-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZFuBJdwqGq8VBUvxODZ+7BACB6rOdSdEbAJJ0fQUPXJEzVahZhzAi0TtA2lImCk /9YbdcaVo2wjsSGGegja6A== 0000891618-97-001152.txt : 19970313 0000891618-97-001152.hdr.sgml : 19970313 ACCESSION NUMBER: 0000891618-97-001152 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 46 FILED AS OF DATE: 19970312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROBUSINESS SERVICES INC CENTRAL INDEX KEY: 0001028751 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-23189 FILM NUMBER: 97555564 BUSINESS ADDRESS: STREET 1: 5934 GIBRALTAR CITY: PLEASANTON STATE: CA ZIP: 94566 BUSINESS PHONE: 5107349990 MAIL ADDRESS: STREET 1: 5934 GIBRALTAR CITY: PLEASANTON STATE: CA ZIP: 94566 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PROBUSINESS SERVICES, INC. (Exact name of Registrant as specified in its charter) ------------------------ DELAWARE 7374 94-2976066 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation) Classification Code Number) Identification No.)
5934 GIBRALTAR DRIVE PLEASANTON, CA 94588 (510) 734-9990 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ THOMAS H. SINTON PRESIDENT AND CHIEF EXECUTIVE OFFICER 5934 GIBRALTAR DRIVE PLEASANTON, CA 94588 (510) 734-9990 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: ALAN K. AUSTIN, ESQ. KENNETH L. GUERNSEY, ESQ. ELIZABETH R. FLINT, ESQ. KARYN R. SMITH, ESQ. ELIZABETH M. KURR, ESQ. RICHARD S. JASEN, ESQ. JOHN L. WHITTLE, ESQ. COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI ONE MARITIME PLAZA PROFESSIONAL CORPORATION 20TH FLOOR 650 PAGE MILL ROAD SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304-1050 (415) 693-2000 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================================ PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001 per share............................. 2,300,000 shares $12.00 $27,600,000 $8,364 ================================================================================================================
(1) Includes 300,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) promulgated 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 OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 12, 1997 LOGO 2,000,000 SHARES COMMON STOCK All of the shares of Common Stock offered hereby are being sold by ProBusiness Services, Inc. ("ProBusiness" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. --------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================= PRICE TO PROCEEDS TO PUBLIC UNDERWRITING COMPANY(1) DISCOUNTS AND COMMISSIONS - ------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(2).......................... $ $ $ =================================================================================================
(1) Before deducting expenses payable by the Company, estimated at $950,000. (2) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. --------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY WILLIAM BLAIR & COMPANY The date of this Prospectus is , 1997 3 ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR THE SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Summary............................................................................... 4 Risk Factors.......................................................................... 6 Use of Proceeds....................................................................... 14 Dividend Policy....................................................................... 14 Capitalization........................................................................ 15 Dilution.............................................................................. 16 Selected Financial Data............................................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 18 Business.............................................................................. 25 Management............................................................................ 35 Certain Transactions.................................................................. 43 Principal Stockholders................................................................ 44 Description of Capital Stock.......................................................... 45 Shares Eligible for Future Sale....................................................... 48 Underwriting.......................................................................... 49 Legal Matters......................................................................... 51 Experts............................................................................... 51 Change in Accountants................................................................. 51 Additional Information................................................................ 51 Index to Financial Statements......................................................... F-1
ProBusiness(R) is a registered trademark of the Company. BeneSphere Administrators(TM) and Enrollnet(TM) are trademarks of the Company. This Prospectus also includes trade names and trademarks of companies other than ProBusiness. The Company was incorporated in California in October 1984 and intends to reincorporate in Delaware prior to this offering. The Company's executive offices are located at 5934 Gibraltar Drive, Pleasanton, California 94588, and its telephone number is (510) 734-9990. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and gives effect to (i) a reincorporation of the Company in Delaware prior to this offering, (ii) the conversion of all outstanding shares of the Company's Preferred Stock into Common Stock automatically upon the completion of this offering and (iii) the issuance of 160,956 shares of Common Stock upon the net exercise of warrants upon the completion of this offering. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is a leading provider of employee administrative services for large employers, typically with over 250 employees. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. As of January 31, 1997, the Company provided services to over 1,200 clients and provided payroll services to 400 clients with an aggregate of approximately 375,000 employees and an average of approximately 900 employees. The Company's clients include: 3Com Corporation, Abbott Laboratories, Airtouch Communications Inc., AST Research, Inc., Coach Leatherwear Co., Inc., The Gillette Company, Kellogg USA Inc., LSI Logic Corporation, Netscape Communications Corp., Sunglass Hut International, Inc., TCI Cablevision, Toyota Motor Corporation, Watkins-Johnson Company and Williams-Sonoma, Inc. Many large businesses have found that outsourcing non-core functions reduces costs, improves service, quality and efficiency, allows personnel to focus on core competencies and enhances productivity through access to advanced technologies. In recent years, payroll processing and benefits administration have increased in complexity due to continual changes in regulations and increasingly sophisticated employee benefits plans. As a result, the demand for outsourcing employee administrative services has grown significantly and is expected to continue to grow over the next several years. It is estimated that third-party payroll and payroll tax services alone generated approximately $3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in revenue in 2000. The Company differentiates itself from its competitors through its proprietary technology, high quality, responsive and professional client service and focus on the needs of large employers. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team of specialists led by a personal account manager who proactively manages each client's account and marshals the resources of the team to meet the client's specific needs. ProBusiness maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company believes that its low client-to-account manager ratio and its focus on client service are key factors in enabling the Company to achieve a high payroll client retention rate, which was approximately 90% in 1996. The Company's objective is to be the premier provider of employee administrative services for large employers. The Company's strategy to accomplish its objective includes expanding its client base by increasing its direct sales force, offering additional services to existing clients, developing a comprehensive and fully integrated suite of employee administrative services, and increasing the breadth of its service offerings and features. The Company is committed to maintaining the high levels of professional and personal service that it believes have allowed it to establish a competitive advantage in its industry. In March 1997, entities affiliated with General Atlantic Partners LLC ("General Atlantic") purchased $10.0 million of Preferred Stock of the Company. As a result, General Atlantic will own approximately 11.4% of the Company's outstanding Common Stock upon the completion of this offering. General Atlantic is a private equity investment firm. 4 6 THE OFFERING Common Stock offered by the Company............................ 2,000,000 shares Common Stock to be outstanding after this offering............. 10,057,727 shares(1) Use of proceeds................................................ To repay indebtedness and for working capital and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... PRBZ
SUMMARY FINANCIAL DATA (in thousands, except per share data)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------------------------- ---------------------------- PRO FORMA PRO FORMA 1994 1995 1996 1996(2) 1995 1996 1996(2) ------- ------ ------- --------- ------ ------- --------- STATEMENTS OF OPERATIONS DATA: Revenue............................... $ 4,069 $7,095 $13,863 $17,341 $5,106 $10,199 $11,855 Operating expenses: Cost of providing services.......... 1,629 2,703 6,435 7,875 2,278 5,238 6,120 General and administrative expenses.......................... 1,202 1,304 2,054 3,152 801 1,491 2,150 Research and development expenses... 1,202 1,038 1,257 1,482 298 1,308 1,308 Client acquisition costs............ 1,467 2,943 5,388 6,411 2,068 4,628 5,436 Acquisition of in-process technology........................ -- -- 711 711 -- -- -- ------- ------ ------- ------- ------ ------- ------- Total operating expenses.............. 5,500 7,988 15,845 19,631 5,445 12,665 15,014 ------- ------ ------- ------- ------ ------- ------- Loss from operations.................. (1,431) (893) (1,982) (2,290) (339) (2,466) (3,159) Interest expense, net................. 46 86 404 440 117 508 519 ------- ------ ------- ------- ------ ------- ------- Net loss.............................. $(1,477) $ (979) $(2,386) $(2,730) $ (456) $(2,974) $(3,678) ======= ====== ======= ======= ====== ======= ======= Pro forma net loss per share(3)....... $ (0.29) $ (0.33) $ (0.36) $ (0.44) ======= ======= ======= ======= Shares used in computing pro forma net loss per share(3)................... 8,212 8,212 8,294 8,294 ======= ======= ======= =======
DECEMBER 31, 1996 -------------------------------- PRO FORMA ACTUAL AS ADJUSTED(2)(4)(5) ------- -------------------- BALANCE SHEET DATA: Cash and cash equivalents............................................... $ 1,254 $ 21,694 Working capital......................................................... 32 18,240 Total assets............................................................ 11,904 35,594 Long-term debt and note payable to stockholder, less current portion.... 8,380 1,159 Capital lease obligations, less current portion......................... 2,179 979 Total stockholders' equity (deficit).................................... (2,886) 26,655
- --------------- (1) Includes 1,149,466 shares of Common Stock issuable upon conversion of Preferred Stock sold to General Atlantic in March 1997. Excludes as of December 31, 1996 (i) 568,917 shares of Common Stock subject to outstanding options; (ii) 121,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,727,628 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan, which includes an increase in the number of shares reserved under the 1996 Stock Option Plan in February 1997; and (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. See "Management -- Stock Plans" and Notes 3, 4, 6, 7, 10 and 11 of Notes to Financial Statements -- ProBusiness Services, Inc. (2) The pro forma statements of operations for the year ended June 30, 1996 and the six months ended December 31, 1996 have been prepared as if the acquisitions of BeneSphere Administrators, Inc. and Dimension Solutions, Inc. had occurred as of July 1, 1995. The pro forma balance sheet as of December 31, 1996 has been prepared as if the acquisition of BeneSphere Administrators, Inc. had occurred on December 31, 1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial Information. (3) See Note 6 of Notes to Selected Unaudited Pro Forma Condensed Consolidated Financial Information for an explanation of the determination of the shares used in computing pro forma net loss per share. (4) Adjusted to reflect proceeds from the sale of $10.0 million of Preferred Stock in March 1997 and the repayment of approximately $4.8 million of outstanding indebtedness from such proceeds. (5) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company and the receipt and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 7 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Common Stock offered by this Prospectus. OPERATING LOSSES; NEED TO COMMIT TO EXPENSES IN ADVANCE OF REVENUES The Company has experienced significant operating losses since its inception and expects to incur significant operating losses in the future due to continued client acquisition costs, investments in research and development and costs associated with expanding its sales efforts and operations to new geographic regions. As of December 31, 1996, the Company had an accumulated deficit of approximately $15.7 million. The establishment of new client relationships involves lengthy and extensive sales and implementation processes. The sales process generally takes three to nine months or longer, and the implementation process generally takes three to six months or longer. In connection with the acquisition of each new client, the Company incurs substantial client acquisition costs, which consist primarily of sales and implementation expenses and, to a lesser extent, marketing expenses. The Company's ability to achieve profitability will depend in part upon its ability to attract and retain new clients, offer new services and features and achieve market acceptance of new services. There can be no assurance that the Company will achieve or sustain profitability in the future. The Company has made acquisitions in the past and intends to pursue acquisitions in the future. In connection with acquisitions, the Company has in the past incurred and will likely incur in the future costs associated with adding personnel, integrating technology and increasing overhead to support the acquired business, acquiring in-process technology and amortization expenses related to goodwill. As a result, such acquisitions have had and any future acquisition could have an adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS The Company's business is characterized by significant seasonality. As a result, the Company's revenue has been subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters, primarily due to new clients beginning services in January (the beginning of the tax year and the Company's third fiscal quarter) and higher interest income earned on tax funds. Further, the Company's operating expenses are typically higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company's quarterly operating results have in the past and will in the future vary significantly depending on a variety of factors, including the number and size of new clients starting services, the decision of one or more clients to delay or cancel implementation or ongoing services, interest rates, seasonality, the ability of the Company to design, develop and introduce new services and features for existing services on a timely basis, transition costs to new technologies, expenses incurred for geographic expansion, risks associated with payroll tax and benefits administration services, price competition, a reduction in the number of employees of its clients, and general economic factors. Revenue from new clients represents a significant portion of quarterly revenue in the third and fourth fiscal quarters. A substantial majority of the Company's operating expenses, particularly personnel and related costs, depreciation and rent, is relatively fixed in advance of any particular quarter. The Company's agreements with its clients generally do not have significant penalties for cancellation. As a result, any decision by a client to delay or cancel implementation of the Company's services or the Company's underutilization of personnel may cause significant variations in operating results in a 6 8 particular quarter and could result in losses for such quarter. As the Company secures larger clients, the time required for implementing the Company's services increases, which could contribute to larger fluctuations in revenue. Interest income earned from investing payroll tax funds, which is a significant portion of the Company's revenue, is vulnerable to fluctuations in interest rates. In addition, the Company's business may be affected by shifts in the general health of the economy, client staff reductions, strikes, acquisitions of its client by other companies and other downturns. There can be no assurance that the Company's future revenue and results of operations will not vary substantially. It is possible that in some future quarter the Company's results of operations will be below the expectations of public market analysts and investors. In either case, the market price of the Company's Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH ACQUISITIONS In January 1997, the Company acquired BeneSphere Administrators, Inc. ("BeneSphere"), a provider of benefits administration services. The integration of BeneSphere's business with the Company's business has placed and will continue to place a significant burden on the Company's management. Such integration is subject to risks commonly encountered in making such acquisitions, including, among others, loss of key personnel of the acquired company, the difficulty associated with assimilating the personnel and operations of the acquired company, the potential disruption of the Company's ongoing business, the maintenance of uniform standards, controls, procedures and policies, and the impairment of the Company's reputation and relationships with employees and clients. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with its acquisition of BeneSphere. While the Company has no current agreements or negotiations underway with respect to any acquisition, the Company intends to make additional acquisitions of complementary services, technologies or businesses. There can be no assurance that any future acquisition will be completed or that, if completed, will be effectively assimilated into the Company's business. In addition, future acquisitions could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities, and amortization expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the Company's business, financial condition or results of operations or on the market price of the Company's Common Stock. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION SERVICES The Company's payroll tax service is subject to various risks resulting from errors and omissions in filing client tax returns and paying tax liabilities owed to tax authorities on behalf of clients. The Company's clients calculate and transfer to the Company contributed employer and employee tax funds. The Company processes the data received from the client and remits the funds along with a tax return to the appropriate tax authorities when due. Tracking, processing and paying such tax liabilities is complex. Errors and omissions have occurred in the past and may occur in the future in connection with such service. The Company is subject to large cash penalties imposed by tax authorities for late filings or underpayment of taxes. To date, such penalties have not been significant. However, there can be no assurance that any liabilities associated with such penalties will not have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that the Company's reserves or insurance for such penalties will be adequate. In addition, failure by the Company to make timely or accurate tax return filings or pay tax liabilities when due on behalf of clients may damage the Company's reputation and could adversely affect its relationships with existing clients and its ability to gain new clients. The Company's payroll tax service is also dependent upon government regulations, which are subject to continuous changes. Failure by the Company to implement these changes into its services and technology in a timely manner would have a material adverse effect on the Company's business, 7 9 financial condition and results of operations. In addition, since a significant portion of the Company's revenue is derived from interest earned from investing tax funds, changes in policies relating to withholding federal or state income taxes or reduction in the time allowed for taxpayers to remit payment for taxes owed to government authorities would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's benefits administration services are subject to various risks resulting from errors and omissions in processing and filing COBRA or other benefit plan forms in accordance with governmental regulations and the respective plans. The Company processes data received from employees and employers and is subject to penalties for any late or misfiled plan forms. There can be no assurance the Company's reserves or insurance for such penalties will be adequate. In addition, failure to properly file plan forms would have a material adverse effect on the Company's reputation, which could adversely affect its relationships with existing clients and its ability to gain new clients. The Company's benefits administration services are also dependent upon government regulations which are subject to continuous changes that could reduce or eliminate the need for benefits administration services. The Company has access to confidential information and to client funds. As a result, the Company is subject to potential claims by its clients for the actions of the Company's employees arising from damages to the client's business or otherwise. There can be no assurance that the Company's fidelity bond and errors and omissions insurance will be adequate to cover any such claims. Such claims could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Service Offerings." MANAGEMENT OF GROWTH The Company's business has grown significantly in size and complexity over the past three years, which has placed significant demands on the Company's management, systems, internal controls, and financial and physical resources. In order to meet such demands, the Company intends to continue to hire new employees, open new offices to gain clients in new geographic regions and invest in new equipment or make other capital expenditures. In addition, the Company expects that it will need to develop further its financial and managerial controls and reporting systems and procedures to accommodate any future growth. Failure to expand any of the foregoing areas in an efficient manner could have a material adverse effect on the Company's business, financial condition or results of operations. The Company is currently in the process of integrating BeneSphere's business with the Company's business. The Company intends to establish a production facility in Southern California and open new sales offices to gain new clients. In addition, the Company has leased a larger facility to house its operations in Pleasanton, California, which the Company expects will be completed in late 1997. There can be no assurance that the Company will be able to effectively integrate BeneSphere's business or establish such facilities on a timely basis. In addition, the Company's growth may depend to some extent on its ability to successfully complete strategic acquisitions to expand or complement its existing business. There can be no assurance that suitable acquisitions can be identified, consummated or successfully integrated into the Company's operations. Any inability to manage growth effectively could have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTEREST RATE FLUCTUATIONS The Company invests tax funds transferred to it by clients until the Company remits the funds to tax authorities when due. Interest income earned from investing these funds represents a significant portion of the Company's revenue. The Company typically invests tax funds in short- to mid-term investment-grade securities, which are subject to interest rate fluctuations. As a result, the Company's business, financial condition and results of operations are significantly impacted by interest rate fluctuations. The Company intends to minimize the impact of interest rate fluctuations through hedging activities, although it currently does not do so and no assurance can be given that such 8 10 activities will be successful. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL COMPETITION The market for the Company's services is intensely competitive, subject to rapid change and significantly affected by new service introductions and other market activities of industry participants. The Company primarily competes with several public and private payroll service providers such as Automatic Data Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller, regional competitors. Many of these companies have longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and a larger number of clients than the Company. In addition, many of these companies offer more services or features than the Company and have processing facilities located throughout the United States. The Company also competes with in-house employee services departments and, to a lesser extent, banks and local payroll companies. With respect to benefits administration services, the Company competes with insurance companies, benefits consultants and other local benefits outsourcing companies. The Company may also compete with marketers of related products and services that may offer payroll or benefits administration services in the future. The Company has experienced, and expects to continue to experience, competition from new entrants into its markets. Increased competition could result in pricing pressures, loss of market share and loss of clients, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. The failure of the Company to compete successfully would have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Competition." RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; RISKS OF SOFTWARE DEFECTS The technologies in which the Company has invested to date are rapidly evolving and have short life cycles, which requires the Company to anticipate and rapidly adapt to technological changes. In addition, the Company's industry is characterized by increasingly sophisticated and varied needs of clients, frequent new service and feature introductions and emerging industry standards. The introduction of services embodying new technologies and the emergence of new industry standards and practices can render existing services obsolete and unmarketable. The Company's future success will depend, in part, on its ability to develop advanced technologies, enhance its existing services with new features, add new services that address the changing needs of its clients, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. Several of the Company's competitors invest substantially greater amounts in research and development than the Company, which may allow them to introduce new services or features before the Company. Even if the Company is able to develop new technologies in a timely manner, it may incur substantial costs in deploying new services and features to its clients, including costs of additional personnel. If the Company is unable to develop and introduce new services and new features of existing services in a timely or cost-effective manner, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business -- Service Offerings" and "-- Research and Development." Application software used by the Company may contain defects or failures when introduced or when new versions or enhancements are released. The Company has in the past discovered software defects in certain of its applications, in some cases only after its systems have been used by clients. There can be no assurance that future defects will not be discovered in existing or new applications or releases. Any such occurrence could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Technology" and "-- Research and Development." DEPENDENCE ON THIRD-PARTY PROVIDERS The Company depends on third-party courier services to deliver paychecks to clients. The Company does not have any formal written agreements with any of the courier services that it uses. 9 11 Such courier services have been in the past and may be in the future unable to timely pick up or deliver the paychecks from the Company to its clients for a variety of reasons, including employee strikes, storms or other adverse weather conditions, earthquakes or other natural disasters, logistical or mechanical failures or accidents. Failure by the Company to deliver client paychecks on a timely basis would have a material adverse effect on the Company's business, financial condition and results of operations and could damage the Company's reputation and adversely affect its relationships with existing clients and its ability to gain new clients. DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA The Company conducts all of its payroll and payroll tax processing and production at the Company's headquarters located in Pleasanton, California and intends to establish an alternative processing center and back-up facility in Southern California. The Company establishes for each client a complete set of payroll data at the Pleasanton processing center and client headquarters so that clients are able to process payroll checks based on the data they have on site if necessary. There can be no assurance that the Company's disaster recovery procedures are sufficient or that the data recovered at the client site would be sufficient to allow the client to calculate and produce payroll in a timely fashion. The Company's operations are dependent on its ability to protect its computer systems against damage from a major catastrophe (such as an earthquake or other natural disaster), fire, power loss, security breach, telecommunications failure or similar event. No assurance can be given that the precautions that the Company has taken to protect itself from or minimize the impact of such events will be adequate. Any damage to the Company's data centers, failure of telecommunications links or breach of the security of the Company's computer systems could result in an interruption of the Company's operations or other loss which may not be covered by the Company's insurance. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL The Company's success depends to a significant degree on its ability to attract and retain experienced employees. There is substantial competition for experienced personnel, which the Company expects to continue. Many of the companies with which the Company competes for experienced personnel have greater financial and other resources than the Company. The Company may in the future experience difficulty in recruiting sufficient numbers of qualified personnel. The inability to attract and retain experienced personnel as required could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition," "-- Employees" and "Management." RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION A substantial majority of the Company's revenue has been derived from clients located in the western United States. The Company's ability to achieve significant future revenue growth will in large part depend on its ability to gain new clients throughout the United States. Currently, the Company has eight sales representatives located outside of California, and the Company intends to locate additional sales representatives in major metropolitan areas throughout the United States. The Company opened a sales office in Irvine, California in February 1995. All production for the Company's clients has been maintained primarily at the Company's headquarters in Pleasanton, California. The Company intends to move a portion of the production services to Irvine, California in late 1997, however, there can be no assurance that such services will be transferred on time or at all. The Company also expects to open additional sales offices in the future. This growth has resulted in new and increased responsibilities for management personnel and has placed and continues to place a significant strain on the Company's management and operating and financial systems. The Company will be required to continue to implement and improve its systems on a timely basis and in such a manner as is necessary to accommodate the increased number of transactions and clients and the 10 12 increased size of the Company's operations. Any failure to implement and improve the Company's systems or to hire and retain the appropriate personnel to manage its operations would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, an increase in the Company's operating expenses from its planned expansion will have a material adverse effect on the Company's business, financial condition and results of operations if revenue does not increase to support such expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW SERVICES FEATURES The Company's future business, financial condition and results of operations will continue to depend upon the Company's ability to add new services or enhancements to existing services that address the needs of the market. Failure by the Company to successfully design, develop and introduce new services or enhancements on a timely basis could prevent the Company from maintaining existing client relationships, gaining new clients or expanding its markets and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Research and Development." DEPENDENCE ON KEY PERSONNEL The Company's success will depend on the performance of the Company's senior management and other key employees. The Company's senior management team does not have prior executive management experience in publicly traded companies. The loss of the services of any senior management or other key employee could have a material adverse effect on the Company's business, financial condition and results of operations. The Company generally does not enter into employment or noncompetition agreements with its employees. If one or more of the Company's key employees resigns from the Company to join a competitor or to form a competitor, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on the Company's business, financial condition and results of operations. In the event of the loss of any key personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its technical knowledge, practices, procedures or client lists by a former employee or that such disclosure or use would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's success is dependent in part upon its proprietary software technology. The Company has no patents, patent applications or registered copyrights. The Company relies on a combination of contract, copyright and trade secret laws to establish and protect its proprietary technology. The Company distributes its services under software license agreements that grant clients licenses to use the Company's services and contain various provisions protecting the Company's ownership and the confidentiality of the underlying technology. The Company generally enters into confidentiality and/or license agreements with its employees and existing and potential clients, and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology. There can be no assurance that the Company's services and technology do not infringe any existing patents, copyrights or other proprietary rights of others, or that third parties will not assert infringement claims in the future. If any such claims are asserted and upheld, the costs of defense could be substantial and any resulting liability to the Company could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Proprietary Rights." 11 13 CONCENTRATION OF STOCK OWNERSHIP Upon completion of this offering, the Company's directors and executive officers and their respective affiliates will beneficially own approximately 48.2% of the outstanding Common Stock. As a result, these stockholders, if they act together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have power to influence any stockholder action or approval requiring a majority vote. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change of control of the Company. See "Principal Stockholders" and "Description of Capital Stock." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiation among the Company and the representatives of the Underwriters based upon several factors and may not be indicative of the market price of the Company's Common Stock following this offering. The market price of the Company's Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new services by the Company or its competitors, market conditions in the information services industry, quarterly fluctuations in the Company's operating results, changes in financial estimates by securities analysts or other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology and services companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the marketplace for a company's securities, securities class action litigation often has been instituted. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. SUBSTANTIAL DILUTION The assumed initial public offering price is substantially higher than the pro forma net tangible book value per share of the outstanding Common Stock. As a result, purchasers of the Common Stock offered hereby will incur immediate, substantial dilution in the amount of $8.71 per share. To the extent that outstanding options or warrants to purchase the Company's Common Stock are exercised, there will be further dilution. The Company has in the past granted a substantial number of options to purchase Common Stock to employees as part of compensation packages, and the Company expects that it will continue to grant a substantial number of options in the future. In addition, the Company has adopted an employee stock purchase plan that will provide employees an opportunity to purchase shares below prevailing market value. The Company also may issue shares of its Common Stock in connection with strategic acquisitions or alliances, which could also result in dilution to stockholders. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 10,057,727 shares of Common Stock, based upon the number of shares outstanding as of December 31, 1996 and including 1,149,466 shares of Common Stock issuable upon conversion of Preferred Stock issued in March 1997. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act 12 14 ("Affiliates"). The remaining 8,057,727 shares of Common Stock held by existing stockholders (the "Restricted Shares") are "restricted securities," as that term is defined in Rule 144 under the Securities Act. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) approximately 2,000 Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) approximately 1,000 Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; (iii) approximately 6,702,341 Restricted Shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus; and (iv) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods. In addition, certain of the Restricted Shares are subject to vesting. As of December 31, 1996, options to purchase 568,917 shares of Common Stock were outstanding, of which options to purchase 138,416 shares were then exercisable. The Company intends to file a Form S-8 registration statement under the Securities Act 90 days after the date of this Prospectus to register 1,727,628 shares of Common Stock reserved for issuance under the Company's 1989 Stock Option Plan and 1996 Stock Option Plan and 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. In addition, warrants to purchase 121,892 shares of Common Stock are outstanding, all of which will be eligible for sale 180 days after the date of this Prospectus. Pursuant to agreements between the Company and certain stockholders and warrantholders (or their permitted transferees), approximately 6,360,470 shares of Common Stock and 121,892 shares issuable upon exercise of warrants are entitled to certain registration rights under the Securities Act. See "Description of Capital Stock" and "Shares Eligible for Future Sale." ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. The Company has no present plans to issue shares of Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Further, certain other provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. These provisions include a classified board, advance notice procedures for stockholders to nominate candidates for election as directors of the Company, authorization of the Board of Directors to alter the number of directors without stockholder approval, limitations on persons who can call stockholder meetings, lack of cumulative voting and prohibition of stockholder actions by written consent. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter and Bylaw Provisions." 13 15 USE OF PROCEEDS The net proceeds from the sale of the 2,000,000 shares of Common Stock in this offering are estimated to be approximately $19.5 million ($22.6 million if the Underwriters' over-allotment option is exercised in full) at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriters' discounts and commissions and offering expenses payable by the Company. The Company intends to use approximately $4.3 million of the net proceeds to repay a substantial portion of the Company's outstanding indebtedness, which consists of (i) $4.0 million of subordinated debt due in 1998 or 30 days after the completion of this offering, which bears interest at 8.0% per annum and (ii) $250,000 of indebtedness incurred in connection with the acquisition of Dimension Solutions, Inc. ("Dimension Solutions"), which is due in 1999 and bears interest at the prime rate plus 2.5%. See "Certain Transactions" and Note 3 of Notes to the Financial Statements -- ProBusiness Services, Inc. The remainder of the net proceeds to the Company of this offering, approximately $15.2 million, will be used for general corporate purposes, including capital expenditures and working capital. The Company also may use a portion of the net proceeds to pay up to $4.5 million of the contingent purchase price of BeneSphere. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 of Notes to the Financial Statements -- ProBusiness Services, Inc. The Company also may use a portion of the net proceeds for the acquisition of companies, technology or services that complement the business of the Company, however, no such transactions currently are planned or being negotiated. The amounts actually expended may vary depending upon numerous factors. Pending the foregoing uses, the Company intends to invest the net proceeds from this offering in investment-grade, short-term, interest-bearing securities, money market funds or similar short-term investments. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain its earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's working capital line of credit agreement prohibits the payment of cash dividends without the lender's prior approval. 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1996 on an actual basis and on a pro forma as adjusted basis to give effect to (i) the acquisition of BeneSphere as if such acquisition had occurred on December 31, 1996; (ii) the sale of $10.0 million of Preferred Stock, which will convert into 1,149,466 shares of Common Stock upon completion of this offering, and the repayment of approximately $4.8 million of outstanding indebtedness from such proceeds; (iii) the conversion of all outstanding shares of Preferred Stock into Common Stock automatically upon the completion of this offering; and (iv) the sale and issuance of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) and receipt and application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be reviewed in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
DECEMBER 31, 1996 ------------------------ PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (in thousands) Long-term debt and note payable to stockholder, less current portion(1)......................................................... $ 8,380 $ 1,159 Capital lease obligations, less current portion(1)................... 2,179 979 Stockholders' equity: Preferred Stock, $.01 par value; 6,000,000 shares authorized, 2,653,301 shares issued and outstanding, actual; $.001 par value; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted.............................. 27 -- Common Stock, $.01 par value; 20,000,000 shares authorized, 1,440,703 shares issued and outstanding, actual; $.001 par value; 60,000,000 shares authorized, 10,057,727 shares issued and outstanding, pro forma as adjusted(2)....................... 14 10 Additional paid-in capital........................................... 13,298 42,999 Accumulated deficit.................................................. (15,681) (15,810) Note receivable from stockholder..................................... (544) (544) -------- -------- Total stockholders' equity (deficit)..................... (2,886) 26,655 -------- -------- Total capitalization................................ $ 7,673 $ 28,793 ======== ========
- --------------- (1) See Notes 3 and 4 of Notes to Financial Statements -- ProBusiness Services, Inc. (2) Excludes as of December 31, 1996 (i) 568,917 shares of Common Stock subject to outstanding options; (ii) 121,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,727,628 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan, which includes an increase in the number of shares reserved under the 1996 Stock Option Plan in February 1997; and (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. See "Management -- Stock Plans" and Notes 3, 4, 6, 7, 10 and 11 of Notes to Financial Statements -- ProBusiness Services, Inc. 15 17 DILUTION The pro forma net tangible book value of the Company as of December 31, 1996 was approximately $3,493,000 or $0.43 per share of Common Stock. Pro forma net tangible book value per share represents the amount of the Company's total net tangible assets less total liabilities, divided by the pro forma number of shares of Common Stock issued and outstanding at that date, after giving effect to (i) the acquisition of BeneSphere as if it had occurred on December 31, 1996; (ii) the issuance of Preferred Stock convertible into 1,149,466 shares of Common Stock and the repayment of approximately $4.8 million of outstanding indebtedness at December 31, 1996 from such proceeds; and (iii) the conversion of all outstanding shares of Preferred Stock into Common Stock automatically upon the completion of this offering. Net tangible book value dilution per share to new stockholders represents the difference between the amount paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after the completion of this offering. After giving effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of December 31, 1996, would have been approximately $23,003,000 or $2.29 per share. This represents an immediate increase in net tangible book value of $1.86 per share to existing stockholders and an immediate dilution of $8.71 per share to new stockholders purchasing Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.................... $11.00 Pro forma net tangible book value per share at December 31, 1996.......................................................... $ 0.43 Increase in pro forma net tangible book value per share attributable to new stockholders.............................. 1.86 ------- Pro forma net tangible book value per share after the offering... 2.29 ------- Dilution per share to new stockholders............................. $ 8.71 =======
The following table summarizes, on a pro forma basis as of December 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by purchasers of the shares offered hereby, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, at an assumed initial public offering price of $11.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders............. 8,057,727 80.11% $22,978,000 51.09% $ 2.85 --------- New stockholders.................. 2,000,000 19.89 22,000,000 48.91 11.00 --------- ----- ---------- ----- Total................... 10,057,727 100.00% $44,978,000 100.00% ========= ===== ========== =====
The foregoing assumes no exercise of options to purchase Common Stock after December 31, 1996. Excludes, as of December 31, 1996 (i) 568,917 shares of Common Stock subject to outstanding options; (ii) 121,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,727,628 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan, which includes an increase in the number of shares reserved under the 1996 Stock Option Plan in February 1997; and (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. See "Management -- Stock Plans" and Notes 3, 4, 6, 7, 10 and 11 of Notes to Financial Statements -- ProBusiness Services, Inc. 16 18 SELECTED FINANCIAL DATA The following selected statements of operations data for the years ended June 30, 1994, 1995 and 1996 and the six months ended December 31, 1996 and the balance sheet data at June 30, 1995 and 1996 and December 31, 1996 are derived from the financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The balance sheet data at June 30, 1994 are derived from financial statements of the Company that have been audited by Ernst & Young LLP that are not included in this Prospectus. The statements of operations data for the years ended June 30, 1992 and 1993 and the balance sheet data at June 30, 1992 and 1993 are derived from unaudited financial statements not included in this Prospectus. The statements of operations data for the six months ended December 31, 1995 have been derived from unaudited financial statements that include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results of operations for the six months ended December 31, 1996 are not necessarily indicative of the results to be expected for any future periods. The pro forma statements of operations data for the six months ended December 31, 1996 and the year ended June 30, 1996 and the pro forma as adjusted balance sheet data as of December 31, 1996 have been derived from selected unaudited pro forma condensed consolidated financial information which is included elsewhere in this Prospectus. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Financial Statements and Notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED DECEMBER YEAR ENDED JUNE 30, 31, --------------------------------------------------------- --------------------------- PRO PRO FORMA FORMA 1992 1993 1994 1995 1996 1996(1) 1995 1996 1996(1) ------- ------- ------- ------ ------- -------- ------ ------- -------- (in thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Revenue............................... $ 668 $ 1,864 $ 4,069 $7,095 $13,863 $17,341 $5,106 $10,199 $11,855 Operating expenses: Cost of providing services.......... 537 1,117 1,629 2,703 6,435 7,875 2,278 5,238 6,120 General and administrative expenses.......................... 637 1,023 1,202 1,304 2,054 3,152 801 1,491 2,150 Research and development expenses... 456 787 1,202 1,038 1,257 1,482 298 1,308 1,308 Client acquisition costs............ 349 701 1,467 2,943 5,388 6,411 2,068 4,628 5,436 Acquisition of in-process technology........................ -- -- -- -- 711 711 -- -- -- ------- ------- ------- ------ ------- ------- ------ ------- ------- Total operating expenses.......... 1,979 3,628 5,500 7,988 15,845 19,631 5,415 12,665 15,014 ------- ------- ------- ------ ------- ------- ------ ------- ------- Loss from operations.................. (1,311) (1,764) (1,431) (893) (1,982) (2,290) (339) (2,466) (3,159) Interest (income) expense, net........ 14 (4) 46 86 404 440 117 508 519 ------- ------- ------- ------ ------- ------- ------ ------- ------- Net loss.............................. $(1,325) $(1,760) $(1,477) $ (979) $(2,386) $(2,730) $ (456) $(2,974) $(3,678) ======= ======= ======= ====== ======= ======= ====== ======= ======= Pro forma net loss per share(2)....... $ (0.29) $ (0.33) $ (0.36) $ (0.44) ======= ======= ======= ======= Shares used in computing pro forma net loss per share(2)................... 8,212 8,212 8,294 8,294 ======= ======= ======= =======
DECEMBER 31, 1996 JUNE 30, ----------- --------------------------------------------------- 1992 1993 1994 1995 1996 ACTUAL ------ ------ ------ ------ ------- ----------- (in thousands) BALANCE SHEET DATA: Cash and cash equivalents................... $ 328 $ 277 $ 114 $ 852 $ 4,041 $ 1,254 Working capital (deficiency)................ 281 255 (119) 69 2,972 32 Total assets................................ 1,101 1,213 2,019 4,134 10,939 11,904 Long-term debt and note payable to stockholder, less current portion......... 0 22 394 1,016 8,072 8,380 Capital lease obligations, less current portion................................... 0 83 174 168 253 2,179 Total stockholders' equity (deficit)........ 931 832 705 1,366 (136) (2,886) PRO FORMA AS ADJUSTED(1)(3)(4) -------------------- BALANCE SHEET DATA: Cash and cash equivalents................... $ 21,694 Working capital (deficiency)................ 18,240 Total assets................................ 35,594 Long-term debt and note payable to stockholder, less current portion......... 1,159 Capital lease obligations, less current portion................................... 979 Total stockholders' equity (deficit)........ 26,655
