred Stock); and
WHEREAS, Warburg owns shares of Series B Convertible Preferred Stock of
the Company, par value $0.01 per share (the "Series B Preferred Stock"), and
shares of Series C Preferred Stock of the Company, par value $0.01 per share
(the "Series C Preferred Stock"), and warrants to purchase shares of Class A
Common Stock of the Company (the "Warrants"); and
WHEREAS, certain of the Other Investors own shares of the Series A
Preferred Stock and warrants to purchase Class B Common Stock, par value $0.01
per share, of the Company (the "Class B Common Stock"); and
WHEREAS, ABS and Warburg, pursuant to the terms of a Stock Purchase
Agreement, dated as of December 17, 1999 with the Company (the "Series D
Purchase Agreement") agreed to purchase shares of the Series D Convertible
Preferred Stock, par value $0.01 per share of the Company (the "Series D
Preferred Stock", and together with the Series A Preferred Stock and Series B
Preferred Stock, the "Convertible Preferred Stock"), of the Company; and
WHEREAS, the execution and delivery of this Agreement is a condition to
the closing of the sale and purchase of Series D Preferred Stock under the
Series D Purchase Agreement; and.
WHEREAS, the Company, Warburg and the Other Investors are parties to that
certain Registration Rights Agreement, dated as of February 2, 1999, as amended
(the "Registration Rights Agreement"); and
WHEREAS, the Company and the Investors desire to amend and restate the
Registration Rights Agreement to define the registration rights of the Investors
on the terms and subject to the conditions herein set forth;
1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms have the respective meaning
set forth below:
Commission: shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act;
Common Stock: shall mean the Class A Common Stock, par value $.01 per
share, of the Company;
Exchange Act: shall mean the Securities Exchange Act of 1934, as
amended;
Holder: shall mean any holder of Registrable Securities;
Initial Public Offering: shall mean the initial public offering of
shares of Common Stock pursuant to a registration under the Securities Act;
Person: shall mean an individual, partnership, limited liability
company, joint-stock company, corporation, trust or unincorporated
organization, and a government or agency or political subdivision thereof;
register, registered and registration: shall mean a registration effected
by preparing and filing a registration statement in compliance with the
Securities Act (and any post-effective amendments filed or required to be filed)
and the declaration or ordering of effectiveness of such registration statement;
Registrable Securities: shall mean (A) shares of Common Stock issuable
upon conversion of the shares of the Convertible Preferred Stock or exercise of
the Warrants, (B) any additional shares of Common Stock acquired by the
Investors and (C) any stock of the Company issued as a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
shares of Preferred Stock or Common Stock referred to in clause (A) or (B).
Registration Expenses: shall mean all expenses incurred by the Company in
compliance with Sections 2(a) and (b) hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, fees and expenses of one counsel for all the Holders in
an amount not to exceed $15,000, blue sky fees and expenses and the expense of
any special audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company, which shall be
paid in any event by the Company);
security or securities: shall have the meaning set forth in Section
2(1) of the Securities Act;
2
<PAGE>
Securities Act: shall mean the Securities Act of 1933, as amended; and
Selling Expenses: shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for each of the Holders other than fees and expenses of
one counsel for all the Holders in an amount not to exceed $15,000.
2. REGISTRATION RIGHTS
(a) Requested Registration.
(i) Number of Requests for Registration. After December 17,
2000, the Holders of at least 30% of the Series D Preferred Stock issued
pursuant to the Series D Purchase Agreement (or Common Stock issued upon
conversion thereof) may request that the Company file two registration
statements under the Securities Act covering the Registrable Securities
that are the subject of such request. In addition, the Holders of
Registrable Securities (other than Registrable Securities issued upon
conversion of the Series D Preferred Stock) may request that the Company
file two registration statements under the Securities Act covering the
Registrable Securities that are the subject of such request.
(ii) Request for Registration. If the Company shall receive
from the applicable Holders a written request that the Company effect any
registration with respect to all or a part of their Registrable
Securities, the Company will:
(A) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders;
and
(B) as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable
regulations issued under the Securities Act) as may be so requested
and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in
such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are
specified in a written request received by the Company within 10
business days after written notice from the Company is given under
Section 2(a)(ii)(A) above; provided that the Company shall not be
obligated to effect, or take any action to effect, any such
registration pursuant to this Section 2(a):
(1) If such registration would be the Initial Public
Offering, unless such request for registration is received
from the Holders of at least 51% of the shares of Common Stock
issued or issuable upon conversion of the Convertible
Preferred Stock and exercise of the Warrants;
3
<PAGE>
(2) Within 180 days following the Initial Public
Offering;
(3) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of
process in effecting such registration, qualification or
compliance, unless the Company is already subject to service
in such jurisdiction and except as may be required by the
Securities Act or applicable rules or regulations thereunder;
(4) After the Company has effected the applicable number
of registrations set forth in Section 2(a)(i) above and such
registrations have been declared or ordered effective and the
sales of such Registrable Securities shall have closed; or
(5) If the Registrable Securities requested by all
Holders to be registered pursuant to such request do not have
an anticipated aggregate public offering price (before any
underwriting discounts and commissions) of at least
$10,000,000.
The registration statement filed pursuant to the request of the Investors
may, subject to the provisions of Section 2(a)(iii) below, include other
securities of the Company which are held by Persons who, by virtue of agreements
with the Company, are entitled to include their securities in any such
registration ("Other Stockholders").
The registration rights set forth in this Section 2 may be assigned, in
whole or in part, to any transferee of Registrable Securities (who shall be
bound by all obligations of this Agreement).
(iii) Underwriting. If the Holders intend to distribute the
Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request
made pursuant to Section 2(a).
If Other Stockholders request such inclusion, the Holders shall
offer to include the securities of such Other Stockholders in the underwriting
and may condition such offer on their acceptance of the further applicable
provisions of this Section 2. The Holders whose shares are to be included in
such registration and the Company shall (together with all Other Stockholders
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by the requesting
Holders and reasonably acceptable to the Company. Notwithstanding any other
provision of this Section 2(a), if the representative advises the Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the securities of the Company held by Other Stockholders shall
be excluded from such registration to the extent so required by such limitation.
If, after the exclusion of such shares, further reductions are still required,
the number of shares included in the registration by each Holder shall be
reduced on a pro rata basis (based on the number of shares held by such
4
<PAGE>
Holder), by such minimum number of shares as is necessary to comply with such
request. No Registrable Securities or any other securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. Any shares that are thereby excluded from the
underwriting shall be withheld from the market by the Holders thereof for a
period (not to exceed 30 days prior to the effective date and 90 days
thereafter) that the managing underwriter reasonably determines is necessary in
order to effect the underwritten public offering. If any Other Stockholder who
has requested inclusion in such registration as provided above disapproves of
the terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, the underwriter and the Holders. The securities
so withdrawn shall also be withdrawn from registration. If the underwriter has
not limited the number of Registrable Securities or other securities to be
underwritten, the Company and officers and directors of the Company may include
its or their securities for its or their own account in such registration if the
representative so agrees and if the number of Registrable Securities and other
securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
(iv) Company Deferral. If the Company is engaged in any
activity or transaction or preparations or negotiations for any activity
or transaction that the Company desires to keep confidential for business
reasons and the Company determines in good faith that the public
disclosure requirements imposed on the Company under the Securities Act in
connection with a registration hereunder would require disclosure of such
activity, transaction, preparation or negotiations and that such
disclosure would be seriously detrimental to the Company, the Company
shall have the right, by written notice to the Holders, (A) to defer the
filing of such registration statement for a period of not more than 120
days after receipt of the request for such registration from the Holder or
Holders requesting such registration; provided that during such time the
Company may not file a registration statement for securities to be issued
and sold for its own account or that of anyone other than the Holder or
Holders requesting such registration, or (B) to withdraw a registration
statement after filing and after such notice, but prior to the
effectiveness thereof, provided that the Company shall bear all expenses
incurred by such Holder or otherwise in connection with such withdrawn
registration statement; and provided further that such right may not be
exercised more than once in any twelve-month period. Such withdrawn
registration statement shall not be counted in determining the number of
registrations in which such Holder's securities have been included or in
any other way adversely affect such Holder's rights hereunder.
(b) Company Registration.
(i) If the Company shall determine to register any of its
equity securities either for its own account or for the account of Other
Stockholders, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a Commission Rule 145
transaction, or a registration on any registration form which does not
permit secondary sales or does not include substantially the same
information as would be required to be included in a registration
statement covering the sale of Registrable Securities, the Company will:
5
<PAGE>
(A) promptly give to each of the Holders a written notice thereof
(which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable blue
sky or other state securities laws); and
(B) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by the Holders within fifteen (15) days after receipt of
the written notice from the Company described in clause (i) above, except
as set forth in Section 2(b)(ii) below. Such written request may specify
all or a part of the Holders' Registrable Securities.