- --------------- (1) The pro forma statements of operations for the year ended June 30, 1996 and the six months ended December 31, 1996 have been prepared as if the acquisitions of BeneSphere and Dimension Solutions had occurred as of July 1, 1995. The pro forma balance sheet as of December 31, 1996 has been prepared as if the acquisition of BeneSphere had occurred as of December 31, 1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial Information. (2) See Note 6 of Notes to Selected Unaudited Pro Forma Condensed Consolidated Financial Information for an explanation of the determination of the pro forma shares used in computing pro forma net loss per share. (3) Adjusted to reflect proceeds from the sale of $10.0 million of Preferred Stock in March 1997 and the repayment of approximately $4.8 million of outstanding indebtedness from such proceeds. (4) Adjusted to reflect the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following discussion also should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus. OVERVIEW ProBusiness Services, Inc. is a leading provider of employee administrative services for large employers. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. Since 1992, the Company has experienced significant growth of its revenue, client base and average client size. Revenue increased from $668,000 in fiscal 1992 to $13.9 million in fiscal 1996, and increased to $10.2 million for the six months ended December 31, 1996 from $5.1 million for the same period in fiscal 1996. From December 31, 1992 to December 31, 1996, the client base for payroll services increased from 113 to 376 clients while the average size of the Company's payroll clients increased from approximately 225 employees to approximately 775 employees. As of January 31, 1997, the Company serviced approximately 400 payroll clients with an average of approximately 900 employees per client. The Company's revenue growth is primarily due to continued growth in its client base, the introduction of its payroll tax service in fiscal 1996, an increase in the average size of its clients, the introduction of new features and other services and a high retention rate of existing clients (approximately 90% for the 12 months ended May 31, 1996). The Company does not anticipate it will sustain this rate of growth in the future. The establishment of new client relationships involves lengthy and extensive sales and implementation processes. The sales process generally takes three to nine months or longer, and the implementation process generally takes three to six months or longer. In connection with the acquisition of each new client, the Company incurs substantial client acquisition costs, which consist primarily of sales and implementation expenses and, to a lesser extent, marketing expenses. In addition, the Company's revenue is subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters primarily due to new clients beginning services in January (the beginning of the tax year and the Company's third fiscal quarter) and higher interest income earned on tax funds. Further, the Company's operating expenses are typically higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company expects this pattern to continue. The Company has experienced significant operating losses since its inception and expects to incur significant operating losses in the future due to continued client acquisition costs, investments in research and development and costs associated with expanding its sales efforts and operations to new geographic regions. As of December 31, 1996, the Company had an accumulated deficit of approximately $15.7 million. There can be no assurance that the Company will achieve or sustain profitability in the future. The Company has made acquisitions of businesses in the past and intends to pursue acquisitions in the future. In connection with acquisitions, the Company has in the past incurred and will likely incur in the future costs associated with adding personnel, integrating technology, increasing overhead to support the acquired businesses, acquiring in-process technology and amortizing expenses related to 18 20 intangible assets. As a result, such acquisitions have had and any future acquisition could have an adverse effect on the Company's results of operations. In January 1997, the Company acquired all of the outstanding capital stock of BeneSphere for an initial purchase price of $3.3 million, with up to an additional $4.5 million to be paid in quarterly installments, beginning April 1998 through January 2000, if certain financial conditions are met. In connection with the acquisition of BeneSphere, the Company recorded $2.3 million of goodwill, which will be amortized ratably over 20 years and could be increased by up to $4.5 million if the purchase price increases. In May 1996, the Company acquired substantially all of the business and assets of Dimension Solutions for a purchase price of $1.3 million. In connection with the acquisition of Dimension Solutions, the Company recorded a one-time charge of $711,000 in fiscal 1996 relating to the purchase of in-process technology. The Company derives its revenue from fees charged to clients for services and income earned from investing payroll tax funds. The Company typically invests tax funds collected from clients and their employees in federally insured or investment-grade securities, which are subject to interest rate fluctuations. The Company generally recognizes revenue from services when such services are performed and recognizes income from investments when earned. Payroll and payroll tax clients generally are subject to contracts with an initial term of 36 months. Interest income earned on collected, but unremitted funds amounted to $1.9 million, none and none, for fiscal years 1996, 1995 and 1994, respectively, and $1.7 million and none for the six months ended December 31, 1996 and 1995, respectively. Benefits administration and human resources software clients generally are subject to contracts with an initial term of 12 months. The Company's contracts generally do not have significant penalties for cancellation. For the six-month period ended December 31, 1996, no client accounted for more than 3% of the Company's revenue. The Company's cost of providing services consists primarily of ongoing account management, tax operations and production costs and, to a lesser extent, amortization of capitalized software development costs. The Company capitalizes software development costs after technological feasibility of the software relating to a service has been established and amortizes such costs over the useful life of the software, generally 36 months. General and administrative expenses consist primarily of personnel costs, professional fees and other overhead costs for finance and corporate services. Research and development expenses consist primarily of personnel costs. Client acquisition costs consist of all sales and implementation expenses and, to a lesser extent marketing expenses. As of June 30, 1996, the Company had federal and state net operating loss carryforwards of approximately $9.0 million and $3.4 million, respectively. At December 31, 1996, the Company had federal and state net operating loss carryforwards of approximately $11.5 million and $4.1 million, respectively. The net operating loss carryforwards will expire at various dates beginning in the tax year 1997 through 2011, if not utilized. The Company's utilization of the net operating loss carryforwards may be subject to annual limitations under the Internal Revenue Code as a result of changes in the Company's ownership, which limitations could significantly restrict or partially eliminate their utilization. No income tax expense has been recorded since the Company's inception. In March 1997, General Atlantic purchased $10.0 million of Preferred Stock of the Company, which will convert into 1,149,466 shares of Common Stock automatically upon the completion of this offering. 19 21 RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of revenue for the periods indicated:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------- --------------- 1994 1995 1996 1995 1996 ----- ----- ----- ----- ----- STATEMENTS OF OPERATIONS DATA: Revenue.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- Operating expenses: Cost of providing services..................... 40.0 38.1 46.4 44.6 51.4 General and administrative expenses............ 29.5 18.4 14.8 15.7 14.6 Research and development expenses.............. 29.6 14.6 9.1 5.8 12.8 Client acquisition costs....................... 36.1 41.5 38.9 40.5 45.4 Acquisition of in-process technology........... -- -- 5.1 -- -- ----- ----- ----- ----- ----- Total operating expenses.................... 135.2 112.6 114.3 106.6 124.2 ----- ----- ----- ----- ----- Loss from operations............................. (35.2) (12.6) (14.3) (6.6) (24.2) Interest expense, net............................ 1.1 1.2 2.9 2.3 5.0 ----- ----- ----- ----- ----- Net loss......................................... (36.3)% (13.8)% (17.2)% (8.9)% (29.2)% ===== ===== ===== ===== =====
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995 Revenue. Revenue increased 99.7% to $10.2 million in the six months ended December 31, 1996 from $5.1 million in the six months ended December 31, 1995, primarily due to an increase in the number and average size of the Company's payroll clients, the introduction of the Company's payroll tax service and, to a lesser extent, the introduction of the Company's human resources software. Interest income earned on collected but unremitted payroll tax funds amounted to $1.7 million and none for the six months ended December 31, 1996 and 1995, respectively. Cost of Providing Services. Cost of providing services increased 129.9% to $5.2 million in the six months ended December 31, 1996 from $2.3 million in the six months ended December 31, 1995 and increased as a percentage of revenue to 51.4% from 44.6%. The increases were primarily due to hiring personnel for the introduction of the Company's payroll tax service, hiring additional managers for payroll account management and, to a lesser extent, hiring account management personnel for the Company's human resources software. General and Administrative Expenses. General and administrative expenses increased 86.1% to $1.5 million in the six months ended December 31, 1996 from $801,000 in the six months ended December 31, 1995 and decreased as a percentage of revenue to 14.6% from 15.7%. The increase in absolute dollars resulted primarily from the hiring of additional management and administrative personnel to support the Company's growth. Research and Development Expenses. Research and development expenses increased 338.9% to $1.3 million in the six months ended December 31, 1996 from $298,000 in the six months ended December 31, 1995 and increased as a percentage of revenue to 12.8% from 5.8%. The increases were primarily a result of additional personnel and equipment to develop enhancements and new features to its existing services. Capitalized software development costs were $403,000 and $600,000 in the six months ended December 31, 1996 and 1995, respectively. Client Acquisition Costs. Client acquisition costs increased 123.8% to $4.6 million in the six months ended December 31, 1996 from $2.1 million in the six months ended December 31, 1995 and increased as a percentage of revenue to 45.4% from 40.5%. The increases were due to the establishment of a separate sales force to market the Company's payroll tax service on a stand-alone basis, increased 20 22 expenses resulting from the expansion of the Company's payroll sales force, and implementation expenses relating to an increased number of new clients that started services in January 1997. Net Interest Expense. Net interest expense increased 334.2% to $508,000 in the six months ended December 31, 1996 from $117,000 in the six months ended December 31, 1995, primarily due to the issuance of promissory notes to certain investors in October and December 1995 and increased borrowings under the Company's line of credit. YEARS ENDED JUNE 30, 1996 AND 1995 Revenue. Revenue increased 95.4% to $13.9 million in fiscal 1996 from $7.1 million in fiscal 1995, primarily due to an increase in the number and average size of the Company's payroll clients and the introduction of the Company's payroll tax service in January 1996. Interest income earned on collected but unremitted payroll tax funds amounted to $1.9 million in fiscal 1996. No interest income was earned in fiscal 1995. Cost of Providing Services. Cost of providing services increased 138.1% to $6.4 million in fiscal 1996 from $2.7 million in fiscal 1995 and increased as a percentage of revenue to 46.4% from 38.1%. The increases were primarily due to hiring personnel for the introduction of the Company's payroll tax service, hiring additional managers for payroll account management and, to a lesser extent, hiring account management personnel for the Company's human resources software. General and Administrative Expenses. General and administrative expenses increased 57.5% to $2.1 million in fiscal 1996 from $1.3 million in fiscal 1995, but decreased as a percentage of revenue to 14.8% from 18.4%. The increase in absolute dollars resulted primarily from the hiring of additional management and administrative personnel to support the Company's growth. Research and Development Expenses. Research and development expenses increased 21.1% to $1.3 million in fiscal 1996 from $1.0 million in fiscal 1995, but decreased as a percentage of revenue to 9.1% from 14.6%. Research and development expenses decreased as a percentage of revenue due in part to higher revenue and an increase in the amount of expenses that were capitalized in fiscal 1996. Capitalized software development costs were $645,000 in fiscal 1996 and $137,000 in fiscal 1995. Client Acquisition Costs. Client acquisition costs increased 83.1% to $5.4 million in fiscal 1996 from $2.9 million in fiscal 1995 but decreased as a percentage of revenue to 38.9% from 41.5%. The increase in absolute dollars was primarily due to increased expenses resulting from the expansion of the Company's payroll sales force and, to a lesser extent, implementation expenses relating to an increased number of new clients. Acquisition of In-Process Technology. In fiscal 1996, the Company recorded a one-time charge of $711,000 relating to the purchase of in-process technology in connection with the Company's acquisition of Dimension Solutions in May 1996. Net Interest Expense. Net interest expense increased to $404,000 in fiscal 1996 from $86,000 in fiscal 1995, primarily due to the issuance of promissory notes to certain investors in October and December 1995 and increased borrowings under the Company's line of credit. YEARS ENDED JUNE 30, 1995 AND 1994 Revenue. Revenue increased 74.4% to $7.1 million in fiscal 1995 from $4.1 million in fiscal 1994, primarily due to an increase in the number and average size of the Company's payroll clients. Cost of Providing Services. Cost of providing services increased 65.9% to $2.7 million in fiscal 1995 from $1.6 million in fiscal 1994 but decreased as a percentage of revenue to 38.1% from 40.0%. The increase in absolute dollars was primarily due to an increase in account management personnel to support the Company's expanded client base and an increase in production costs. General and Administrative Expenses. General and administrative expenses increased 8.5% to $1.3 million in fiscal 1995 from $1.2 million in fiscal 1994, but decreased as a percentage of revenue to 21 23 18.4% from 29.5%. The increase in absolute dollars resulted primarily from the hiring of additional management and administrative personnel to support the Company's growth. Research and Development Expenses. Research and development expenses decreased 13.6% to $1.0 million in fiscal 1995 from $1.2 million in fiscal 1994 and decreased as a percentage of revenue to 14.6% from 29.6%. The decreases were due to the capitalization of software development costs in fiscal 1995, which were $137,000. The Company did not capitalize any software development costs in fiscal 1994. Client Acquisition Costs. Client acquisition costs increased 100.6% to $2.9 million in fiscal 1995 from $1.5 million in fiscal 1994 and increased as a percentage of revenue to 41.5% from 36.1%. The increases were primarily due to implementation expenses relating to an increased number of new clients and, to a lesser extent, increased expenses resulting from the expansion of the Company's payroll sales force. Net Interest Expense. Net interest expense increased to $86,000 in fiscal 1995 from $46,000 in fiscal 1994, due to increased borrowings under the Company's line of credit during 1995. QUARTERLY RESULTS The following table sets forth selected unaudited quarterly financial information for each of the six quarters in the period ended December 31, 1996, as well as such data expressed as a percentage of the Company's revenue for the periods presented. This information has been derived from unaudited statements of operations data that, in the opinion of management, are stated on a basis consistent with the audited financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The Company's results of operations for any quarter are not necessarily indicative of the results to be expected in any future period.
QUARTER ENDED ------------------------------------------------------------ 1995 1996 ------------------ --------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- ------- -------- ------- (in thousands) Revenue............................... $2,430 $2,676 $4,056 $ 4,701 $ 4,675 $ 5,524 Operating expenses: Cost of providing services.......... 1,025 1,253 1,955 2,202 2,288 2,950 General and administrative expenses......................... 392 409 533 720 622 869 Research and development expenses... 124 174 421 538 625 683 Client acquisition costs............ 968 1,100 1,488 1,832 2,215 2,413 Acquisition of in-process technology....................... -- -- -- 711 -- -- ------ ------ ------ ------- ------- ------- Total operating expenses.............. 2,509 2,936 4,397 6,003 5,750 6,915 Loss from operations.................. (79) (260) (341) (1,302) (1,075) (1,391) Interest expense, net................. 51 66 121 166 204 304 ------ ------ ------ ------- ------- ------- Net loss.............................. $ (130) $ (326) $ (462) $(1,468) $ (1,279) $(1,695) ====== ====== ====== ======= ======= =======
22 24
QUARTER ENDED ------------------------------------------------------------ 1995 1996 ------------------ --------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- ------- -------- ------- (in thousands) Revenue............................... 100.0% 100.0 % 100.0% 100.0% 100.0% 100.0% Operating expenses: Cost of providing services.......... 42.2 46.8 48.2 46.8 48.9 53.4 General and administrative expenses......................... 16.1 15.3 13.1 15.3 13.3 15.7 Research and development expenses... 5.2 6.5 10.4 11.5 13.4 12.4 Client acquisition costs............ 39.8 41.1 36.7 39.0 47.4 43.7 Acquisition of in-process technology....................... -- -- -- 15.1 -- -- ------ ------ ------ ------- ------- ------- Total operating expenses.............. 103.3 109.7 108.4 127.7 123.0 125.2 ------ ------ ------ ------- ------- ------- Loss from operations.................. (3.3) (9.7) (8.4) (27.7) (23.0) (25.2) Interest expense, net................. 2.0 2.5 3.0 3.5 4.4 5.5 ------ ------ ------ ------- ------- ------- Net loss.............................. (5.3)% (12.2)% (11.4)% (31.2)% (27.4)% (30.7)% ====== ====== ====== ======= ======= =======
Revenue has increased during the last six quarters primarily as a result of the increase in the Company's payroll clients, the introduction of the Company's payroll tax service in January 1996 and, to a lesser extent, the introduction of the Company's human resources software in May 1996. The Company's revenue is subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters primarily due to new clients beginning services at the beginning of the tax year in January and higher interest income earned on tax funds. The Company's operating expenses typically are higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company expects this pattern to continue. Cost of providing services increased in the second quarter of fiscal 1997 primarily due to an increase in account management personnel, costs associated with the Company's payroll tax service and production costs related to the Company's expanded client base. Cost of providing services increased in the second and third quarters of fiscal 1996 primarily due to the hiring of personnel for the introduction of the Company's payroll tax service in the third quarter of fiscal 1996. The Company's quarterly operating results have in the past and will in the future vary significantly depending on a variety of factors, including the number and size of new clients starting services, the decision of one or more clients to delay or cancel implementation or ongoing services, interest rates, seasonality, the ability of the Company to design, develop and introduce new services and features for existing services on a timely basis, transition costs to new technologies, expenses incurred for geographic expansion, risks associated with payroll tax and benefits administration services, price competition, a reduction in the number of employees of its clients, and general economic factors. Revenue from new clients represents a significant portion of quarterly revenue in the third and fourth fiscal quarters. A substantial majority of the Company's operating expenses, particularly personnel and related costs, depreciation and rent, is relatively fixed in advance of any particular quarter. The Company's agreements with its clients generally do not have significant penalties for cancellation. As a result, any decision by a client to delay or cancel implementation of the Company's services or the Company's underutilization of personnel may cause significant variations in operating results in a particular quarter and could result in losses for such quarter. As the Company secures larger clients, the time required for implementing the Company's services increases, which could contribute to larger fluctuations in revenue. Interest income earned from investing payroll tax funds, which is a significant portion of the Company's revenue, is vulnerable to fluctuations in interest rates. In addition, the Company's business may be affected by shifts in the general health of the economy, client staff 23 25 reductions, strikes, acquisitions of its client by other companies and other downturns. There can be no assurance that the Company's future revenue and results of operations will not vary substantially. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through a combination of private sales of equity securities, private debt and bank borrowings, and to a lesser extent, capital equipment leases. As of December 31, 1996, the Company had raised approximately $13.0 million in private sales of equity securities. In October and December 1995, the Company issued an aggregate principal amount of $4.0 million in subordinated promissory notes with an interest rate of 8% per annum due on the earlier of three years from the date of issuance of the note or 30 days after completion of this proposed offering. In March 1997, General Atlantic purchased $10.0 million of Preferred Stock of the Company. At December 31, 1996, the Company had $1.3 million of cash and cash equivalents, a $10.0 million secured revolving line of credit, which expires April 1998, and a secured equipment lease of $2.0 million, under which the Company may borrow through July 1997. At December 31, 1996, the Company had outstanding borrowings of approximately $4.3 million and $1.9 million under these facilities, respectively. The Company intends to repay a substantial portion of such outstanding debt from the net proceeds of this offering. Net cash used in operating activities for the six months ended December 31, 1996 was $2.5 million, compared to net cash used in operating activities for the same period in fiscal 1996 of $851,000. The cash used in operating activities for both periods was primarily the result of net losses and increases in prepaid expenses, accounts receivable and unbilled receivables, which in the six months ended December 31, 1996 were partially offset by an increase in accrued liabilities. Net cash used in operating activities for fiscal 1996, 1995 and 1994 was $202,000, $444,000 and $1.3 million, respectively. The decrease in cash used in operating activities in fiscal 1995 compared to fiscal 1994 was primarily due to a decline in net losses and an increase in accrued liabilities. Net cash used in investing activities was $403,000 and $1.5 million for the six months ended December 31, 1996 and 1995, respectively, and $3.3 million, $1.4 million and $451,000 for fiscal 1996, 1995 and 1994, respectively. The increases in net cash used in investing activities during these periods resulted primarily from capital expenditures for equipment, furniture and fixtures to support the Company's increased personnel. In addition, the Company capitalized software development costs of $403,000 and $600,000 for the six months ended December 31, 1996 and 1995, respectively, and $645,000, $137,000 and none in fiscal 1996, 1995 and 1994, respectively. The Company expects to make additional capital expenditures for furniture, equipment and fixtures in connection with the move of its corporate headquarters and the establishment of an additional production facility, both planned to occur in late 1997. In addition, the Company anticipates that it will continue to expend funds for software development in the future. Net cash provided by financing activities was $71,000 in the six months ended December 31, 1996 and $6.7 million, $2.6 million and $1.6 million for the fiscal years ended 1996, 1995 and 1994, respectively. Net cash provided by financing activities for fiscal 1996 was primarily through borrowings under the Company's credit facilities and the issuance of $4.0 million of subordinated debt in October and December 1995. Financing activities provided cash for fiscal 1995 and 1994 primarily from the issuance of equity securities and borrowings under credit agreements. The Company believes that the net proceeds from this offering, together with existing cash balances and anticipated cash flows from operations, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. The Company may also utilize cash to acquire or invest in complementary businesses or to obtain the right to use complementary technologies, although the Company does not have any pending plans to do so. The Company may sell additional equity or debt securities or obtain additional credit facilities. 24 26 BUSINESS The following Business section contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW ProBusiness is a leading provider of employee administrative services for large employers, typically with over 250 employees. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. As of January 31, 1997, the Company provided services to over 1,200 clients and provided payroll services to 400 clients with an aggregate of approximately 375,000 active employees and an average of approximately 900 employees. The Company differentiates itself from its competitors through its proprietary technology, high quality, responsive and professional client service and focus on the needs of large employers. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team of specialists led by a personal account manager who proactively manages each client's account and marshals the resources of the team to meet the client's specific needs. ProBusiness maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company believes that its low client-to-account manager ratio and its focus on client service are key factors in enabling the Company to achieve a high payroll client retention rate, which was approximately 90% in 1996. INDUSTRY BACKGROUND Many large businesses have found that outsourcing non-core functions reduces costs, improves service, quality and efficiency, allows personnel to focus on core competencies and enhances productivity through access to advanced technologies. As a result, the demand for outsourcing employee administrative services has grown significantly and is expected to continue to grow over the next several years. It is estimated that third-party payroll and payroll tax services alone generated approximately $3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in revenue in 2000. Payroll processing and benefits administration lend themselves to outsourcing because both are complex and costly for employers to conduct internally. Payroll processing involves tracking employee data, calculating payroll data and producing paychecks and direct deposits, remitting and filing payroll taxes and generating management reports. Benefits administration consists of many human resources functions, such as the enrollment and processing of flexible benefits plans and the administration and management of COBRA programs. In recent years, payroll processing and benefits administration have increased in complexity due to continual changes in regulations and increasingly sophisticated employee benefit plans. For example, large employers must have the ability to calculate taxes for multiple federal, state and local government agencies, collect garnishments based on different state laws and make numerous agency filings. In addition, payroll and benefits administration systems must keep pace with rapidly evolving business operations as companies increase in size, expand geographically or add new operations. Finally, these systems must be flexible and scalable to integrate with increasingly advanced computer systems as companies adopt new technologies. 25 27 Despite the complexities of payroll processing and the advantages provided by outsourcing, most large employers continue to process payroll in-house because they believe their unique business needs require the control and integration of an in-house system. These in-house payroll systems generally run on expensive mainframe or minicomputer systems and require customization and significant ongoing technical support. In addition, such systems typically are operated and maintained by large payroll departments, which are supported by dedicated programmers, systems analysts and production personnel. As their payroll needs change, employers that process their payroll in-house must continue to make significant investments in personnel, hardware and software to maintain and upgrade their payroll systems. Large employers that have outsourced their payroll processing needs have looked primarily to traditional payroll service providers, which process payroll data received from clients utilizing mainframe computers located at multiple regional data centers. This approach utilizes two systems, the client's and the service provider's, which have different hardware, operating systems, software applications and data configurations. Maintaining and synchronizing two separate systems makes it difficult for these service providers to update code, add features and functionality and provide clients with customization and integration with their other systems. In addition, the complexities presented by operating two separate systems often impede the timely identification and resolution of client payroll processing problems. Many large employers that choose to outsource their employee administration functions require a payroll provider that offers a high level of flexibility and client service. In addition, these employers prefer to have a single service provider of comprehensive and integrated services for their payroll and other employee administrative needs. Given the inherent limitations of the technology used by traditional payroll processing providers, such providers are unable to deliver a highly responsive and flexible solution. As a result, the Company believes a significant opportunity exists for service providers that can furnish large employers with high quality client service and a payroll system that offers the cost-effective benefits of outsourcing, while providing the same level of control, customization and integration as an in-house system. THE PROBUSINESS SOLUTION The Company's solution provides large employers with the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, system control, customization and integration of an in-house system. The Company combines its PC-based technology and personalized client service to provide a broad range of service offerings, including payroll processing, payroll tax filing, human resources software and benefits administration. Technology. The Company's proprietary PC-based technology for its payroll services provides a platform for delivering high levels of service together with the flexibility and control of an in-house system. The Company creates a mirrored version of each client's system, which allows the Company's account managers to access client information using the same data, programs and screens as the client uses on its PC network. This enables the Company to quickly and easily identify client problems or modify application programs in response to client requests. The client maintains control by having direct access to all calculation programs and all historical and transactional data, which also provides the client with flexibility to respond quickly to employee and third-party inquiries, to fully analyze payroll data and to generate management reports. The Company's system architecture is designed to distribute payroll processing tasks to multiple low cost, high performance PCs, which enables the Company to scale its system continually to handle increasing transaction volumes. The Company's PC-based application software supports the development of customized solutions for each client that can be easily upgraded and integrated with a client's other systems. In addition, multiple networked PCs facilitate exception processing and rapid response that large employers require. 26 28 Client Service. The Company delivers high quality, responsive and professional service by establishing a business partnership with each client. The Company assigns each client a personal account manager, who proactively manages the account and marshals the resources of a strategic team of specialists to meet the client's specific needs. The Company maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company supports each client with functional and regulatory expertise in payroll, payroll tax and employee benefits, as well as specialists in pay data interfaces, general ledger interfaces, paid-time-off, report writing and systems integration. The Company uses its systems integration expertise to facilitate the integration of its payroll processing system with the client's existing hardware and software. To support and provide high quality service, the Company focuses on hiring experienced accounting and technical professionals from the payroll, accounting, human resources and financial services industries. The Company promotes its client service culture by instilling a sense of ownership in each employee through incentive compensation and recognition of achievements based on providing high quality service to clients. Cost Effectiveness. The Company believes that it provides its clients with a more cost-effective payroll solution than most other third-party providers. During the implementation process, the Company reengineers the client's payroll processes and designs a payroll system that integrates with the client's other systems. Once implementation is completed, integration between payroll and other systems is improved, eliminating manual tasks and allowing a client to redeploy specialized personnel to other functions within the organization. STRATEGY The Company's objective is to be the premier provider of employee administrative services for large employers. The Company's strategy is to continue providing clients with high levels of personal service and developing a comprehensive and fully integrated suite of employee administrative services. The Company also intends to expand its client base and provide additional services to its existing clients. The Company's ongoing strategy includes the following key factors: - PROVIDE PREMIER SERVICE. The Company is committed to providing high levels of personal service and proactive account management, including maintaining a low client-to-account manager ratio. The Company believes that its ability to consistently deliver high quality service is a competitive advantage in the large employer market and is a key factor in enabling the Company to achieve a high payroll client retention rate, which was approximately 90% in 1996. - EXPAND CLIENT BASE. The Company intends to continue adding to its client base by expanding its direct sales force and locating sales representatives in major metropolitan areas throughout the United States, as well as increasing its penetration in existing markets and pursuing strategic alliances and acquisitions. - PROVIDE A COMPREHENSIVE AND INTEGRATED SOLUTION. The Company intends to continue investing substantial resources to further develop a comprehensive and fully integrated suite of employee administrative services and extend the functionality of its existing proprietary technology. The Company's goal is to create a single data processing system that it can use as a platform to offer a full range of services to clients, thereby strengthening client relationships and improving efficiencies for both the Company and its clients. - INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that there is a significant opportunity for it to cross-market its services to its existing client base, as few of its current clients use all of the Company's services. In addition, the Company intends to leverage its relationships with existing clients to market new services and features. - PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. The Company intends to pursue acquisitions and alliances to increase the range of services and service features it offers, add industry 27 29 and technical expertise, and acquire complementary technology. For example, in the last year, the Company introduced its human resources software and its benefits administration services through the acquisitions of Dimension Solutions and BeneSphere, respectively. - ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES. The Company seeks to continue providing its clients with a high level of service by hiring professionals who are experienced in their fields. Service personnel are recruited from payroll, accounting, human resources and financial services industries, and many have professional experience as accounting managers or hold Certified Public Accountant or Certified Payroll Professional accreditations. The Company's employees receive incentive compensation and recognition of achievements based on providing high quality service to clients. The Company's strategy involves substantial risks and uncertainties. There can be no assurance that the Company will be successful in implementing its strategy or that its strategy, even if implemented, will lead to successful achievement of the Company's objectives. If the Company is unable to implement its strategy effectively, the Company's business, financial condition and results of operations will be materially adversely affected. See "Risk Factors." SERVICE OFFERINGS The Company provides a broad range of employee administrative services, including payroll processing, payroll tax filing, benefits administration and human resources software. The Company intends to expand its service offerings through future acquisitions and to develop enhancements to its existing services internally. Payroll Processing. The Company processes time and attendance data to calculate and produce employee paychecks, direct deposits and reports for its clients. The Company delivers the paychecks and reports to clients within 24 to 48 hours of the Company's receipt of the data electronically submitted from the client. The Company's system is highly configurable to meet the specialized needs of each client yet maintains the ability to provide high volume processing. The system integrates easily with the client's general ledger, human resources and time and attendance systems. In addition, the Company offers many sophisticated features, including the automatic enrollment and tracking of paid time off, proration of compensation for new hires and integrated garnishment processing. Payroll Tax Filing. The Company collects contributed employer and employee tax funds from clients, deposits such funds with tax authorities when due, files all tax returns and reconciles the client's account. The Company will also represent the client before tax authorities in any dispute or inquiry. The Company introduced its payroll tax service in January 1996 to existing payroll clients and to corporations who process their payroll in-house. Benefits Administration. In January 1997, the Company introduced its benefits administration services through the acquisition of BeneSphere. Such services include flexible benefits enrollment and processing, COBRA administration, consolidated billing and eligibility tracking and premium payment services. Employees can enroll in and choose their flexible spending benefits through traditional paper-based forms or through World Wide Web-accessible enrollment sites using the Company's recently introduced Enrollnet(TM) service. Human Resources Software. In May 1996, the Company introduced its human resources software through the acquisition of Dimension Solutions. The Company's human resources software tracks and reports general employee information, including compensation, benefits, skills, performance, training, job titles and medical history. For clients that also use the Company's payroll service, the human resources data can be transferred to the payroll services system, thus eliminating the need for duplicate data entry. 28 30 CLIENT SERVICE The Company believes that its focus and dedication to providing high levels of client service is a competitive advantage in the large employer market. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll system and process and implementing a cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team that includes a sales representative, a sales analyst, an implementation manager, an account manager and numerous functional, regulatory and technical support specialists. Sales. The Company believes that client service begins with the sales process. A sales representative and a sales analyst work together to assess a potential client's payroll processing needs. Based on this assessment, the sales team then identifies opportunities to reengineer the prospective client's payroll processes and to design a payroll solution that integrates effectively with its other systems. The payroll sales cycle typically ranges from three to nine months or longer. Implementation. Upon engagement by a client, the Company assigns a team of technical support specialists, headed by an implementation manager who leads the transition from the client's former payroll system to the Company's system. The implementation manager works with the client, the sales analyst and technical support specialists to integrate the Company's payroll system with the client's other systems and to customize the system to improve the client's payroll processes. The Company uses its systems integration expertise to facilitate the integration of its payroll processing system with the client's existing hardware and software. The implementation process generally takes three to six months or longer, depending on the complexity of the client's payroll processes and systems and the size of the client. Account Management. An account manager is assigned to each client during the implementation process and serves as the client's day-to-day contact at the Company. The account manager coordinates the efforts of the Company's functional, regulatory and technical support specialists as necessary. The account manager visits each client regularly and establishes an annual business plan with the client that details scheduled payroll events such as open enrollment periods for employee benefits plans or software system changes. This annual business plan allows the Company to provide clients with uninterrupted payroll services during these periods. Account managers use the Company's proprietary CallLog system to record and track all client calls, record client feedback and help ensure that the client's needs are addressed promptly and thoroughly. The Company maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. Support Specialists. The Company supports each client with functional and regulatory specialists in payroll, payroll tax and employee benefits, as well as pay data interfaces, general ledger interfaces, paid-time-off, report writing and system integration. Each of these specialists is available to speak directly with clients as needed, meet with clients onsite or support clients indirectly through the account manager. The Company is committed to continually monitoring the quality of its service through client feedback mechanisms. The Company obtains valuable insights into the needs of its clients through its partnership with each client and from client responses to surveys, which are conducted semi-annually. The Company uses this information to develop new technologies, identify new service offerings, optimize the services provided to existing clients and improve the level of service provided to clients. The Company also uses client feedback as a basis for incentive compensation and recognition of achievements. TECHNOLOGY The Company's proprietary PC-based technology for its payroll services provides a platform for delivering high levels of service together with the flexibility and control of an in-house system. The Company creates a mirrored version of each client's system, which allows the Company's account 29 31 managers to access client information using the same data, programs and screens as the client uses on its PC network. This enables the Company to quickly and easily identify client problems or modify application programs in response to client requests. The client maintains control by having direct access to all calculation programs and all historical and transactional data, which also provides the client with flexibility to respond quickly to employee and third-party inquiries, to fully analyze payroll data and to generate management reports. The Company's system architecture is designed to distribute payroll processing tasks to multiple low cost, high performance PCs, which enables the Company to scale its system continually to handle increasing transaction volumes. The Company's PC-based application software supports the development of customized solutions for each client that can be easily upgraded and integrated with a client's other systems. In addition, multiple networked PCs facilitate exception processing and rapid response that large employers require. 30 32 CLIENTS The Company targets large companies, typically with over 250 employees, with complex and changing business needs in diverse industries. As of January 31, 1997, the Company provided services to over 1,200 clients. Of these clients, 400 were payroll clients, with an aggregate of approximately 375,000 active employees and an average of approximately 900 employees. Although the Company is extending its national presence, most of the Company's revenue historically has been derived from clients located in the western United States. For the six-month period ended December 31, 1996, no client accounted for more than 3% of the Company's revenue. The Company's agreements with its clients generally do not have significant penalties for cancellation. Set forth below is a representative list of the Company's clients as of January 31, 1997, each of which has over 1,000 employees and from which the Company expects revenue of at least $25,000 in calendar 1997. TECHNOLOGY 3Com Corporation Advanced Micro Devices, Inc. Airtouch Communications, Inc. AST Research, Inc. Atmel Corporation Bay Networks Inc. Cadence Design Systems Inc. Fujitsu, Ltd. Hitachi America Ltd Informix Corporation Integrated Device Technology, Inc. Intuit Inc. KLA Instruments Corporation LSI Logic Corporation Netscape Communications Corp. Novell, Inc. Pacific Scientific Company Quantum Corporation Read-Rite Corporation Siemens Business Communication Systems, Inc. Silicon Graphics, Inc. Silicon Systems, Inc. Solectron Corporation Storage Technology Corporation Sybase, Inc. TCI Cablevision VeriFone, Inc. RETAIL Childrens Discovery Centers of America, Inc. Coach Leatherwear Co., Inc. Dollar General Corporation Michaels Stores, Inc. Natural Wonders, Inc. St. John Knits Inc. Sunglass Hut International, Inc. Williams-Sonoma, Inc. SERVICES/PUBLISHING California Casualty Group CCH Incorporated Clubcorp International First Allmerica Life Insurance Koll Management Services, Inc. North American Title Insurance Company U.S. Computer Services Ziff Davis Publishing Company FOOD PRODUCTS AND SERVICES Bon Appetit Management Company Fleming Companies, Inc. Fresh Choice, Inc. Kellogg USA Inc. OreIda Foods Inc. Pacific Coast Producers Specialty Restaurants Corp. OTHER Abbott Laboratories Allergan, Inc. The Gillette Company Pharmacia & Upjohn, Inc. Raychem Corporation Toyota Motor Corporation Watkins-Johnson Company 31 33 SALES AND MARKETING The Company employs a direct sales force to gain new payroll and payroll tax clients and increase the number of services provided to existing clients. The Company currently targets large employers through direct marketing, seminars, trade shows and active participation in local chapters of the American Payroll Association. The Company uses a team selling approach, whereby sales analysts and sales representatives collaborate to assess a potential client's needs and develop a cost-effective solution. The payroll sales cycle typically ranges from three to nine months or longer. The Company primarily utilizes insurance brokers to attract new benefits administration clients. The Company believes that its long-term competitiveness depends on increasing its national presence. The Company believes that locating direct sales representatives in major metropolitan areas throughout the United States is the most effective means of increasing its national client base. The Company seeks to attract and retain experienced industry sales representatives. The Company's marketing department provides support materials and marketing communications to sales representatives and promotes public relations, performs direct mailings and participates in seminars and trade shows. COMPETITION The market for the Company's services is intensely competitive, subject to rapid change and significantly affected by new service introductions and other market activities of industry participants. The Company primarily competes with several public and private payroll service providers such as Automatic Data Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller, regional competitors. Many of these companies have longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and a larger number of clients than the Company. In addition, many of these companies offer more services or features than the Company and have processing facilities located throughout the United States. The Company also competes with in-house employee services departments and, to a lesser extent, banks and local payroll companies. With respect to benefits administration services, the Company competes with insurance companies, benefits consultants and other local benefits outsourcing companies. The Company may also compete with marketers of related products and services that may offer payroll or benefits administration services in the future. The Company has experienced, and expects to continue to experience, competition from new entrants into its markets. Increased competition could result in pricing pressures, loss of market share and loss of clients, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the principal competitive factors affecting its market include client service, system functionality and performance, system scalability, reputation, system cost and geographic location. The failure of the Company to compete successfully would have a material adverse effect on the Company's business, financial condition and results of operations. RESEARCH AND DEVELOPMENT The Company intends to continue investing substantial resources to further develop a comprehensive and fully integrated suite of employee administrative services and extend the functionality of its proprietary payroll processing systems. The Company has committed resources to the following development initiatives: - WINDOWS VERSION PAYROLL. The Company expects to introduce a new version of its payroll system that will run under Windows 95 and Windows NT. - ON-LINE SERVICES. The Company intends to provide secure on-line employee access to its payroll and benefits systems through the World Wide Web that will provide services such as benefits enrollment, W-4 changes and time and attendance tracking. 32 34 - INTEGRATED PAYROLL AND HUMAN RESOURCES SYSTEM. The Company expects to introduce an integrated payroll and human resources system utilizing client/server technology that will run under Windows 95 and Windows NT. - JAVA-BASED OBJECT ORIENTED SYSTEM. As a long-term initiative, the Company is developing a second generation integrated payroll and human resources system based on object and Inter/internet technology. The information discussed above in "Research and Development" contains forward-looking statements that involve risks and uncertainties. Actual events could differ materially from those anticipated in these forward-looking statements, as a result of certain factors including those discussed in the paragraph below. The technologies in which the Company has invested to date are rapidly evolving and have short life cycles, which requires the Company to anticipate and rapidly adapt to technological changes. In addition, the Company's industry is characterized by increasingly sophisticated and varied needs of clients, frequent new service and feature introductions and emerging industry standards. The Company's future success will depend, in part, on its ability to develop advanced technologies, enhance its existing services with new features, add new services that address the changing needs of its clients, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. If the Company is unable to develop and introduce new services and new features of existing services in a timely or cost-effective manner, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, application software used by the Company may contain defects or failures when introduced or when new versions or enhancements are released. The Company has in the past discovered software defects in certain of its applications, in some cases, only after its systems have been used by clients. There can be no assurance that future defects will not be discovered in existing or new applications or releases. Any such occurrence could have a material adverse effect upon the Company's business, financial condition and results of operations. PROPRIETARY RIGHTS The Company's success is dependent in part upon its proprietary software technology. The Company has no patents, patent applications or registered copyrights. The Company relies on a combination of contract, copyright and trade secret laws to establish and protect its proprietary technology. The Company distributes its services under software license agreements that grant clients licenses to use the Company's services and contain various provisions protecting the Company's ownership and the confidentiality of the underlying technology. The Company generally enters into confidentiality and/or license agreements with its employees and existing and potential clients, and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology. There can be no assurance that the Company's services and technology do not infringe any existing patents, copyrights or other proprietary rights of others, or that third parties will not assert infringement claims in the future. If any such claims are asserted and upheld, the costs of defense could be substantial and any resulting liability to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of February 28, 1997, the Company had 303 full-time employees. The Company believes that its relations with its employees are good. 33 35 FACILITIES The Company's headquarters are located in Pleasanton, California and consist of approximately 52,000 square feet of office space leased pursuant to multiple leases which terminate between March 1999 and February 2001. In September 1996, the Company entered into a build-to-suit lease, whereby the Company will lease approximately 130,000 square feet of office space located in Pleasanton, California. Upon completion of the facility, estimated to be in late 1997, the Company will relocate its headquarters to the new facility. The term of the build-to-suit lease expires approximately 11 years from completion of the facility. The Company also has a sales and implementation office in Irvine, California, where it leases approximately 4,500 square feet under a lease which terminates with respect to 1,750 square feet in February 1997 and with respect to 2,721 square feet in November 1997. The Company intends to relocate and expand these facilities in Irvine to include processing and production and back-up facilities in late 1997. Although the Company believes it will be able to lease a facility to accommodate its needs in a timely fashion and at reasonable rates, there can be no assurance that it will be able to do so. Such failure would have a material adverse effect on the Company's business, financial condition and results of operations. BeneSphere's processing operations are located in Bellevue, Washington, where BeneSphere leases approximately 6,587 square feet under a lease that will terminate on June 1, 2003. 34 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the executive officers and directors of the Company as of March 12, 1997.
NAME AGE POSITION - ------------------------------ --- -------------------------------------------------------- Thomas H. Sinton.............. 48 Chairman of the Board, President, Chief Executive Officer, Director Jane Beule.................... 45 Vice President, Marketing Jeffrey M. Bizzack............ 36 Executive Vice President, Sales Mark F. Curtis................ 42 Vice President, Production Alison M. Elder............... 34 Executive Vice President, BeneSphere Division Mitchell W. Everton........... 40 Executive Vice President, Tax & Operations Dwight L. Jackson............. 51 Vice President, Human Resources Leslie A. Johnson............. 48 Vice President, Client Services Steven E. Klei................ 36 Vice President, Finance, Chief Financial Officer and Secretary Robert E. Schneider........... 39 Vice President, Research & Development David C. Hodgson(1)........... 40 Director Michael L. Hughes(2).......... 62 Director Ronald W. Readmond(1)(2)...... 54 Director Thomas P. Roddy(2)............ 61 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Sinton, founder of the Company, has served as a Director of the Company since the Company's incorporation in October 1984, and from March 1993 to present, Mr. Sinton has served as the President and Chief Executive Officer of the Company. Since December 1996 and for a period between September 1989 and February 1993, Mr. Sinton served as Chairman of the Board. Mr. Sinton holds a B.A. degree in English Literature, magna cum laude, from Harvard University, an M.S. degree in Food Science from the University of California at Davis and an M.B.A. degree from Stanford University. Mr. Sinton received a Fulbright Fellowship to study at the University of Vienna in Vienna, Austria. Ms. Beule has served as Vice President, Marketing of the Company since October 1994. From November 1993 to July 1994, Ms. Beule was Director of Product Management at Macromedia, Inc., a provider of software products. From February 1992 to November 1993, Ms. Beule held various positions in product management at Caere Corporation, a provider of software products. From August 1982 to February 1992, Ms. Beule held various positions in marketing and product management at Hewlett-Packard Company. Ms. Beule holds a B.A. degree from the University of Wisconsin and an M.B.A. degree from Harvard University. Ms. Beule received a Fulbright Fellowship to study at the Rheinische Friedrich-Wilhelms Universitaet in Bonn, Germany. Mr. Bizzack has served as Executive Vice President, Sales of the Company since July 1993. From October 1992 to July 1993, Mr. Bizzack served as Vice President, Sales of the Company. From October 1988 to October 1992, Mr. Bizzack served as a District Sales Manager of the Company. Mr. Bizzack attended Saint Mary's College. Mr. Curtis has served as Vice President, Production of the Company since March 1993. From November 1987 to February 1993, Mr. Curtis was Director of Service at Ultratech Stepper, Inc., a 35 37 subsidiary of General Signal Corp., a semi-conductor capital equipment manufacturing firm. Mr. Curtis holds a B.A. degree in Management from Saint Mary's College. Ms. Elder has served as Executive Vice President, BeneSphere Division of the Company since January 1997 when the Company acquired BeneSphere. From September 1993 to January 1997, Ms. Elder was founder of the California operations and held various positions at BeneSphere, most recently serving as President and Chief Executive Officer. In 1987, Ms. Elder joined the Employee Benefits Division of Lincoln National Life Insurance as a Flexible Spending Program specialist and from August 1990 to September 1993 Ms. Elder served as Western Regional Manager of Plan Management Administrators which was part of Lincoln National Life Insurance Company. Ms. Elder holds a B.A. degree in Communication Studies from the University of California, Santa Barbara. Mr. Everton has served as Executive Vice President, Tax & Operations of the Company since August 1995, and from July 1993 to July 1995, he served as Executive Vice President, Operations of the Company. From July 1992 to July 1993, Mr. Everton served as Vice President, Operations of the Company. From June 1986 to July 1992, Mr. Everton held various management positions with Systems Tax Service, a payroll tax filing company that was acquired by Ceridian Corporation in 1993. Mr. Everton holds a B.A. degree in Business Economics from the University of California, Santa Barbara and an M.B.A. degree from the University of California, Berkeley. Mr. Jackson has served as Vice President, Human Resources of the Company since June 1996. From June 1993 to June 1996, Mr. Jackson was founder and President of Dimension Solutions, which the Company acquired in June 1996. From February 1992 to June 1993, Mr. Jackson served as a consultant for Marathon Systems, a software development company. Mr. Jackson holds a B.E.S. in Electrical Engineering from Brigham Young University. Ms. Johnson has served as Vice President, Client Services of the Company since September 1993. From May 1992 to September 1993, Ms. Johnson was Director, National Accounts for Automatic Data Processing. From January 1976 until her division was acquired by Automatic Data Processing in May 1992, Ms. Johnson held several positions at BankAmerica Corporation, most recently as Vice President, Northern California National Accounts. Ms. Johnson holds a B.A. degree in Communications from the University of Colorado. Mr. Klei has served as Vice President, Finance and Chief Financial Officer of the Company since July 1995 and as Secretary of the Company since August 1996. From April 1993 to July 1995, Mr. Klei was Corporate Controller for Esprit de Corp, an apparel company. From December 1990 to April 1993, Mr. Klei provided consulting services to financially troubled companies based on his experience at New Home Interiors ("New Home"), a regional operator of showrooms for home products and services. In such capacity, Mr. Klei joined Rainbow Records ("Rainbow"), a retailer of records and videos, as a consultant in December 1990 at which time Rainbow was contemplating a liquidation. Mr. Klei presided over the orderly liquidation of Rainbow as Chief Financial Officer from April 1991 to February 1992. Subsequently, Rainbow entered into involuntary bankruptcy and received final approval from the bankruptcy court in the Northern District of California in Oakland. Mr. Klei joined Comfort Zone, a retailer of bedroom furnishings in February 1992 as a consultant and subsequently served as Vice President and Chief Financial Officer until April 1993. From May 1988 to December 1990, Mr. Klei was a minority owner and served as Chief Financial Officer of New Home. In connection with his position at New Home, Mr. Klei personally guaranteed certain obligations of New Home, which became due upon New Home's liquidation in 1991. As a result of such obligations, in September 1993, Mr. Klei applied for and was granted a full discharge of all debts under Chapter 7 of the federal Bankruptcy Code. Mr. Klei holds a B.S. degree in Accounting from Central Michigan University and is a Certified Public Accountant. Mr. Schneider has served as Vice President, Research & Development of the Company since November 1996. From April 1995 to July 1996, Mr. Schneider served as Senior Vice President of Product Development at Premenos Technology Corporation, an electronic commerce software company. From February 1989 to March 1995, Mr. Schneider held several positions at Sybase Inc., most 36 38 recently as Vice President and Business Unit Manager of the Server Products Group. Mr. Schneider holds a B.S. degree in Computer Science from University of San Francisco. Mr. Hodgson has served as a Director of the Company since March 1997. Mr. Hodgson is a Managing Member of General Atlantic Partners LLC ("GAP LLC") and has been with GAP LLC since 1982. Mr. Hodgson is also a director of Baan Company, N.V., a publicly-traded software company, Walker Interactive, a publicly-traded software company, and several other privately-held software companies, in which GAP LLC or one of its affiliates is an investor. Mr. Hodgson holds an A.B. degree in Mathematics from Dartmouth College and an M.B.A. degree from Stanford University. Mr. Hughes has served as a Director of the Company since 1989. From March 1993 to December 1996, Mr. Hughes served as Chairman of the Board. Since 1985, Mr. Hughes has been Managing and General Partner of the Hughes Investment Partnership, a partnership engaged in mortgage lending. Mr. Hughes holds a B.S. degree in Accounting from Benjamin Franklin University and is a Certified Public Accountant. Mr. Readmond has served as a Director of the Company since February 1997. Since January 1997, Mr. Readmond has been an advisor of Barbour Griffith & Rogers, a lobbying firm, and Chairman of International Equity Partners, L.P., a private equity and project development company. From August 1989 to December 1996, Mr. Readmond held various positions at Charles Schwab & Co. Inc., most recently serving as Vice Chairman. Mr. Readmond holds a B.A. degree in Economics from Western Maryland College. Mr. Roddy has served as a Director of the Company since 1992. Since 1988, Mr. Roddy has served as President and Chief Executive Officer of Lafayette Investments Inc., an investment banking and investment advisory company. Mr. Roddy holds a B.S. degree in Biochemistry from Villanova University. Mr. Jackson was appointed an officer of the Company pursuant to the acquisition agreement between the Company and Dimension Solutions. Mr. Hodgson was nominated and elected as a Director of the Company pursuant to an agreement entered into between the Company, General Atlantic and Thomas H. Sinton and his affiliates, in connection with the sale of Preferred Stock by the Company to General Atlantic. Under such agreement, General Atlantic and Mr. Sinton and his affiliates agreed to vote their shares to elect one director to the Board of Directors designated by General Atlantic until the third annual meeting of stockholders after this offering. The Board of Directors presently consists of five members who hold office until the annual meeting of stockholders or until a successor is duly elected and qualified. Effective upon the Company's reincorporation into Delaware, the Board of Directors will be divided into three classes. One class of directors will be elected annually and its members will hold office for a three-year term or until their successors are duly elected and qualified, or until their earlier removal or resignation. The number of directors will initially be five and may be changed by a resolution of the Board of Directors. Executive officers are elected by the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee oversees actions taken by the Company's independent auditors, recommends the engagement of auditors and reviews the results and scope of the audit and other services provided by the Company's independent auditors, reviews and evaluates the Company's control functions and reviews the Company's investment policy. The Compensation Committee was established in November 1996 and will make recommendations to the Board of Directors concerning salaries and incentive compensation for employees and consultants of the Company. The Compensation Committee will also administer the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan. Prior to November 1996, the Board of Directors made recommendations regarding compensation for employees and consultants of the Company. See "-- Stock Plans." 37 39 DIRECTOR COMPENSATION Members of the Company's Board of Directors do not receive compensation for their services as directors. Certain directors have been granted options to purchase Common Stock in the past, and options may be granted to directors of the Company in the future. Mr. Roddy has received options to purchase 62,500 shares of the Company's Common Stock, Mr. Hughes has received options to purchase 160,000 shares of the Company's Common Stock and Mr. Readmond has received options to purchase 15,000 shares of the Company's Common Stock at exercise prices ranging from $0.19 to $7.25 per share. EXECUTIVE COMPENSATION The following table sets forth the compensation paid to (i) the Chief Executive Officer and (ii) the Company's five other most highly compensated executive officers (collectively with the Chief Executive Officer, the "Named Executive Officers") for services rendered in all capacities to the Company during the fiscal year ended June 30, 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------ ---------------------- NO. OF SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY COMMISSIONS UNDERLYING OPTIONS - --------------------------------------------- ---- -------- ----------- ------------------ Thomas H. Sinton............................. 1996 $137,500 $ 0 100,000 President and Chief Executive Officer Jane Beule................................... 1996 100,000 0 10,000 Vice President, Marketing Jeffrey M. Bizzack........................... 1996 100,000 48,000 65,400 Executive Vice President, Sales Mitchell W. Everton.......................... 1996 100,000 0 60,200 Executive Vice President, Tax & Operations Leslie A. Johnson............................ 1996 100,000 0 10,000 Vice President, Client Services Steven E. Klei............................... 1996 95,833 0 75,000 Vice President, Finance and Chief Financial Officer
38 40 The following table sets forth information regarding stock options granted during the fiscal year ended June 30, 1996 to each of the Named Executive Officers. OPTION GRANTS IN FISCAL 1996
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------------------------------------ VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK PRICE SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION UNDERLYING GRANTED TO PRICE TERM($)(4) OPTIONS EMPLOYEES IN PER EXPIRATION ------------------------ NAME GRANTED(#)(1) FISCAL 1996(%)(2) SHARE($)(3) DATE 5% 10% - -------------------- ------------- ----------------- ----------- ---------- ---------- ---------- Thomas H. Sinton.... 100,000 6.9% .4350 11/29/2005 1,748,284 2,809,617 Jane Beule.......... 10,000 0.7 .3950 11/29/2005 175,228 281,362 Jeffrey M. Bizzack........... 33,000 2.3 .3950 11/29/2005 578,254 928,494 32,400 2.2 .3950 3/8/2006 567,740 911,612 Mitchell W. Everton... 38,000 2.6 .3950 11/29/2005 665,868 1,069,174 22,200 1.5 .3950 3/8/2006 389,007 624,623 Leslie A. Johnson... 10,000 0.7 .3950 11/29/2005 175,228 281,362 Steven E. Klei...... 35,000 2.4 .3950 11/29/2005 613,299 984,766 40,000 2.7 .3950 3/8/2006 700,914 1,125,447
- --------------- (1) These options were granted under either the Company's 1989 Stock Option Plan or Executive Stock Option Plan. The options granted are immediately exercisable, but are subject to repurchase in the event the optionee's employment with the Company ceases for any reason. The options generally vest over four years, as to 25% of the shares one year from the grant date and as to 1/48th of the shares in each successive month thereafter, with full vesting occurring on the fourth anniversary date. The options have a term of ten years, subject to earlier termination in certain situations related to termination of employment. See "Stock Plans." (2) Based on a total of 1,459,530 options granted to all employees, consultants and directors during fiscal 1996. (3) Represents the fair market value of the underlying Common Stock as determined by the Board of Directors on the date of grant. (4) The potential realizable value is calculated based on the term of the option at the time of grant (ten years) and the assumed initial public offering price of $11.00. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent the Company's prediction of its stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the initial public offering price appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. 39 41 The following table sets forth for each of the Named Executive Officers the shares acquired and the value realized on each exercise of stock options during the year ended June 30, 1996 and the number and value of securities underlying unexercised options held by the Named Executive Officers at June 30, 1996: FISCAL YEAR AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS ON VALUE --------------------------- AT FISCAL YEAR END($)(1) EXERCISE REALIZED EXERCISABLE UNEXERCISABLE --------------------------- NAME (#) ($) (#) (#) EXERCISABLE UNEXERCISABLE - ------------------------ -------- -------- ----------- ------------- ----------- ------------- Thomas H. Sinton........ 100,000 -- -- -- -- -- Jane Beule.............. 52,000 -- -- -- -- -- Jeffrey M. Bizzack...... 125,400 10,466 -- -- -- -- Mitchell W. Everton..... 50,447 7,060 2,533 47,220 2,166 40,373 Leslie A. Johnson....... 62,000 4,000 -- -- -- -- Steven E. Klei.......... 45,000 -- -- 30,000 -- 25,650
- --------------- (1) The amount set forth represents the difference between the estimated fair market value of $1.25 per share of Common Stock on June 30, 1996, as determined by the Company's Board of Directors, multiplied by the applicable number of options. STOCK PLANS 1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees, directors and consultants of nonstatutory stock options. As of December 31, 1996, options to purchase an aggregate of 483,164 shares of Common Stock were outstanding under the 1989 Plan. In February 1997, the Board of Directors of the Company increased the shares available for future grants under the 1989 Plan by 1,375,766, for a total of 1,675,048 shares available for future grants under the 1989 Plan. Options granted under the 1989 Plan before the effective date of the 1996 Plan described below will remain outstanding in accordance with their terms, but no further options will be granted under the 1989 Plan after this offering. 1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the Board of Directors in February 1996 under the name "Executive Stock Option Plan." The 1996 Plan provides for the granting to employees (including officers and employee directors) of incentive stock options and for the granting to employees, directors and consultants of nonstatutory stock options. In November 1996 and February 1997, the Board of Directors of the Company approved, effective upon the offering and subject to stockholder approval, an amendment and restatement of the 1996 Plan to (i) rename the Executive Stock Option Plan as the "1996 Stock Option Plan" and (ii) authorized for an increase in the number of shares reserved for issuance under the plan of any unused or canceled shares under the 1989 Plan plus annual increases equal to the lesser of (a) 250,000 shares, (b) two percent (2%) of the number of outstanding shares of Common Stock on such date or (c) a lesser amount determined by the Board. As of December 31, 1996, options to purchase an aggregate of 85,753 shares of Common Stock were outstanding under the 1996 Plan and 1,727,628 (including the number of shares available for future grants under the 1989 Plan) shares remained available for future grants under the 1996 Plan. The 1996 Plan is administered by the Board of Directors or a committee appointed by the Board (the "Administrator") and has a term of ten years. Subject to the provisions of the 1996 Plan, the Administrator has the authority to determine the individuals to whom stock options are to be granted, the number of shares to be covered by each 40 42 option, the exercise price, the fair market value of the Common Stock, the type of option, the term of the option, the restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions. Incentive stock options granted under the 1996 Plan must have an exercise price of (i) at least 110% of fair market value of the Common Stock on the date of grant if granted to an employee who owns stock representing more than 10% of the voting power of all classes of stock of the Company, any parent or any subsidiary or (ii) at least 100% of fair market value of the Common Stock on the date of grant if granted to any other employee. In the case of a nonstatutory stock option, the per share exercise price is determined by the Administrator. No participant may be granted in any fiscal year of the Company an option to purchase more than 125,000 shares, and over the remaining term of the 1996 Plan such participant may not be granted options to purchase more than 250,000 additional shares. Payments by optionholders upon exercise of an option may be made (as determined by the Administrator) in cash or such other form of payment as permitted under the 1996 Plan, including without limitation, by promissory note or by surrender of certain shares of Common Stock. In addition, an optionee may pay the exercise price by means of a so-called "cashless exercise." In the event of a proposed merger of the Company with or into another corporation, outstanding options may be assumed or equivalent options may be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that such successor corporation does not agree to assume options or substitute equivalent options, optionees will have the right to exercise their options as to all shares subject to such options, including shares as to which options would not otherwise be exercisable. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in November 1996, subject to stockholder approval. The Company has reserved a total of 500,000 shares of Common Stock for issuance under the Purchase Plan, with the number of shares to be increased annually on each anniversary date of the adoption of the Purchase Plan by a number of shares equal to the lesser of (i) 150,000 shares, (ii) one and one-half percent (1.5%) of the outstanding number of shares on such date or (iii) a lesser number determined by the Board. The Purchase Plan, which is intended to qualify under Section 423 of the Code, permits eligible employees of the Company to purchase Common Stock through payroll deductions of up to 15% of their base straight time gross earnings and commissions (but exclusive of payments for overtime, shift premiums, incentive compensation, incentive payments, bonuses or other payments). An eligible employee's right to purchase stock under the Purchase Plan may not accrue at a rate that exceeds $25,000 worth of stock in any calendar year. The price of Common Stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the Common Stock on the first day of an offering period or last day of the applicable purchase period. Employees may end their participation in the Purchase Plan at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the plan. The Purchase Plan will be implemented by an initial offering period of up to 24 months commencing on the first trading day on or after the effective date of the Public Offering and ending on the last trading day on or before April 30, 1999. Subsequent offering periods will last 24 months and will commence on the first trading day on or after November 1 and May 1 of each year during which the Purchase Plan is in effect, and will terminate on the last trading day in the periods ending 24 months later. Each 24-month offering period will consist of four purchase periods of approximately six months duration. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any designated subsidiary for at least 20 hours per week and for more than five months in any calendar year. 401(K) PLAN The Company maintains a 401(k) retirement savings plan (the "401(k) Plan"). The 401(k) Plan provides that each participant may contribute up to 18% of his or her pre-tax gross compensation (up to a statutorily prescribed annual limit of $9,500 in 1996). The percentage elected by certain highly 41 43 compensated participants may be required to be lower. All amounts contributed by employee participants and earnings on these contributions are fully vested at all times. Employee participants may elect to invest their contributions in various established funds. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Amended and Restated Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which a director derives an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its employees and agents to the fullest extent permitted by law. The Company intends to enter into agreements to indemnify its directors and officers, in addition to the indemnification provided for in the Company's Amended and Restated Certificate of Incorporation and Bylaws. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee was formed in November 1996 and is composed of Messrs. Hodgson and Readmond. No interlocking relationship exists between any member of the Company's Board of Directors and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. 42 44 CERTAIN TRANSACTIONS Between May 1994 and September 1995, Thomas H. Sinton, a director and officer of the Company, and his immediate family loaned an aggregate of $1,040,000 to the Company at an interest rate of 10.0% per annum. The Company has paid all such loans in full. On December 5, 1996, the Company loaned $543,750 at an interest rate of 6.31% per year to Robert E. Schneider, an officer of the Company, to permit Mr. Schneider to exercise options to purchase Common Stock of the Company. All principal and interest is due December 5, 2000. As of January 31, 1997, Mr. Schneider had not paid any amount on the note. In connection with the acquisition of BeneSphere, the Company assumed a promissory note issued by BeneSphere on December 31, 1996 to Alison M. Elder, an officer of the Company, for $275,000. The principal bears interest at a rate of 9.0% per year. On January 7, 1997, the Company loaned $543,750 at an interest rate of 6.1% per year to Alison M. Elder, an officer of the Company, to permit Ms. Elder to exercise options to purchase Common Stock of the Company. All principal and interest is due January 7, 2001. As of January 31, 1997, Ms. Elder had not paid any amount on the note. On January 31, 1997, the Company loaned $250,000 at an interest rate of 6.1% per year to Jeffrey M. Bizzack, an officer of the Company, to permit Mr. Bizzack to purchase a residence. Accrued interest must be paid on a monthly basis beginning two years from the date of the note. All principal and accrued but unpaid interest is due January 31, 2001 unless Mr. Bizzack's employment with the Company terminates, in which case, the note may become due earlier. As of January 31, 1997, Mr. Bizzack had not paid any amount on the note. Information with respect to compensation to directors and executive officers is set forth under "Management -- Directors Compensation" and "-- Executive Compensation." 43 45 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock, as of December 31, 1996 (assuming the automatic conversion of all outstanding shares of Preferred Stock into shares of Common Stock effective upon the completion of this offering), and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (a) each person or entity known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (b) each director of the Company, (c) each of the Named Executive Officers, and (d) all directors and executive officers of the Company as a group. Unless otherwise noted in the footnotes to the table, (i) the Company believes that the persons named in the table have sole voting and investment power with respect to all shares of Common Stock indicated as being beneficially owned by them and (ii) officers and directors can be contacted at the principal offices of the Company.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) SHARES -------------------- BENEFICIALLY PRIOR TO AFTER NAME OF BENEFICIAL OWNERS OWNED OFFERING OFFERING - ------------------------------------------------------------- ------------ -------- -------- Thomas H. Sinton(2)(3)....................................... 2,840,068 35.2% 28.2 General Atlantic Partners, LLC(4)............................ 1,149,466 14.3 11.4 Jane Beule(5)................................................ 52,000 * * Jeffrey M. Bizzack(6)........................................ 125,400 1.6 1.2 Mitchell W. Everton (7)...................................... 68,642 * * Leslie A. Johnson(8)......................................... 69,500 * * Steven E. Klei(9)............................................ 60,167 * * David C. Hodgson(4).......................................... 1,149,466 14.3 11.4 Michael L. Hughes............................................ 149,288 1.9 1.5 Ronald W. Readmond(10)....................................... 2,012 * * Thomas P. Roddy(11).......................................... 209,821 2.6 2.1 All directors and executive officers as a group (14 persons)(12)............................................... 4,861,564 60.1 48.2
- --------------- * Represents beneficial ownership of less than one percent. (1) Based on 8,057,727 shares of Common Stock outstanding prior to the offering and 10,057,727 outstanding upon completion of the offering. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days of December 31, 1996 upon the exercise of warrants or vested options. Calculations of percentage of beneficial ownership assume the exercise by only the respective named stockholder of all options and warrants for the purchase of Common Stock held by such stockholder which are exercisable within 60 days of December 31, 1996. (2) Includes shares held by the Silas D. Sinton Trust Estate, the Silas Jack Sinton Family Trust and as a custodian for minor children. Also includes 68,750 shares subject to the Company's repurchase rights. (3) The address of Mr. Sinton is c/o ProBusiness, Inc., 5934 Gibraltar Dr., Pleasanton, CA 94588. (4) Includes 978,368 shares held by General Atlantic Partners 39, L.P. ("GAP 39") and 171,098 shares held by GAP Coinvestment Partners, L.P. ("GAP Coinvestment"). The general partner of GAP 39 is GAP LLC. The managing members of GAP LLC are Steven A. Denning, Stephen P. Reynolds, David C. Hodgson, J. Michael Cline, William O. Grabe and William E. Ford. The same managing members of GAP LLC are the general partners of GAP Coinvestment. Mr. Hodgson is a director of the Company. Mr. Hodgson disclaims beneficial ownership of shares owned by GAP 39 and GAP Coinvestment, except to the extent of his pecuniary interests therein. The address for GAP 39, GAP Coinvestment, GAP LLC and Mr. Hodgson is c/o General Atlantic Service Corporation, Three Pickwick Plaza, Greenwich, CT 06830. (5) Includes 22,708 shares subject to the Company's repurchase rights. (6) Includes 29,803 shares subject to the Company's repurchase rights. (7) Includes 18,195 shares issuable upon exercise of vested options and 667 shares subject to the Company's repurchase rights. (8) Includes 17,291 shares subject to the Company's repurchase rights. (9) Includes 8,833 shares issuable upon exercise of vested options and 34,062 shares subject to the Company's repurchase rights. (10) Includes 2,012 shares issuable upon exercise of warrants. (11) Includes 28,730 shares held by the Lafayette Investments Inc. of which Mr. Roddy is President and Chief Executive Officer and 15,900 shares held by the Lafayette Investments Inc. 401(k) Plan and Trust. (12) Includes 27,028 shares issuable upon exercise of vested options, 2,012 shares issuable upon exercise of warrants and 262,152 shares subject the Company's repurchase rights. 44 46 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, par value $0.001 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.001 per share ("Preferred Stock"). COMMON STOCK As of December 31, 1996, there were 8,057,727 shares of Common Stock outstanding held of record by 252 stockholders (including 1,149,466 shares of Common Stock issuable upon conversion of Preferred Stock issued in March 1997). The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors, and as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefore. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, without any further vote or action by stockholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. WARRANTS In connection with a loan agreement, which terminated in April 1996, between Silicon Valley Bank ("SVB") and the Company, the Company issued SVB a warrant to purchase 9,446 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through January 13, 2000. In connection with an equipment lease, the Company issued LINC Capital Management ("LINC") a warrant to purchase 10,000 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through July 31, 2001. In connection with a loan agreement, the Company issued Coast Business Credit ("Coast") a warrant to purchase 9,500 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through April 30, 2001. In connection with an amendment to the loan agreement between Coast and the Company to extend the line of credit, the Company issued a warrant to Coast to purchase an additional 9,500 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable through October 25, 2001. In connection with a built-to- suit lease, the Company issued Britannia Hacienda V Limited Partnership ("Britannia Hacienda") and its partners warrants to purchase an aggregate of 22,500 shares of Series E Preferred Stock at an exercise price of $7.94 per share, exercisable from the date that part of the construction to be performed under the lease is substantially complete until the earlier of either five years from the date 45 47 of the consummation of a public offering or November 14, 2004. The warrants to purchase Series E Preferred Stock shall represent the right to purchase shares of Common Stock upon completion of this offering, at a conversion rate of two shares of Common Stock for each share of Series E Preferred Stock. In connection with its acquisition of BeneSphere, the Company issued warrants to purchase an aggregate of 50,000 shares of Common Stock to two former shareholders of BeneSphere at an exercise price of $9.00 per share, exercisable at any time through January 7, 2002. REGISTRATION RIGHTS OF CERTAIN HOLDERS Upon completion of this offering, the holders (or their permitted transferees) of approximately 6,360,470 shares of Common Stock and 121,892 shares issuable upon exercise of warrants (collectively the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities act of 1933, as amended (the "Securities Act"). If the Company proposes to register its Common Stock, subject to certain exceptions, under the Securities Act, the Holders are entitled to notice of the registration and are entitled to include, at the Company's expense, such shares therein, provided that the managing underwriter has the right to limit a certain number of such shares included in the registration. These rights do not apply to this offering. In addition, certain of the Holders may require the Company at its expense on no more than two occasions to file a registration statement under the Securities Act with respect to their shares of Common Stock. Such rights may not be exercised until 180 days after the completion of this offering. In addition, General Atlantic may request the Company to file a registration statement under the Securities Act with respect to 1,149,466 shares of Common Stock on one occasion as long as certain conditions are met. If the Holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. Moreover, if the Company were to include in a Company initiated registration shares held by the Holders pursuant to exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise additional capital. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Amended and Restated Certificate of Incorporation (the "Charter") provides for the division of the Board of Directors into three classes with staggered three-year terms. See "Management -- Executive Officers and Directors." Under the Charter, any vacancy on the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Charter also provides that after the completion of this offering, any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. The Charter further provides that special meetings of the stockholders may only be called by the Chairman of the Board of Directors, the Chief Executive Officer, the President of the Company, the Board of Directors or the holders of shares entitled to cast not less than forty percent (40%) of the votes at that meeting. Under the Bylaws, in order for any 46 48 matter to be considered "properly brought" before a meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. The foregoing provisions could have the effect of delaying until the next stockholders meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. The Charter requires the affirmative vote of the holders of at least 66 2/3% of the shares of capital stock of the Company issued and outstanding and entitled to vote to amend or repeal any of the foregoing Charter provisions. The 66 2/3% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series Preferred Stock that might be outstanding at the time any such amendments are submitted to stockholders. The Bylaws also may be amended or repealed by a majority vote of the Board of Directors subject to any limitations set forth in the Bylaws. TRANSFER AGENT AND REGISTRAR has been appointed as the transfer agent and registrar for the Company's Common Stock. 47 49 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 10,057,727 shares of Common Stock, based upon the number of shares outstanding as of December 31, 1996, including 1,149,466 shares Common Stock issuable upon conversion of Preferred Stock issued March 1997. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" ("Affiliates") of the Company, as that term is defined in Rule 144 under the Securities Act as amended on April 29, 1997. The remaining 8,057,727 shares of Common Stock held by existing stockholders (the "Restricted Shares") are "restricted securities," as that term is defined in Rule 144 under the Securities Act. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) approximately 2,000 Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) approximately 1,000 Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; (iii) approximately 6,702,341 Restricted Shares will be eligible for sale upon expiration of the lock-up agreements, 180 days after the date of this Prospectus; and (iv) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective two-year holding periods. In addition, certain of the Restricted Shares are subject to the Company's repurchase right. As of December 31, 1996, options to purchase 568,917 shares of Common Stock were outstanding, of which options to purchase 138,416 shares were then exercisable. The Company intends to file a Form S-8 registration statement 90 days after the date of this Prospectus of this offering under the Securities Act to register 1,727,628 shares of Common Stock reserved for issuance under the Company's 1989 Plan and 1996 Plan and 500,000 shares of Common Stock reserved for issuance under the Company's Purchase Plan thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing. In addition, warrants to purchase 121,892 shares of Common Stock are outstanding, all of which will be eligible for sale 180 days after the date of this Prospectus. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year but less than two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then-outstanding shares of the Common Stock (approximately 10,058 shares immediately after the offering) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. In general, under Rule 701 under the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchases shares from the Company in connection with a compensatory stock or option plan or other written agreement related to compensation is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with certain restrictions contained in Rule 144. Prior to this offering, there has been no public market for the Common Stock of the Company and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock prevailing from time to time may have on the market price of the Common Stock. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market may adversely affect the market price of the Common Stock offered hereby and could impair the Company's future ability to raise capital through an offering of its equity securities. 48 50 UNDERWRITING The Underwriters named below, acting through their representatives, Robertson, Stephens & Company LLC and William Blair & Company, L.L.C. (the "Representatives"), have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase the numbers of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER UNDERWRITER OF SHARES ---------------------------------------------------------------- ---------- Robertson, Stephens & Company LLC............................... William Blair & Company, L.L.C. ................................ ---------- Total................................................. 2,000,000 ==========
The Representatives have advised the Company that the Underwriters propose to offer shares of the Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock, at the same price per share as will be paid for the 2,000,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 2,000,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 2,000,000 shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Each officer and director and certain holders of shares of the Company's Common Stock have agreed with the Representatives, for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock owned as of the date of this Prospectus or thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of Robertson, Stephens & Company LLC. However, Robertson, Stephens & Company LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the Representatives and any of the Company's stockholders providing consent by the Representatives to the sale of shares prior to the expiration of the Lock-Up Period. The Company has agreed that during the Lock-Up Period, the Company will not, subject to certain exceptions, without the prior written consent of Robertson, Stephens & Company LLC, (i) consent to the disposition of any shares held by stockholders prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to sell or otherwise dispose of, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock, other 49 51 than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and warrants and the Company's issuance of options and stock under the existing stock option and stock purchase plans. See "Shares Eligible for Future Sale." The Representatives have advised the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. Certain persons participating in this offering may engage in transactions, including syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock on the Nasdaq National Market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 50 52 LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of December 31, 1996, certain members and investment partnerships of Wilson Sonsini Goodrich & Rosati, P.C., beneficially owned an aggregate of 12,881 shares of the Company's Common Stock. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Cooley Godward LLP, San Francisco, California. EXPERTS The financial statements of (i) ProBusiness, Inc. as of June 30, 1995 and 1996 and December 31, 1996 and for each of the three years in the period ended June 30, 1996 and the six-month period ended December 31, 1996, (ii) BeneSphere Administrators, Inc. as of June 30, 1996 and for the year then ended and (iii) Dimension Solutions, Inc. as of April 30, 1996 and for the year then ended appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS Effective June 1996, the Company engaged Ernst & Young as its principal independent auditors to replace Coopers & Lybrand LLP ("Coopers & Lybrand"), who were dismissed as auditors of the Company effective January 1996. The decision to change independent auditors was approved by the Company's Audit Committee and Board of Directors. In connection with audits of the two fiscal years ended June 30, 1995, and in the subsequent interim period, there were no disagreements with Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Coopers & Lybrand, would have caused them to make reference to the matter in their report. The reports of Coopers & Lybrand on the financial statements of the Company for the past two years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 under the Securities Act, with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. A copy of the Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. 51 53 INDEX TO FINANCIAL STATEMENTS
PAGE ----- PROBUSINESS SERVICES, INC. Report of Independent Auditors........................................................ F-2 Balance Sheets........................................................................ F-3 Statements of Operations.............................................................. F-4 Statements of Stockholders' Equity (Deficit).......................................... F-5 Statements of Cash Flows.............................................................. F-6 Notes to Financial Statements......................................................... F-8 BENESPHERE ADMINISTRATORS, INC. Report of Independent Auditors........................................................ F-21 Balance Sheets........................................................................ F-22 Statements of Operations.............................................................. F-23 Statements of Shareholders' Deficit................................................... F-24 Statements of Cash Flows.............................................................. F-25 Notes to Financial Statements......................................................... F-26 DIMENSION SOLUTIONS, INC. Report of Independent Auditors........................................................ F-30 Balance Sheet......................................................................... F-31 Statement of Operations............................................................... F-32 Statement of Shareholders' Deficit.................................................... F-33 Statement of Cash Flows............................................................... F-34 Notes to Financial Statements......................................................... F-35 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Introduction.......................................................................... F-38 Statements of Operations for the year ended June 30, 1996............................. F-39 Statements of Operations for the six months ended December 31, 1996................... F-40 Balance Sheet as of December 31, 1996................................................. F-41 Notes to Financial Statements......................................................... F-42