(ii) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an
underwriting, the Company shall so advise each of the Holders as a part of
the written notice given pursuant to Section 2(b)(i)(A). In such event,
the right of each of the Holders to registration pursuant to this Section
2(b) shall be conditioned upon such Holders' participation in such
underwriting and the inclusion of such Holders' Registrable Securities in
the underwriting to the extent provided herein. The Holders whose
Registrable Securities are to be included in such registration shall
(together with the Company and the other stockholders distributing their
securities through such underwriting) enter into an underwriting agreement
in customary form with the representative of the underwriter or
underwriters selected for underwriting by the Company. Notwithstanding any
other provision of this Section 2(b), if the representative determines
that marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the allocation priority
set forth below) exclude from such registration and underwriting some or
all of the Registrable Securities to be included in the registration and
underwriting. The Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be
allocated in the following manner: The securities of the Company held by
officers, directors and Other Stockholders of the Company (other than
Registrable Securities and other than securities held by holders who by
contractual right demanded such registration ("Demanding Holders")) shall
be excluded from such registration and underwriting to the extent required
by such limitation, and, if a limitation on the number of shares is still
required, the number of shares that may be included in the registration
and underwriting by each of the Holders and Demanding Holders shall be
reduced, on a pro rata basis (based on the number of shares, calculated on
a fully-diluted basis, held by such Holder), by such minimum number of
shares as is necessary to comply with such limitation. If any of the
Holders or any officer, director or Other Stockholder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration. Any shares that
are thereby excluded from the underwriting shall be withheld from the
market by the Holders thereof for a period (not to exceed 30 days prior to
the effective date and 90 days thereafter) that the managing underwriter
reasonably determines is necessary in order to effect the underwritten
public offering.
6
<PAGE>
(c) Form S-3. Following the Initial Public Offering, the Company
shall use its best efforts to qualify for registration on Form S-3 for secondary
sales. After the Company has qualified for the use of Form S-3, Warburg and ABS
shall have the right to request any number of registrations on Form S-3 (such
requests shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended method of disposition of shares by
such holders), subject only to the following:
(i) The Company shall not be required to effect a registration
pursuant to this Section 2(c) unless the requesting Holders propose to
dispose of shares of Registrable Securities having an aggregate price to
the public (before deduction of underwriting discounts and expenses of
sale) of more than $5,000,000.
(ii) The Company shall not be required to effect a registration
pursuant to this Section 2(c) within 180 days of the effective date of the
most recent registration pursuant to this Section 2.
(iii) The Company shall not be required to effect a registration
pursuant to this Section 2(c) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act or applicable rules or
regulations thereunder.
The Company shall give written notice to all Holders of the receipt of a
request for registration pursuant to this Section 2(c) and shall provide a
reasonable opportunity for other Holders to participate in the registration,
provided that if the registration is for an underwritten offering, the terms of
Section 2(a)(iii) shall apply to all participants in such offering. Subject to
the foregoing, the Company will use its best efforts to effect promptly the
registration of all shares of Registrable Securities on Form S-3 to the extent
requested by the Holder or Holders thereof for purposes of disposition.
(d) Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Section 2 shall be borne by the Company, and all Selling Expenses shall be born
by the Holders of the securities so registered pro rata on the basis of the
number of their shares so registered.
(e) Registration Procedures. In the case of each registration
effected by the Company pursuant to this Section 2, the Company will keep the
Holders, as applicable, advised in writing as to the initiation of each
registration and as to the completion thereof. At its expense, the Company will:
(i) keep such registration effective for a period of one
hundred twenty (120) days or until the Holders, as applicable, have
completed the distribution described in the registration statement
relating thereto, whichever first occurs; provided, however, that (A) such
120-day period shall be extended for a period of time equal to the period
during which the Holders, as applicable, refrain from selling any
securities included in
7
<PAGE>
such registration in accordance with provisions in Section 2(j) hereof;
and (B) in the case of any registration of Registrable Securities on Form
S-3 which are intended to be offered on a continuous or delayed basis,
such 120-day period shall be extended until all such Registrable
Securities are sold, provided that Rule 415, or any successor rule under
the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act
governing the obligation to file a post-effective amendment permit, in
lieu of filing a post-effective amendment which (y) includes any
prospectus required by Section 10(a) of the Securities Act or (z) reflects
facts or events representing a material or fundamental change in the
information set forth in the registration statement, the incorporation by
reference of information required to be included in (y) and (z) above to
be contained in periodic reports filed pursuant to Section 12 or 15(d) of
the Exchange Act in the registration statement;
(ii) furnish such number of prospectuses and other documents
incident thereto as each of the Holders, as applicable, from time to time
may reasonably request;
(iii) notify each Holder of Registrable Securities covered by
such registration at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing; and
(iv) furnish, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to
such securities becomes effective, (1) an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders participating in
such registration, addressed to the underwriters, if any, and to the
Holders participating in such registration, and (2) a letter, dated as of
such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the
Holders participating in such registration, addressed to the underwriters,
if any, and if permitted by applicable accounting standards, to the
Holders participating in such registration.
(f) Indemnification.
(i) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors and partners, and each person
controlling each of the Holders, and each underwriter, if any, and each
person who controls any underwriter, with respect to each registration
which has been effected pursuant to this Section 2, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising
8
<PAGE>
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other
document including any related registration statement, notification or the
like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities
Act or the Exchange Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and
will reimburse each of the Holders, each of its officers, and each person
controlling each of the Holders, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to the
Company by the Holders or underwriters specifically for use therein.
(ii) Each of the Holders will, if Registrable Securities held
by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each
of its directors and officers and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter, each Other Stockholder and
each of their officers, directors, and partners, and each person
controlling such Other Stockholder, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering
circular or other document made by such Holder, or any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements by such Holder therein not
misleading, and will reimburse the Company and such Other Stockholders,
directors, officers, partners, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use therein; provided, however, that the obligations of
each of the Holders hereunder shall be limited to an amount equal to the
net proceeds to such Holder of securities sold as contemplated herein.
(iii) Each party entitled to indemnification under this
Section 2f (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom;
provided that counsel for the Indemnifying Party, who shall conduct the
defense of such
9
<PAGE>
claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld) and
the Indemnified Party may participate in such defense at such party's
expense (unless the Indemnified Party shall have reasonably concluded that
there may be a conflict of interest between the Indemnifying Party and the
Indemnified Party in such action, in which case the reasonable fees and
expenses of counsel shall be at the expense of the Indemnifying Party and
the Indemnified Party in such action, in which case the reasonable fees
and expenses of counsel shall be at the expense of the Indemnifying
Party), and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 2 unless the Indemnifying Party is
materially prejudiced thereby. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in
writing and as shall be reasonably required in connection with the defense
of such claim and litigation resulting therefrom.
(iv) If the Indemnification provided for in this Section 2(f)
is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to herein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
liability, claim, damage or expense in such proportion as is appropriate
to reflect the relative fault of the Indemnifying Party on the one hand
and of the Indemnified Party an the other in connection with the
statements or omissions which resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations.
The relative fault of the Indemnifying Party and of the Indemnified Party
shall be determined by reference to, among other things, whether the
untrue (or alleged untrue) statement of a material fact or the omission
(or alleged omission) to state a material fact relates to information
supplied by the Indemnifying Party of by the Indemnified Party and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(v) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with any underwritten
public offering contemplated by this Agreement are in conflict with the
foregoing provisions, the provisions in such underwriting agreement shall
be controlling.
(vi) The foregoing indemnity agreement of the Company and
Holders is subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time of the registration statement in question becomes
effective or the amended prospectus filed with the Commission
10
<PAGE>
pursuant to Commission Rule 424(b) (the "Final Prospectus"), such
indemnity or contribution agreement shall not inure to the benefit of any
underwriter or Holder if a copy of the Final Prospectus was furnished to
the underwriter and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required
by the Securities Act.
(g) Information by the Holders. Each of the Holders holding
securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Section 2. Notwithstanding anything to the contrary in this
Agreement, any Holder that does not timely furnish such information to the
Company shall not be entitled to participate in any registration hereunder.
(h) Rule 144 Reporting.
With a view to making available the benefits of certain rules and
regulations of the commission which may permit the sale of restricted securities
to the public without registration, the Company agrees to:
(i) make and keep public information available as those terms
are understood and defined in Rule 144 under the Securities Act ("Rule
144"), at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act at any time after it has
become subject to such reporting requirements; and
(iii) so long as the Holder owns any Registrable Securities,
furnish to the Holder upon request, a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 (at any time
from and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), and such reports and documents so filed thereunder as the
Holder may reasonably request in availing itself of any rule or regulation
of the Commission allowing the Holder to sell any such securities without
registration.
(i) "Market Stand-off" Agreement. Each of the Holders agrees, if
requested by the Company and an underwriter of equity securities of the Company,
not to sell or otherwise transfer or dispose of any Registrable Securities held
by such Holder during the 180-day period following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that;
11
<PAGE>
(i) such agreement only applies to the Initial Public
Offering; and
(ii) all officers and directors of the Company enter into
similar agreements. If requested by the underwriters, the Holders shall
execute a separate agreement to the foregoing effect. The Company may
impose stop-transfer instructions with respect to any securities subject
to the foregoing restriction until the end of said 180-day period. The
provisions of this Section 2(i) shall be binding upon any transferee who
acquires Registrable Securities.
(j) Suspension of Sales. Upon receipt of written notice from the
Company that a registration statement or prospectus contains an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (a
"Misstatement"), each Holder of Registrable Securities shall forthwith
discontinue disposition of Registrable Securities until such Holder has received
copies of the supplemented or amended prospectus that corrects such
Misstatement, or until such Holder is advised in writing by the Company that the
use of the prospectus may be resumed, and, if so directed by the Company, such
Holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the 120-day period
referred to in Section 2(e)(i) hereof shall be extended by the number of days
during the period from and including the date of the giving of such notice to
and including the date when each seller of Registrable Securities covered by
such registration statement either has received the copies of the supplemented
or amended prospectus or has been advised in writing by the Company that the use
of the prospectus may be resumed.
(k) Termination. The registration rights set forth in this Section 2
shall not be available to any Holder if, in the opinion of counsel to the
Company, all of the Registrable Securities then owned by such Holder could be
sold in any 90-day period pursuant to Rule 144 (without giving effect to the
provisions of Rule 144(k)).