F-1 54 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders ProBusiness Services, Inc. We have audited the accompanying balance sheets of ProBusiness Services, Inc. as of June 30, 1995 and 1996 and December 31, 1996 and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 1996 and for the six month period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ProBusiness Services, Inc. at June 30, 1995 and 1996 and December 31, 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996 and for the six month period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Walnut Creek, California March 12, 1997 F-2 55 PROBUSINESS SERVICES, INC. BALANCE SHEETS (In thousands, except share amounts)
UNAUDITED PRO FORMA STOCKHOLDERS' JUNE 30, EQUITY (DEFICIT) ------------------- DECEMBER 31, DECEMBER 31, 1995 1996 1996 1996 ------- -------- ------------ ---------------- ASSETS Current assets: Cash and cash equivalents............... $ 852 $ 4,041 $ 1,254 Accounts receivable..................... 433 769 1,169 Unbilled receivables.................... 255 585 1,180 Prepaid expenses........................ 113 327 660 ------- -------- -------- Total current assets...................... 1,653 5,722 4,263 Equipment, furniture and fixtures, net.... 1,972 3,992 5,933 Other assets.............................. 509 1,225 1,708 ------- -------- -------- Total assets.................... $ 4,134 $ 10,939 $ 11,904 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable........................ $ 194 $ 623 $ 680 Accrued liabilities..................... 446 1,458 2,335 Deferred revenue........................ 82 274 370 Notes payable to stockholder............ 236 284 25 Current portion of long-term debt....... 512 -- -- Current portion of capital lease obligations.......................... 114 111 821 ------- -------- -------- Total current liabilities....... 1,584 2,750 4,231 Note payable to stockholder, non-current............................. -- 250 250 Long-term debt, less current portion...... 1,016 7,822 8,130 Capital lease obligations, less current portion................................. 168 253 2,179 Commitments Stockholders' equity (deficit): Preferred stock, $.01 par value; authorized: 6,000,000 shares; issued outstanding: 2,613,301 shares at June 30, 1995 and 2,653,301 shares at June 30 and December 31, 1996; Pro forma: $.001 par value; authorized: 5,000,000 shares; no shares issued and outstanding (aggregate liquidation preference: $12,078,000 at December 31, 1996)................ 27 27 27 $ -- Common stock, $.01 par value; authorized: 20,000,000 shares; issued and outstanding: 13,428 shares at June 30, 1995, 1,214,984 shares at June 30, 1996 and 1,440,703 shares at December 31, 1996; Pro forma: $.001 par value; authorized: 60,000,000 shares; issued and outstanding: 6,747,305 shares..................... -- 12 14 7 Additional paid-in capital.............. 11,660 12,532 13,298 13,332 Accumulated deficit..................... (10,321) (12,707) (15,681) (15,681) Note receivable from stockholder........ -- -- (544) (544) ------- -------- -------- -------- Total stockholders' equity (deficit)..................... 1,366 (136) (2,886) $ (2,886) ======== ------- -------- -------- Total liabilities and stockholders' equity (deficit)..................... $ 4,134 $ 10,939 $ 11,904 ======= ======== ========
See accompanying notes. F-3 56 PROBUSINESS SERVICES, INC. STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------------ ------------------ 1994 1995 1996 1995 1996 ------- ------ ------- ------ ------- (UNAUDITED) Revenue.................................... $ 4,069 $7,095 $13,863 $5,106 $10,199 Operating expenses: Cost of providing services............... 1,629 2,703 6,435 2,278 5,238 General and administrative expenses...... 1,202 1,304 2,054 801 1,491 Research and development expenses........ 1,202 1,038 1,257 298 1,308 Client acquisition costs................. 1,467 2,943 5,388 2,068 4,628 Acquisition of in-process technology..... -- -- 711 -- -- ------- ------ --------- ------ --------- Total operating expenses.............. 5,500 7,988 15,845 5,445 12,665 ------- ------ --------- ------ --------- Loss from operations....................... (1,431) (893) (1,982) (339) (2,466) Interest expense, net...................... 46 86 404 117 508 ------- ------ --------- ------ --------- Net loss................................... $(1,477) $ (979) $(2,386) $ (456) $(2,974) ======= ====== ========= ====== ========= Pro forma net loss per share (Note 1)...... $ (0.29) $ (0.36) ========= ========= Shares used in computing pro forma net loss per share (Note 1).............. 8,212 8,294 ========= =========
See accompanying notes. F-4 57 PROBUSINESS SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts)
PREFERRED STOCK COMMON STOCK ------------------------------- ------------------------------- NOTE TOTAL ADDITIONAL ADDITIONAL RECEIVABLE STOCKHOLDERS' PAID-IN PAID-IN ACCUMULATED FROM EQUITY SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER (DEFICIT) --------- ------ ---------- --------- ------ ---------- ----------- --------------- ------------- Balances, June 30, 1993.... 2,163,189 $ 22 $ 8,675 700 $ -- $ -- $ (7,865) $ -- $ 832 Issuance of Series D preferred stock at $5.94 per share, net of issuance costs..... 236,996 2 1,347 -- -- -- -- -- 1,349 Exercise of stock options... -- -- -- 2,920 -- 1 -- -- 1 Net loss.... -- -- -- -- -- -- (1,477) -- (1,477) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1994.... 2,400,185 24 10,022 3,620 -- 1 (9,342) -- 705 Issuance of Series E preferred stock at $7.94 per share, net of issuance costs..... 213,116 3 1,635 -- -- -- -- -- 1,638 Exercise of stock options... -- -- -- 9,808 -- 2 -- -- 2 Net loss.... -- -- -- -- -- -- (979) -- (979) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1995.... 2,613,301 27 11,657 13,428 -- 3 (10,321) -- 1,366 Issuance of Series E preferred stock at $7.94 per share, net of issuance costs..... 40,000 -- 317 -- -- -- -- -- 317 Exercise of stock options... -- -- -- 1,201,556 12 355 -- -- 367 Issuance of preferred stock warrants... -- -- 200 -- -- -- -- -- 200 Net loss.... -- -- -- -- -- -- (2,386) -- (2,386) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1996.... 2,653,301 27 12,174 1,214,984 12 358 (12,707) -- (136) Exercise of stock options... -- -- -- 225,719 2 605 -- (544) 63 Issuance of preferred stock warrants... -- -- 161 -- -- -- -- -- 161 Net loss.... -- -- -- -- -- -- (2,974) -- (2,974) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, December 31, 1996........ 2,653,301 $ 27 $ 12,335 1,440,703 $ 14 $963 $ (15,681) $(544) $(2,886) ========= === ======= ========= === ==== ======== ===== =======
See accompanying notes. F-5 58 PROBUSINESS SERVICES, INC. STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, --------------------------- ---------------------- 1994 1995 1996 1995 1996 ------- ------- ------- ----------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss...................................... $(1,477) $ (979) $(2,386) $ (456) $ (2,974) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 230 517 1,146 395 901 Acquisition of in-process technology........ -- -- 711 -- -- Changes in operating assets and liabilities: Accounts receivable and unbilled receivables............................ (231) (210) (521) (810) (995) Prepaid expenses......................... (12) (77) (214) (112) (333) Other assets............................. (8) (22) 151 (40) (84) Accounts payable......................... 125 (1) 360 37 57 Accrued liabilities...................... 46 273 650 24 877 Deferred revenue......................... 4 55 (99) 111 96 ------ ------ ------ ------ ------ Net cash used in operating activities......... (1,323) (444) (202) (851) (2,455) INVESTING ACTIVITIES Purchases of equipment, furniture and fixtures.................................... (451) (1,281) (2,685) (916) -- Other......................................... -- -- 3 -- -- Capitalization of software development costs....................................... -- (137) (645) (600) (403) ------ ------ ------ ------ ------ Net cash used in investing activities......... (451) (1,418) (3,327) (1,516) (403) FINANCING ACTIVITIES Net decrease in restricted cash............... (284) (41) -- -- -- Borrowings under line of credit agreements.... 283 1,402 5,934 88 11,188 Repayments of borrowings under line of credit agreements.................................. -- (157) (3,478) (55) (10,687) Proceeds from note payable.................... 75 -- 4,000 4,000 -- Repayments under note payable................. -- (75) -- -- (259) Proceeds from notes payable to stockholders... 250 500 250 290 -- Repayments under notes payable to stockholders................................ -- (566) (227) -- -- Principal payments on capital lease obligations................................. (63) (103) (128) (55) (234) Proceeds from issuance of preferred stock..... 1,349 1,638 -- -- -- Proceeds from issuance of common stock........ 1 2 367 53 63 ------ ------ ------ ------ ------ Net cash provided by financing activities..... 1,611 2,600 6,718 4,321 71 ------ ------ ------ ------ ------ Net (decrease) increase in cash and cash equivalents................................. (163) 738 3,189 1,954 (2,787) Cash and cash equivalents, beginning of period...................................... 277 114 852 852 4,041 ------ ------ ------ ------ ------ Cash and cash equivalents, end of period...... $ 114 $ 852 $ 4,041 $ 2,806 $ 1,254 ====== ====== ====== ====== ======
F-6 59
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, 1994 1995 1996 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.... $ 50 $ 136 $ 377 $ 91 $ 607 ====== ====== ====== ====== ====== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of equipment, furniture and fixtures under capital leases............ $ 198 $ 126 $ 210 $ -- $ 2,644 ====== ====== ====== ====== ====== Issuance of warrants in connection with debt..................................... $ -- $ -- $ 200 $ -- $ 161 ====== ====== ====== ====== ====== Note receivable from stockholder issued in connection with stock option exercise.... $ -- $ -- $ -- $ -- $ 544 ====== ====== ====== ====== ====== ACQUISITION OF DIMENSION SOLUTIONS, INC.: Issuance of Series E preferred stock........ $ -- $ -- $ 317 $ -- $ -- Liabilities assumed......................... -- -- 997 -- -- ------ ------ ------ ------ ------ $ -- $ -- $ 1,314 $ -- $ -- ====== ====== ====== ====== ======
See accompanying notes. F-7 60 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS ProBusiness Services, Inc. provides employee administrative services for large employers. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effectiveness of outsourcing and high levels of client service while providing the flexibility, control, customization and integration of an in-house system. On May 23, 1996, the Company acquired substantially all of the business and assets of Dimension Solutions, Inc. ("Dimension Solutions"), a California corporation, for $1,314,000. The transaction was recorded under the purchase method of accounting, and the results of operations of Dimension Solutions, Inc. have been included in the financial statements of the Company beginning May 24, 1996 (Note 10). On January 1, 1997, the Company acquired all of the outstanding stock of BeneSphere Administrators, Inc. ("BeneSphere"), a Washington Corporation, for $3,255,000, plus contingent payments of up to $4,500,000. The transaction will be recorded under the purchase method of accounting. Since the acquisition occurred subsequent to December 31, 1996, no results of operations of BeneSphere have been included in the historical results of operations (Note 10). INTERIM FINANCIAL INFORMATION The consolidated financial statements for the six months ended December 31, 1995 are unaudited but include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for fair presentation of its financial position and results of operations. Operating results for the six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for any future periods. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Such complex estimates include provisions for doubtful accounts and penalties and interest relating to payroll tax processing and estimates regarding the recoverability of capitalized software. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures are stated at cost, net of accumulated depreciation and amortization. Depreciation of equipment, furniture and fixtures is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold F-8 61 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) improvements and assets under capital leases are amortized over the shorter of the life of the asset or the term of the lease. PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES In connection with its payroll processing and payroll tax filing services, the Company collects funds from clients for payment of payroll taxes, holds such funds in bank accounts which are segregated from the Company's accounts until payment is due, remits the funds to the appropriate taxing authority and files federal, state and local tax returns. For such services, the Company derives its payroll tax filing revenue from fees charged and from interest income it receives on tax filing deposits temporarily held pending remittance on behalf of its clients to taxing authorities. These collected but unremitted funds are not included in the accompanying balance sheets. Collected but unremitted funds are invested primarily with high credit quality financial institutions. The amount of funds held by the Company under these arrangements with customers was $0, $1,402,000 and $104,417,000 at June 30, 1994, 1995 and 1996, respectively, and $116,547,000 at December 31, 1996. Interest income earned on collected but unremitted funds, which is classified as revenue, amounted to approximately $0, $0 and $1,896,000, for fiscal years 1994, 1995 and 1996 respectively, and $0 and $1,675,000 for the six months ended December 31, 1995 and 1996, respectively. The Company's payroll tax service is subject to various risks resulting from errors and omissions in filing client tax returns and paying tax liabilities owed to tax authorities on behalf of clients. The Company's clients calculate and transfer to the Company contributed employer and employee tax funds. The Company processes the data received from the client and remits the funds along with a tax return to the appropriate tax authorities when due. Tracking, processing and paying such tax liabilities is complex. Errors and omissions have occurred in the past and may occur in the future in connection with such service. The Company is subject to large cash penalties imposed by tax authorities for late filings or underpayment of taxes. To date, such penalties have not been significant. However, there can be no assurance that any liabilities associated with such penalties will not have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that the Company's reserves or insurance for such penalties will be adequate. In addition, failure by the Company to make timely or accurate tax return filings and pay tax liabilities when due on behalf of clients may damage the Company's reputation and adversely affect its relationships with existing clients and its ability to gain new clients. The Company's payroll tax service is also dependent upon government regulations, which are subject to continuous changes. Failure by the Company to implement these changes into its services and technology in a timely manner would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, since a significant portion of the Company's revenue is derived from interest earned from investing tax funds, changes in policies relating to withholding federal or state income taxes or reduction in the time allowed for taxpayers to remit payment for taxes owed to government authorities would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has access to confidential information and to client funds. As a result, the Company is subject to potential claims by its clients for the actions of the Company's employees arising from damages to the client's business or otherwise. There can be no assurance that the Company's fidelity bond and errors and omissions insurance will be adequate to cover any such claims. Such claims could have a material adverse effect on the Company's business, financial condition or results of operations. F-9 62 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) The Company's operations are dependent on its ability to protect its computer systems against damage from a major catastrophe (such as an earthquake or other natural disaster), fire, power loss, security breach, telecommunications failure or similar event. No assurance can be given that the precautions that the Company has taken to protect itself from or minimize the impact of such events will be adequate. Any damage to the Company's data centers, failure of telecommunications links or breach of the security of the Company's computer systems could result in an interruption of the Company's operations or other loss which may not be covered by the Company's insurance. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. REVENUE RECOGNITION Revenue from payroll processing and payroll tax filing services under client contracts is recognized as the services are performed. Revenue earned in advance of a client billing is reported as unbilled receivables and is billed in accordance with the terms of the client contract. Interest income earned on unremitted payroll tax funds is recognized as earned. SOFTWARE DEVELOPMENT COSTS The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company capitalizes software development costs incurred after establishing technological feasibility of the product prior to the general release of the service using the product. Costs incurred in connection with the enhancement of the Company's existing products or after the general release of the service using the product are expensed in the current period and included in the research and development costs within the statement of operations. The Company amortizes the capitalized software development costs on a straight line basis over the estimated product life, which is generally a 36 month period and such amortization is included in cost of providing services within the statement of operations. CONCENTRATION OF CREDIT RISK The Company's cash balances are maintained in certificates of deposit, money market funds and checking accounts with three financial institutions. The Company's sales are primarily to customers in the western United States. Credit evaluations are performed as necessary and the Company does not require collateral from customers. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, the FASB issued Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which establishes a fair value method of accounting for stock-based compensation plans. The Company intends to continue to account for employee stock options using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 will require certain additional disclosures in the Company's fiscal year 1997 financial statements. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which F-10 63 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The Company has adopted Statement No. 121 in fiscal year 1997, which has not had a material impact. NET LOSS AND PRO FORMA NET LOSS PER SHARE Except as noted below, net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that, pursuant to applicable Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares (stock options, warrants and preferred stock) issued during the period commencing 12 months prior to the initial filing of a proposed public offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method for stock options and warrants and the as if-converted method for preferred stock at the estimated initial public offering price). Per share information calculated on this basis is as follows (in thousands except per share amounts):
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, --------------------------------------- -------------------------- 1994 1995 1996 1996 ----------- ----------- ----------- 1995 ----------- ----------- (UNAUDITED) Net loss per share................ $ (0.52) $ (0.34) $ (0.80) $ (0.16) $ (0.97) ======== ======== ======= ======= ========= Shares used in calculating net loss per share.................. 2,859 2,863 2,985 2,904 3,068 ======== ======== ======= ======= =========
Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares from convertible preferred stock issued more than 12 months prior to the proposed initial public offering that will automatically convert upon completion of the Company's initial public offering (using the as if-converted method) from the original date of issuance. 2. EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures consist of the following (in thousands):
JUNE 30, ------------------- DECEMBER 31, 1995 1996 1996 ------- ------- ------------ Equipment and leasehold improvements............... $ 2,710 $ 5,145 $7,584 Furniture and fixtures............................. 532 1,060 1,175 Construction in progress........................... -- -- 90 ------- ------- 3,242 6,205 8,849 Less accumulated depreciation and amortization..... (1,270) (2,213) (2,916) ------- ------- $ 1,972 $ 3,992 $5,933 ======= =======
Equipment, furniture and fixtures include amounts for assets acquired under capital leases, principally production, office and computer equipment, of $434,000, $644,000 and $3,487,000 at June 30, 1995 and 1996, and December 31, 1996, respectively. Accumulated amortization of these assets was $174,000, $313,000 and $534,000 at June 30, 1995 and 1996 and December 31, 1996, respectively. F-11 64 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
JUNE 30, ------------------- DECEMBER 31, 1995 1996 1996 ------- ------- ------------ Borrowings under line of credit agreements......... $ 1,528 $ 3,984 $4,259 Subordinated notes payable......................... -- 3,838 3,871 ------- ------- 1,528 7,822 8,130 Less current portion............................... (512) -- -- ------- ------- $ 1,016 $ 7,822 $8,130 ======= =======
LINE OF CREDIT AGREEMENTS At June 30, 1996, the Company had a line of credit agreement (the "Agreement") which provided for borrowings that were limited to the lesser of $4,000,000 or three times the Company's average monthly cash collections over the three month period prior to the borrowing date, less $150,000. In October 1996, the Agreement was amended to provide for borrowings that are limited to the lesser of $10,000,000, of which $1,000,000 is designated as an equipment acquisition loan, or four times the Company's average monthly cash collections, as defined, (decreased by a factor of one month for each 30% decrease in the Company's revenue, measured on a quarterly basis) over the four month period prior to the borrowing date, less $150,000. Borrowings outstanding under the Agreement bear interest at the bank's prime rate plus 1% (8.25% at June 30, 1996 and December 31, 1996) and interest is payable monthly. The Company is required to pay a minimum of $30,000 in interest quarterly plus other renewal fees under the Agreement. Borrowings outstanding under the Agreement are collateralized by substantially all of the Company's assets not otherwise encumbered. The financial covenants of the Agreement require the Company to maintain a minimum cash balance. The cash balance requirement at June 30, 1996 and December 31, 1996 was not material. The Agreement expires in April 1998, but is subject to automatic renewal for an additional year at the option of the Company. The Company has classified the $4,259,000 of borrowings under the Agreement as non-current liabilities at December 31, 1996 as management expects to maintain adequate cash collections during fiscal year 1997 to support at least such level of borrowings. Equipment acquisition loans bear interest at the bank's prime rate plus 1%. Borrowings are to be repaid over a 36 month period following a six month period of payments for interest only. There were no borrowings under the equipment acquisition loans during fiscal year 1996 or the six months ended December 31, 1996. In connection with line of credit agreements, the Company issued warrants in 1995 and 1996 to purchase 9,446 and 9,500 shares, respectively, of the Company's Series E preferred stock with an exercise price of $7.94 per share which expire in January 2000 through April 2001. The Company deemed the fair value of these warrants to be immaterial at the date of issuance. NOTES PAYABLE TO STOCKHOLDERS Notes payable to stockholder at June 30, 1995 and 1996 and December 31, 1996, includes notes due to an officer, director and majority stockholder of the Company. The notes are due on demand and bear interest at the rate of 10%. The amounts due to this majority stockholder were $236,000, $284,000 and $25,000 at June 30, 1995 and 1996 and December 31, 1996, respectively. F-12 65 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) Note payable to stockholder, non-current at June 30, 1996 and December 31, 1996 includes a $250,000 subordinated note payable, which is payable to a stockholder, assumed in the acquisition of Dimension Solutions, Inc. The note is due in fiscal 1999 and bears interest at the prime rate plus 2.5% per annum (Note 10). SUBORDINATED NOTES PAYABLE On October 20, 1995 and December 12, 1995, the Company issued $1,100,000 and $2,900,000, respectively of subordinated notes payable to investors ("Subordinated Notes"). The Subordinated Notes and interest accrued thereon are due and payable on demand upon the earlier of three years from the date of the notes or, at the option of the Company or the Subordinated Notes holders, within 30 days after the completion of a public offering of the Company's common stock which triggers the automatic conversion of the Company's outstanding preferred stock into common stock. The Subordinated Notes accrue interest at the rate of 8% per annum, and such interest is payable on a quarterly basis. In connection with the issuance of the Subordinated Notes, the Company issued warrants to purchase 125,926 shares of the Company's Series E Preferred Stock at $7.94 per share. The warrants, to the extent not previously exercised, shall expire on the earlier of (i) the date the underlying Subordinated Notes are repaid in full, (ii) immediately prior to the completion of a public offering of the Company's common stock which triggers the automatic conversion of the Company's outstanding preferred stock into common stock, or (iii) any sale, consolidation or merger of the Company in which the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. The Company deemed the fair value of warrants to be $200,000, which amount has been recorded as a reduction of the carrying amount of the Subordinated Notes and is being amortized using the effective interest method over the term of the Subordinated Notes. EQUIPMENT LEASE LINE On July 9, 1996, the Company entered into an equipment lease line agreement under which the Company may acquire up to $2,000,000 of equipment through July 1997. In connection with the equipment lease line, the Company issued a warrant to purchase 10,000 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share. The warrant is exercisable for five years from the date of the final equipment purchase. The Company deemed the fair value of this warrant to be immaterial at the date of issuance. As of December 31, 1996, the Company had used approximately $1,870,000 of the equipment lease line. Amounts outstanding under the agreement are classified as capital lease obligations in the balance sheet and are secured by the equipment. F-13 66 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 4. LEASE OBLIGATIONS The Company leases its facilities and various equipment under non-cancellable operating leases which expire at various dates through 2001. The Company is also obligated under a number of capital equipment leases expiring at various dates through 2001. The future minimum lease payments under capital and operating leases subsequent to December 31, 1996 for capital leases and June 30, 1996 for operating leases are summarized as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 1997............................................................ $1,187 $ 1,176 1998............................................................ 1,161 1,208 1999............................................................ 1,066 908 2000............................................................ 355 365 2001............................................................ -- 188 ----- ------ Total minimum lease payments.................................... 3,769 $ 3,845 ====== Less amounts representing interest.............................. (769) ----- Present value of net minimum capital lease obligations.......... 3,000 Less current portion............................................ (821) ----- $2,179 =====
In September 1996, the Company entered into a lease arrangement under which the lessor will build a facility into which the Company will move its corporate headquarters. This operating lease will expire approximately eleven years from completion of the facility and will require the Company to pay a minimum average monthly lease payment of approximately $167,000 over the life of the lease and such lease payments are not included in the above table as the completion date is not known. As part of the build to suit lease agreement, the Company issued a warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share. The warrant is exercisable for the lesser of eight years from the date of completion or five years from the date of an initial public offering which triggers conversion of Series E Preferred Stock. The Company valued the warrants at $161,000. Rent expense was $248,000, $407,000 and $707,000 for fiscal years 1994, 1995 and 1996, and $305,000 and $624,000 for the six months ended December 31, 1995 and 1996, respectively. 5. INCOME TAXES As of June 30, 1996, the Company had federal and state net operating loss carryforwards of approximately $9,028,000 and $3,424,000, respectively. As of December 31, 1996, the Company had federal and state net operating loss carryforwards of $11,530,000 and $4,123,000, respectively. The Company also had federal and state research and development tax credit carryforwards of approximately $274,000 and $123,000, respectively as of June 30, 1996, and $385,000 and $168,000, respectively, as of December 31, 1996. The federal net operating loss and federal credit carryforwards will expire at various dates beginning with the fiscal year ending 1999 through 2011, if not utilized. The state net operating loss carryforwards and state credit carryforwards will expire at various dates beginning with the fiscal year ending 1997 through 2011, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state F-14 67 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
JUNE 30, ------------------- DECEMBER 31, 1995 1996 1996 ------- ------- ------------ Deferred tax assets: Net operating loss carryforwards......................... $ 2,539 $ 3,279 $ 4,172 Research and development credit carryforwards............ 355 397 553 Other.................................................... 98 162 204 ------- ------- Gross deferred tax assets.................................. 2,992 3,838 4,929 Less valuation allowance................................... (2,988) (3,597) (4,682) ------- ------- Deferred tax assets........................................ 4 241 247 Deferred tax liabilities: Capitalized software development costs................... (4) (130) (154) Other.................................................... -- (111) (93) ------- ------- Gross deferred tax liabilities............................. (4) (241) (247) ------- ------- Net deferred taxes......................................... $ -- $ -- $ -- ======= =======
A valuation allowance has been established and, accordingly, no benefit has been recognized for the Company's net operating losses and other deferred tax assets. The net valuation allowance increased by $609,000 during the year ended June 30, 1996 and $1,085,000 during the six month period ended December 31, 1996. The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of net losses since its inception and expected near-term future losses. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. 6. STOCKHOLDERS' EQUITY PREFERRED STOCK As of June 30, 1996 and December 31, 1996, the Company has authorized 6,000,000 shares of preferred stock, of which 1,500,000 shares have been designated as Series A, B and C shares, 500,000 shares have been designated as Series D and E shares and 500,000 shares are undesignated. F-15 68 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) Preferred stock consists of the following (dollars in thousands):
SHARES LIQUIDATION OUTSTANDING PREFERENCE ----------- ----------- Series A:................................................ 920,000 $ 3,501 B................................................. 919,400 3,497 C................................................. 260,785 1,288 D................................................. 300,000 1,782 E................................................. 253,116 2,010 --------- ------- Total........................................ 2,653,301 $12,078 ========= =======
Holders of the Company's Series A, B, C, D and E preferred stock are entitled to receive non-cumulative dividends in the amount of $.02 per share per annum in preference to holders of the Company's common stock at the discretion of the Board of Directors. No dividends were declared during fiscal years 1994, 1995 and 1996 and during the six months ended December 31, 1996. Each holder of preferred stock may, at any time, convert such holder's preferred stock to shares of common stock. Holders of preferred stock generally have the same voting rights as holders of common stock. Preferred stock is initially convertible at the ratio of one share of preferred stock to two shares of common stock, subject to adjustment to prevent dilution in the event that the Company issues additional shares. Additionally, conversion is automatic upon the completion of an underwritten public offering of common stock in which the price per share is not less than $3.50 per share with aggregate gross proceeds to the Company of at least $7,000,000. In the event of the liquidation of the Company, holders of Series A, B, C, D and E preferred stock are entitled to receive an amount per share equal to $3.805, $3.804, $4.94, $5.94 and $7.94, respectively, prior and in preference to any distribution of Company assets to holders of common stock, plus all declared and unpaid dividends. STOCK SPLIT In November 1994, the Company's stockholders authorized a two-for-one split of its common stock. All references in the accompanying financial statements to the number of shares of common have been restated to reflect the stock split. PROPOSED PUBLIC OFFERING OF COMMON STOCK On November 15, 1996, the Board of Directors authorized the Company to proceed with an initial public offering of the Company's common stock. If the offering is consummated under the terms presently anticipated, all of the currently outstanding preferred stock will automatically convert into 5,306,602 shares of common stock. Prior to the offering, the Company plans to reincorporate in Delaware and authorize 5,000,000 shares of undesignated preferred stock, increase the number of authorized shares of common stock to 60,000,000 and adopt a par value of $.001 per share for common and preferred shares. In addition, the Company will change its name from ProBusiness, Inc. to ProBusiness Services, Inc. The unaudited pro forma stockholders' equity (deficit) at December 31, 1996 gives effect to the conversion of all outstanding shares of convertible preferred stock into 5,306,602 shares of common stock upon the completion of the Company's initial public offering of shares. F-16 69 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) NOTES RECEIVABLE In December 1996 the Company advanced $544,000 in the form of a note receivable from a stockholder, who is also an executive officer, in connection with the exercise of options to purchase common stock. The note is due on December 2000, bears interest at 6.31% and is full recourse. In January 1997, the Company advanced $544,000 in the form of a note receivable from a stockholder, who is also an executive officer, in connection with the exercise of options to purchase common stock. The note is due on January 2001, bears interest at 6.10% and is full recourse. In January 1997, the Company advanced $250,000 against a note receivable from a stockholder and executive officer. The note is due in January 2001, bears interest at 6.10% and is full recourse. 7. STOCK OPTION AND STOCK PURCHASE PLANS STOCK OPTION PLANS The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees, directors and consultants of nonstatutory stock options. At December 31, 1996, 2,987,248 shares of common stock are reserved for the exercise of stock options under the 1989 Plan. Individuals owning more than 10% of the Company's stock are not eligible to participate in the plan unless the option's price is at least 110% of the fair market value of the common stock at the date of grant. Options issued to employees owning less than 10% of the Company's stock may be granted at prices of at least 100% (85% for nonemployees) of the fair market value of the stock at the grant date. Under the terms of the plan, options generally vest at the rate of 25% on the first anniversary of the vesting commencement date as defined by the option agreement and ratably on a monthly basis for the remaining shares thereafter until fully vested at the end of the fourth year. The options expire at the earlier of ten years from date of grant or six months after termination of employment with the Company and are not transferable. In 1996, the Company established the 1996 Executive Stock Option Plan ("Executive Plan") which provides for stock options to employees and consultants. Under the Executive Plan, the Board of Directors may grant nonstatutory stock options to employees and consultants and incentive stock options to employees only. At June 30, 1996 and December 31, 1996, 750,000 shares of common stock are reserved for exercise of stock options under the 1996 Plan. The grant of incentive stock option to an employee who owns stock representing more than 10% of the voting power of all classes of stock of the Company must be no less than 110% of the fair market value per share on the date of grant. Fair market value is determined by the Board of Directors. For all other employees the options must be no less than 100% of the fair market value per share on the date of grant. All nonstatutory stock options granted are at a price that is determined by the Board of Directors. The options generally expire ten years from the date of grant and are exercisable as determined by the Board of Directors. In November 1996, the Board of Directors approved, effective upon the offering and subject to stockholder approval, an amendment and restatement of the Executive Plan to rename 1996 Executive Stock Option Plan to the 1996 Stock Option Plan (the "1996 Plan") and authorized for issuance under the 1996 Plan a total of 750,000 shares plus any unused or cancelled shares under the 1989 Plan, and an annual increase to be added on each anniversary date of the adoption of the 1996 Plan equal to the lesser of (a) 250,000 shares, (b) 2% of the outstanding shares of common stock on such date or (c) a lesser amount determined by the Board. The 1996 Plan provides for grants to employees (including F-17 70 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) officers and employee directors) of incentive stock options and for the granting to employees, directors and consultants of nonqualified stock options. A summary of the activity under the 1989 and 1996 Plans is set forth below:
EXERCISE PRICE PER NUMBER SHARE OF SHARES ------------------ ----------- Outstanding at June 30, 1993................. $0.190 - $0.297 603,646 Granted.................................... 0.247 - 0.395 293,800 Exercised.................................. 0.190 - 0.297 (2,920) Canceled................................... 0.190 - 0.297 (12,080) ----------- ---------- Outstanding at June 30, 1994................. 0.190 - 0.395 882,446 Granted.................................... 0.295 - 0.395 164,436 Exercised.................................. 0.190 - 0.395 (9,808) Canceled................................... 0.190 - 0.395 (18,178) ----------- ---------- Outstanding at June 30, 1995................. 0.190 - 0.395 1,018,896 Granted.................................... 0.395 - 4.75 1,459,530 Exercised.................................. 0.190 - 0.435 (1,201,556) Canceled................................... 0.190 - 0.395 (634,069) ----------- ---------- Outstanding at June 30, 1996................. 0.190 - 4.75 642,801 Granted.................................... 4.753 - 7.25 189,750 Exercised.................................. 0.190 - 7.25 (225,719) Canceled................................... 0.247 - 7.25 (37,915) ----------- ---------- Outstanding at December 31, 1996............. $0.190 - $ 7.25 568,917 =========== ==========
As of December 31, 1996, options to purchase 138,416 shares of common stock were vested and exercisable at an average exercise price of $0.44 per share, and at December 31, 1996, options to purchase 351,862 shares were available for future grant. Subsequent to December 31, 1996, the Company increased the shares available for future grant under the 1989 Plan by 1,375,766, subject to stockholder approval. 1996 EMPLOYEE STOCK PURCHASE PLAN The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in November 1996, effective upon the offering and subject to stockholder approval. The Company has reserved a total of 500,000 shares of common stock for issuance under the Purchase Plan, with an annual increase to be added on each anniversary date of the adoption of the Purchase Plan equal to the lesser of (a) 150,000 shares, (b) 1.5% of the outstanding shares on such date or (c) a lesser amount determined by the Board. The price of common stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the common stock on the first or last day of each purchase period. The Purchase Plan will be implemented by an initial offering period of approximately 24 months commencing on the first trading day on or after the effective date of the offering and ending on the last trading day on or before April 30, 1998. Subsequent offering periods will last 24 months and will commence on the first trading day on or after November 1 and May 1 of each year during which the Purchase Plan is in effect, and will terminate on the last trading day in the periods ending 24 months later. Each 24-month offering period will consist of 4 purchase periods of approximately 6 months duration. The Purchase Plan will be administered by the Board of Directors or F-18 71 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any designated subsidiary for at least 20 hours per week and for more than 5 months in any calendar year. 8. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the benefit of certain qualified employees. Employees may elect to contribute to the Plan, through payroll deductions of up to 18% of their compensation, subject to certain limitations. The Company, at its discretion, may make additional contributions. The Company did not make any contributions to the Plan in fiscal years 1994, 1995 or 1996 or in the six month period ended December 31, 1996. 9. BALANCE SHEET DETAIL Other assets consist of the following (in thousands):
JUNE 30, ----------------- DECEMBER 31, 1995 1996 1996 ------ ------ ------------ Capitalized software development costs, net........................................ $ 137 $ 835 $1,036 Covenant-not-to-compete...................... -- 41 34 Prepaid royalties............................ -- 100 100 Deferred loan costs.......................... -- -- 161 Restricted cash deposits..................... 325 -- -- Deposits and other........................... 47 249 377 ---- ------ $ 509 $1,225 $1,708 ==== ======
Accumulated amortization for capitalized software development costs was approximately $0, $172,000 and $330,000 at June 30, 1995 and 1996 and December 31, 1996, respectively. Accrued liabilities consist of the following (in thousands):
JUNE 30, ----------------- DECEMBER 31, 1995 1996 1996 ------ ------ ------------ Accrued expenses............................. $ 262 $ 737 $1,271 Accrued tax penalties........................ -- -- 488 Accrued payroll and related expenses......... 100 301 344 Accrued acquisition costs.................... -- 172 124 Other........................................ 84 248 108 ---- ------ $ 446 $1,458 $2,335 ==== ======
10. BUSINESS ACQUISITIONS On May 23, 1996, the Company acquired substantially all of the business and assets of Dimension Solutions, Inc. The total purchase price of $1,314,000 consisted of the issuance of 40,000 shares of Series E convertible preferred stock with a fair value of $317,000 and the assumption of $997,000 of Dimension Solutions, Inc. liabilities (including acquisition costs). F-19 72 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) A summary of the purchase price allocation is as follows (in thousands): Current and other assets............................................ $ 318 In-process technology (charged to operations)....................... 711 Developed software.................................................. 225 Covenant-not-to-compete............................................. 60 ------ Total purchase price allocation..................................... $1,314 ======
On January 1, 1997, the Company acquired all of the outstanding stock of BeneSphere Administrators, Inc. The purchase price consisted of $500,000 in cash, of which $250,000 was paid upon closing and $250,000 is payable on April 30, 1997, warrants to purchase 50,000 shares of common stock at a price of $9.00 per share with an estimated fair value of $160,000 and are exercisable for five years from the date of grant, the assumption of $2,595,000 of BeneSphere's liabilities (including acquisition costs) plus contingent payments based on BeneSphere's revenues in excess of certain base amounts, as defined in the agreement, over the next two calendar years following the acquisition which cannot exceed $4,500,000. The contingent payments are payable in cash in four quarterly payments beginning April 1, 1998 for the calendar year 1997 payment and April 1, 1999 for the calendar year 1998 payment. Interest shall accrue at a rate of 9% per annum on all earned but unpaid balances. A summary of the purchase price allocation is as follows (in thousands): Current and other assets.................................................... $ 673 Goodwill.................................................................... 2,272 Customer list............................................................... 310 ------ Total purchase price allocation............................................. $3,255 ======
Goodwill arising from the acquisition will be amortized on a straight-line basis over 20 years. The following unaudited pro forma information represents the combined results of operations as if the acquisitions of Dimension Solutions and BeneSphere had occurred as of the beginning of the periods presented and does not purport to be indicative of what would have occurred had the acquisitions been made as of that date or the results which may occur in the future.
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, 1996 1996 ---------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro forma net revenues............................. $ 17,341 $ 11,855 Pro forma net loss................................. (2,730) (3,678) Pro forma net loss per share....................... $ (0.33) $ (0.44)
The pro forma results include the historical operations of the Company and the historical operations of the acquired businesses adjusted to reflect the amortization of intangible assets resulting from the acquisitions of $247,000 and $76,000 for the year ended June 30, 1996 and the six months ended December 31, 1996, respectively. The pro forma results do not include salaries and bonuses of $123,000 and $779,000 for the year ended June 30, 1996 and the six months ended December 31, 1996, respectively, paid to executives of BeneSphere which will not be incurred on an ongoing basis. The pro forma results do not include any adjustments for the Company's proposed initial public offering. F-20 73 PROBUSINESS SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED) 11. SUBSEQUENT EVENTS PRIVATE FINANCING In March 1997, the Company issued 574,733 shares of $.01 par value Series F preferred stock to entities affiliated with General Atlantic Partners LLC at $17.40 per share resulting in gross proceeds of approximately $10 million. Holders of Series F preferred stock are entitled to receive non-cumulative dividends in the amount of $.02 per share per annum in preference to holders of the Company's common stock at the discretion of the Board of Directors. In the event dividends are paid on any share of common stock, an additional dividend shall be paid with respect to all outstanding shares of Series F preferred in an amount equal per share of Series F preferred (on an as-if-converted to common stock basis) to the amount paid or set aside for each share of common stock. Each holder of Series F preferred stock, may, at any time, convert such holder's preferred stock to shares of common stock. Holders of Series F preferred stock generally have the same voting rights as holders of common stock. Series F preferred stock is initially convertible at the ratio of one share of preferred stock to two shares of common stock, subject to adjustment to prevent dilution in the event that the Company issues additional shares. Additionally, conversion of Series F preferred stock is automatic upon the completion of an underwritten public offering of common stock in which the price per share is not less than $8.70 per share with aggregate gross proceeds to the Company of at least $10,000,000. In the event of liquidation of the Company, holders of Series F preferred stock are entitled to receive an amount per share equal to $17.40 prior and in preference to any distribution of the Company assets to holders of common stock, plus all declared and unpaid dividends. F-21 74 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders BeneSphere Administrators, Inc. We have audited the accompanying balance sheet of BeneSphere Administrators, Inc. as of June 30, 1996 and the related statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BeneSphere Administrators, Inc. at June 30, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Seattle, Washington December 20, 1996 F-22 75 BENESPHERE ADMINISTRATORS, INC. BALANCE SHEETS (In thousands, except share amounts)
DECEMBER 31, 1996 JUNE 30, ------------ 1996 -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................................... $ 2 $ 5 Accounts receivable............................................... 116 120 Prepaid sales commissions......................................... 200 155 Prepaids and deposits............................................. 22 63 ----- ------- Total current assets................................................ 340 343 Furniture, equipment, and improvements, at cost less accumulated depreciation of $195 and $254 at June 30, 1996 and December 31, 1996, respectively................................................ 259 330 ----- ------- Total assets.............................................. $ 599 $ 673 ===== ======= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Borrowings under line of credit................................... $ 111 $ 188 Accounts payable.................................................. 125 243 Accrued liabilities............................................... 68 507 Customer deposits................................................. 724 1,032 Bonus payable to shareholder...................................... -- 275 ----- ------- Total current liabilities................................. 1,028 2,245 Commitments and contingencies Shareholders' deficit: Common stock, no par value: 50,000 shares authorized; 20,000 and 27,156 shares issued and outstanding at June 30, 1996 and December 31, 1996, respectively.................................................. 68 332 Accumulated deficit............................................... (497) (1,904) ----- ------- Total shareholders' deficit............................... (429) (1,572) ----- ------- Total liabilities and shareholders' deficit............... $ 599 $ 673 ===== =======
See accompanying notes. F-23 76 BENESPHERE ADMINISTRATORS, INC. STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------ 1996 1995 1996 ---------- ------ ------- (UNAUDITED) Revenues.................................................... $2,424 $1,046 $ 1,656 Costs and expenses: Operating costs........................................... 873 364 882 Selling, general, and administrative...................... 1,614 776 2,170 ------ ------ ------ Total costs and expenses.................................... 2,487 1,140 3,052 ------ ------ ------ Loss from operations........................................ (63) (94) (1,396) Other expense, net.......................................... 8 3 11 ------ ------ ------ Net loss.................................................... $ (71) $ (97) $(1,407) ====== ====== ====== Net loss per common share................................... $(3.55) $(4.85) $(70.21) ====== ====== ====== Number of shares used in calculation of net loss per common share..................................................... 20,000 20,000 20,039 ====== ====== ======
See accompanying notes. F-24 77 BENESPHERE ADMINISTRATORS, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT (In thousands, except share amounts)
COMMON STOCK ------------------ ACCUMULATED SHARES CAPITAL DEFICIT TOTAL ------ ------- ----------- ------- Balances at June 30, 1995........................ 20,000 $ 68 $ (375) $ (307) Distributions paid to shareholders............. -- -- (51) (51) Net loss....................................... -- -- (71) (71) ------ ---- ------- ------- Balances at June 30, 1996........................ 20,000 68 (497) (429) Issuance of common stock to shareholder in lieu of cash compensation (unaudited)............ 7,156 264 -- 264 Net loss (unaudited)........................... -- -- (1,407) (1,407) ------ ---- ------- ------- Balances at December 31, 1996 (unaudited)........ 27,156 $ 332 $(1,904) $(1,572) ====== ==== ======= =======
See accompanying notes. F-25 78 BENESPHERE ADMINISTRATORS, INC. STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------- 1996 1995 1996 ---------- ----- ------- (UNAUDITED) OPERATING ACTIVITIES Net loss..................................................... $ (71) $ (97) $(1,407) Adjustments to reconcile net loss to net cash provided by operating activities: Noncash items: Depreciation and amortization........................... 90 44 59 Loss on disposal of furniture and equipment............. 8 -- -- Issuance of common stock to shareholder in lieu of cash compensation.......................................... -- -- 264 Changes in operating assets and liabilities: Accounts receivable..................................... (86) (21) (4) Prepaid sales commissions............................... (98) (147) 45 Prepaids and deposits................................... (11) (2) (41) Accounts payable........................................ 90 9 118 Accrued liabilities..................................... (96) (44) 439 Customer deposits....................................... 348 454 308 Bonus payable to shareholder............................ -- -- 275 ----- ----- ----- Net cash provided by operating activities.................... 174 196 56 INVESTING ACTIVITY -- purchases of furniture and equipment... (234) (100) (130) FINANCING ACTIVITIES Proceeds from line of credit borrowings...................... 439 60 651 Repayments of line of credit borrowings...................... (339) (71) (574) Distributions paid to shareholders........................... (51) -- -- ----- ----- ----- Net cash provided by (used in) financing activities.......... 49 (11) 77 ----- ----- ----- Net (decrease) increase in cash and cash equivalents......... (11) 85 3 Cash and cash equivalents, beginning of period............... 13 13 2 ----- ----- ----- Cash and cash equivalents, end of period..................... $ 2 $ 98 $ 5 ===== ===== ===== Supplemental disclosure of cash flow information: Interest paid on line of credit borrowings................. $ 3 $ -- $ 11 ===== ===== =====
See accompanying notes. F-26 79 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 1996 (INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE SIX-MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) 1. REPORTING ENTITY BeneSphere Administrators, Inc. is the successor corporation to A-Plus Administrators, Inc. d.b.a. Benefits-Plus Administrators (APA), a Washington Corporation, and Baransky Reppond, Inc. d.b.a. Benefits-Plus Administrators (BRI), a California Corporation. In December 1995, BRI was merged into APA (see Note 3). Subsequent to June 30, 1996, APA's name was changed to BeneSphere Administrators, Inc. (BAI). BAI provides benefits administration services which include flexible benefits enrollment and processing, COBRA administration, and consolidated billing and eligibility tracking and premium payment services for small and medium-sized companies located in the Pacific Northwest and northern California. 2. SIGNIFICANT ACCOUNTING POLICIES UNAUDITED FINANCIAL INFORMATION The financial statements as of December 31, 1996 and for the six-months ended December 31, 1996 and 1995 are unaudited. The unaudited financial statements include all normal recurring adjustments which BAI's management considers necessary for a fair presentation. Operating results for the six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for any future periods. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates include provisions for doubtful accounts and estimates of accrued liabilities to be paid. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents. FURNITURE, EQUIPMENT, AND IMPROVEMENTS Furniture, equipment, and improvements are recorded at cost. Depreciation is computed utilizing accelerated depreciation methods over the estimated useful lives of the assets, which range from five to seven years. CUSTOMER DEPOSITS AND PREPAID SALES COMMISSIONS Customer deposits for set-up and administrative services and related revenues are deferred and amortized ratably on a monthly basis over a period that does not exceed the initial term of the contract. Sales commissions associated with set-up and administrative services are prepaid and recognized ratably on a monthly basis over the same contract period. F-27 80 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS BAI's financial instruments consist of cash and cash equivalents, accounts receivable and payable, and short-term borrowings. The fair values of these instruments approximate their recorded values. CONCENTRATIONS OF CREDIT RISK BAI's cash balances are maintained in checking accounts with one financial institution and, as such, are subject to federal deposit insurance limitations. Credit evaluations of BAI's customers are performed as necessary, and BAI does not require collateral from its customers. No individual customer or industry comprises a significant concentration of business for BAI. PER SHARE DATA Net loss per common share is computed based on the weighted average number of common shares outstanding during the period. 3. BUSINESS COMBINATIONS APA and BRI were members of a controlled group of corporations. Effective December 31, 1995, BRI was merged into APA through the issuance of 10,000 shares of APA's common stock for all of BRI's outstanding common stock. The merger has been accounted for in a manner similar to pooling of interests and, accordingly, the accompanying financial statements include the accounts of BRI on a historical cost basis and its operations for all periods prior to the merger. Details of the results of operations of the previously separate companies for the six-month period ended December 31, 1995 follow:
REVENUES NET LOSS -------- -------- (IN THOUSANDS) APA.................................... 3$35.... $(72) BRI.................................... 711 (25) ------ ---- Combined............................... $1,046 $(97) ====== ====
The shareholders believe that the merger of BRI and APA was a tax-free transaction. However, should the Internal Revenue Service successfully challenge BAI on this matter, BAI's shareholders have agreed to reimburse BAI and its successors for any required tax payments. As a result, no amounts have been accrued in the accompanying financial statements related to the potential payment and reimbursement of taxes from the merger. Under a stock acquisition agreement (the Agreement), BAI's shareholders agreed to sell all of their outstanding common stock shares to ProBusiness Services, Inc. (PBI) for cash and additional future consideration as of January 1, 1997. Since the acquisition occurred subsequent to December 31, 1996, no adjustments to recorded amounts have been included in the historical balance sheet or results of operations. PBI, a privately held California corporation which provides payroll processing services, has committed to fund the operations of BAI through at least January 1, 1998. 4. LINE OF CREDIT BAI has a line of credit with a bank on which it could borrow up to a maximum of $275,000 at June 30, 1996 (increased to $425,000 in October 1996). Outstanding borrowings on the line of credit bear interest at the bank's prime rate plus 1%, (9.25% at June 30, 1996), are collateralized by F-28 81 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) substantially all assets of BAI, and are guaranteed by certain shareholders. Interest on the outstanding borrowings is payable monthly. All outstanding principal borrowings are due upon demand or, if no demand is made, on January 31, 1997. The line of credit agreement also provides, among other matters, restrictions on additional financing, mergers, and acquisitions. 5. INCOME TAXES BRI was a C Corporation under the Internal Revenue Code (IRC) and was, therefore, subject to corporate income tax. Amounts related to income taxes payable and temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes prior to and at the date of merger were immaterial. APA, with the consent of its shareholders, elected to be taxed as an S Corporation under the IRC. As a result, BAI, as APA's successor, is generally not subject to corporate income tax, and the shareholders separately report their respective pro rata shares of BAI's income, deductions, losses, and credits on their personal income tax returns. It is BAI's practice to accrue and pay cash distributions to shareholders in amounts sufficient for them to meet their personal income tax obligations resulting from the S Corporation status. Retained earnings (accumulated deficit) are charged at the time the estimated distributions are accrued. 6. RELATED-PARTY TRANSACTIONS BAI is charged and allocated certain administrative and overhead costs incurred and paid by various controlled group members on BAI's behalf. These costs totaled $206,000 for the year ended June 30, 1996, and $62,000 and $177,000 for the six months ended December 31, 1995 and 1996, respectively, and are included in selling, general, and administrative expenses. Effective December 31, 1996, BAI issued 7,156 shares of common stock to an existing shareholder for past services rendered. A value of $264,000 was assigned to the common stock by BAI, which was derived by an independent third party utilizing a discounted cash flows analysis, less a marketability discount. Payroll withholding taxes in the amount of $240,000 have been accrued by BAI at December 31, 1996 and will be paid by BAI on behalf of the shareholder. BAI also agreed to pay a one-time $275,000 cash bonus to the shareholder. Compensation expense in the amount of $779,000 was recorded in selling, general, and administrative expenses for the six months ended December 31, 1996 related to the stock and bonus transactions. 7. 401(K) PLAN BAI participates in a 401(k) plan sponsored by a controlled group member. The plan is available to all employees meeting certain eligibility requirements. Contributions by BAI are based on a matching formula as defined in the plan. Contribution expense related to the plan totaled $4,000 for the year ended June 30, 1996. F-29 82 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. LEASE COMMITMENTS BAI leases office space under noncancelable operating leases which contain rent escalation clauses and renewal options. In addition to base rent, BAI is required to pay a pro rata portion of the building's monthly taxes and operating costs as additional rent. Future minimum base lease payments under noncancelable operating leases at June 30, 1996 are as follows:
YEARS ENDING JUNE 30 (IN THOUSANDS) ------------------------------------- 1997................................. $115 1998................................. 115 1999................................. 87 2000................................. 88 2001................................. 100 Thereafter........................... 194 ---- $699 ====
Rent expense totaled $97,000 for the year ended June 30, 1996, and $41,000 and $55,000 for the six months ended December 31, 1995 and 1996, respectively. 9. ACCRUED LIABILITIES Accrued liabilities consisted of the following:
JUNE 30, DECEMBER 31, 1996 1996 -------- ------------ (IN THOUSANDS) Accrued taxes payable on shareholder stock compensation...................................... $ -- $240 Other accrued liabilities........................... 68 267 --- ---- $ 68 $507 === ====
F-30 83 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Dimension Solutions, Inc. We have audited the accompanying balance sheet of Dimension Solutions, Inc. as of April 30, 1996 and the related statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dimension Solutions, Inc. at April 30, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Walnut Creek, California November 20, 1996 F-31 84 DIMENSION SOLUTIONS, INC. BALANCE SHEET APRIL 30, 1996 (In thousands, except share amounts) ASSETS Current assets: Cash............................................................................... $ 4 Accounts receivable................................................................ 99 Prepaid expenses................................................................... 3 ----- Total current assets................................................................. 106 Equipment, furniture and fixtures (less accumulated depreciation of $50)............. 69 Other assets......................................................................... 5 ----- Total assets............................................................... $ 180 ===== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable................................................................... $ 59 Accrued expenses................................................................... 88 Customer deposits.................................................................. 320 Note payable to shareholder........................................................ 25 ----- Total current liabilities.................................................. 492 Note payable to shareholder.......................................................... 250 Commitments Shareholders' equity: Common stock, no par value, authorized: 100,000 shares; issued and outstanding: 10,000 shares................................................................... 30 Accumulated deficit................................................................ (592) ----- Total shareholders' deficit................................................ (562) ----- Total liabilities and shareholders' deficit................................ $ 180 =====
See accompanying notes. F-32 85 DIMENSION SOLUTIONS, INC. STATEMENT OF OPERATIONS YEAR ENDED APRIL 30, 1996 (In thousands, except share and per share amounts) Revenues........................................................................... $ 1,054 Cost of revenues................................................................... 492 ------- Gross profit....................................................................... 562 Operating expenses Research and development......................................................... 225 Selling, general and administrative expenses..................................... 458 ------- Total operating expenses........................................................... 683 ------- Loss from operations............................................................... (121) Interest expense, net.............................................................. 28 ------- Net loss........................................................................... $ (149) ======= Net loss per share................................................................. $(14.90) ======= Number of shares used in calculation of the net loss per share..................... 10,000 =======
See accompanying notes. F-33 86 DIMENSION SOLUTIONS, INC. STATEMENT OF SHAREHOLDERS' DEFICIT YEAR ENDED APRIL 30, 1996 (In thousands, except share amounts)
COMMON STOCK TOTAL ----------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT DEFICIT DEFICIT ------- ------- ------------ -------------- Balances, April 30, 1995......................... 10,000 $30 $ (443) $ (413) Net loss....................................... -- -- (149) (149) ------ --- ------- ----- Balances, April 30, 1996......................... 10,000 $30 $ (592) $ (562) ====== === ======= =====
See accompanying notes. F-34 87 DIMENSION SOLUTIONS, INC. STATEMENT OF CASH FLOWS YEAR ENDED APRIL 30, 1996 (In thousands) OPERATING ACTIVITIES Net loss............................................................................. $(149) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation....................................................................... 25 Changes in operating assets and liabilities: Accounts receivable............................................................. 12 Prepaid expenses................................................................ (3) Other assets.................................................................... 1 Accounts payable................................................................ (23) Accrued expenses................................................................ 2 Customer deposits............................................................... (133) ----- Net cash used in operating activities................................................ (268) INVESTING ACTIVITIES Additions to equipment, furniture and fixtures....................................... (32) ----- Net cash used in investing activities................................................ (32) FINANCING ACTIVITIES Borrowings under line of credit agreement............................................ 185 Proceeds from note payable to shareholder............................................ 25 ----- Net cash provided by financing activities............................................ 210 ----- Net change in cash and cash equivalents.............................................. (90) Cash, beginning of year.............................................................. 94 ----- Cash, end of year.................................................................... $ 4 ===== Supplemental disclosure of cash flow information: Cash paid for interest............................................................. $ 25 ===== Supplemental disclosure of noncash financing activities: Obligation under line-of-credit agreement exchanged for note payable to a shareholder..................................................................... $ 250 =====
See accompanying notes. F-35 88 DIMENSION SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Dimension Solutions, Inc. (the "Company") is a California corporation which sells personal computer-based human resource management software and maintenance support to small to medium sized employers throughout the United States. On May 23, 1996, substantially all of the Company's business and assets were acquired by ProBusiness, Inc. (the "Purchaser" or "ProBusiness"). No adjustments to recorded amounts of assets or liabilities resulting from the acquisition have been included in the accompanying financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reported period. Actual results could differ from these estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is computed using the double declining balance method over the estimated useful lives of the assets which range from three to seven years. REVENUE RECOGNITION AND DEFERRED IMPLEMENTATION COSTS The Company recognizes revenue from the sale of human resource management software when a noncancellable license agreement has been signed, the product has shipped and all significant contractual obligations have been satisfied. The Company's revenue recognition policy is in compliance with the provisions of the American Institute of Certified Public Accountants Statement of Position 91-1, "Software Revenue Recognition." Human resource software maintenance revenue is billed annually, in advance. Customer deposits for software maintenance are deferred and recognized ratably over the term of the maintenance agreement. INCOME TAXES The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." PER SHARE DATA Net loss per common share is computed based on the weighted average number of common shares outstanding during the year. 2. NOTES PAYABLE TO SHAREHOLDER On October 15, 1995, the Company received $25,000 in cash in exchange for a note payable to a shareholder which is due on January 31, 1997. Interest is payable monthly at a rate equal to the lesser F-36 89 DIMENSION SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) of the prime rate plus 2 1/2 percent or the maximum allowable rate under California law. The entire principal amount is payable on the due date. During the year ended April 30, 1996, the Company had a balance of $250,000 outstanding under a line of credit agreement. This liability was assumed by a shareholder of the Company. In exchange, the Company signed a note payable with the shareholder for $250,000. Interest on the note is payable by the Company from time to time at a rate equal to the lesser of prime plus 2 1/2 percent or the maximum allowed rate based on California law. The total outstanding principal is due on the earlier of the closing of an initial public offering by ProBusiness or December 31, 1999. 3. LEASE OBLIGATIONS The Company leases its facilities and various equipment under noncancellable operating leases which expire at various dates through September 1999. The future minimum lease payments under operating leases subsequent to April 30, 1996 are summarized as follows:
YEAR ENDING APRIL 30, (IN THOUSANDS) --------------------------------------------- -------------- 1997......................................... $ 60 1998......................................... 57 1999......................................... 57 2000......................................... 24 ---- Total minimum lease payments................. $198 ====
Rent expense for the year ended April 30, 1996 was $67,000. 4. INCOME TAXES Effective June 16, 1994, the Company's stockholders elected to have the Company taxed as an S Corporation for federal and state income tax purposes, whereby taxable income is allocated to the individual stockholders. The Company is subject to a state franchise tax of 1.5% of taxable income. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement No. 109"). Under Statement No. 109, the liability method is used to account for income taxes. Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes are immaterial. 5. SHAREHOLDERS' EQUITY The Company was originally capitalized on June 16, 1994 with $30,000 in consideration paid by investors who received a total of 10,000 shares of common stock. No additional capital transactions occurred through April 30, 1996. 6. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the benefit of certain qualified employees. Employees may elect to contribute to the Plan, through payroll deductions subject to certain limitations. The Company may make contributions in accordance with the Plan. The Company did not make any contributions to the Plan in 1996. F-37 90 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The selected unaudited pro forma condensed consolidated financial information for the Company set forth below gives effect to the acquisition of certain assets and liabilities of Dimension Solutions, Inc. (Dimension) and the acquisition of BeneSphere Adminstrators, Inc. (BeneSphere). The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of the Company, Dimension and BeneSphere and should be read in conjunction with those financial statements and the notes thereto included elsewhere herein. The selected unaudited pro forma condensed consolidated statements of operations data for the year ended June 30, 1996 and the six months ended December 31, 1996 set forth below give effect to the acquisitions as if they occurred on July 1, 1995. The selected unaudited pro forma condensed consolidated balance sheet as of December 31, 1996 set forth below gives effect to the acquisition of BeneSphere as if it occurred on December 31, 1996. The selected unaudited pro forma condensed consolidated financial information set forth below reflects certain adjustments, including, among others, adjustments to reflect the amortization of the excess purchase prices and the elimination of certain non-recurring expenses. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements -- the Company, Dimension Solutions, Inc. and BeneSphere Administrators, Inc." The selected unaudited pro forma condensed consolidated financial information set forth below does not purport to represent what the consolidated results of operations or financial condition of the Company would actually have been if the Dimension and BeneSphere acquisitions and related transactions had in fact occurred on such dates or to project the future consolidated results of operations or financial condition of the Company. F-38 91 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1996 (In thousands, except per share amounts)
COMPANY DIMENSION BENESPHERE (2)(3) PRO FORMA FOR THE FOR THE FOR THE PRO FORMA FOR THE YEAR ENDED YEAR ENDED YEAR ENDED BUSINESS YEAR ENDED JUNE 30, APRIL 30, JUNE 30, COMBINATION JUNE 30, 1996(1) 1996 1996 COMBINED ADJUSTMENTS 1996 ------------- ------------- ------------ -------- ----------- ---------- Revenue........................... $13,863 $ 1,054 $2,424 $17,341 $ -- $ 17,341 Operating expenses: Cost of providing services...... 6,435 492 873 7,800 75 7,875 General and administrative expenses..................... 2,054 458 591 3,103 49 3,152 Research and development expenses..................... 1,257 225 -- 1,482 -- 1,482 Client acquisition costs........ 5,388 -- 1,023 6,411 -- 6,411 Acquisition of in-process technology................... 711 -- -- 711 -- 711 ------- ------ ------ ------- ----- ---------- Total operating expenses..... 15,845 1,175 2,487 19,507 124 19,631 ------- ------ ------ ------- ----- ---------- Loss from operations.............. (1,982) (121) (63) (2,166) (124) (2,290) Interest expense, net............. 404 28 8 440 440 ------- ------ ------ ------- ----- ---------- Net loss.......................... $(2,386) $ (149) $ (71) $(2,606) $(124) $ (2,730) ======= ====== ====== ======= ===== ========== Pro forma net loss per common share(5)........................ $ (0.33) ========== Number of shares used to compute pro forma net loss per common share(6)........................ 8,212 ==========
See accompanying notes. F-39 92 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 (In thousands, except per share amounts)
(2)(3) COMPANY BENESPHERE PRO FORMA PRO FORMA FOR THE SIX FOR THE SIX BUSINESS FOR THE SIX MONTHS ENDED MONTHS ENDED COMBINATION MONTHS ENDED DEC. 31, 1996 DEC. 31, 1996 COMBINED ADJUSTMENTS DEC. 31, 1996 ------------- ------------- -------- ----------- ------------- Revenue....................... $10,199 1,6$56..... $11,855 $ -- $11,855 Operating expenses: Cost of providing services................. 5,238 882 6,120 -- 6,120 General and administrative expenses................. 1,491 1,362 2,853 (703) 2,150 Research and development expenses................. 1,308 -- 1,308 -- 1,308 Client acquisition costs.... 4,628 808 5,436 -- 5,436 ------- ------- ------- ----- ---------- Total operating expenses............... 12,665 3,052 15,717 (703) 15,014 ------- ------- ------- ----- ---------- Loss from operations.......... (2,466) (1,396) (3,862) 703 (3,159) Interest expense, net......... 508 11 519 -- 519 ------- ------- ------- ----- ---------- Net loss...................... $(2,974) $(1,407) $(4,381) $ 703 $(3,678) ======= ======= ======= ===== ========== Pro forma net loss per common share(5).................... $ (0.44) ========== Number of shares used to compute pro forma net loss per common share(6)......... 8,294 ==========
See accompanying notes. F-40 93 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 (In thousands)
(4) PRO FORMA COMPANY BENESPHERE BUSINESS PRO FORMA AS OF AS OF COMBINATION AS OF DEC. 31, 1996 DEC. 31, 1996 COMBINED ADJUSTMENTS DEC. 31, 1996 ------------- ------------- -------- ----------- ------------- ASSETS Current assets................ $ 4,263 $ 343 $ 4,606 $ -- $ 4,606 Equipment, furniture and fixtures, net............... 5,933 330 6,263 -- 6,263 Other assets.................. 1,708 -- 1,708 -- 1,708 Customer lists................ -- -- -- 310 310 Goodwill...................... -- -- -- 2,272 2,272 -------- ------- -------- ------ -------- Total assets.................. 11$,904..... $ 673 $12,577 2,$582.... $ 15,159 ======== ======= ======== ====== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities........... $ 4,231 $ 2,245 $ 6,476 $ 350 $ 6,826 Current-related party payable..................... -- -- -- 500 500 Long-term debt, less current portion..................... 8,380...... -- 8,380 -- 8,380 Capital lease obligations, less current portion........ 2,179 -- 2,179 -- 2,179 Stockholders' equity (deficit): Preferred stock............. 27 -- 27 -- 27 Common stock................ 14 332 346 (332) 14 Additional paid-in capital.................. 13,298 -- 13,298 160 13,458 Accumulated deficit......... (15,681) (1,904) (17,585) 1,904 (15,681) Stockholder's note.......... (544) -- (544) -- (544) -------- ------- -------- ------ -------- Total stockholders' equity (deficit)................... (2,886) (1,572) (4,458) 1,732 (2,726) -------- ------- -------- ------ -------- Total liabilities and stockholders' equity (deficit)................... $ 11,904 $ 673 $12,577 $ 2,582 $ 15,159 ======== ======= ======== ====== ========
See accompanying notes. F-41 94 NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Pro forma and offering adjustments for the unaudited pro forma condensed consolidated balance sheet as of December 31, 1996 and statements of operations for the six months ended December 31, 1996 and for the year ended June 30, 1996, are as follows: (1) The operating results for the Company for the year ended June 30, 1996 include 38 days of operations for Dimension which are immaterial and, therefore, are not adjusted in the pro forma results of operations for the year ended June 30, 1996. (2) Reflects the amortization of the cost over the fair value of net assets acquired for the Dimension and BeneSphere acquisitions as follows:
COST OVER THE FAIR VALUE OF NET AMORTIZATION ASSETS ACQUIRED PERIOD --------------- ------------ (IN THOUSANDS) Dimension: In-process technology....................... $ 711 N/A Covenants not-to-compete.................... 60 3 yrs Software.................................... 225 3 yrs BeneSphere: Goodwill.................................... 2,272 20 yrs Customer list............................... 310 8 yrs
(3) Selling, general and administrative expenses have been reduced by $123,000 to eliminate salaries paid to executives of BeneSphere during the period ended June 30, 1996, and $504,000 and $275,000 in stock and cash bonuses, respectively, paid to the president of BeneSphere during the six months ended December 31, 1996, which will not be incurred on an ongoing basis as the salaries have been negotiated for future periods. (4) To reflect the purchase of all of the outstanding stock of BeneSphere Administrators, Inc. for a total purchase price of $3,255,000. The purchase price consisted of a $250,000 cash payment, a $250,000 short-term note payable, the assumption of BeneSphere's net liabilities (including acquisition costs) and the value of $160,000 assigned to warrants issued in connection with the acquisition. (5) Pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding. Such pro forma net loss reflects the impact of the adjustments above. (6) Pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding plus common equivalent shares from convertible preferred stock, that will be converted upon the closing of the Company's proposed initial public offering (using the if-converted method), have been included in the computation whether dilutive or anti-dilutive. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued by the Company at proceeds below the assumed public offering price for the twelve-month period prior to the offering have been included in the computation as if they were outstanding for all periods presented (using the treasury stock method at the estimated initial public offering price) whether dilutive or anti-dilutive. Historical net loss per share has not been presented for any periods due to certain material non-recurring charges, which occurred in various periods, and pro forma adjustments which adjust acquired subsidiaries operations to more appropriately reflect ongoing operations. Thus, management considers that historical net loss per share is not indicative of the ongoing entity and has not presented such information. F-42 95 LOGO 96 APPENDIX -- DESCRIPTION OF GRAPHICS COVER: The Front Cover of the Prospectus includes the ProBusiness logo at the top of the page. Description of LOGO: The ProBusiness logo consists of the word "ProBusiness," all in black letters and all in lower case letters except the "P" and the "B," with a red triangle to the left of a triangular space in the side of the "P." INSIDE FRONT COVER: The Inside Front Cover of the Prospectus includes the headers in italics "Client Service", "Technology," "Expertise" and "Comprehensive Solutions," each on a separate line and indented a space from the preceding header. Below the headers is an arrow pointing to the ProBusiness logo at the bottom right side of the page. The background photo behind the text depicts ProBusiness service personnel assisting a client. At the bottom of the page is the following: "CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'" GATEFOLD: The Gatefold consists of three horizontal tiers, the top and the middle containing text and photographs and the bottom containing text related to the text and photographs in the middle tier. The top tier consists of captions accompanying the following: the ProBusiness logo, a rectangular collage of photographs and a rectangle containing client logos. In the background of the top tier is a photograph of ProBusiness service personnel assisting a client. The middle tier consists of the words "Business Partnership" at the far left in italics, then three equal-size rectangular photographs and, at the far right, a collage of four overlapping rectangular photographs. The middle tier photographs are connected by downward arrows to corresponding captions, which are in the bottom tier of the gatefold. Description #1: Description of the left section of the upper tier of the gatefold: The ProBusiness logo with text below it stating, "ProBusiness is a leading provider of outsourced payroll processing, payroll tax filing and benefits administration services to large employers." Description #2: Description of the center section of the upper tier of the gatefold: A collage of photographs depicting various documents and items related to the services provided by ProBusiness. Caption: "ProBusiness focuses on providing high quality and cost-effective employee administrative services to large employers." This caption appears above the collage in Description #2. Description #3: Description of the right section of the upper tier of the gatefold: A rectangle containing the logos of the following eight companies: CCH Incorporated, Sunglass Hut 97 International, Inc., Fujitsu, Ltd., Informix Corporation, Advanced Micro Devices, Inc., 3Com Corporation, AST Research, Inc., and AllAmerica. Caption: "ProBusiness's clients include many large employers in diverse industries." This caption appears below the rectangle containing the clients' logos in Description #3. Description #4: Description of the left section of the middle tier of the gatefold: "Business Partnership." Caption: "ProBusiness differentiates itself from its competitors by establishing a business partnership with each client. The Company develops relationships with each client by assessing payroll processing needs, reengineering and designing payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship by providing proactive account management and technical support." This caption appears below the text described in Description #4. Description #5: Description of the left center section of the middle tier of the gatefold: A rectangular photograph of an account manager of ProBusiness assisting a client. Caption: "Client Service - Delivering high quality, responsive and professional client service is a key competitive advantage of the Company. Each client works with a personal account manager who serves as the client's day-to-day contact and is responsible for meeting the client's needs. The Company believes that its low client-to-account manager ratio is a key factor in enabling the Company to achieve a high payroll client retention rate." This caption appears below the photograph in Description #5. Description #6: Description of the center section of the middle tier of the gatefold: A rectangular photograph of two employees of the Company using personal computers in the Company's production facility. Caption: "Technology - ProBusiness's PC-based, distributed architecture is reliable, flexible and scalable. This technology enables the Company to provide high levels of client service and customized solutions for each client that can be easily upgraded and integrated with the client's other systems." This caption appears below the photograph in Description #6. Description #7: Description of the right center section of the middle tier of the gatefold: A rectangular photograph of a ProBusiness specialist diagramming a client's payroll system on a white board. Caption: "Expertise - ProBusiness delivers technical expertise through specialists in design, process, implementation and systems integration. The Company delivers functional and regulatory expertise in payroll, payroll tax and employee benefits." This caption appears below the photograph in Description #7. 98 Description #8: Description of the right section of the middle tier of the gatefold: Rectangular photographs of documents and a computer screen, all of which relate to the service offerings provided by ProBusiness. Caption: "Comprehensive Solutions - ProBusiness provides employers with a broad range of employee administrative services: payroll processing; payroll tax filing, human resources software and employee benefits administration, including flexible benefits enrollment and processing and COBRA administration." This caption appears below the photograph in Description 8. BACK COVER: The Back Cover of the Prospectus includes the ProBusiness logo in the center of the page. 99 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale and distribution of Common Stock being registered. All amounts are estimates except the registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- Registration fee.................................................. $ 8,364 NASD filing fee................................................... 3,260 Printing expenses................................................. 165,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 400,000 Blue sky fees and expenses........................................ 5,000 Transfer agent and registrar fees and expenses.................... 15,000 Nasdaq National Market application and listing fees............... 43,394 Miscellaneous..................................................... 9,982 ------- Total................................................... $ 950,000 =======