3. MISCELLANEOUS
(a) Directly or Indirectly. Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether such action is taken
directly or indirectly by such Person.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed entirely within such state.
(c) Section Headings. The headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not
be deemed to constitute a part thereof.
12
<PAGE>
(d) Notices.
(i) All communications under this Agreement shall be in
writing and shall be delivered by hand or facsimile or mailed by overnight
courier or by registered or certified mail, postage prepaid:
(A) if to the Company, to 16 Tech Circle, Natick,
Massachusetts 01760, Attention: President (facsimile:
508-653-1279), or at such other address as it may have furnished
in writing to the Investors;
(B) if to the Investors, at the address or facsimile number
listed on Schedule I hereto, or at such other address or facsimile
number as may have been furnished the Company in writing.
(ii) Any notice so addressed shall be deemed to be given; if
delivered by hand or facsimile, on the date of such delivery; if mailed by
courier, on the first business day following the date of such mailing; and
if mailed by registered or certified mail, on the third business day after
the date of such mailing.
(e) Reproduction of Documents. This Agreement and all documents
relating thereto, including, without limitation, any consents, waivers and
modifications which may hereafter be executed may be reproduced by the Investor
by any photographic, photostatic, microfilm, microcard, miniature photographic
or other similar process and the Investors may destroy any original document so
reproduced. The parties hereto agree and stipulate that any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and
whether or not such reproduction was made by the Investors in the regular course
of business) and that any enlargement, facsimile or further reproduction of such
reproduction shall likewise be admissible in evidence.
(f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.
(g) Entire Agreement; Amendment and Waiver. This Agreement
constitutes the entire understanding of the parties hereto and supersedes all
prior understanding among such parties. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the Company and the Investors holding a majority of the then
outstanding Registrable Securities. The foregoing notwithstanding, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders of Registrable Securities whose shares are being sold pursuant
to a registration statement and that does not directly or indirectly affect the
rights of other Holders of shares of Registrable Securities may be given by the
Holders of a majority of the shares of Registrable Securities being sold.
(h) Severability. In the event that any part or parts of this
Agreement shall be held illegal or unenforceable by any court or administrative
body of competent jurisdiction, such
13
<PAGE>
determination shall not effect the remaining provisions of this Agreement which
shall remain in full force and effect.
(i) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
[signature page follows]
14
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first set forth above.
WORKSCAPE, INC.
By: /s/ James G. Carlson
-------------------------------
Name: James G. Carlson
Title: Chief Executive Officer
INVESTORS:
ABS CAPITAL PARTNERS III, L.P.
By: ABS Partners III, L.L.C.
Its: General Partner
By: /s/ Timothy T. Weglicki
-------------------------------
Name: Timothy T. Weglicki
Title: Managing Member
WARBURG, PINCUS EQUITY PARTNERS, L.P.
By: Warburg, Pincus & Co.,
Its: General Partner
By: /s/ Joel Ackerman
-------------------------------
Name: Joel Ackerman
Title: Partner
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS I, C.V.
By: Warburg, Pincus & Co.,
Its: General Partner
By: /s/ Joel Ackerman
-------------------------------
Name: Joel Ackerman
Title: Partner
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS II, C.V.
By: Warburg, Pincus & Co.,
Its: General Partner
By: /s/ Joel Ackerman
-------------------------------
Name: Joel Ackerman
Title: Partner
S-1
<PAGE>
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS III, C.V.
By: Warburg, Pincus & Co.,
Its: General Partner
By: /s/ Joel Ackerman
-------------------------------
Name: Joel Ackerman
Title: Partner
/s/ James G. Carlson
-------------------------------
James G. Carlson
/s/ Timothy T. Clifford
-------------------------------
Timothy T. Clifford
s
/s/ Kenneth F. Phillips
-------------------------------
Kenneth F. Phillips
/s/ Salvatore Percia
-------------------------------
Salvatore Percia
/s/ Robert T. Barry
-------------------------------
Robert T. Barry
/s/ Richard P. Gallagher
-------------------------------
Richard P. Gallagher
/s/ Arthur T. Schultz
-------------------------------
Arthur T. Schultz
S-2
<PAGE>
SCHEDULE I
Name and Address of Investor
ABS Capital Partners III, L.P.
One South Street, 25th Floor
Baltimore, MD 21202
Attention: Timothy Weglicki
Fax: (410) 895-4380
Warburg, Pincus Equity Partners, L.P.
466 Lexington Avenue
New York, NY 10017
Attention: Patrick T. Hackett
Fax: (212) 878-9361
Warburg, Pincus Netherlands Equity Partners I, C.V.
c/o Warburg, Pincus Equity Partners, L.P.
466 Lexington Avenue
New York, NY 10017
Attention: Patrick T. Hackett
Fax: (212) 878-9361
Warburg, Pincus Netherlands Equity Partners II C.V.
c/o Warburg, Pincus Equity Partners, L.P.
466 Lexington Avenue
New York, NY 10017
Attention: Patrick T. Hackett
Fax: (212) 878-9361
Warburg, Pincus Netherlands Equity Partners III, C.V.
c/o Warburg, Pincus Equity Partners, L.P.
466 Lexington Avenue
New York, NY 10017
Attention: Patrick T. Hackett
Fax: (212) 878-9361
<PAGE>
James G. Carlson F. Selby Wellman
1763 Brookside Lane 101 Richelieu Dr.
Vienna, VA 22182 Cary, NC 27511
Timothy T. Clifford Richard C. Zoretic
41 Rolling Meadow Drive 2471 Oakton Hills Drive
Holliston, MA 01746 Oakton, Virginia 22124
Salvatore Percia George W. Bickerstaff
10 Pamela Lane 28 Sturges Commons
Sterling, MA 01564 Wesport, CT 06880
Kenneth Phillips Sidney W. Stolz
189 Bacon Street 2026 R Street, N.W.
Natick, MA 01760 Washington, D.C. 20009
Robert T. Barry
23 Jefferson Road
Franklin, MA 02083
Richard P. Gallagher
24 Elizabeth Way
Easton, MA 02356
Arthur T. Schultz
5503 Dalys Way
Valrico, FL 33594
BEA Systems
2315 North First Street
San Jose, CA 95131
S-4
<PAGE>
REGISTRATION RIGHTS AGREEMENT JOINDER
As of the date set forth below, the undersigned is acquiring from
Workscape, Inc., a Delaware corporation (the "Company"), 800,000 shares of the
Class A Common Stock of the Company (the "Shares"). By execution of this
Registration Rights Agreement Joinder, the undersigned agrees to become and
shall be deemed a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 17, 1999, by and among the Company and the
stockholders of the Company identified therein (the "Registration Rights
Agreement"). The undersigned shall have all rights, and shall observe all the
obligations, applicable to an "Other Investor" as set forth in the Registration
Rights Agreement. Please add the undersigned to the list of "Other Investors"
set forth in Schedule I to the Registration Rights Agreement.
Dated: February 15, 2000 BEA Systems, Inc.
By: /s/ Robert S. Donohue
------------------------------
Name: Robert S. Donohue
Title: Vice President and General Counsel
Address: 2315 North First Street
San Jose, California 95131
Telephone: (408) 570-8000
Agreed to as of
February 15, 2000:
Workscape, Inc.
By: /s/ James G. Carlson
---------------------------
Name: James G. Carlson
Title:Chairman and Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT JOINDER
As of the date set forth below, the undersigned is acquiring from
Workscape, Inc., a Delaware corporation (the "Company"), 45,000 shares of the
Class A Common Stock of the Company (the "Shares"). By execution of this
Registration Rights Agreement Joinder, the undersigned agrees to become and
shall be deemed a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 17, 1999, by and among the Company and the
stockholders of the Company identified therein (the "Registration Rights
Agreement"). The undersigned shall have all rights, and shall observe all the
obligations, applicable to an "Other Investor" and an "Investor" as set forth in
the Registration Rights Agreement. Please add the undersigned to the list of
"Other Investors" set forth in Schedule I to the Registration Rights Agreement.
Dated: February 24, 2000 /s/ Richard Zoretic
----------------------------------------
Richard Zoretic
Address: 2471 Oakton Hills Dr.
Oakton, VA 22124
Fax: 703-255-9543
Telephone: 703-255-4706
AGREED TO AS OF
FEBRUARY 24, 2000:
Workscape, Inc.
By: /s/ James G. Carlson
---------------------------
Name: James G. Carlson
Title:Chairman and Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT JOINDER
As of the date set forth below, the undersigned is acquiring from
Workscape, Inc., a Delaware corporation (the "Company"), 40,000 shares of the
Class A Common Stock of the Company (the "Shares"). By execution of this
Registration Rights Agreement Joinder, the undersigned agrees to become and
shall be deemed a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 17, 1999, by and among the Company and the
stockholders of the Company identified therein (the "Registration Rights
Agreement"). The undersigned shall have all rights, and shall observe all the
obligations, applicable to an "Other Investor" and an "Investor" as set forth in
the Registration Rights Agreement. Please add the undersigned to the list of
"Other Investors" set forth in Schedule I to the Registration Rights Agreement.
Dated: February 24, 2000 /s/ George W. Bickerstaff
----------------------------------------
George W. Bickerstaff
Address: 28 Sturges Commons
Westport, CT 06880
Fax: 203-255-3514
Telephone: 203-254-1682
AGREED TO AS OF
FEBRUARY 24, 2000:
Workscape, Inc.