- --------------- * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Reference is made to Article Ninth of the Amended and Restated Certificate of Incorporation of the Company, and to Article Ninth of the form of the Amended and Restated Certificate of Incorporation to be effective upon the completion of this offering filed herewith as Exhibits 3.1 and 3.2; Article VI of the By laws of the Company, filed herewith as Exhibit 3.3; Section 145 of the Delaware General Corporation Law; and the form of indemnification agreement filed herewith as Exhibit 10.11 which, among other things, and subject to certain conditions, authorize the Company to indemnify, or indemnify by their terms, as the case may be, the directors and officers of the Company against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or officer. Section 8 of the form of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters and their controlling persons, on the one hand, and of the Company and its controlling persons on the other hand, for certain liabilities arising under the Securities Act of 1933, as amended (the "Act"), the Exchange Act of 1934, as amended or otherwise. The Company intends to obtain directors and officers insurance providing indemnification for certain of the Company's directors, officers, affiliates, partners or employees for certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since February 1994, the Company has sold unregistered securities in the amounts, on the dates and for the aggregate amounts of consideration set forth below. The shares of Preferred Stock issued or issuable are convertible into shares of Common Stock at the rate of 2 shares of Common Stock for each share of Series E Preferred Stock. (a) In September 1994, the Company issued 197,468 shares of Series E Preferred Stock to 53 purchasers at $7.94 per share for an aggregate purchase price of $1,567,896. II-1 100 (b) In October 1994, the Company issued an additional 15,648 shares of Series E Preferred Stock to 4 purchasers at $7.94 per share for an aggregate purchase price of $124,245. (c) In January 1995, the Company issued a warrant to purchase 9,446 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Silicon Valley Bank in connection with a line of credit. (d) In October 1995, the Company issued warrants to purchase 34,630 shares of Series E Preferred Stock of the Company at an exercise price of $7.94 per share to 9 stockholders under a loan agreement whereby the Company issued promissory notes to such stockholders with an aggregate principal amount of $1,100,000. (e) In December 1995, the Company issued warrants to purchase 91,296 shares of Series E Preferred Stock of the Company at an exercise price of $7.94 per share to 37 stockholders under a loan agreement whereby the Company issued promissory notes to such stockholders with an aggregate principal amount of $2,900,000. (f) In April 1996, the Company issued a warrant to purchase 9,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Coast Business Credit ("Coast") in connection with a line of credit. (g) In May 1996, in connection with its acquisition of Dimension Solutions, Inc. ("Dimension Solutions") the Company issued 40,000 shares of Series E Preferred Stock to Dimension Solutions. (h) In July 1996, the Company issued a warrant to purchase 10,000 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to LINC Capital Management in connection with an equipment lease. (i) In October 1996, the Company issued a warrant to purchase 9,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Coast in connection with an amendment to the line of credit. (j) In November 1996, the Company issued a warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Britannia Hacienda V Limited Partnership and its partners in connection with a facilities lease. (k) In January 1997, the Company issued warrants to purchase an aggregate of 50,000 shares of its Common Stock at an exercise price of $9.00 per share to two of the former shareholders of BeneSphere in connection with the Company's acquisition of BeneSphere. (l) In March 1997, the Company issued 574,733 shares of Series F Preferred Stock to two purchasers at $17.40 per share for an aggregate purchase price of $10,000,354. (m) Since 1989 and through December 31, 1996, the Company has granted stock options to purchase 2,180,022 shares of the Company's Common Stock at a weighted average exercise price of $0.85 per share to employees, consultants and directors pursuant to its 1996 Stock Option Plan, or predecessor plans. Of these options, 168,886 have been canceled without being exercised, 1,440,703 have been exercised and 568,917 remain outstanding. The sales and issuances of securities described in paragraphs (a) through (l) were deemed to be exempt from registration under the Securities Act by virtue of Rule 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The sales and issuances of securities described in paragraph (m) were deemed to be exempt from registration from the Securities Act by virtue of Rule 701 of the Securities Act as they were offered and sold pursuant to written compensatory benefit plans as provided by Rule 701. II-2 101 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ --------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension Solutions. 2.2 Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere Administrators, Inc. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Form of Amended and Restated Certificate of Incorporation, to be effective upon completion of the offering. 3.3 Bylaws of the Registrant. 4.1 * Specimen Common Stock Certificate of Registrant. 4.2 Amended and Restated Registration Rights Agreement, dated March 12, 1997 between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and certain stockholders of Registrant. 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon Valley Bank and related Antidilution and Registration Rights Agreements. 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast Business Credit and related Antidilution and Registration Rights Agreement. 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast Business Credit and related Antidilution and Registration Rights Agreement. 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and LINC Capital Management. 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain purchasers. 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and T.J. Bristow and Elizabeth S. Bristow. 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and SDK Incorporated. 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and Laurence Shushan and Magdalena Shushan. 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Louis R. Baransky. 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Ben W. Reppond. 4.8 Form of Note issued by Registrant on October 20, 1995 and December 12, 1995 (see also Exhibit 10.12). 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23, 1994, Second Amendment to Lease dated December 9, 1994, and Third Amendment to Lease, dated March 16, 1995 between Registrant and Hacienda Park Associates. 10.2 Lease Agreement and Addendum Number One, dated August 26, 1993, and First Amendment to Lease, dated March 23, 1994, between Registrant and Hacienda Park Associates.
II-3 102
EXHIBIT NUMBER DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.3 Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994 and Second Amendment, dated October 5, 1994 between Registrant and Hacienda Park Associates. 10.4 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23, 1996, between Registrant and Hacienda Park Associates. 10.5 Built-to-Suit Lease, dated September 27, 1996, between Registrant and Britannia Hacienda V Limited Partnership. 10.6 Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc. and the Trustees under the Will and of the Estate of James Campbell, Deceased and related Guaranty of Lease. 10.7 1996 Stock Option Plan and related Form of Stock Option Agreement. 10.8 1996 Employee Stock Purchase Plan. 10.9 Employment and Non-competition Agreement, dated May 23, 1996 between Registrant and Dwight L. Jackson. 10.10 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC Capital Management and related Equipment Schedule. 10.11 Form of Indemnification Agreement between Registrant and executive officers and directors. 10.12 Loan Agreement, dated October 20, 1995 between Registrant and certain investors, and First Amendment to Loan Agreement, dated December 12, 1995, between Registrant and certain investors. 10.13 Loan and Security Agreement, dated April 30, 1996, between Registrant and Coast Business Credit, Amendment Number One, dated October 25, 1996 and Amendment Number Two, dated January 6, 1997. 10.14 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider. 10.15 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder. 10.16 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack. 10.17 Office Building Lease between Koll Center Irvine Number Two and Registrant dated November 7, 1994, and Amendments Nos. 1 and 2, thereto. 10.18 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and Registrant, assigned to Registrant on February 29, 1996. 10.19 Promissory Note, dated December 31, 1996 between BeneSphere Administrators, Inc. and Alison Elder. 10.20 Series F Stock Purchase Agreement dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P. 10.21 Stockholders Agreement dated March 12, 1997 between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein). 11.0 Statement regarding computation of Registrant's per share earnings. 16.1 Letter re Change in Certifying Accountant. 21.0 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1). 24.1 Powers of attorney (See page II-6) 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. II-4 103 (B) FINANCIAL STATEMENT SCHEDULES SCHEDULE II VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 104 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, State of California, on this 12th day of March 1997. PROBUSINESS SERVICES, INC. By: /s/ THOMAS H. SINTON ------------------------------------ Thomas H. Sinton President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas H. Sinton and Steven E. Klei, and each of them singly, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission or any regulatory authority granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------- ------------------ /s/ THOMAS H. SINTON President, Chief Executive March 12, 1997 - ------------------------------------------ Officer and Director (Principal Thomas H. Sinton Executive Officer) /s/ STEVEN E. KLEI Vice President, Finance, Chief March 12, 1997 - ------------------------------------------ Financial Officer and Secretary Steven E. Klei (Principal Financial and Accounting Officer) /s/ DAVID C. HODGSON Director March 12, 1997 - ------------------------------------------ David C. Hodgson /s/ MICHAEL L. HUGHES Director March 12, 1997 - ------------------------------------------ Michael L. Hughes /s/ RONALD W. READMOND Director March 12, 1997 - ------------------------------------------ Ronald W. Readmond /s/ THOMAS P. RODDY Director March 12, 1997 - ------------------------------------------ Thomas P. Roddy
II-6 105 SCHEDULE II PROBUSINESS, INC. (DOLLARS IN THOUSANDS) VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
YEAR ENDED JUNE 30 ---------------------------- SIX MONTHS ENDED 1994 1995 1996 DECEMBER 31, 1996 ------ ------ ------ ----------------- Balance at beginning of year................... $2,105 $2,529 $2,988 $ 3,597 Additions...................................... 424 459 609 1,085 Reductions..................................... -- -- -- -- Balance at end of year......................... $2,529 $2,988 $3,597 $ 4,682
S-1 106 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ --------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension Solutions. 2.2 Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere Administrators, Inc. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Form of Amended and Restated Certificate of Incorporation, to be effective upon completion of the offering. 3.3 Bylaws of the Registrant. 4.1 * Specimen Common Stock Certificate of Registrant. 4.2 Amended and Restated Registration Rights Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and certain stockholders of Registrant. 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon Valley Bank and related Antidilution and Registration Rights Agreements. 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast Business Credit and related Antidilution and Registration Rights Agreement. 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast Business Credit and related Antidilution and Registration Rights Agreement. 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and LINC Capital Management. 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain purchasers. 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and T.J. Bristow and Elizabeth S. Bristow. 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and SDK Incorporated. 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and Laurence Shushan and Magdalena Shushan. 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Louis R. Baransky. 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Ben W. Reppond. 4.8 Form of Note issued by Registrant on October 20, 1995 and December 12, 1995 (see also Exhibit 10.12). 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23, 1994, Second Amendment to Lease, dated December 9, 1994, and Third Amendment to Lease, dated March 16, 1995, between Registrant and Hacienda Park Associates. 10.2 Lease Agreement and Addendum Number One, dated August 26, 1993, and First Amendment to Lease, dated March 23, 1994, between Registrant and Hacienda Park Associates. 10.3 Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994, and Second Amendment, dated October 5, 1994, between Registrant and Hacienda Park Associates.
107
EXHIBIT NUMBER DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.4 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23, 1996, between Registrant and Hacienda Park Associates. 10.5 Built-to-Suit Lease, dated September 27, 1996, between Registrant and Britannia Hacienda V Limited Partnership. 10.6 Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc. and the Trustees under the Will and of the Estate of James Campbell, Deceased and related Guaranty of Lease. 10.7 1996 Stock Option Plan and related Form of Stock Option Agreement. 10.8 1996 Employee Stock Purchase Plan. 10.9 Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight L. Jackson. 10.10 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC Capital Management and related Equipment Schedule. 10.11 Form of Indemnification Agreement between Registrant and executive officers and directors. 10.12 Loan Agreement, dated October 20, 1995, between Registrant and certain investors and First Amendment to Loan Agreement, dated December 12, 1995, between Registrant and certain investors. 10.13 Loan and Security Agreement, dated April 30, 1996, between Registrant and Coast Business Credit, Amendment Number One, dated October 25, 1996, and Amendment Number Two, dated January 6, 1997. 10.14 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider. 10.15 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder. 10.16 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack. 10.17 Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November 7, 1994, and Amendments No. 1 and 2 thereto. 10.18 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and Registrant, assigned to Registrant on February 29, 1996. 10.19 Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and Alison Elder. 10.20 Series F Preferred Stock Purchase Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P. 10.21 Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein). 11.0 Statement regarding computation of Registrant's per share earnings. 16.1 Letter re Change in Certifying Accountant. 21.0 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1). 24.1 Powers of attorney (See page II-6). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 2,000,000 SHARES1 PROBUSINESS SERVICES, INC. COMMON STOCK UNDERWRITING AGREEMENT ____________, 1997 ROBERTSON, STEPHENS & COMPANY LLC WILLIAM BLAIR & COMPANY, L.L.C. As Representatives of the several Underwriters c/o Robertson, Stephens & Company LLC 555 California Street Suite 2600 San Francisco, California 94104 Ladies/Gentlemen: PROBUSINESS SERVICES, INC, a Delaware corporation (the "Company"), addresses you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirms its agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 2,000,000 shares of its authorized and unissued Common Stock, $0.001 par value (the "Firm Shares"), to the several Underwriters. The Company also proposes to grant to the Underwriters an option to purchase up to 300,000 additional shares of the Company's (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-_________) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and ____________________ 1 Plus an option to purchase up to 300,000 additional shares from the Company to cover over-allotments. 1. 2 regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses"), and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, however, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is 2. 3 required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) Each of the Company and the Subsidiary (as defined below) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of the Subsidiary free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and the Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor the Subsidiary is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other 3. 4 agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound; and neither the Company nor the Subsidiary is in material violation of any material law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties of which the Company has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than BeneSphere Administrators, Inc. (the "Subsidiary"). (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound, (ii) the charter or bylaws of the Company or the Subsidiary or (iii) any material law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties of which the Company has knowledge. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company or the Subsidiary of the transactions herein contemplated, except such as may be required under the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other securities or Blue Sky laws, all of which requirements have been satisfied or will have been satisfied prior to the Closing Date (as hereinafter defined) in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, the Subsidiary or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise or might materially and adversely affect their properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or the Subsidiary of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal 4. 5 and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the date stated therein and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company in all material respects); the Firm Shares and the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act or the Exchange Act or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company does not have has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (g) Ernst & Young LLP, which has examined (i) the financial statements of the Company, together with the related schedules and notes, as of December 31, 1996 and June 30, 1996 and for each of the years in the three (3) years ended June 30, 1996, (ii) the financial statements of BeneSphere Administrators, Inc., together with the related schedules and notes, as of June 30, 1996, and for the year then ended; (iii) the financial statements of Dimension Solutions, together with the related schedules and notes, as of April 30, 1996 and for the year then ended; and (iv) the selected unaudited pro forma condensed consolidated financial information of the Company, all as filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited financial statements of the Company, together with the related schedules and notes, and the unaudited condensed consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company and the Subsidiary at the respective dates and for the respective periods to which they apply; and all audited financial statements of the Company, together with the related schedules and notes, and the unaudited condensed consolidated financial information (other than the selected and summary financial and statistical data included in the Registration Statement), filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been 5. 6 compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise (ii) any transaction that is material to the Company and the Subsidiary considered as one enterprise, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and the Subsidiary considered as one enterprise, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and the Subsidiary considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary, or (vi) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus (i) each of the Company and the Subsidiary has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise, (ii) the agreements to which the Company or the Subsidiary is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and the Subsidiary (as applicable) except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and the Subsidiary has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, each of the Company and the Subsidiary owns or leases all such properties as are necessary to its operations as described in the Prospectus. (j) The Company and the Subsidiary have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or the Subsidiary that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and the Subsidiary. (k) The Company and the Subsidiary maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the 6. 7 Company or the Subsidiary against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor the Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor the Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (l) To the best of Company's knowledge, no labor disturbance by the employees of the Company or the Subsidiary exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal third-party service providers that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. No collective bargaining agreement exists with any of employees of the Company or the Subsidiary and, to the best of the Company's knowledge, no such agreement is imminent. (m) Each of the Company and the Subsidiary owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights that are necessary to conduct its businesses in all material respects as described in the Registration Statement and Prospectus; no patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights have expired or terminated except such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise; no patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights that are necessary to conduct the Company's or the Subsidiary's businesses as described in the Registration Statement and Prospectus will expire or terminate prior to four years from the date of this Agreement; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company or the Subsidiary by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (n) The Common Stock has been approved for quotation on the Nasdaq National Market, subject to official notice of issuance. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and 7. 8 sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) Neither the Company nor the Subsidiary has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer and director of the Company and each beneficial owner of shares representing at least ___% of the Company's outstanding Common Stock has agreed in writing that such person will not, for a period beginning the date of the writing and ending 180 days from the date of the Prospectus (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson, Stephens & Company LLC. (t) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and the Subsidiary is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) neither the Company nor the Subsidiary has received notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the 8. 9 Prospectus, (iii) to its knowledge, neither the Company nor the Subsidiary has conducted any activities that would require it to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company or the Subsidiary has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (u) Each of the Company and the Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or the Subsidiary or any of the members of the families of any of them that are required to be disclosed in the Registration Statement and Prospectus that are not so disclosed. (w) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $_____ per share, the respective number of Firm Shares as hereinafter set forth. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by wire transfer of same-day funds, paid to an account designated by of the Company, at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050 (or at such other place as may be agreed upon among the Representatives and the Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location 9. 10 including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $_____ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under the second, sixth and ninth paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, 10. 11 it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly, upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the reasonable opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare as promptly as practicable upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may reasonably designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. 11. 12 (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of three (3) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants), and will furnish to you and the other several Underwriters hereunder, upon request (i) statements of operations of the Company for each of the first three (3) quarters in the form filed with the Commission as part of the Company's quarterly report on Form 10-Q, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company or the Subsidiary, and (vi) any additional information of a public nature concerning the Company or the Subsidiary, or its business which you may reasonably request. During such three (3) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder (other than for noncompliance with paragraph (e) of Section 6 hereof), or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (k) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been or is likely 12. 13 to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) During the Lock-up Period, the Company will not, without the prior written consent of Robertson Stephens & Company LLC, effect the Disposition of, directly or indirectly, any Securities other than the sale of the Firm Shares and the Option Shares hereunder and the Company's issuance of (i) options or Common Stock under the Company's presently authorized 1989 Stock Option Plan, as amended, 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan (the "Stock Plans"); (ii) Common Stock upon exercise of any warrants of the Company outstanding as set forth in the Registration Statement and Prospectus; (iii) securities pursuant to equipment or lease financing activities entered into in the ordinary course of the Company's business; or (iv) securities to a strategic partner of the Company in conjunction with an agreement involving a service, technical, manufacturing and/or marketing collaboration. (m) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under the Stock Plans or any other employee benefit plan. 5. EXPENSES. (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Blue Sky Survey and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company in connection with the performance of their obligations hereunder. (ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the 13. 14 Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(b) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(d) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. 14. 15 (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your reasonable judgment, is material and adverse and that makes it, in your reasonable judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus; (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of counsel for the Company, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) Each of the Company and the Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) Each of the Company and the Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) Each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the Subsidiary considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than BeneSphere Administrators, Inc.; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the date stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation 15. 16 of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (vi) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (viii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, including supporting schedules, and financial data derived therefrom, as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (x) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; (xi) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of federal statutes and the General Corporation Law of the State of Delaware are accurate summaries thereof and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; (xii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; (xiii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a material default under, any material bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other 16. 17 agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any material order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (xiv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xv) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or the Subsidiary of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; (xvi) To such counsel's knowledge, neither the Company nor the Subsidiary is presently (a) in material violation of its respective charter or bylaws or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or the Subsidiary or over any of their properties or operations; and (xvii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement. In addition, such counsel shall state that such counsel has participated in conferences with certain officers and other representatives of the Company, its independent certified public accountants and you and your counsel, at which such conferences the contents of the Registration Statement and the Prospectus and related matters were discussed, and although they have not verified the accuracy, completeness or fairness of such information, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement (other than the financial statements, including supporting schedules, and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Prospectus (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 17. 18 Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Cooley Godward LLP in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernest & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations; (ii) set forth their opinion with respect to their examination of (A) the balance sheets of the Company as of December 31, 1996 and June 30, 1996 and related consolidated statements of operations, stockholders' equity and cash flows for the six (6) months ended December 31, 1996 and the twelve (12) months ended June 30, 1996, (B) the balance sheet of BeneSphere Administrators, Inc. as of June 30, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended and (C) the balance sheet of Dimension Solutions, Inc. as of April 30, 1996 and the related statements of operations, shareholders' deficit and cash flows for the year then ended; (iii) state that Ernest & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 on the financial statements for the quarter in the quarter ended March 31, 1997 (the "Quarterly Financial Statements"); (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting 18. 19 principles consistently applied across the periods presented; and (v) address other matters agreed upon by Ernest & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as of December 31, 1996 did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and, to the best of the Company's knowledge, no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus contained all material information required to be included therein by the Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise, (b) any transaction that is material to the Company and the Subsidiary considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and the Subsidiary considered as one enterprise, incurred by the Company or the Subsidiary except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and the Subsidiary considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary or (f) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has 19. 20 been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (h) The Company shall have obtained and delivered to you an agreement from each officer and director of the Company and each beneficial owner of shares representing at least ___% of the Company's outstanding Common Stock in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (i) The Company shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 300,000 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) 20. 21 bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by wire transfer of same-day funds, paid to an account designated by the Company. Such delivery and payment shall take place at the offices of Wilson Sonsini Goodrich & Rosati, PC, 650 Page Mill Road, Palo Alto, CA 94304-1050 or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be reasonably satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue 21. 22 statement or alleged untrue statement of any material fact contained in the Registration Statement or the 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 (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or the 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 (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement, each director of the Company and each person, if any, who controls the Company within the 22. 23 meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the 23. 24 amount of damages which such Underwriter has otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(d) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter or the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company, or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have 24. 25 the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, the Company shall not be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a 25. 26 loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel; and if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 5934 Gilbraltar Drive, Pleasanton, CA 94588, telecopier number (510) 847-3817, Attention: Thomas H. Sinton, Chief Executive Officer, with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, telecopier number: (415) 493-6811, Attention: Alan K. Austin. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by Robertson, Stephens & Company LLC on behalf of you. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 26. 27 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, PROBUSINESS SERVICES, INC. By ----------------------------------- Thomas H. Sinton President and Chief Executive Officer ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: ROBERTSON, STEPHENS & COMPANY LLC WILLIAM BLAIR & COMPANY, L.L.C. On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By ----------------------------------------- ROBERTSON, STEPHENS & COMPANY LLC By ----------------------------------------- ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C. By ----------------------------------------- Authorized Signatory 27. 28 SCHEDULE A
UNDERWRITERS NUMBER OF FIRM SHARES TO BE PURCHASED Robertson, Stephens & Company LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . William Blair & Company, L.L.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 ===============
A-1. EX-2.1 3 AGREEMENT AND PLAN OF REORGANIZATION 1 Exhibit 2.1 AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN PROBUSINESS, INC. AND DIMENSION SOLUTIONS DATED AS OF MAY 23, 1996 2 INDEX OF EXHIBITS EXHIBIT DESCRIPTION - ------- ----------- Exhibit A Subordination Agreement Exhibit B Eighteenth Amendment to Registration Rights Agreement Exhibit C Assignment and Assumption Agreement Exhibit D Bill of Sale Exhibit E Trademark Assignment Exhibit F Copyright Assignment Exhibit G Seller Schedules Exhibit H Employment and Noncompetition Agreement Exhibit I Cara Agreement Attachment 1 California Administrative Code 3 INDEX OF SCHEDULES SELLER SCHEDULE DESCRIPTION - --------------- ----------- 1.1(a) Retained Assets 1.1(a)(ii) Intellectual Property and Patents 1.1(a)(iii) Software Products 1.1(a)(vi) Inventory 1.1(b) Assumed Liabilities 2.1 Articles of Incorporation and Bylaws of Dimension Solutions 2.2 Capitalization 2.4 Governmental and Third Party Consents 2.5 Seller Financials 2.6 Undisclosed Liabilities 2.7 No Changes 2.8(b) Tax Returns and Audits 2.10(a) Liens on Property 2.10(b) Asset List 2.11 Intellectual Property 2.12 Assumed Contracts 2.13 Interested Party Transactions 2.14 Governmental Authorizations 2.15 Litigation 2.18 Environmental Matters 2.20(a) Employees 2.20(b) Employee Grievances 2.20(c) Employee Benefit Plans and Employees 2.20(d) Employee Plan Compliance 2.21 Insurance of Assets 6.3(n) Persons to Enter Into Employment and Noncompetition Agreements 4 TABLE OF CONTENTS
PAGE ---- ARTICLE I - THE ACQUISITION.......................................................................................... 1 1.1 Purchase of Assets.................................................................................... 1 1.2 Consideration......................................................................................... 4 1.3 Instruments of Transfer............................................................................... 5 1.4 Closing............................................................................................... 6 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLER................................................................ 7 2.1 Organization of Seller................................................................................ 7 2.2 Seller Capital Structure.............................................................................. 7 2.3 Subsidiaries.......................................................................................... 8 2.4 Authority; Consents................................................................................... 8 2.5 Seller Financial Statements........................................................................... 8 2.6 No Undisclosed Liabilities............................................................................ 9 2.7 No Changes............................................................................................ 9 2.8 Tax and Other Returns and Reports..................................................................... 10 2.9 Restrictions on Business Activities................................................................... 12 2.10 Title of Properties; Absence of Liens and Encumbrances................................................ 12 2.11 Intellectual Property................................................................................. 12 2.12 Agreements, Contracts and Commitments................................................................. 13 2.13 Interested Party Transactions......................................................................... 14 2.14 Governmental Authorization............................................................................ 14 2.15 Litigation............................................................................................ 14 2.16 Accounts Receivable................................................................................... 14 2.17 Minute Books.......................................................................................... 15 2.18 Environmental Matters................................................................................. 15 2.19 Brokers' and Finders' Fees; Third Party Expenses...................................................... 15 2.20 Employee Benefit Plans................................................................................ 16 2.21 Insurance............................................................................................. 17 2.22 Compliance with Laws.................................................................................. 17 2.23 Complete Copies of Materials.......................................................................... 17 2.24 Inventories........................................................................................... 17 2.25 No Insolvency......................................................................................... 18 2.26 Issuance of Shares.................................................................................... 18 2.27 Representations Complete.............................................................................. 18 2.28 Only Representations.................................................................................. 19
-i- 5 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER................................................................ 19 3.1 Organization, Standing and Power...................................................................... 19 3.2 Authority; Consents................................................................................... 19 3.3 Litigation............................................................................................ 19 3.4 Brokers' and Finders' Fees; Third Party Expenses...................................................... 19 3.5 Authorization of Shares............................................................................... 19 3.6 Amendments to Registration Rights Agreement........................................................... 20 3.7 Representations Complete.............................................................................. 20 ARTICLE IV - COVENANTS OF SELLER..................................................................................... 20 4.1 Conduct of Business of Seller......................................................................... 20 4.2 No Solicitation....................................................................................... 22 4.3 Covenant Not to Compete............................................................................... 22 4.4 Discharge of Debts.................................................................................... 23 ARTICLE V - ADDITIONAL AGREEMENTS.................................................................................... 23 5.1 Seller Shareholder Approval........................................................................... 23 5.2 Access to Information................................................................................. 24 5.3 Confidentiality....................................................................................... 24 5.4 Expenses.............................................................................................. 24 5.5 Public Disclosure..................................................................................... 24 5.6 Consents.............................................................................................. 25 5.7 Best Efforts.......................................................................................... 25 5.8 Notification of Certain Matters....................................................................... 25 5.9 Additional Documents and Further Assurances........................................................... 25 5.10 Employee Benefits..................................................................................... 25 5.11 Tax Returns........................................................................................... 26 5.12 Bulk Sales............................................................................................ 26 5.13 Employment Agreements................................................................................. 26 5.14 Securities Laws....................................................................................... 26 5.15 Closing Statement..................................................................................... 29 5.16 Settlement of Litigation and Other Disputes........................................................... 29 5.17 Updating of Schedules................................................................................. 29