By: /s/ James G. Carlson
---------------------------
Name: James G. Carlson
Title:Chairman and Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT JOINDER
As of the date set forth below, the undersigned is acquiring from
Workscape, Inc., a Delaware corporation (the "Company"), 200,000 shares of the
Class A Common Stock of the Company (the "Shares"). By execution of this
Registration Rights Agreement Joinder, the undersigned agrees to become and
shall be deemed a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 17, 1999, by and among the Company and the
stockholders of the Company identified therein (the "Registration Rights
Agreement"). The undersigned shall have all rights, and shall observe all the
obligations, applicable to an "Other Investor" and an "Investor" as set forth in
the Registration Rights Agreement. Please add the undersigned to the list of
"Other Investors" set forth in Schedule I to the Registration Rights Agreement.
Dated: February 24, 2000 /s/ F. Selby Wellman
----------------------------------------
F. Selby Wellman
Address: 101 Richelieu Dr.
Cary, NC 27511
Fax: 919-392-2299
Telephone: 919-468-3344
AGREED TO AS OF
FEBRUARY 24, 2000:
Workscape, Inc.
By: /s/ James G. Carlson
---------------------------
Name: James G. Carlson
Title:Chairman and Chief Executive Officer
<PAGE>
REGISTRATION RIGHTS AGREEMENT JOINDER
As of the date set forth below, the undersigned is acquiring from
Workscape, Inc., a Delaware corporation (the "Company"), 30,000 shares of the
Class A Common Stock of the Company (the "Shares"). By execution of this
Registration Rights Agreement Joinder, the undersigned agrees to become and
shall be deemed a party to that certain Amended and Restated Registration Rights
Agreement, dated as of December 17, 1999, by and among the Company and the
stockholders of the Company identified therein (the "Registration Rights
Agreement"). The undersigned shall have all rights, and shall observe all the
obligations, applicable to an "Other Investor" and an "Investor" as set forth in
the Registration Rights Agreement. Please add the undersigned to the list of
"Other Investors" set forth in Schedule I to the Registration Rights Agreement.
Dated: March 6, 2000 /s/ Sidney W. Stolz
----------------------------------------
Sidney W. Stolz
Address: 2026 R Street, N.W.
Washington, D.C. 20009
Fax:
Telephone:
AGREED TO AS OF
March 6, 2000:
Workscape, Inc.
By: /s/ James G. Carlson
---------------------------
Name: James G. Carlson
Title:Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 10.11
WORKSCAPE, INC.
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT, dated as of December
17, 1999, among Warburg, Pincus Equity Partners, L.P., a Delaware limited
partnership ("WPEP") and certain partnerships affiliated with WPEP whose names
appear on Schedule I hereto (collectively "Warburg"); ABS Capital Partners III,
L.P., a Delaware limited partnership ("ABS"); the individuals whose names and
addresses appear from time to time on Schedule II hereto (the "Other
Investors"); and Workscape, Inc., a Delaware corporation (the "Company"), amends
and restates that certain Stockholders Agreement dated as of February 2, 1999,
as amended as of July 15, 1999. Warburg, ABS and the Other Investors are
hereinafter collectively referred to as the "Investors."
RECITALS
WHEREAS, certain of the Other Investors own shares of Series A
Convertible Preferred Stock, par value $0.01 per share of the Company (the
"Series A Preferred Stock"); and
WHEREAS, Warburg and certain of the Other Investors, pursuant to the
terms of an Agreement and Plan of Recapitalization and Sale dated February 2,
1999, as amended, with the Company (the "First Purchase Agreement"), purchased
shares of the Series A Preferred Stock; and
WHEREAS, Warburg, pursuant to the terms of a Securities Purchase
Agreement dated July 15, 1999 with the Company (the "Second Purchase
Agreement"), purchased shares of Series B Convertible Preferred Stock of the
Company, par value $0.01 per share ("Series B Preferred Stock"), Series C
Preferred Stock, par value $0.01 per share ("Series C Preferred Stock"), and
warrants to purchase Class A Common Stock (as defined herein) of the Company
(the "Warrants"); and
WHEREAS, certain of the Other Investors have, pursuant to the terms of
certain subscription agreements (collectively, the "Subscription Agreements"),
purchased shares of the Series A Preferred Stock, Series B Preferred Stock and
Class A Common Stock, par value $0.01 per share, of the Company ("Class A Common
Stock"), and warrants to purchase shares of Class B Common Stock, par value
$0.01 per share, of the Company ("Class B Common Stock", and together with the
Class A Common Stock, the "Common Stock"); and
WHEREAS, ABS and Warburg, pursuant to the terms of a Stock Purchase
Agreement dated as of December 17, 1999 with the Company (the "Series D Purchase
Agreement"), have agreed to purchase shares of Series D Convertible Preferred
Stock of the Company, par value $0.01 per share ("Series D Preferred Stock", and
together with the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock, the "Preferred Stock"); and
WHEREAS, the Investors and the Company desire to promote their mutual
interests by agreeing to certain matters relating to the operations of the
Company and the disposition and
<PAGE>
voting of the Common Stock and the Preferred Stock. The Common Stock (including
all shares of Class A Common Stock issuable upon exercise of the Warrants) and
the Preferred Stock are referred to collectively herein as the "Shares".
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. COVENANTS OF THE PARTIES
(a) Legends. The certificates evidencing the Shares acquired by the
Investors will bear a legend reflecting the restrictions on the transfer of such
securities contained in this Agreement in substantially the following form:
"The Securities evidenced hereby are subject to the terms of
that certain Amended and Restated Stockholders Agreement,
dated as of December 17, 1999, by and among the Company and
certain investors identified therein, including certain
restrictions on transfer. A copy of this Agreement has been
filed with the Secretary of the Company and is available upon
request."
(b) Additional Investors. The parties hereto acknowledge that certain
employees of the Company may become stockholders of the Company after the date
hereof. As a condition to the issuance of shares of capital stock of the Company
to them, the Company shall require such employees to execute and deliver an
agreement containing restrictions substantially similar to those set forth in
Sections 3(a), (b) and (d) hereof.
2. BOARD OF DIRECTORS
(a) Election of Directors.
(i) From and after the date hereof, the Investors and
the Company shall take all action within their respective power,
including but not limited to, the voting of all shares of capital stock
of the Company owned by them, required to cause the Board of Directors
of the Company (the "Board") to consist of five (5) members or such
other number as the Board may from time to time establish, to maintain
the quorum requirements for actions of the Board at a majority of the
entire number of directors, to maintain the voting requirements for
actions of the Board at a majority of directors present at a meeting at
which there is a quorum (except in respect of such matters as this
Agreement, the Amended and Restated Certificate of Incorporation or the
Bylaws of the Company may impose a greater requirement), and at all
times throughout the term of this Agreement to include (A) as long as
Warburg owns (beneficially within the meaning of Rule 13d-3 under the
Exchange Act) at least fifteen percent (15%) of the shares of Common
Stock (on a fully converted basis), two representatives designated by
Warburg (each, a "Warburg Director"), (B) as long as ABS owns
(beneficially within the meaning of Rule 13d-3 under the Exchange Act)
at least fifty percent (50%) of the shares of Series D Preferred Stock
(or shares of Class A Common Stock into which such shares have been
2
<PAGE>
converted) purchased by it under the Series D Purchase Agreement, one
representative designated by ABS (the "ABS Director"), and (C) James G.
Carlson and Timothy T. Clifford, each of whom shall be entitled to be a
member of the Board for so long as he is serving as an executive
officer of the Company (the "Voting Agreement"). For as long as Warburg
and ABS are entitled to designate directors under this Section 2(a),
the Investors agree that the Warburg Directors and the ABS Director
shall be three of the Preferred Stock Directors (as defined in the
Company's Amended and Restated Certificate of Incorporation).
Notwithstanding anything to the contrary, as of February 2, 2004,
Messrs. Phillips and Percia shall no longer be subject to the Voting
Agreement.
(ii) From the date on which the Company completes an
underwritten public offering for shares of Common Stock (the "Initial
Public Offering") pursuant to a registration under the Securities Act
of 1933, as amended (the "Securities Act"), and for as long as Warburg
owns beneficially (within the meaning of Rule 13d-3 under the Exchange
Act) at least twenty percent (20%) of the Common Stock, the Company
will nominate and use its best efforts to have two individuals
designated by Warburg elected to the Board. From the date on which the
Company completes its Initial Public Offering and for as long as
Warburg owns beneficially and of record at least ten percent (10%) of
the outstanding shares of Common Stock, the Company will nominate and
use its best efforts to have one individual designated by Warburg
elected to the Board.
(b) Replacement Directors. In the event that any Warburg
Director or the ABS Director (a "Withdrawing Director") designated in the manner
set forth in Section 2(a) hereof is unable to serve, or once having commenced to
serve, is removed or withdraws from the Board, such Withdrawing Director's
replacement (the "Substitute Director") will be designated by Warburg or ABS, as
applicable. The Investors and the Company agree to take all action within their
respective power, including, but not limited to, the voting of capital stock of
the Company owned by them (i) to cause the election of such Substitute Director
promptly following his or her nomination pursuant to this Section 2(b) or (ii)
upon the written request of Warburg or ABS, as applicable, to remove, with or
without cause, any Warburg Director or the ABS Director, as the case may be.
(c) Observation Rights. In addition to the agreements of the
Investors and the Company set forth above, the Company and each Investor hereby
agree that for so long as ABS is a party to this Agreement and this Agreement is
in effect, ABS shall have the right to have one observer attend each Board
meeting in addition to any directors it has designated in accordance with
Section 2(a). Such observer shall not be entitled to vote on any matter
presented to the Board, and, except as otherwise requested by the Board, shall
not actively participate in Board meetings.
(d) Board Committees. The Company and each Investor further
agree to take, or to cause the Board of Directors to take, all such actions
necessary to cause the ABS Director to be nominated to each committee of the
Board, whether now in existence or created after the date hereof, unless such
nomination would be contrary to applicable law.
3
<PAGE>
3. TRANSFER OF STOCK
(a) Resale of Securities. No Other Investor shall Transfer any
Shares other than in accordance with the provisions of this Section 3. Any
Transfer or purported Transfer made in violation of this Section 3 shall be null
and void and of no effect.
(b) Rights of First Refusal.
(i) No Other Investor shall Transfer any of the
Shares owned by him (except to members of such Other Investor's family,
heirs, executors or legal representatives or trusts for the benefit of
such Other Investor or such Other Investor's family, provided in each
instance that such transferee agrees to be bound by the provisions of
this Agreement as if such transferee were an original signatory hereto)
unless the Other Investor desiring to make the Transfer (hereinafter
referred to as the "Transferor") shall have first made the offers to
sell all of the Shares then proposed to be transferred by the
Transferor (the "Subject Shares") to the Company and then to the
Investors holding Preferred Stock (the "Preferred Holders") as
contemplated by this Section 3(b), and such offers shall not have been
accepted.
(ii) Offer by Transferor. Copies of the Transferor's
offer shall be given to the Company and the Preferred Holders and shall
consist of an offer to sell to the Company or, failing its election to
purchase all of the Subject Shares, then to the Preferred Holders, all
of the Subject Shares pursuant to a bona fide offer of a third party,
to which copies shall be attached a statement of intention to Transfer
to such third party, the name and address of the prospective third
party transferee, the number of Subject Shares involved in the proposed
Transfer, and the terms of such Transfer.
(iii) Acceptance of Offer.
(A) Within twenty (20) days after the receipt of the
offer described in Section 3(b)(ii), the Company may, at its
option, elect to purchase some or all of the Subject Shares.
The Company shall exercise such option by giving notice
thereof to the Transferor and to the Preferred Holders within
twenty (20) days after receipt of such notice.
(B) If the Company does not elect to purchase all of
the Subject Shares within such 20-day period, one or more
Preferred Holders may purchase all, but not less than all, of
the remaining Subject Shares by giving notice thereof to the
Transferor and to the Company within twenty (20) days after
receipt of notice from the Transferor in accordance with
Section 3(b) to the effect that the Company did not exercise
its option to purchase all of the Subject Shares. Each
Preferred Holder who has complied with the notice provisions
hereof shall be entitled to purchase a pro rata portion of the
remaining Subject Shares equal to the number of remaining
Subject Shares multiplied by a fraction, the numerator of
which shall be the number of Shares owned by such Preferred
Holder and the denominator of which shall be the aggregate
number of Shares owned by the
4
<PAGE>
Preferred Holders electing to purchase the remaining Subject
Shares. Each Preferred Holder shall have the right of
over-subscription such that if any Preferred Holder having a
similar right of first refusal fails to exercise such right to
purchase its pro rata portion of the remaining Subject Shares,
the Transferor shall promptly notify the other Preferred
Holders and the other Preferred Holders may purchase the
non-purchasing Preferred Holder's portion on a pro rata basis,
within five business days of the date of this subsequent
notice by the Transferor.
(C) In either event, the notice required to be given
by the purchasing party or parties (the "Purchaser") shall
specify a date for the closing of the purchase which shall not
be more than thirty (30) days after the date of the giving of
such notice.
(iv) Purchase Price. The purchase price per share for
the Subject Shares shall be the price per share offered to be paid by
the prospective Transferee described in the offer, which price shall be
paid in cash or, if so provided in the offer of the prospective
transferee, cash plus deferred payments of cash in the same
proportions, and with the same terms of deferred payment as therein set
forth.
(v) Consideration Other Than Cash. If the offer of
Subject Shares under this Section 3(b) is for consideration other than
cash or cash plus deferred payments of cash, the Purchaser shall pay
the cash equivalent of such other consideration. If the Transferor and
the Purchaser cannot agree on the amount of such cash equivalent within
ten (10) days after the beginning of the 20-day period under Section
3(b)(iii)(A), any of such parties may, by three (3) days' written
notice to the other, initiate appraisal proceedings under Section
3(b)(vi) for determination of the cash equivalent. The Purchaser may
give written notice to the Transferor revoking an election to purchase
all, but not less than all, of the Subject Shares within ten (10) days
after determination of the appraised value, if it chooses not to
purchase the Subject Shares.
(vi) Appraisal Procedure. If any party shall initiate
an appraisal procedure to determine the amount of the cash equivalent
of any consideration for Subject Shares under Section 3(b)(v), then the
Transferor, on the one hand, and the Purchaser, on the other hand,
shall each promptly appoint as an appraiser an individual who shall be
a member of a nationally-recognized investment banking firm. Each
appraiser shall, within thirty (30) days of appointment, separately,
investigate the value of the consideration for the Subject Shares as of
the proposed transfer date and shall submit a notice of an appraisal of
that value to each party. Each appraiser shall be instructed to
determine such value without regard to income tax consequences to the
Transferor as a result of receiving cash rather than other
consideration. If the appraised values of such consideration (the
"Earlier Appraisals") vary by less than ten percent (10%), the average
of the two appraisals on a per share basis shall be controlling as the
amount of the cash equivalent. If the appraised values vary by more
than ten percent (10%), the appraisers, within ten (10) days of the
submission of the last appraisal, shall appoint a third appraiser who
shall be member of a nationally recognized investment banking firm. The
third
5
<PAGE>
appraiser shall, within thirty (30) days of his appointment, appraise
the value of the consideration for the Subject Shares (without regard
to the income tax consequences to the Transferor as a result of
receiving cash rather than other consideration) as of the proposed
transfer date and submit notice of his appraisal to each party. The
value determined by the third appraiser shall be controlling as the
amount of the cash equivalent unless the value is greater than the two
Earlier Appraisals, in which case the higher of the two Earlier
Appraisals will control, and unless that value is lower than the two
Earlier Appraisals, in which case the lower of the two Earlier
Appraisals will control. If any party fails to appoint an appraiser or
if one of the two initial appraisers fails after appointment to submit
his appraisal within the required period, the appraisal submitted by
the remaining appraiser shall be controlling. The Transferor and the
Purchaser shall each bear the cost of its respective appointed
appraiser. The cost of the third appraisal shall be shared one-half by
the Transferor and one-half by the Purchaser.
(vii) Closing of Purchase. The Closing of the
purchase shall take place at the office of the Company or such other
location as shall be mutually agreeable and the purchase price, to the
extent comprised of cash, shall be paid at the closing, and cash
equivalents and documents evidencing any deferred payments of cash
permitted pursuant to Section 3(b)(iv) above shall be delivered at the
closing. At the closing, the Transferor shall deliver to the Purchaser
the certificates evidencing the Subject Shares to be conveyed, duly
endorsed and in negotiable form with all the requisite documentary
stamps affixed thereto.
(viii) Release from Restriction; Termination of
Rights. If the offer to sell is not accepted by the Company, the
Preferred Holders or a combination thereof, the Transferor may make a
bona fide Transfer to the prospective transferee named in the statement
attached to the offer in accordance with the agreed upon terms of such
Transfer, provided that (A) such Transfer shall be made only in strict
accordance with the terms therein stated and (B) the transferee agrees,
in writing, to be bound by the provisions of this Agreement. If the
Transferor shall fail to make such Transfer within sixty (60) days
following the expiration of the time provided above for the election by
the Preferred Holders or, if the Purchaser revokes an election to
purchase the Subject Shares pursuant to Section 3(b)(v), within sixty
(60) days of the date of such notice of revocation, such Subject Shares
shall again become subject to all the restrictions of this Section 3.
(ix) Limitations. The provisions of this Section 3(b)
shall not apply to (A) sales by Tag-Along Investors (as defined below)
pursuant to Section 3(c) hereof or (B) sales by Investors pursuant to
Section 3(d) hereof.
(c) Tag-Along Rights.
(i) If any Investor (a "Selling Holder") intends to
Transfer (other than to any of its Affiliates or to the Company) Shares
representing at least three percent (3%) of the fully-diluted equity of
the Company, the Selling Holder shall notify the remaining
6
<PAGE>
Investors (the "Tag-Along Investors"), in writing, of such proposed
Transfer and its terms and conditions. Within ten (10) business days of
the date of such notice, each other Tag-Along Investor shall notify the
Selling Holder if it elects to participate in such Transfer. Any
Tag-Along Investor that fails to notify the Selling Holder within such
ten (10) business day period shall be deemed to have waived its rights
hereunder. Each Tag-Along Investor that so notifies the Selling Holder
shall have the right to sell, at the same price and on the same terms
and conditions as the Selling Holder, an amount of Shares equal to the
Shares the third party actually proposes to purchase multiplied by a
fraction, the numerator of which shall be the number of Shares issued
and owned by such Tag-Along Investor and the denominator of which shall
be the aggregate number of Shares issued and owned by the Selling
Holder and each Tag-Along Investor exercising its rights under this
Section 3(c) (assuming, in the case of sales of Common Stock, full
conversion of all shares of Preferred Stock held by the Selling Holder
and each Tag-Along Investor exercising its rights under this Section
3(c)). Notwithstanding the foregoing, if the Selling Holder is selling
only shares of Preferred Stock, holders of Common Stock shall not have
the right to sell shares of Common Stock pursuant to this Section 3(c).
(ii) Notwithstanding anything contained in this
Section 3(c), if all or a portion of the purchase price consists of
securities and the sale of such securities to the Tag-Along Investors
would require either a registration under the Securities Act or the
preparation of a disclosure document pursuant to Regulation D under the
Securities Act (or any successor regulation) or a similar provision of
any state securities law, then, at the option of the Selling Holder,
any one or more of the Tag-Along Investors may receive, in lieu of such
securities, the fair market value of such securities in cash, as
determined in good faith by the Board.
(d) Drag-Along Right.
(i) If at any time and from time to time after the
date of this Agreement, any Investors that together hold at least 80%
of the Shares (the "Controlling Holders") wish to Transfer in a bona
fide arms' length sale all of their Shares to any Person or Persons who
are not Affiliates of the Controlling Holders (for purposes of this
Section 3(d), the "Proposed Transferee"), the Controlling Holders shall
have the right (for purposes of Section 3(d), the "Drag-Along Right")
to require each Investor to sell to the Proposed Transferee all of his
or its Shares (including any warrants or options to acquire Shares) for
the same per share consideration as proposed to be received by the
Controlling Holders (less, in the case of options or warrants, the
exercise price for such options or warrants) then held by such
Investor. Each Investor agrees to take all steps necessary to enable
him or it to comply with the provisions of this Section 3(d) to
facilitate the Controlling Holders' exercise of a Drag-Along Right.
(ii) To exercise a Drag-Along Right, the Controlling
Holders shall give each Investor a written notice (for purposes of this
Section 3(d), a "Drag-Along Notice") containing (1) the name and
address of the Proposed Transferee and (2) the proposed
7
<PAGE>
purchase price, terms of payment and other material terms and
conditions of the Proposed Transferee's offer. Each Investor shall
thereafter be obligated to sell his or its Shares (including any
warrants or options held by such Investor), provided that the sale to
the Proposed Transferee is consummated within ninety (90) days of
delivery of the Drag- Along Notice. If the sale is not consummated
within such 90-day period, then each Investor shall no longer be
obligated to sell such Investor's Shares pursuant to that specific
Drag-Along Right but shall remain subject to the provisions of this
Section 3(d).
(iii) Notwithstanding anything contained in this
Section 3(d), if all or a portion of the purchase price consists of
securities and the sale of such securities to the Investors would
require either a registration under the Securities Act or the
preparation of a disclosure document pursuant to Regulation D under the
Securities Act (or any successor regulation) or a similar provision of
any state securities law, then, at the option of the Controlling
Holders, the Investors may receive, in lieu of such securities, the
fair market value of such securities in cash, as determined in good
faith by the Board.
(iv) Satisfaction of Conditions. The obligations of
the Investors pursuant to this Section 3(d) are subject to the
satisfaction of the following conditions:
(1) upon the consummation of the sale, all
of the holders of capital stock of the Company shall receive
the same proportion of the aggregate consideration from such
sale that such holder would have received if such aggregate
consideration had been distributed by the Company in complete
liquidation pursuant to the rights and preferences set forth
in the Certificate of Incorporation as in effect immediately
prior to such sale;
(2) for purposes of determining the per
share consideration received by the Controlling Holders, the
aggregate consideration to be received pursuant to the
Proposed Transferee's offer shall be deemed to include (A) any
consideration received by an Investor or its affiliate for any
reason in a transaction arising from or contemplated by the
Proposed Transferee's offer, including, without limitation,
broker's and/or advisor's fees, transitional services and
other post-closing consulting agreements (other than
post-closing employment agreements in the ordinary course
consistent with past practice), and (B) any option, warrant or
other right to acquire and/or dispose of securities of the
successor to the Company resulting from the Proposed
Transferee's offer;
(3) if any holders of shares of any class of
capital stock of the Company are given an option as to the
form and amount of consideration to be received, all holders
of shares of such class will be given the same option;
(4) no Investor shall be obligated to make
any out-of-pocket expenditure prior to the consummation of the
sale (excluding modest expenditures for postage, copies, etc.)
and no Investor shall be obligated to pay more than its "pro
rata share" of reasonable expenses incurred in connection with
a
8
<PAGE>
consummated sale to the extent such expenses are incurred for
the benefit of all Investors and are not otherwise paid by the
Company or the acquiring party (costs incurred by or on behalf
of an Investor for its sole benefit will not be considered
costs of the transaction hereunder); and
(5) no Investor shall be required to make
any representations or indemnities in connection with the
sale, other than (a) representations concerning each
Investor's valid ownership of its Shares, free of all liens
and encumbrances (other than those arising under applicable
federal and state securities laws), and each Investor's
authority, power and right to enter into and consummate such
sale without violating any other agreement and (b) indemnities
with respect to such representations by it, provided that such
Investor's liability for indemnity shall in no event exceed
the total purchase price received by such Investor for its
Shares.
(e) Subscription Right.
(i) If at any time after the date hereof, the Company
proposes to issue equity securities of any kind (the term "equity
securities" shall include for these purposes any warrants, options or
other rights to acquire equity securities and debt securities
convertible into equity securities) of the Company (other than the
issuance of securities (A) upon conversion of the Preferred Stock
pursuant to the Company's Certificate of Incorporation, (B) to the
public in a firm commitment underwriting pursuant to a registration
statement filed under the Securities Act, (C) pursuant to the
acquisition of another Person by the Company by merger, purchase of
substantially all of the assets or other form of reorganization, (D)
pursuant to an employee stock option plan, stock bonus plan, stock
purchase plan or other management equity program, (E) to vendors,
lenders, customers and consultants to the Company, (F) in connection
with the payment by the Company of Contingent Consideration (as defined
in Section 2.2(a) of the First Purchase Agreement) or (G) upon exercise
of the Warrants or warrants to purchase Class B Common Stock
outstanding on the date hereof, then, as to each Investor who then
holds in excess of five percent (5%) of the then outstanding shares of
Common Stock (on an as converted basis), the Company shall:
(1) give written notice setting forth in
reasonable detail (w) the designation and all of the terms and
provisions of the securities proposed to be issued (the
"Proposed Securities"), including, where applicable, the
voting powers, preferences and relative participating,
optional or other special rights, and the qualification,
limitations or restrictions thereof and interest rate and
maturity; (x) the price and other terms of the proposed sale
of such securities; (y) the amount of such securities proposed
to be issued; and (z) such other information as the Investors
may reasonably request in order to evaluate the proposed
issuance (it being agreed that Kenneth Phillips and Salvatore
Percia will be counted as one holder for purposes of said
requirements); and
9
<PAGE>
(2) offer to issue to each such Investor a
portion of the Proposed Securities equal to a percentage
determined by dividing (x) the number of shares of Common
Stock held by such Investor and issuable to such Investor,
assuming conversion in full of any convertible securities then
held by such Investor, by (y) the total number of shares of
Common Stock then outstanding, including for purposes of this
calculation all shares of Common Stock issuable upon
conversion in full of any then outstanding convertible
securities.
Each Investor shall have 15 days from the date of receipt of
any such notice to notify the Company in writing that it intends to purchase all
or a portion of its pro rata share of the Proposed Securities and stating
therein the quantity of Proposed Securities to be purchased. If an Investor
elects to purchase a share of the Proposed Securities, it shall do so on the
same terms and conditions as the other purchasers thereof. If an Investor fails
to exercise the rights granted hereunder within the 15-day period, the Company
shall have 90 days to effect the sale of the Proposed Securities at a price and
on terms no more favorable, in the aggregate, to the purchasers thereof than
those offered to the Investors. If the sale is not effected within the 90- day
period, the Company shall not issue and sell the Proposed Securities without
first offering the Proposed Securities to the Investors in the manner provided
in this Section 3(e).
(f) Injunctive Relief. The Company and the Investors hereby
declare that it is impossible to measure in money the damages which will accrue
to the parties hereto by reason of the failure of any Investor to perform any of
its obligations as set forth in this Section 3. Therefore, the Company and the
Investors shall have the right to specific performance of such obligations, and
if any party hereto shall institute any action or proceeding to enforce the
provisions hereof, each of the Company and the Investors hereby waives the claim
or defense that the party instituting such action or proceeding has an adequate
remedy at law.
4. TERMINATION. This Agreement shall terminate:
(a) upon the closing of a Qualified Public Offering (as
defined in the Company's Amended and Restated Certificate of Incorporation),
provided, however, the provisions of Section 2(a)(ii) shall remain in full force
and effect following the closing of such Qualified Public Offering and shall
remain in effect at all times following the closing of the Initial Public
Offering;
(b) on the date on which Warburg, ABS and the beneficial
owners of a majority of the Shares (other than Warburg and ABS) shall have
agreed in writing to terminate this Agreement; or
(c) when neither Warburg nor ABS is a shareholder of the
Company.
5. INTERPRETATION OF THIS AGREEMENT.
(a) Terms Defined. As used in this Agreement, the following
terms have the respective meaning set forth below:
10
<PAGE>
Affiliate: shall mean any Person or entity, directly or indirectly
controlling, controlled by or under common control with such Person or entity.
Exchange Act: shall mean the Securities Exchange Act of 1934, as
amended.
Person: shall mean an individual, partnership, joint-stock company,
corporation, limited liability company, trust or unincorporated organization,
and a government or agency or political subdivision thereof.
security or securities: shall have the meaning set forth in Section
2(1) of the Securities Act.
Securities Act: shall mean the Securities Act of 1933, as amended.
Transfer: shall mean any sale, assignment, pledge, hypothecation, or
other disposition or encumbrance.
(b) Accounting Principles. Where the character or amount of
any asset or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, this shall be done in
accordance with U.S. generally accepted accounting principles at the time in
effect, to the extent applicable, except where such principles are inconsistent
with the requirements of this Agreement.
(c) Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such Person.
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State.
(e) Section Headings. The headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part thereof.
6. MISCELLANEOUS.
(a) Notices.
(i) All communications under this Agreement shall be
in writing and shall be delivered by hand or facsimile or mailed by
overnight courier or by registered or certified mail, postage prepaid:
(A) if to any of the Other Investors, at the address
or facsimile number of such Other Investor shown on Schedule
II, or at such other address as the Other Investor may have
furnished the Company in writing;
11
<PAGE>
(B) if to Warburg, at 466 Lexington Avenue, New
York, New York 10017 (facsimile: (212) 878-9361), marked for
attention of Patrick T. Hackett, or at such other address as
Warburg may have furnished the Company in writing;
(C) if to ABS, at One South Street, 25th Floor,
Baltimore, Maryland 21202 (facsimile: (410) 895-4380), marked
for attention of Timothy T. Weglicki, or at such other address
as ABS may have furnished the Company in writing;
(D) if to the Company, at 16 Tech Circle, Natick,
Massachusetts 01760 (facsimile (508) 653-1279), marked for
attention of President, or at such other address as it may
have furnished in writing to each of the Investors.
(ii) Any notice so addressed shall be deemed to be
given if delivered by hand or facsimile, on the date of such delivery;
if mailed by courier, on the first business day following the date of
such mailing; and if mailed by registered or certified mail, on the
third business day after the date of such mailing.
(b) Reproduction of Documents. This Agreement and all
documents relating thereto, including, without limitation, (i) consents, waivers
and modifications which may hereafter be executed, (ii) documents received by
each Investor pursuant hereto and (iii) financial statements, certificates and
other information previously or hereafter furnished to each Investor, may be
reproduced by each Investor by a photographic, photostatic, microfilm,
microcard, miniature photographic or other similar process and each Investor may
destroy any original document so reproduced. All parties hereto agree and
stipulate that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made by each
Investor in the regular course of business) and that any enlargement, facsimile
or further reproduction of such reproduction shall likewise be admissible in
evidence.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.
(d) Entire Agreement; Amendment and Waiver. This Agreement and
the First Purchase Agreement, Second Purchase Agreement, Series D Purchase
Agreement and Subscription Agreements constitute the entire understanding of the
parties hereto relating to the subject matter hereof and supersede all prior
understandings among such parties. This Agreement may be amended, and the
observance of any term of this Agreement may be waived with (and only with) the
written consent of the Company, Warburg, ABS and the holders of a majority of
the Shares (measured on a fully converted, exchanged or exercised basis) other
than Warburg and ABS.
(e) If at any time Warburg owns more than 50% of the issued
and outstanding voting securities of the Company, including for this purpose all
securities owned by Warburg
12
<PAGE>
that are convertible into or exchangeable for voting securities of the Company
("Voting Stock"), Warburg agrees that (i) it shall be entitled to vote (or take
action by written consent in respect of) not more than 50% of the issued and
outstanding shares of Voting Stock and (ii) it will vote (or take action by
written consent in respect of) any shares in excess of 50% of the Voting Stock
("Neutral Shares") in proportion to the vote of all other holders of Voting
Stock voting (or acting by written consent) on such matter, unless Warburg
elects to abstain from voting in respect of the Neutral Shares; provided,
however, that any amendment or waiver to this Section 6(e) may be effected by
the holders of a majority of the Shares other than Warburg.
(f) Severability. In the event that any part or parts of this
Agreement shall be held illegal or unenforceable by any court or administrative
body of competent jurisdiction, such determination shall not affect the
remaining provisions of this Agreement which shall remain in full force and
effect.
[signature pages follow]
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
WORKSCAPE, INC.
By: /s/ James G. Carlson
-------------------------------------
Name: James G. Carlson
Title: Chief Executive Officer
ABS CAPITAL PARTNERS III, L.P.
By ABS Partners III, L.L.C.
Its General Partner
By: /s/ Tim Weglicki
-------------------------------------
Name: Tim Weglicki
Title: Managing Member
WARBURG, PINCUS EQUITY PARTNERS, L.P.
By:Warburg, Pincus & Co.,
Its:General Partner
By: /s/ Joel Ackerman
-------------------------------------
Name: Joel Ackerman
Title: Partner
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS I, C.V.
By:Warburg, Pincus & Co.,
Its:General Partner
By: /s/ Joel Ackerman
-------------------------------------
Name: Joel Ackerman
Title: Partner
S-1
<PAGE>
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS II, C.V.
By:Warburg, Pincus & Co.,
Its:General Partner
By: /s/ Joel Ackerman
-------------------------------------
Name: Joel Ackerman
Title: Partner
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS III, C.V.
By:Warburg, Pincus & Co.,
Its:General Partner
By: /s/ Joel Ackerman
-------------------------------------
Name: Joel Ackerman
Title: Partner
/s/ James G. Carlson
----------------------------------------
James G. Carlson
/s/ Timothy T. Clifford
----------------------------------------
Timothy T. Clifford
/s/ Kenneth F. Phillips, Jr.
----------------------------------------
Kenneth F. Phillips, Jr.
/s/ Salvatore Percia
----------------------------------------
Salvatore Percia
/s/ Robert T. Barry
----------------------------------------
Robert T. Barry
/s/ Richard P. Gallagher
----------------------------------------
Richard P. Gallagher
/s/ Arthur T. Schultz
----------------------------------------
Arthur T. Schultz
S-2
<PAGE>
/s/ Julianne Bonvino
----------------------------------------
Julianne Bonvino
/s/ MaryLee Praetz
----------------------------------------
MaryLee Praetz
/s/ Donald Fitch
----------------------------------------
Donald Fitch
/s/ Timothy McDonald
----------------------------------------
Timothy McDonald
/s/ Lee Ingram
----------------------------------------
Lee Ingram
/s/ Susanne Bowen
----------------------------------------
Susanne Bowen
S-4
<PAGE>
SCHEDULE I
Warburg Investors
Warburg, Pincus Equity Partners, L.P.
Warburg, Pincus Netherlands Equity Partners I, C.V.
Warburg, Pincus Netherlands Equity Partners II, C.V.
Warburg, Pincus Netherlands Equity Partners III, C.V.
<PAGE>
SCHEDULE II
Other Investors
Name and Address of Other Investor
James G. Carlson
1763 Brookside Lane
Vienna, VA 22182
Timothy T. Clifford
41 Rolling Meadow Drive
Holliston, MA 01746
Salvatore Percia
10 Pamela Lane
Sterling, MA 01564
Kenneth Phillips
189 Bacon Street
Natick, MA 01760
Robert T. Barry
23 Jefferson Road
Franklin, MA 02038
Richard P. Gallagher
24 Elizabeth Way
Easton, MA 02356
Arthur T. Schultz
5503 Dalys Way
Valrico, FL 33594
Julianne Bonvino
189 Purchase Street
Milford, MA 01757
<PAGE>
MaryLee Praetz
12680 Catawba Drive
Lake Ridge, VA 22192
Donald Fitch
15701 Cochester Road
Tampa, FL 33647
Timothy McDonald
4001 N. 30th Street
Arlington, VA 22207
Lee Ingram
8 Gore Drive
Newberryport, MA 01950
Susanne Bundy
150 Steeple Gate Lane
Roswell, GA 30076
<PAGE>
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
This Agreement is made as of ___________, ___, 2000, by and
between WORKSCAPE, INC., a Delaware corporation (the "Company"), and
______________________ ("Director").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Director is unwilling to serve, or continue to serve, the
Company as a director without assurances that adequate liability insurance,
indemnification or a combination thereof is, and will continue to be, provided;
and
WHEREAS, the Company, in order to induce Director to continue to
serve the Company, has agreed to provide Director with the benefits contemplated
by this Agreement which benefits are intended to supplement or replace, if
necessary, the Company's existing directors' and officers' liability insurance;
and
WHEREAS, as a result of the provision of such benefits Director has
agreed to serve or to continue to serve as a director of the Company;
NOW, THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including the Director's
continued service to the Company, the Company and Director hereby agree as
follows:
1. Definitions. The following terms, as used herein, shall
have the following respective meanings:
"Covered Amount" means Loss and Expenses which, in type or amount,
are not insured under the directors' and officers' liability insurance
maintained by the Company from time to time.
"Covered Act" means any breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done or
wrongfully attempted by Director or any of the foregoing alleged by any
claimant or any claim against Director solely by reason of him being a
director or officer of the Company.
"D&O Insurance" means the directors' and officers' liability
insurance issued by the insurer(s), and having the policy number(s),
amount(s) and deductible(s) set forth on Exhibit A hereto and any
replacement or substitute policies issued by one or more reputable
insurers providing in all respects coverage at least comparable to and in
the same amount as that provided under the policy or policies identified
on Exhibit A.
"Determination" means a determination, based on the facts known at
the time, made by:
1
<PAGE>
(i) a majority vote of the directors who are not parties to
the action, suit or proceeding as to which indemnification has been
requested, even though less than a quorum, or, if there are no such
directors, or if such directors so direct; or
(ii) independent legal counsel in a written opinion prepared
at the request of a majority of a quorum of disinterested directors; or
(iii) a majority of the disinterested stockholders of the
Company; or
(iv) a final adjudication by a court of competent
jurisdiction.
"Determined" shall have a correlative meaning.
"Excluded Claim" means any payment for Losses or Expenses in
connection with any claim:
(i) based upon or attributable to Director gaining in fact
any personal profit or advantage to which Director is not entitled; or
(ii) for the return by Director of any remuneration paid to
Director without the previous approval of the stockholders of the
Company which is illegal; or
(iii) for an accounting of profits in fact made from the
purchase or sale by Director of securities of the Company within the
meaning of Section 16 of the Securities Exchange Act of 1934 as
amended, or similar provisions of any state law; or
(iv) resulting from Director's knowingly fraudulent,
dishonest or willful misconduct; or
(v) the payment of which by the Company under this Agreement
is not permitted by applicable law.
"Expenses" means any reasonable expenses incurred by Director as a
result of a claim or claims made against him for Covered Acts including,
without limitation, counsel fees and costs of investigative, judicial or
administrative proceedings or appeals, but shall not include Fines.
"Fines" means any fine, penalty or, with respect to an employee
benefit plan, any excise tax or penalty assessed with respect thereto.
"Loss" means any amount which Director is legally obligated to pay
as a result of a claim or claims made against him for Covered Acts
including, without limitation, damages and judgments and sums paid in
settlement of a claim or claims, but shall not include Fines.
2
<PAGE>
2. Maintenance of D&O Insurance.
(a) The Company hereby represents and warrants that Exhibit A
contains a complete and accurate description of the policies of directors' and
officers' liability insurance purchased by the Company and that such policies
are in full force and effect.
(b) The Company hereby covenants and agrees that, so long as
Director shall continue to serve as a director of the Company and thereafter so
long as Director shall be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether civil, criminal or
investigative, by reason of the fact that Director was a director of the
Company, the Company, subject to Section 2(d), shall maintain in full force and
effect D&O Insurance.
(c) In all policies of D&O Insurance, Director shall be named
as an insured in such a manner as to provide Director the same rights and
benefits, subject to the same limitations, as are accorded to the Company's
directors or officers most favorably insured by such policy.
(d) The Company shall have no obligation to maintain D&O
Insurance if the Company determines in good faith that such insurance is not
reasonably available, the premium costs for such insurance is disproportionate
to the amount of coverage provided, or the coverage provided by such insurance
is limited by exclusions so as to provide an insufficient benefit.
3. Indemnification. The Company shall indemnify Director and
hold him harmless from the Covered Amount of any and all Losses and Expenses
subject, in each case, to the further provisions of this Agreement.
4. Excluded Coverage.
(a) The Company shall have no obligation to indemnify Director
for and hold him harmless from any Loss or Expense which has been determined, by
final adjudication by a court of competent jurisdiction, to constitute an
Excluded Claim.
(b) The Company shall have no obligation to indemnify Director
and hold him harmless for any Loss or Expense to the extent that Director is
indemnified by the Company pursuant to the Company's Bylaws or otherwise
indemnified.
5. Indemnification Procedures.
(a) Promptly after receipt by Director of notice of the
commencement of or the threat of commencement of any action, suit or proceeding,
Director shall, if indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement thereof.
3
<PAGE>
(b) If, at the time of the receipt of such notice, the Company
has D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such action, suit or proceeding to the insurers in accordance
with the procedures set forth in the respective policies in favor of Director.
The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of Director, all Losses and Expenses payable as
a result of such action, suit or proceeding in accordance with the terms of such
policies.
(c) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such action, suit or
proceeding, have applicable D&O Insurance, or if a Determination is made that
any Expenses arising out of such action, suit or proceeding will not be payable
under the D&O Insurance then in effect, the Company shall be obligated to pay
the Expenses of any such action, suit or proceeding in advance of the final
disposition thereof and the Company, if appropriate, shall be entitled to assume
the defense of such action, suit or proceeding, with counsel satisfactory to
Director, upon the delivery to Director of written notice of its election so to
do. After delivery of such notice, the Company will not be liable to Director
under this Agreement for any legal or other Expenses subsequently incurred by
the Director in connection with such defense other than reasonable Expenses of
investigation provided that Director shall have the right to employ its counsel
in any such action, suit or proceeding but the fees and expenses of such counsel
incurred after delivery of notice from the Company of its assumption of such
defense shall be at the Director's expense provided further that if (i) the
employment of counsel by Director has been previously authorized by the Company,
(ii) Director shall have reasonably concluded that there may be a conflict of
interest between the Company and Director in the conduct of any such defense or
(iii) the Company shall not, in fact, have employed counsel to assume the
defense of such action, the fees and expenses of counsel shall be at the expense
of the Company.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made within sixty (60) days of
Director's written request therefor unless a Determination is made that the
claims giving rise to Director's request are Excluded Claims or otherwise not
payable under this Agreement, provided that all payments on account of the
Company's obligations under Paragraph 5(c) of this Agreement prior to the final
disposition of any action, suit or proceeding shall be made within 20 days of
Director's written request therefor and such obligation shall not be subject to
any such determination but shall be subject to Paragraph 5(e) of this Agreement.
(e) Director agrees that he will reimburse the Company for all
Losses and Expenses paid by the Company in connection with any action, suit or
proceeding against Director in the event and only to the extent that a
Determination shall have been made by a court in a final adjudication from which
there is no further right of appeal that the Director is not entitled to be
indemnified by the Company for such Expenses because the claim is an Excluded
Claim or because Director is otherwise not entitled to payment under this
Agreement.
6. Settlement. The Company shall have no obligation to indemnify
Director under this Agreement for any amounts paid in settlement of any action,
suit or proceeding effected
4
<PAGE>
without the Company's prior written consent. The Company shall not settle any
claim in any manner which would impose any Fine or any obligation on Director
without Director's written consent. Neither the Company nor Director shall
unreasonably withhold their consent to any proposed settlement.
7. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which the Director may be entitled under
any bylaw, agreement, vote of stockholders or of disinterested directors or
otherwise, both as to action in his official capacity and as to action in any
other capacity by holding such office, and shall continue after the Director
ceases to serve the Corporation as a Director.
8. Enforcement.
(a) Director's right to indemnification shall be enforceable
by Director only in the Chancery Court of the State of Delaware and shall be
enforceable notwithstanding any adverse Determination, other than a
Determination which has been made by a final adjudication of a court of
competent jurisdiction. In any such action, if a prior adverse Determination has
been made, the burden of proving that indemnification is required under this
Agreement shall be on Director. The Company shall have the burden of proving
that indemnification is not required under this Agreement if no prior adverse
Determination shall have been made.
(b) In the event that any action is instituted by Director
under this Agreement, or to enforce or interpret any of the terms of this
Agreement, Director shall be entitled to be paid all court costs and expenses,
including reasonable counsel fees, incurred by Director with respect to such
action, unless the court determines that each of the material assertions made by
Director as a basis for such action were not made in good faith or were
frivolous.
9. Severability. In the event that any provision of this Agreement
is determined by a court to require the Company to do or to fail to do an act
which is in violation of applicable law, such provision shall be limited or
modified in its application to the minimum extent necessary to avoid a violation
of law, and, as so limited or modified, such provision and the balance of this
Agreement shall be enforceable in accordance with their terms.
10. Choice of Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware.
11. Consent to Jurisdiction. The Company and the Director each
hereby irrevocably consent to the jurisdiction of the courts of the State of
Delaware for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be brought only in the Chancery Court of the State of
Delaware.
12. Successor and Assigns. This Agreement shall be (i) binding upon
all successors and assigns of the Corporation (including any transferee of all
or substantially all of its
5
<PAGE>
assets and any successor by merger or otherwise by operation of law) and (ii)
shall be binding on and inure to the benefit of the heirs, personal
representatives and estate of Director.
13. Amendment. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
[signature page follows]
6
<PAGE>
IN WITNESS WHEREOF, the Company and Director have executed this Agreement
as of the day and year first above written.
WORKSCAPE, INC.
By:
-----------------------------
Name:
Title:
--------------------------------
Director
7
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF WORKSCAPE, INC.
Currently, the registrant has no subsidiaries.
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts"
and to the use of our report on Workscape, Inc. dated February 18, 2000,
except for Note 15, as to which the date is March 20, 2000, in the
Registration Statement (Form S-1) and related Prospectus of Workscape, Inc.
for the registration of shares of its common stock to be filed on or about
March 21, 2000.
/s/ Ernst & Young LLP
McLean, Virginia
March 20, 2000
<PAGE>
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and
to the use of our report on the Employee Self Service Business of Edify
Corporation dated January 28, 2000, in the Registration Statement (Form S-1) and
related Prospectus of Workscape, Inc. for the registration of shares of
Workscape Inc.'s common stock to be filed on or about March 21, 2000.
/s/ Ernst & Young LLP
McLean, Virginia
March 20, 2000
<PAGE>
Exhibit 23.3
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and
to the use of our report on NOAH Software, Incorporated dated September 21,
1999, in the Registration Statement (Form S-1) and related Prospectus of
Workscape, Inc. for the registration of shares of Workscape's common stock to
be filed on or about March 21, 2000.
/s/ Ernst & Young LLP
McLean, Virginia
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,352
<SECURITIES> 0
<RECEIVABLES> 7,002
<ALLOWANCES> 214
<INVENTORY> 0
<CURRENT-ASSETS> 20,620
<PP&E> 6,050
<DEPRECIATION> 2,106
<TOTAL-ASSETS> 47,150
<CURRENT-LIABILITIES> 14,241
<BONDS> 0
0
54,648
<COMMON> 98
<OTHER-SE> (23,050)
<TOTAL-LIABILITY-AND-EQUITY> 47,150
<SALES> 16,394
<TOTAL-REVENUES> 16,394
<CGS> 14,050
<TOTAL-COSTS> 14,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (23,022)
<INCOME-TAX> (23,022)
<INCOME-CONTINUING> (23,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,022)
<EPS-BASIC> (88.94)
<EPS-DILUTED> (88.94)
</TABLE>