-ii- 6 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE VI - CONDITIONS TO THE ACQUISITION........................................................................... 29 6.1 Conditions to Obligations of Each Party to Effect the Acquisition..................................... 29 6.2 Additional Conditions to Obligations of Seller........................................................ 29 6.3 Additional Conditions to the Obligations of Buyer. .................................................. 30 ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER...................................................................... 33 7.1 Termination........................................................................................... 33 7.2 Effect of Termination................................................................................. 34 7.3 Amendment............................................................................................. 34 7.4 Extension; Waiver..................................................................................... 34 ARTICLE VIII - INDEMNITY AGREEMENT................................................................................... 34 8.1 Agreement to Indemnify; Offset........................................................................ 34 8.2 Expiration of Indemnification and Representations and Warranties...................................... 35 8.3 Claims................................................................................................ 35 8.4 Objections to Claims.................................................................................. 36 8.5 Resolution of Conflicts; Arbitration.................................................................. 36 8.6 Third Party Claims.................................................................................... 37 8.7 Remedies.............................................................................................. 37 8.8 Representative........................................................................................ 37 ARTICLE IX - GENERAL PROVISIONS...................................................................................... 38 9.1 Notices............................................................................................... 38 9.2 Interpretation........................................................................................ 39 9.3 Counterparts.......................................................................................... 39 9.4 Entire Agreement...................................................................................... 39 9.5 Severability.......................................................................................... 39 9.6 Other Remedies........................................................................................ 40 9.7 Governing Law......................................................................................... 40 9.8 Rules of Construction................................................................................. 40
-iii- 7 ATTACHMENT 1 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." -iv- 8 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of May 23, 1996 by and between ProBusiness, Inc., a California corporation ("Buyer"), Dimension Solutions, a California corporation ("Seller"), Dwight L. Jackson, Stephen P. Blanding, Kirk G., Ward, Stephen P. Blanding and Mayno W. Blanding Family Trust dated 8/3/92 and Ward Family Revocable Trust dated 3/28/94 ("Seller's Affiliates and Shareholders"). RECITALS A. The Boards of Directors of each of Seller and Buyer believe it is in the best interests of each company and their respective shareholders that Buyer acquire all of the assets of, and assume certain of the liabilities of Seller (the "Acquisition") in exchange for 40,000 shares of Series E Preferred Stock of Buyer and to enter into an employment agreement with Dwight L. Jackson, President of Seller, as Vice President, Human Resources Systems of Buyer. B. Seller is engaged in the business of developing, manufacturing and licensing computer software programs for the human resource market (the "Business"). C. Immediately after the Closing (as defined below), Buyer will enter into a License Agreement with Cara Information Technology Ltd. to license a file server version of specified software modules acquired by Buyer pursuant to this Agreement. NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE ACQUISITION 1.1 Purchase of Assets. (a) Purchase and Sale of Assets. On the terms and subject to the conditions set forth in this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer agrees to purchase and acquire from Seller on the Closing Date (as defined in Section 1.4(a)), all of Seller's right, title and interest in and to all of the assets and properties of Seller (collectively the "Assets" and specifically excluding those assets set forth on Schedule 1.1(a) (the "Excluded Assets")) in their current condition and free and clear of all liens, pledges, charges, claims, security interests or other encumbrances of any sort (collectively, "Liens"), including without limitation, the following: (i) all cash, cash equivalents and accounts receivable of Seller; 9 (ii) all patents, patent applications, copyrights, trademarks, service marks, trade names, trade secrets, proprietary information, technology rights and licenses, proprietary rights and processes, customer lists, know-how, research and development in progress, and any and all other intellectual property including, without limitation, all things authored, discovered, developed, made, perfected, improved, designed, engineered, devised, acquired, produced, conceived or first reduced to practice by Seller or any of its employees in the course of their employment by Seller and that pertain to or are used in the Business, or that are relevant to an understanding or to the development of the Business or to the performance by the products of the Business of their intended functions or purposes, whether tangible or intangible, in any stage of development, including without limitation enhancements, designs, technology, improvements, inventions, works of authorship, formulas, processes, routines, subroutines, techniques, concepts, object code, flow charts, diagrams, coding sheets, source code, listings and annotations, programmers' notes, information, work papers, work product and other materials of any types whatsoever, and all rights of any kind in or to any of the foregoing (collectively, the "Intellectual Property") used or held for use in the Business. All Intellectual Property is listed on Schedule 1.1(a)(ii) hereto, as well as all licenses used for such Intellectual Property; (iii) all rights and ownership of all existing software products of Seller (the "Products"), including but not limited to those listed on Schedule 1.1(a)(iii), any other computer programs developed or under development by Seller, and all copies of the Products (including revisions and updates in process), and all technical, design, development, installation, operation and maintenance information concerning the Products, including source code, source documentation, source listings and annotations, engineering notebooks, test data and test results, all in sufficient detail to permit a reasonably skilled software developer not involved in the development of the Products to maintain, enhance and correct errors in the Products without assistance from or reference to any other persons or materials as well as all reference manuals and support materials normally distributed to end-users and potential end-users in connection with the distribution of the Products (collectively, the foregoing shall be hereinafter referred to as, the "Software Products"). Notwithstanding the foregoing, Seller shall not be required to prepare or produce any documentation to satisfy the provisions of this subparagraph; (iv) all of Seller's claims against any parties relating to any right, property or asset included in the Assets, or against any party to a Contract (as defined in Section 2.12 herein) if Seller's rights under such Contracts are assigned and transferred to Buyer at the Closing, including without limitation, unliquidated rights under manufacturers' and vendors' warranties or guaranties; (v) all of Seller's rights (including, without limitation, any leasehold interests) under any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound, including without limitation, those set forth in Schedule 2.12 if Seller's rights under such Contracts are assigned and transferred to Buyer at the Closing; (vi) all inventory, wherever located, owned by Seller; the inventory referred to herein shall include, but is not limited to, those items described in Schedule 1.1(a)(vi) hereto; -2- 10 (vii) all fixed assets, equipment and supplies of the Seller wherever located (including leasehold improvements); (viii) all governmental permits, licenses or approvals owned or held by Seller associated with the ownership, use or operation of the Assets; and (ix) the corporate name "Dimension Solutions," "First Resource" and "First Resource Development"; provided, that for a period of one year following the Closing Date, the Seller shall be authorized to use such names for the purpose of winding down the corporation. (b) Assumption of Liabilities. (i) Buyer shall not assume any liabilities or obligations of Seller (other than those expressly assumed pursuant to this Section 1.1(b)), including without limitation, any liabilities for employment, income, sales, property or other taxes incurred or accrued by Seller, except as provided in Section 1.2(c). It is further expressly agreed that Buyer shall not assume any liabilities for third party claims of infringement of intellectual property rights on products sold by the Seller through the Closing Date or the damages, if any, as set forth in Section 1.1(b)(iii). At the Closing, Buyer shall assume the following obligations and liabilities of Seller (collectively, the "Assumed Liabilities"): (A) all obligations and liabilities of Seller under or related to any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound as set forth on Schedule 2.12 if Seller's rights under such contracts are assigned and transferred to Buyer at the Closing (B) those obligations and liabilities of Seller set forth in Schedule 1.1(b) hereto (including the promissory notes set forth in Section 1.1(b)(ii) below, which are expressly agreed to be assumed subject to the conditions specified in Section 1.1(b)(ii) and the lease agreement set forth in Section 1.1(b)(iii) below, which is expressly agreed to be assumed subject to the conditions specified in Section 1.1(b)(iii)), and (C) all obligations pursuant to Sections 1.2(c), 1.3(a)(iv) and 5.13 hereunder. Buyer expressly is not assuming any obligations or liabilities, whether accrued, absolute, contingent, matured, unmatured or other, of Seller except for the Assumed Liabilities. (ii) Buyer specifically assumes the promissory notes between Seller and Kirk G. Ward and Stephen P. Blanding dated April 30, 1996 for an aggregate principal amount of $250,000 (the "$250,000 Note") and BARW dated October 15, 1995 for an aggregate principal amount of $25,000 as set forth in Schedule 1.1(b), subject to Seller's delivery to Buyer of a Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding, attached hereto as Exhibit A binding each of Mr. Ward and Mr. Blanding and their successors and assignees, to subordinate payment by Buyer of any and all indebtedness, liabilities, guarantees and other obligations of Buyer to Mr. Ward and Mr. Blanding now existing or hereinafter arising to the payment to Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and Loan Association and other creditors who are banking and equipment leasing institutions ("Institutional Creditors") of Buyer, of all indebtedness, liabilities, guarantees and other obligations of Buyer to Coast and such other Institutional Creditors, now existing or hereinafter arising and including such terms and conditions as more specifically set fourth in Exhibit A attached hereto. -3- 11 (iii) Buyer specifically assumes the obligations under the lease agreement by and between Seller and AJ Partners Limited Partnership ("Lessor"), managed by Draper and Kramer of California, Incorporated dated July 18, 1994 (the "Lease Agreement") and both parties will use their best efforts to obtain a consent to a formal assignment pursuant to the Lease Agreement. It is expressly agreed that Buyer shall not assume any liabilities for damages arising out of any failure on the part of Buyer or Seller to obtain written consent under Section 12 of the Lease Agreement of Lessor to Seller's assignment of the rights and obligations under the Lease Agreement to Buyer prior to the Closing Date and Assumed Liabilities under this Agreement expressly excludes any such damages. (c) Risk of Loss. In the event any of the Assets are unavailable for delivery to Buyer on the Closing Date as a result of risks for which such Assets were insured by Seller, Buyer may at its option elect (i) to require Seller to deliver to Buyer assignments of such Seller's rights under its insurance policies, if any, applicable to such Assets and to close on that basis, or (ii) to not close due to the failure of a condition to closing if the amount of the loss reasonably can be expected to be in excess of $25,000. Seller hereby agrees to make such assignment of rights if Buyer so elects. 1.2 Consideration. (a) Consideration for Assets. Subject to the terms and conditions set forth in this Agreement (including, without limitation, the provisions of Article VI hereof), as full payment for the transfer of the Assets by Seller to Buyer, Buyer shall issue to Seller at the Closing 40,000 shares of Series E Preferred Stock of Buyer (the "Shares") with a fair market value of $7.94 per share for an aggregate purchase price of $317,600 (the "Purchase Price"). As of the Closing Date, the shares are convertible into 80,000 shares of Common Stock of Buyer and shall have rights, privileges and preferences as set forth in the Seller's Articles of Incorporation, as amended and in effect as of the date hereof. In addition, Buyer shall grant Seller registration rights with respect to the Shares pursuant to Eighteenth Amendment to the Registration Rights Agreement dated as of December 1, 1989, as amended (the "Registration Rights Agreement") attached hereto as Exhibit B whereby the Common Stock issuable upon the conversion of the Shares shall be deemed "Registrable Securities" and Seller shall be deemed a "Holder" under the Registration Rights Agreement. (b) Seller's C Reorganization. Seller intends for the transactions contemplated by this Agreement to (i) constitute a "sale of assets reorganization" within the meaning of Section 181(c) of the California Corporations Code, and (ii) qualify as a non-taxable stock for assets reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). Buyer and Seller desires to adopt this Agreement as a plan of reorganization in accordance with the provisions of Section 368(a)(1)(C) of the Code. Seller will, pursuant to the plan of reorganization, and immediately after the receipt of the Shares, distribute the Shares to the shareholders of Seller. The Shares will be distributed to the shareholders of Seller in proportion to the number of shares each holds in Seller. In addition, Seller shall, pursuant to the plan of reorganization, and as soon as practicable following the Closing Date, and in no event later than December 31, 1996, distribute all of its remaining assets to its shareholders in liquidation and therefore formally dissolve pursuant to Section 1900 et seq. of the California Corporations Code. -4- 12 Buyer makes no representations or warranties as to whether the transactions contemplated by this Agreement constitute a "sale of assets reorganization" within the meaning of Section 181(c) of the California Corporations Code, or that such transactions qualify as a non-taxable stock for assets reorganization within the meaning of Section 368(a)(1)(C) of the Code. The parties agree that such qualifications are for the benefit of Seller, and are not conditions to this Agreement. (c) Transfer Taxes. Buyer shall pay and promptly discharge when due sales and use tax ("Sales Taxes") imposed or levied by the State of California by reason of the sale of the Assets to Buyer. 1.3 Instruments of Transfer. (a) Transfer of Customers. (i) Intent. It is the intent of parties hereto that all of the Business and all of Seller's backlog, if any, relating to the Business be transferred to Buyer. Accordingly, the parties agree to use their best efforts to facilitate such transfer of customers as soon as possible. (ii) Purchase Order Data. Seller shall provide or make available to Buyer, at the closing (A) a list of all outstanding written customer orders, purchase orders and other customer commitments from Seller's current customers, (B) the names of all customers (the "Current Customers") and (C) data regarding Seller's standard cost of sales for the items covered by such orders and shall provide upon request such other information as is (AA) relevant to profitability on such items, (BB) available to Seller without incurring undue effort or expense and (CC) requested by Buyer. (iii) Transfer of Orders; Assignments. Prior to such Closing, Seller and Buyer agree to cooperate with each other in conducting joint contacts with the Current Customers (as appropriate) for the purpose of attempting to obtain such customers' consent to transfer orders from Seller to Buyer (or to issue new orders to Buyer for the same or similar items) and to assign Seller's rights and obligations under the Contracts to Buyer, if such Contracts are assigned to Buyer, as of the Closing. (iv) Assumption of Obligation. To the extent that Seller's backlog is transferred or assigned to Buyer or that Buyer accepts a new purchase order from a Current Customer, Buyer agrees to assume and perform all obligations thereunder and to use reasonable efforts to fill the order in accordance with its terms. (b) Instruments of Transfer. The sale, assignment, transfer, conveyance and delivery of the Assets shall be made by such bills of sale and other recordable instruments of assignment, transfer and conveyance as Buyer shall reasonably request. -5- 13 1.4 Closing. (a) Closing. Unless this Agreement is earlier terminated pursuant to Section 7.1, the closing of the transactions contemplated by this Agreement shall be consummated (the "Closing") at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, at 5:00 p.m., Pacific Daylight Savings time, on May 23, 1996, or at such other time or place as the parties shall mutually agree (the "Closing Date"). (b) Delivery. At the Closing: (i) Seller shall deliver to Buyer a copy of the Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding pursuant to Section 1.1(b)(ii) in the form attached hereto as Exhibit A; (ii) Buyer shall deliver to Seller an instrument of assumption of liabilities by which Buyer shall assume the Assumed Liabilities as of the Closing in the form attached hereto as Exhibit C; (iii) Seller shall deliver to Buyer all bills of sale, endorsements, assignments, consents to assignments to the extent obtained and other instruments and documents as Buyer may reasonably request to sell, convey, assign, transfer and deliver to Buyer good title to all the Assets free and clear of any and all Liens in the form attached hereto as Exhibit D; (iv) Seller shall deliver to Buyer a Trademark Assignment in the form attached hereto as Exhibit E; (v) Seller shall deliver to Buyer a Copyright Assignment in the form attached hereto as Exhibit F; (vi) Seller shall deliver to Buyer UCC termination statements duly executed by the holders of all security interests of record with respect to all outstanding UCC-1 financing statements evidencing security interests in any of the Assets excluding the tax liens filed by the Internal Revenue Service (the "IRS") on November 10, 1994 and November 16, 1994 in the amount of $17,998.57 and $4,026.46, respectively, and the tax liens filed by the State of California Employment Development Department on March 23, 1995 in the amount of $4,586.97, with respect to liens on the assets of First Resource, a California corporation ("First Resource") and including the UCC-1 financing statement filed by Scott Valley Bank on October 12, 1994 with respect to a lien on substantially all of the assets of Seller; (vii) Buyer shall deliver a stock certificate issued in the name of Buyer representing the Shares; (viii) Seller shall deliver to Buyer evidence satisfactory to Buyer that the loan agreement with Scott Valley Bank has been assigned to the shareholders of the Seller and that Scott -6- 14 Valley Bank has terminated all security interests, security agreements and guaranties affecting or relating to the Assets; and (ix) Seller and Buyer shall deliver or cause to be delivered to one another such other instruments and documents necessary or appropriate to evidence the due execution, delivery and performance of this Agreement. (c) Taking of Necessary Action; Further Action. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Buyer with full right, title and possession to all Assets, the officers and directors of Seller are fully authorized in the name Seller or otherwise to take, and will take, all such lawful and necessary and/or desirable action. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER, SELLER'S AFFILIATES AND SHAREHOLDERS Each of Seller and each of Seller's Affiliates and Shareholders, jointly and severally represents and warrants to Buyer as follows that, except as set forth in the disclosure schedules dated as of the date hereof and supplied by Seller to Buyer and attached hereto as Exhibit G (the "Seller Schedules" and Seller Schedules shall specifically reference the Sections of this Agreement to which the disclosure therein applies): 2.1 Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller has the corporate power to own its property and to carry on its business as now being conducted and as proposed to be conducted. Seller is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the Business, the Assets (or Buyer's interest therein or use thereof following the Closing), or the financial condition or results of operations of Seller (any of which is hereinafter referred to as a "Material Adverse Effect"). Schedule 2.1 includes a complete and correct list of all foreign jurisdictions in which the Seller is qualified to do business. Seller has delivered a true and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, to Buyer, copies of each are attached to Schedule 2.1. 2.2 Seller Capital Structure. Seller's authorized and outstanding capital stock, and the number, type and holder of outstanding securities carrying the right to acquire any of Seller's capital stock, at the date hereof is correctly stated in Schedule 2.2. All the outstanding shares of Seller's capital stock are duly authorized and validly issued. All outstanding securities carrying the right to acquire any of Seller's capital stock issued by Seller are validly outstanding, and the shares of Seller's capital stock reserved for issuance upon the exercise thereof are duly authorized and, upon issuance in accordance with the terms thereof (including due payment of the exercise price set forth therein) will be validly issued, fully paid and nonassessable. Except as set forth in Schedule 2.2, there are no -7- 15 securities of Seller issued or outstanding, and there are no options, calls, subscriptions, warrants, rights, agreements or commitments of any character obligating Seller, contingently or otherwise, to issue shares of its capital stock or to register shares of its capital stock under the Securities Act of 1933, or any other applicable securities laws (Federal or state), or holders of any such securities. 2.3 Subsidiaries. Seller does not have and has never had any subsidiaries or affiliated companies and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. 2.4 Authority; Consents. Subject only to the approval of the Acquisition and this Agreement by Seller's shareholders as contemplated by Section 6.1(a) hereof, Seller has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller, subject only to the approval of the Acquisition by Seller's shareholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligation of Seller, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy and similar laws and general principles of equity. Except as set forth on Schedule 2.4, subject only to the approval of the Acquisition and this Agreement by Seller's shareholders as contemplated by Section 6.1(a) hereof, the execution and delivery of this Agreement by Seller does not, and, as of the Closing, the consummation of the transactions contemplated hereby will not, materially conflict with, or result in any material violation of, or material default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict") (i) any provision of the Articles of Incorporation or Bylaws of Seller or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Seller or its properties or assets. To Seller's knowledge, no consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or Commission having jurisdiction over Seller ("Governmental Entity") or any third party (so as to enable Seller to assign Buyer all of its rights and benefits under the Contracts), is required by or with respect to Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for such consents, waivers, authorizations, filings, approvals and registrations which are set forth on Schedule 2.4. 2.5 Seller Financial Statements. Schedule 2.5 sets forth Seller's unaudited balance sheet as of December 31, 1995 and the related unaudited statement of income for the twelve-month period then ended; Seller's unaudited balance sheet as of March 31, 1996 and the related unaudited statement of income for the three-month period then ended; and Seller's unaudited balance sheet as of April 30, 1996 (the "Balance Sheet") and the related unaudited statement of income for the four-month period then ended (collectively, all such balance sheets and related statement of income shall hereinafter be referred to as "Seller Financials"). Except as set forth in Schedule 2.5, Seller Financials have been -8- 16 internally prepared by Seller in good faith and compiled by an accountant on an accrual basis and on a basis consistent with financial statements prepared by Seller for prior periods. Seller is not aware that the Seller Financials are inconsistent with generally accepted accounting principles applied on a basis consistent throughout the periods indicated (except that they do not contain footnotes); however, the Seller Financials have not been reviewed or audited by an accountant. 2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, Seller does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other (whether or not required to be reflected in financial statements consistent with generally accepted accounting principles), which individually or in the aggregate, (i) has not been reflected in the Balance Sheet, or (ii) has not arisen in the ordinary course of Seller's business since April 30, 1996. 2.7 No Changes. Except as set forth in Schedule 2.7, since April 30, 1996, there has not been, occurred or arisen any: (a) transaction by Seller except in the ordinary course of business as conducted on that date; (b) capital expenditure or commitment by Seller, either individually or in the aggregate, exceeding $5,000; (c) material adverse change in the condition (financial or otherwise), liabilities, assets, business or prospects of Seller; (d) destruction of, damage to or loss of any assets, business or customer of Seller (whether or not covered by insurance); (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of Seller, or any direct or indirect redemption, purchase or other acquisition by Seller of any of its capital stock; (g) increase in the salary or other compensation payable or to become payable by Seller to any of its officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment, by Seller, of a bonus or other additional salary or compensation to any such person. (h) acquisition, sale or transfer of any Asset except in the ordinary course of business as conducted on that date; -9- 17 (i) amendment or termination of any contract, agreement or license to which Seller was/is a party or by which it was/is bound, except in the ordinary course; (j) loan by Seller to any person or entity, incurring by Seller of any indebtedness, guaranteeing by Seller of any indebtedness, issuance or sale of any debt securities of Seller or guaranteeing of any debt securities of others; (k) waiver or release of any right or claim of Seller, including any write-off or other compromise of any account receivable of Seller; (l) the commencement or notice or, to the knowledge of Seller, threat of commencement of any lawsuit or proceeding against or investigation of Seller or its affairs; (m) notice to Seller of any claim of ownership by a third party of Seller's Intellectual Property or of infringement by Seller of any third party's Intellectual Property rights; (n) issuance or sale by Seller of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities; (o) change in pricing or royalties set or charged by Seller; (p) to Seller's knowledge, any event or condition of any character that has or could be reasonably expected to have a Material Adverse Effect; or (q) negotiation or agreement by Seller or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (p) (other than negotiations with Buyer and its representatives regarding the transactions contemplated by this Agreement). 2.8 Tax and Other Returns and Reports. (a) Definition of Taxes. For the purposes of this Agreement, "Tax" or, collectively, "Taxes", means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. Except as set forth in Schedule 2.8(b) and Section 2.8(c) below: (i) Seller has prepared and timely filed all federal, state, local and foreign returns, estimates, information statements and reports ("Returns") relating to any and all Taxes -10- 18 concerning or attributable to Seller, the Assets or Seller's business operations which, as of the date hereof, it is required to file and such Returns were true and accurate and were completed in accordance with applicable law when filed. (ii) Seller (A) has paid all Taxes it is required to pay and (B) has collected or withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld. (iii) Seller has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against Seller. (iv) No audit or other examination of any Return of Seller is presently in progress, nor has Seller been notified of any request for such an audit or other examination. (v) Seller does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved against on the Balance Sheet, whether asserted or unasserted, contingent or otherwise, and Seller has no knowledge of any basis for the assertion of any such liability attributable to Seller, the Assets or Seller's business operations. (vi) There are (and as of immediately following the Closing there will be) no Liens on the Assets of Seller relating to or attributable to Taxes. (c) First Resource IRS Liens. On August 26, 1994 Seller purchased the assets and assumed certain liabilities, excluding the First Resource Tax Liabilities (as defined below), of First Resource pursuant to the Asset Purchase Agreement by and among First Resource and Seller dated July 15, 1994 (the "First Resource Acquisition Agreement"). On November 10, 1994 and November 16, 1994, the IRS filed Notices of Federal Tax Liens (as defined below) on the assets of First Resource in the amounts of $17,998.57 and $4,026.46, respectively (the "First Resource Tax Liabilities"). Seller acquired the assets and assumed certain liabilities, excluding the First Resource Tax Liabilities, of First Resource as a purchaser within the meaning of Section 6323(h)(6) of the Internal Revenue Code of 1986, as amended (the "Code") on August 26, 1994 (i) prior to the filing by the IRS of any notice ("Notice of Federal Tax Lien") of the liens relating to the First Resource Tax Liabilities, meeting the requirements of Section 6323(f) of the Code and (ii) without actual notice of the First Resource Tax Liabilities or the filing or potential filing of any Notice of Federal Tax Lien by the IRS with respect to the First Resource Tax Liabilities. Furthermore, the First Resource Tax Liabilities or any fact related thereto was not brought to the attention of Seller until after August 26, 1994 and would not have been brought to Seller's attention if Seller had exercised due diligence through reasonable routines for communicating significant information to Seller and compliance with such routines (including the performance of a title search). (d) For purposes of this Section , references to Seller include any predecessor or transferror with respect to Seller and any person with whom Seller files or has filed a consolidated or combined Tax return or with respect to whom Seller may have transferee, secondary or other shared liability for Taxes. -11- 19 2.9 Restrictions on Business Activities. There is no agreement, commitment, judgment, injunction, order or decree binding upon Seller or the Assets which has or could reasonably be expected to have the effect of prohibiting or impairing any use by Buyer of the Assets following the Closing or the conduct of the Business as currently conducted. 2.10 Title of Properties; Absence of Liens and Encumbrances. (a) Title to Assets. Except as set forth in Schedule 2.10(a), Seller has good and marketable title to all of the Assets, all of the Assets are free and clear of restrictions on or conditions to transfer or assignment, and at the Closing, Seller will sell, convey, assign, transfer and deliver to Buyer good title to all of the Assets, free and clear of any mortgages, liens, pledges, encumbrances, claims, conditions and restrictions, of any contingent or otherwise. The assets constitute all of the assets owned by Seller, other than the Excluded Assets, and include all of the assets which are reasonably necessary for the continued conduct of the operations of Seller. The Assets are all located at Seller's principal place of business in Newark, California. (b) Assets, Property, Plant and Equipment. Schedule 2.10(b) hereto contains a true and complete list of all assets, properties, improvements, machinery, equipment, furniture and fixtures, office supplies and other tangibles included in the Assets. Between the date hereof and the Closing Date, none of such Assets shall have been disposed of other than in the ordinary course of business or due to normal wear and tear. All real and tangible personal property material to the business or financial condition of Seller, including machinery, equipment and fixtures, included in the Assets and currently used by Seller in its manufacturing operations is, and at the Closing Date will be, in good operating condition and repair, ordinary wear and tear excepted. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge the present use of Seller's premises conforms, and at the Closing Date will conform, with all applicable ordinances and regulations and all building, zoning, health, safety, air and water pollution and other laws and regulations, and all permits necessary thereunder have been obtained and are, and immediately prior to the Closing will be, in full force and effect. Seller does not own any real property. 2.11 Intellectual Property. Except as set forth in Schedule 2.11, (a) Schedule 1.1(a)(ii) lists all Intellectual Property, as well as all licenses for such Intellectual Property, which are used in or necessary to Seller's business as it is now conducted or contemplated to be conducted. Seller owns a valid right or license to use the Intellectual Property being used or held for use to conduct the Business, and the conduct of the Business currently and in the past does not conflict with and has not conflicted with valid intellectual property rights of others. All Intellectual Property used or held for use in the conduct of the Business owned by Seller is so owned free and clear of all Liens and no other person, including without limitation any present or former employee, officer or director of Seller, has any right whatsoever therein. Seller has not infringed or otherwise violated and is not infringing or violating any intellectual property rights of any other person or entity. Seller has taken appropriate steps to protect its Intellectual Property and Seller does not have any obligation to compensate any person or entity for the use of any Intellectual Property used in the conduct of the Business nor has Seller granted to any person or entity any -12- 20 license, option or other rights to use in any manner any of the Intellectual Property so used in the Business, whether requiring the payment of royalties or not. No former or current employee of Seller has any right whatsoever to any Intellectual Property being used or held for use by Seller. No proceedings have been instituted or, to the knowledge of Seller or any of its directors or officers, threatened, nor has any claim been made, against Seller alleging any such infringement or violation. For the Intellectual Property which Seller uses, but does not own, Seller is licensed to use such Intellectual Property and is not in breach or, or default under, such license agreements. Such licensed Intellectual Property is so indicated with an asterisk on Schedule 1.1(a)(ii). (b) Seller has all right, title and interest in and to the Software Products. No person or entity other than Seller owns any right, title or interest in the Software Products including, without limitation, any right to manufacture, use, copy, distribute or sublicense any object code or source code thereof. The Software Products are (i) not subject to any Liens, (ii) not subject to any pending or, to Seller's knowledge, threatened challenge of infringement of the rights of others, nor to the knowledge of Seller is there any basis for a challenge of infringement of any such rights of others, and (iii) freely transferable and assignable to Buyer and will not be rendered invalid or adversely affected in any way by virtue of the execution, delivery and performance of this Agreement. (c) Pursuant to Section 1.5 of the First Resource Acquisition Agreement, Buyer is not and will not be in the future liable to First Resource for any royalties under Sections 1.5.2.2. and 1.5.2.3. of the First Resource Acquisition Agreement in excess of the Assumed Liabilities (as defined in Section 1.5 of the First Resource Acquisition Agreement) as may be increased by any Indemnifiable Losses (as defined in Section 1.5 of the First Resource Acquisition Agreement). In addition, the escrow has been terminated pursuant to Section 1.6 of the First Resource Acquisition Agreement. 2.12 Agreements, Contracts and Commitments. Set forth on Schedule 2.12 is a list of all agreements, contracts and commitments, written or oral, to which Seller is a party or by which it is bound (the "Contracts"). Those Contracts, if any, marked with an asterisk on Schedule 2.12 shall not be assigned by Seller to Buyer at the Closing. (a) Except for such (i) breaches, violations and defaults, (ii) alleged breaches, violations and defaults, and (iii) events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, noted in Schedule 2.12 and those which reasonably would not be expected to have a Material Adverse Effect, Seller has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any Contract. Each Contract is in full force and effect and, except as otherwise disclosed in Schedule 2.12, is not subject to any default thereunder of which Seller has knowledge by any party obligated to Seller pursuant thereto. Each Contract represents the entire understanding between the Seller on the one hand and the party(s) with whom the Contract is entered into on the other hand and there are no promises, agreements or understandings between such parties other than those that are expressly set forth in the Contracts. (b) Seller has no contract or commitment which may restrict the use of or adversely affect an Asset and has no contract which will or is expected to result in a loss to Buyer in -13- 21 operating the Assets or which will or is expected to have an adverse effect on the assets or the Buyer after the Closing. (c) Seller has not given a power of attorney, which is currently in effect, to any person, firm, entity or corporation for any purpose whatsoever in connection or associated with or in any way affecting any of the Assets or the Business, except pursuant to this Agreement or documents required hereby. 2.13 Interested Party Transactions. Except as set forth on Schedule 2.13, no officer, director or shareholder of Seller (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) material interest in any entity which furnished or sold, or furnishes or sells, services or products that Seller furnishes or sells, or proposes to furnish or sell, or (ii) any material interest in any entity that purchases from or sells or furnishes to Seller any goods or services or (iii) a beneficial interest in any contract or agreement set forth in Schedule 2.12. 2.14 Governmental Authorization. Schedule 2.14 accurately lists each consent, license, permit, grant or other authorization issued to Seller by a Governmental Entity (i) pursuant to which Seller currently operates or holds any interest in any of the Assets or (ii) which is required for the operation of the Business or the holding of any such interest (herein collectively called "Seller Authorizations"), which Seller Authorizations are in full force and effect and constitute all Seller Authorizations required to permit Seller to operate or conduct its Business or hold any interest in the Assets. 2.15 Litigation. Except as set forth in Schedule 2.15, there is no action, suit or proceeding of any nature pending or, to Seller's knowledge, threatened against Seller, the Assets or any of its officers or directors in their respective capacities as such, nor, to the knowledge of Seller, is there any basis therefor. Except as set forth in Schedule 2.15, there is no investigation pending or threatened against Seller, its properties or any of its officers or directors (nor, to the knowledge of Seller, is there any basis therefor) by or before any Governmental Entity. Schedule 2.15 sets forth, with respect to any pending or threatened action, suit, proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Entity has at any time notified Seller of any challenge or question regarding the legal right of Seller to manufacture, offer or sell any of its products in the present manner or style thereof. 2.16 Accounts Receivable. (a) Seller has made available to Buyer a list of all accounts receivable of Seller reflected on the Balance Sheet ("Accounts Receivable") along with a range of days elapsed since invoice. (b) All Accounts Receivable of Seller arose in the ordinary course of business, are carried at values determined in accordance with generally accepted accounting principles consistently applied. Seller has no reason to believe that the Accounts Receivable are not collectible except to the -14- 22 extent of reserves therefor set forth in the Balance Sheet. No person has any Lien on any of such Accounts Receivable and no request or agreement for deduction or discount has been made with respect to any of such Accounts Receivable. 2.17 Minute Books. The minute books of Seller made available to Buyer contain accurate summaries of the meetings of directors (or committees thereof) and shareholders and actions by written consent which such summaries purport to summarize. 2.18 Environmental Matters. (a) Hazardous Material. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge, as of the Closing and with the exception of common toxic office supplies such as glue or toner for photocopy machines, no substance (a "Hazardous Material") that has been designated by any Governmental Entity to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, and ureaformaldehyde is present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that Seller has at any time owned, operated, occupied or leased ("Seller Facility"). (b) Hazardous Materials Activities. At no time prior to the Closing has Seller transported, stored, used, sold, disposed of, manufactured, released or exposed its employees or others to Hazardous Materials ("Hazardous Materials Activities") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity ("Environmental Laws). (c) Permits. No environmental approvals, permits, licenses, clearances or consents ("Environmental Permits") are necessary for the conduct of Seller's Hazardous Material Activities, if any. (d) Environmental Liabilities. Except as disclosed on Schedule 2.18, no action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending or, to the knowledge of Seller, threatened concerning or relating to any Seller Facility, any Environmental Permit or any Hazardous Materials Activity involving Seller. Seller is not aware of any fact or circumstance which could involve Seller in any environmental litigation or impose upon Seller any environmental liability. (e) Capital Expenditures. Except as set forth on Schedule 2.18, Seller is not aware of any capital expenditures which are required in order to comply with Environmental Laws. 2.19 Brokers' and Finders' Fees; Third Party Expenses. Seller has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Schedule 2.19 sets forth the principal terms and conditions of any agreement, written or oral, with respect to such fees. -15- 23 2.20 Employee Benefit Plans. (a) Schedule 2.20(a) contains a complete and correct description of all employment, compensation, confidentiality, non-competition, invention and consulting agreements relating to persons employed by Seller ("Business Employees"), whether written or oral (other than oral employment agreements terminable at will by either Seller or the employees without liability to Seller) and a list of each Business Employee and such Business Employee's aggregate annual compensation. Except as set forth in Schedule 2.20(a) Seller does not have any outstanding commitment or agreement to effect any general wage or salary increase for any of the Business Employees. (b) Seller is not a party to or otherwise subject to any collective bargaining agreement, nor is Seller a party to or otherwise subject to any contract or other agreement for the employment of any employee which is not terminable (without liability) on notice of thirty (30) days or less, except as indicated on Schedule 2.20(b). Except as set forth in Schedule 2.20(b), there are no suits, actions or administrative, arbitration or other proceedings pending or threatened against Seller or affecting Seller or its business concerning labor disputes, grievances, petitions for union recognition or organization or charges of unfair labor practices. (c) Schedule 2.20(c) contains a true and correct list of employee benefit plans maintained by or on behalf of Seller with respect to Business Employees including (but not limited to) any pension, profit sharing and other retirement plans, severance pay, vacation pay, medical, dental and life insurance plans, bonus, compensation and deferred compensation plans, and stock options or other stock benefit plans (collectively, the "Plans"). Each Plan described in Schedule 2.20(c) is and has been administered in accordance with the terms and is in material compliance with all applicable requirements of applicable laws, including (but not limited to) the requirements imposed by the Internal Revenue Code of 1986, as amended, and the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Except for Seller's 401(k) plan listed in Schedule 2.20(c), Seller has no Plan that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All filings, and all contributions or other payments required by applicable law with respect to the participation of the Business Employees in any Plan or to be made by Seller with respect to any Plan have been timely made. In no event shall Buyer have any liability in connection with the administration of any Plans or practices. Seller has no liabilities to any Business Employee or beneficiary of a Business Employee other than as specifically set forth in Schedule 2.20(c) to this Agreement. Except as set forth on Schedule 2.20(c), the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Seller compensation or employment plan or agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (d) Employment Matters. Except as set forth on Schedule 2.20(d), Seller (i) is in compliance in all material respects with all applicable federal and state laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and -16- 24 hours, in each case, with respect to Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) (other than routine payments to be made in the normal course of business and consistent with past practice) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits for Employees. 2.21 Insurance. Schedule 2.21 lists all insurance policies and fidelity bonds covering the Assets or the Business. There is no claim by Seller pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid and Seller is otherwise in full compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). Such policies of insurance and bonds are of the type and in amounts customarily carried by persons conducting businesses similar to those of Seller and to the best of Seller's and Seller's Affiliates' and Shareholders' knowledge meet applicable federal, state and local requirements, if any, for such insurance. Seller has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 2.22 Compliance with Laws. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge, Seller is in compliance with all statutes, laws, rules and regulations with respect to or affecting the conduct of its business and the ownership and operation of the Assets where failure to comply would have a material adverse affect on Seller, Seller's business or the Assets. Seller is not subject to any order, injunction or decree issued by any governmental body, agency, authority or court which could impair the ability of Seller to consummate the transactions contemplated hereby or which could have a material adverse effect on Seller's financial condition. 2.23 Complete Copies of Materials. Seller has delivered or made available true and complete copies of each document (or summaries of same) that has been requested by Buyer or its counsel. 2.24 Inventories. All of the inventories of Seller reflected on the Balance Sheet and Seller's books and records on the date hereof were purchased, acquired or produced in the ordinary and regular course of business and in a manner consistent with Seller's regular inventory practices and are set forth on Seller's books and records in accordance with the practices and principles of Seller consistent with the method of treating said items in prior periods. None of the inventory of Seller reflected on the Balance Sheet or on Seller's books and records as of the date hereof (in either case net of the reserve therefor) is obsolete, defective or in excess of the needs of the business of Seller reasonably anticipated during the next six months. The presentation of inventory on the Balance Sheet conforms to generally accepted accounting principles and such inventory is stated at the lower of cost (determined using the first-in, first-out method) or net realizable value. Notwithstanding the foregoing, Seller represents to Buyer that it carries no inventory on the Balance Sheet and on its books and records as of the date hereof, as it only maintains a master set of disks for its Products. -17- 25 2.25 No Insolvency. No petition has been filed by or against Seller for relief under any applicable bankruptcy, insolvency or similar law; no decree or order for relief has been entered in respect of Seller, voluntarily or involuntarily, under any such law; and, no receiver, liquidator, sequestrator, trustee, custodian or other officer has been appointed with respect to the Seller or its assets and liabilities pursuant to any such law. No warrant of attachment, execution or similar process has ben executed against Seller or any of its assets or properties. Seller has not made any assignment for the benefit of creditors. 2.26 Issuance of Shares. (a) Seller will acquire the Shares for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and Seller has no present intention of selling, granting any participation in or otherwise distributing the same. Seller understands and acknowledges that the issuance of the Shares pursuant to this Agreement will not, and any issuance of Common Stock upon conversion thereof may not, be registered under the Securities Act of 1933, as amended (the "Act") on the ground that the issuance provided for in this Agreement is exempt pursuant to Section 4(2) of the Act and that the Buyer's reliance on such exemption is predicated on Seller's representations set forth herein. The Seller covenants that in no event will it make any disposition of any of the Shares, or any Common Stock acquired upon the conversion thereof, except in accordance with the Registration Rights Agreement, which Seller shall become a party to upon the execution of Seller and Buyer of the Eighteenth Amendment to the Registration Rights Agreement. The Seller understands and acknowledges that there is no public market for the trading of the Shares, or the Common Stock acquired upon conversion thereof, and therefore, such Shares, and the Common Stock acquired upon conversion thereof, must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available, and except for the Registration Rights Agreement, the Buyer is under no obligation to register either the Shares or the Common Stock. (b) Seller has business or financial experience or a financial advisor, who is not affiliated with Buyer and who is not being compensated by Buyer or any affiliate or selling agent of Buyer, directly or indirectly, who has business or financial experience, that could be reasonably assumed to have the capacity to protect Seller's own interest in connection with the issuance of the Shares pursuant to this Agreement. 2.27 Representations Complete. None of the representations or warranties made by Seller and Seller's Affiliates and Shareholders (as modified by Seller Schedules), nor any statement made in any Exhibit or certificate furnished by Seller and Seller's Affiliates and Shareholders pursuant to this Agreement, contains or will contain at the Closing Date, any untrue statement of a material fact, or omits or will omit at the Closing Date to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. There is no fact, circumstance or condition of any kind or nature whatsoever known to Seller which reasonably would be expected to have a Material Adverse Effect on the Business as -18- 26 conducted by the Seller through the Closing, which has not been set forth in this Agreement, except those facts concerning general economic, legislative, regulatory or other matters such as may generally impact all businesses of the type operated by Seller. 2.28 Only Representations. Other than as set forth in this Agreement, the Exhibits and Schedules hereto, Seller makes no representations or warranties to Buyer. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 3.1 Organization, Standing and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. 3.2 Authority; Consents. Buyer has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy or similar laws and general principles of equity. The consummation of the transactions contemplated by this Agreement will not materially conflict with any provision of the Articles of Incorporation or Bylaws of Buyer. To Buyer's knowledge, no consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party, is required by or with respect to Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby except for filings made in compliance with federal or state securities laws. 3.3 Litigation. There is no action, suit or proceeding of any nature pending or, to Buyer's knowledge, threatened against Buyer that would in any material way impair Buyer's ability to execute this Agreement and consummate the transactions contemplated hereunder. 3.4 Brokers' and Finders' Fees; Third Party Expenses. Buyer has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.5 Authorization of Shares. The Buyer has authorized and reserved the issuance of the Shares and the Common Stock acquired upon conversion thereof. -19- 27 3.6 Amendments to Registration Rights Agreement. The Second, Third and Fifth amendments to the Registration Rights Agreement were entered into by Buyer and the parties set forth therein for the sole purpose of including additional shares of Buyer's Preferred Stock as "Registerable Securities" and the Purchasers (as defined therein) as "Holders" under the Registration Rights Agreement. 3.7 Representations Complete. None of the representations or warranties made by Buyer, nor any statement made in any Exhibit or certificate furnished by Buyer pursuant to this Agreement, contains or will contain at the Closing Date, any untrue statement of a material fact, or omits or will omit at the Closing Date to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV COVENANTS OF SELLER 4.1 Conduct of Business of Seller. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, Seller agrees (except to the extent that Buyer shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, maintain insurance against loss or damage to the Assets and such other insurance with respect to the Assets as heretofore been maintained, to pay or perform other obligations when due, and, to the extent consistent with such business, use all reasonable efforts consistent with past practice and policies to preserve intact Seller's present business organizations, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired the Assets, including without limitation, Seller's goodwill and the Business at the Closing Date. Seller shall promptly notify Buyer of any event or occurrence or emergency not in the ordinary course of business of Seller, and any event which could have a Material Adverse Effect. Except as expressly contemplated by this Agreement, Seller shall not, without the prior written consent of Buyer (which shall be given, or reasonably withheld, in the cases of clauses (f), (g) and (h) below, within one business day after receipt of written request therefor): (a) Enter into any commitment or transaction not in the ordinary course of business; (b) Transfer to any person or entity any rights to Seller's Intellectual Property; (c) Enter into or amend any agreements pursuant to which any other party is granted marketing, distribution or similar rights of any type or scope with respect to any products of Seller; (d) Amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of the agreements set forth or described in Seller Schedules; -20- 28 (e) Commence any litigation; (f) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of Seller, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock (or options, warrants or other rights exercisable therefor); (g) Except for the issuance of shares of capital stock of Seller upon exercise or conversion of options described in Schedule 2.2, issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities; (h) Cause or permit any amendments to its Articles of Incorporation or Bylaws; (i) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Seller; (j) Sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business; (k) Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities of Seller or guarantee any debt securities of others; (l) Grant any severance or termination pay (i) to any director or officer or (ii) to any other employee; (m) Adopt or amend any employee benefit plan, or enter into any employment contract, pay or agree to pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its employees; (n) Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (o) Pay, discharge or satisfy, in an amount in excess of $5,000 (in any one case) or $15,000 (in the aggregate), any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in Seller Financials (or the notes thereto); -21- 29 (p) Enter into any strategic alliance or joint marketing arrangement or agreement; or (q) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (p) above, or any other action that would (i) prevent Seller from performing or cause Seller not to perform its covenants hereunder or (ii) result in making the representations and warranties in Article II untrue. 4.2 No Solicitation. Until (i) the Closing Date, (ii) 60 days following the date of termination of this Agreement pursuant to the provisions of Section 7.1(b)(i) or 7.1(d) hereof or (iii) the date of termination of this Agreement pursuant to any other provision of Section 7.1 hereof, as the case may be, Seller will not (nor will Seller permit any of Seller's officers, directors, agents, representatives or Affiliates to) directly or indirectly, take any of the following actions with any party other than Buyer and its designees: (a) solicit, encourage, initiate or participate in any negotiations or discussions with respect to, any offer or proposal to acquire all or any portion of Seller's business and properties or capital stock whether by merger, purchase of assets, tender offer or otherwise, (b) except as required by law (in the opinion of outside counsel), including fiduciary duties required by law, disclose any information not customarily disclosed to any person other than its attorneys or financial advisors concerning Seller's business and properties or afford to any person or entity access to its properties, books or records, or (c) assist or cooperate with any person to make any proposal to purchase all or any part of Seller's capital stock or assets, other than selling products of Seller in the ordinary course of business. In the event Seller shall receive any offer or proposal, directly or indirectly, of the type referred to in clause (a) or (c) above, or any request for disclosure or access pursuant to clause (b) above, Seller shall immediately inform Buyer as to any such offer or proposal. 4.3 Covenant Not to Compete. For a period of three (3) years from the Closing, Seller will not directly or indirectly engage in any Competitive Activities (as hereinafter defined). 4.3.1 The term "Competitive Activities" as used herein shall mean: (a) Directly or indirectly engaging in, continuing in or carrying on in the Business (as defined in the Recitals hereof), including owning or controlling any financial interest in any corporation, partnership, firm or other form of business organization which competes with or is engaged in or carries on any aspect of the Business; -22- 30 (b) Consulting with, advising or assisting in any way, whether or not for consideration, any corporation which is now, becomes or may become a competitor of Buyer in any aspect with respect to the Business, including, without limitation, advertising or otherwise endorsing the products of any such competitor or otherwise serving as an intermediary for any such competitor; soliciting customers or sales representatives or otherwise soliciting orders for the sale of any products associated with the Business (other than solely for the benefit of Buyer at its request); loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arms' length basis with any such competitor; soliciting, inducing or attempting to induce any employee of Buyer to leave his or her employment with Buyer; and (c) Engaging in any practice the purpose of which is to evade the provisions of this covenant not to compete or commit any act which is detrimental to the successful use and operation of the Assets by Buyer after Closing or which may adversely affect the Assets; provided, however, that the term "Competitive Activities" shall not include the ownership of securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of such corporation. The parties agree that the geographic scope of this covenant not to compete shall extend worldwide. The parties agree that Buyer may sell, assign or otherwise transfer this covenant not to compete, in whole or in part, to any person, corporation, firm or entity that purchases all or a substantial part of the Assets. 4.4 Discharge of Debts. To the extent necessary and required to transfer, convey, assign and deliver the Assets to Buyer on the Closing Date free and clear of all liens and encumbrances, Seller shall hereafter promptly and fully satisfy and discharge all of its debts, liabilities and obligations when due, or shall obtain full releases from the same or make sufficient provisions to pay the same or to be released therefrom, all to the satisfaction of Buyer. Seller shall not make any distribution to its shareholders until all liabilities and obligations incurred on or prior to the Closing, and all liabilities and obligations arising out of any contract, agreement or other arrangement entered into on or prior to the Closing, have been paid and discharged in full or an amount sufficient therefor has been set aside for payment thereof. ARTICLE V ADDITIONAL AGREEMENTS 5.1 Seller Shareholder Approval. As promptly as practicable after the execution of this Agreement, Seller shall submit this Agreement and the transactions contemplated hereby to its shareholders for approval and adoption as provided by California Law and its Articles of Incorporation and Bylaws. Seller shall use its best efforts to solicit and obtain the written consent, or vote at a duly convened meeting, of its shareholders sufficient to approve the Acquisition and this Agreement and to enable the Closing to occur as promptly as practicable. The materials submitted to Seller's shareholders shall include information regarding Seller, the terms of the Acquisition and this Agreement and the recommendation of the Board of Directors of Seller in favor of the Acquisition and this Agreement (subject to applicable fiduciary duties). -23- 31 5.2 Access to Information. Seller shall afford Buyer and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Closing Date to (a) all of Seller's properties, books, contracts, commitments and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of Seller as Buyer may reasonably request. Seller agrees to maintain and retain any and all information regarding its business operations on or prior to the Closing Date necessary for Buyer to calculate the availability to it of tax credits for research activities under Section 41 of the Code. Seller agrees to provide to Buyer and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.2 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Acquisition. 5.3 Confidentiality. In addition to the obligations of each party pursuant to the existing mutual confidentiality agreement, each of the parties hereto hereby agrees to keep such information or knowledge obtained in any investigation pursuant to Section 1.3 or 5.2, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential; provided, however, that the foregoing shall not apply to information or knowledge which (a) a party can demonstrate was already lawfully in its possession prior to the disclosure thereof by the other party, (b) is generally known to the public and did not become so known through any violation of law or this Agreement, (c) became known to the public through no fault of such party, (d) is later lawfully acquired by such party from other sources, (e) is required to be disclosed by order of court or government agency with subpoena powers or (f) which is disclosed in the course of any litigation between any of the parties hereto. 5.4 Expenses. Whether or not the Acquisition is consummated, all fees and expenses incurred in connection with the Acquisition including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties ("Third Party Expenses") incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses, except Buyer shall pay up to $20,000 of legal and accounting fees incurred by Seller. 5.5 Public Disclosure. Unless otherwise required by law or a court of competent jurisdiction, for a period of five years from the Closing Date, no disclosure (whether or not in response to an inquiry) of any of the specific details of this Agreement and the transactions contemplated thereby, including without limitation, disclosure of the consideration paid for the assets purchased and the indemnification arrangements provided for herein, shall be made by Seller, (other than to Seller's legal counsel and other advisers as shall be reasonably necessary) unless such disclosure is specifically approved by Buyer and Buyer may, at its sole discretion, withhold such approval. -24- 32 5.6 Consents. Seller shall use its best efforts to obtain all necessary consents, waivers and approvals under any of the Contracts as may be required in connection with the Acquisition so as to transfer to Buyer all rights of Seller thereunder as of the Closing. 5.7 Best Efforts. Subject to the terms and conditions provided in this Agreement and to the fiduciary duties of the board of directors of Seller under applicable law as advised by outside counsel, each of the parties hereto shall use its best efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations: to consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Buyer shall not be required to agree to any divestiture by Buyer or any of Buyer's subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Buyer or its subsidiaries or affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets (including without limitation the Assets), properties and stock. 5.8 Notification of Certain Matters. Seller shall give prompt notice to Buyer, and Buyer shall give prompt notice to Seller, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of Seller and Buyer, respectively, contained in this Agreement to be untrue or inaccurate at or prior to the Closing Date and (ii) any failure of Seller or Buyer, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.8 shall not limit or otherwise affect any remedies available to the party receiving such notice. 5.9 Additional Documents and Further Assurances. Each party hereto, at the request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 5.10 Employee Benefits. Except as provided in Section 5.13 immediately prior to the closing, Seller will terminate each of its Business Employees and will discharge all of its obligations to such employees with respect to accrued salary, accrued vacation and sick time, benefit plans and insurance plans, other than accrued vacation and sick time of Business Employees who accept offers of employment from Buyer as set forth below in this Section . Seller shall use its best efforts to assist Buyer in hiring and retaining the services of Business Employees of Seller whom Buyer desires to employ. Seller understands and agrees that (a) Buyer is under no obligation to offer employment with Buyer to any Business Employees of Seller, (b) it is within the sole discretion of Buyer to determine to whom offers of employment with Buyer will be extended and from whom such offers will be withheld, and (c) those Business Employees of Seller who are given offers of employment with Buyer will become, upon their acceptance of such offers, new employees of Buyer with their employment -25- 33 commencing on the Closing Date for all purposes, including but not limited to that of determining their eligibility for Buyer's employment benefits; provided, however, that Buyer will waive all applicable pre-existing condition clauses relating to insurance-based employment benefits, and will assume all vacation and sick time accrued for such Business Employees immediately prior to the Closing Date. Any Business Employee accepting employment with Buyer will be required as a condition precedent to such employment to execute Buyer's standard form of confidentiality and proprietary information agreement and take such other actions generally required by Buyer of its new employees. 5.11 Tax Returns. Except for the Sales Taxes and other Taxes Buyer agrees to pay pursuant to Sections 1.1(b) and 1.2(c) hereof, Seller shall be responsible for and pay when due (i) all of Taxes of Seller attributable to or levied or imposed upon the Assets relating or pertaining to the period (or that portion of any period) ending on or prior to the Closing Date and (ii) all Taxes attributable to, levied or imposed upon, or incurred in connection with the Seller's business operations. Seller shall continue to timely file within the time period for filing, or any extension granted with respect thereto, all of Seller's Tax Returns required to be filed in connection with the Assets and any portion of any such Tax Returns connected therewith shall be true and correct and completed in accordance with applicable laws. 5.12 Bulk Sales. Seller shall, promptly upon request by Buyer, provide all such information and execute and deliver such documents as Buyer may reasonably request in order to enable Seller, through the efforts of Buyer, to comply with the bulk sales laws of any jurisdiction. 5.13 Employment Agreements. Buyer shall offer the persons listed in Schedule 6.3(n) the opportunity to enter into employment and noncompetition agreements with Buyer to become effective following the Closing. Effective upon the Closing, Dwight L. Jackson shall be offered employment pursuant to the terms set forth in the Employment and Noncompetition Agreement attached hereto as Exhibit F. Pursuant to action to be taken by the Board of Directors of Buyer at its next Board meeting at which stock options are granted (and, in any event, within sixty (60) days of the Closing Date), Dwight L. Jackson shall be granted a stock option to purchase 10,000 shares of the Buyer's Common Stock at an exercise price equal to the then-current fair market value of the stock as determined by the Buyer's Board of Directors. 5.14 Securities Laws. (a) Securities Laws Representations and Covenants of Buyer. (1) This Agreement is made with Seller in reliance upon Seller's representation to Buyer, which by Seller's execution of this Agreement Seller hereby confirms, that the Shares to be received by Seller will be acquired for investment for Seller's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that Seller has no present intention of selling, granting any participation in, or otherwise distributing the same. -26- 34 By executing this Agreement, Seller further represents that Seller has no contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Shares. (2) Seller acknowledges and understands that the Shares, and any Common Stock acquired upon the conversion thereof, must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Registration Rights Agreement, Buyer is under no obligation to register either the Shares of Common Stock. (3) Seller understands and acknowledges that the offering of the Shares pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration pursuant to Section 4(2) of the Securities Act, and that the Buyer's reliance upon such exemption is predicated upon Seller's representations set forth in this Agreement. (4) Unless there is in effect a registration statement under the Securities Act covering the proposed transaction, Seller covenants that in no event will Seller dispose of any of the Shares (other than pursuant to Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act ("Rule 144") or any similar or analogous rule) unless and until (i) Seller shall have notified the Buyer of the proposed disposition and shall have furnished the Buyer with a statement of the circumstances surrounding the proposed disposition and (ii) if requested by the Buyer, Seller shall have furnished Buyer with an opinion of counsel satisfactory in form and substance to the Buyer and Buyer's counsel to the effect that (x) such disposition may legally be made in the manner proposed without registration under the Securities Act and (y) appropriate action necessary on the part of Seller for compliance with the Securities Act and any applicable state, local or foreign law has been taken; provided however, no such opinion need be obtained with respect to Seller's distribution of the Shares to its Shareholders pursuant to Section 1.2(b) hereof if such Shareholders agree to be subject to the terms hereof. Each certificate evidencing the Shares transferred as above provided shall bear the appropriate restrictive legend set forth below, except that such certificate shall not bear such legend if the transfer was made in compliance with Rule 144 or if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. (5) Seller represents that: (i) Seller has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of Seller's prospective investment in the Shares; (ii) Seller has received all the information it has requested from Buyer and considers necessary or appropriate for deciding whether to purchase the Shares; (iii) any financial information, financial projections or other forward-looking financial or statistical data received by Seller from Buyer has been reviewed by Seller with the knowledge and understanding that the foregoing constitutes no more than Buyer's reasonable belief as to results which may be achieved, and that no representation, warranty or assurance is, can be or has been made that any such results, -27- 35 financial or otherwise, will actually be achieved by Buyer; (iv) Seller has the ability to bear the economic risks of Seller's prospective investment; and (v) Seller is able, without materially impairing its financial condition, to hold the Shares for an indefinite period of time and to suffer complete loss on its investment. (b) Legends. (1) All certificates for the Shares shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii) PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION." (2) "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." (3) The certificate evidencing the Shares shall also bear any legend required pursuant to any state, local or foreign law governing such securities. A permit to qualify the issuance of these Shares has been ordered by the California Department of Corporations (the "Permit") and the certificate evidencing the Shares shall bear the legend as set forth in Section 5.14(b)(2) required as a condition to the issuance of the Permit. Buyer shall file a Post-Effective Amendment No. 1 to the Permit immediately following the Closing to file an executed copy of this Agreement with the California Department of Corporations to allow the distribution of the Shares by Seller to its Shareholders pursuant to Section 1.2(b) hereof. (c) Seller understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached as Attachment 1. -28- 36 5.15 Closing Statement. Within 45 days after the Closing Date, Seller shall prepare and deliver to the Buyer the following: (i) an income statement (the "Closing Income Statement") for the period from March 31, 1996 through the Closing Date (the "Stub Period") and (ii) a balance sheet as of the Closing Date (the "Closing Balance Sheet"; collectively, the Closing Income Statement and the Closing Balance Sheet shall be referred to as the "Closing Statement"). Such Closing Statement shall, among other things, set forth the net worth of the Company as of the Closing Date. The Closing Statement shall be prepared in good faith with Buyer's reasonable assistance to the extent of Buyer's ability and in accordance with generally accepted accounting principles applied on a consistent basis. 5.16 Settlement of Litigation and Other Disputes. Seller shall use its best efforts to settle any litigation matters arising between the date hereof and the Closing Date, prior to the Closing on terms and conditions satisfactory to Buyer. 5.17 Updating of Schedules. Seller shall deliver to Buyer at least one full day prior to the Closing Date Supplemental Schedules which shall reflect any changes or additions required to update the disclosure set forth in the Schedules to make it true and correct as of the Closing Date. ARTICLE VI CONDITIONS TO THE ACQUISITION 6.1 Conditions to Obligations of Each Party to Effect the Acquisition. The respective obligations of each party to this Agreement to effect the Acquisition shall be subject to the satisfaction at or prior to the Closing Date of the following conditions: (a) Corporate Approvals. This Agreement and the Acquisition shall have been approved and adopted by the requisite vote of the shareholders of Seller. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Acquisition shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Acquisition, which makes the consummation of the Acquisition illegal. 6.2 Additional Conditions to Obligations of Seller. The obligations of Seller to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Seller: (a) Representations, Warranties and Covenants. The representations and warranties of Buyer in this Agreement shall be true and correct on and as of the Closing Date as though such representations and warranties were made on and as of such time and Buyer shall have -29- 37 performed and complied with all covenants, obligations, agreements and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. (b) Certificate of Buyer. Seller shall have been provided with a certificate duly executed on behalf of Buyer by its President to the effect that, as of the Closing Date: (i) all representations and warranties made by Buyer in this Agreement are true and complete; and (ii) all covenants, obligations, agreements and conditions of this Agreement to be performed by Buyer on or before such date have been so performed. (c) Registration Rights Agreement. Buyer and Seller shall have executed and delivered the Eighteenth Amendment to the Registration Rights Agreement pursuant to Section 1.2(a) hereof and attached hereto as Exhibit B. (d) Employment and Noncompetition Agreement. Buyer and Dwight L. Jackson shall have executed and delivered the Employment and Noncompetition Agreement pursuant to Section 5.13 hereof and attached hereto as Exhibit H. 6.3 Additional Conditions to the Obligations of Buyer. The obligations of Buyer to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Buyer: (a) Representations, Warranties and Covenants. The representations and warranties of Seller and Seller's Affiliates and Shareholders in this Agreement shall be true and correct on and as of the Closing Date as though such representations and warranties were made on and as of such time and Seller and Seller's Affiliates and Shareholders shall have performed and complied with all covenants, obligations, agreements and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. (b) Certificate of Seller and Seller's Affiliates and Shareholders. Buyer shall have been provided with a certificate executed on behalf of Seller by its President and by each of Seller's Affiliates and Shareholders to the effect that, as of the Closing Date: (i) all representations and warranties made by Seller and Seller's Affiliates and Shareholders in this Agreement are true and complete; and (ii) all covenants, obligations, agreements and conditions of this Agreement to be performed by Seller and Seller's Affiliates and Shareholders on or before such date have been so performed. -30- 38 (c) Claims. There shall not have occurred any claims (whether or not asserted in litigation) which may materially and adversely affect the consummation of the transactions contemplated hereby or the Business, the Assets or financial condition of Seller or Buyer. (d) Third Party Consents. Any and all consents, waivers, and approvals required from third parties relating to the Contracts so as to assign all rights of Seller thereunder to Buyer as of the Closing shall have been obtained except as set forth in 6.4(b) hereof and except for any consent, waiver and approval by Oracle Corporation, a California corporation ("Oracle") pursuant to Section 8.5 of the Business Alliance Program Agreement between Oracle and Seller dated February 15, 1996. (e) Payment of Outstanding Liabilities. To the extent necessary and required to transfer, convey, assign and deliver the Assets to Buyer on the Closing Date free and clear of all liens and encumbrances, Seller will have taken any and all necessary actions to pay off and/or obtain full releases from all of its liabilities and obligations, or will have made sufficient provisions to so pay or obtain releases, to the satisfaction of Buyer. (f) Bulk Sales Law Compliance. In connection with the transactions contemplated hereby, Seller shall have complied fully with its obligations pursuant to Section 5.12 of this Agreement and there shall have been no intervention by any creditor of Seller prior to the Closing, except as disclosed in Schedule 6.3(f). (g) Satisfaction of Bank Debt. Seller shall have delivered to Buyer evidence satisfactory to Buyer that the loan from Scott Valley Bank has been assigned to Stephen P. Blanding and Kirk G. Ward and that Scott Valley Bank has terminated all security interests, security agreements and guarantees affecting or relating to the Assets. (h) Termination of UCC Financing Statements. Buyer shall have been furnished with UCC termination statements with respect to all UCC-1 financing statements evidencing security interests in any of the Assets excluding the tax liens filed by the IRS on November 10, 1994 and November 16, 1994 in the amount of $17,998.57 and $4,026.46, respectively, and the tax liens filed by the State of California Employment Development Department on March 23, 1995 in the amount of $4,586.97, with respect to liens on the assets of First Resource, and including the UCC-1 financing statement filed by Scott Valley Bank on October 12, 1994 with respect to a lien on substantially all of the assets of Seller. (i) Subordination Agreement. Seller shall have delivered to Buyer a copy of the Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding pursuant to Section 1.1(b)(ii) hereof. (j) Settlement of Outstanding Disputes. Buyer shall have received evidence of the settlement of any litigations and/or disputes described in the Schedules, including a general release from each such litigant or disputant, as the case may be, on terms and in a form satisfactory to it. -31- 39 (k) No Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Buyer's proposed acquisition of the Assets, or limiting or restricting Buyer's conduct or operation of the Business (or its own business) following the Acquisition shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. (l) Governmental Approvals. All consents, approvals, orders and authorizations of, and registrations, declarations and filings with, and expirations of waiting periods imposed by, any governmental entity, domestic or foreign, necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed or have occurred. (m) No Material Adverse Changes. There shall not have occurred any material adverse change in the Business, the Assets or the results of operations or financial condition of Seller. (n) Employment and Noncompetition Agreements. Buyer and Dwight L. Jackson shall have entered into the Employment and Noncompetition Agreement in the form attached hereto as Exhibit H. Buyer and the persons listed in Schedule 6.3(n) shall have entered into the Buyer's standard form of confidentiality and proprietary information agreement. (o) Third Party Rights. No third party shall have any right of any nature whatsoever (including, without limitation, any right to receive royalty payments) in respect of any of the Assets, except rights to use Products pursuant to licenses granted by Seller in the ordinary course of business. (p) Certificates. Seller shall have obtained certificates of good standing from the California Secretary of State as to the good standing of the Seller and from the California Franchise Tax Board as to due payment by Seller of all taxes due, and shall have provided Buyer with true and correct certified copies thereof. (q) Due Diligence. Buyer shall have completed to its satisfaction the due diligence process outlined in Section 5.2 hereof. (r) Closing Documents. Buyer shall have received, in form and substance satisfactory to Buyer and its counsel, each and every other closing document required to be delivered to it pursuant to this Agreement. 6.4 Condition Subsequent to Obligations of Buyer. (a) Cara Agreement. Within twenty (20) days after the Closing, Buyer and Cara Information Technology LTD ("Cara") shall enter into a license agreement (the "Cara Agreement") substantially in the form attached hereto as Exhibit I and Cara shall pay by wire transfer, upon the written instructions from Buyer to Cara, an aggregate of $100,000 of the license fees as set forth in -32- 40 the Cara Agreement of which $75,000 shall be paid upon execution of the Cara Agreement and an additional $25,000 shall be paid upon delivery of the Documentation by Buyer to Cara at such respective times. In no event shall the Cara Agreement be entered into between Seller and Cara prior to the Closing. In addition, Seller hereby guarantees two payments of $50,000 each (for an aggregate of $100,000) by Cara to Buyer to be paid six (6) months and twelve (12) months, respectively, from the date of the Cara Agreement. (b) Third Party Consents. Within twenty (20) days after the Closing, Seller shall have obtained and delivered to Buyer all consents, waivers, and approvals required from Smithware, Inc., a Tennessee Corporation ("Smithware") in accordance with the Software Distribution Agreement dated as of April 19, 1996 by and between Seller and Smithware and from Programmed Intelligence Corporation, a Georgia corporation ("IQ") in accordance with the Software Distribution License Agreement dated as of October 19, 1989, as amended, by and between Seller and IQ to assign all rights of Seller thereunder to Buyer as of the Closing. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. Except as provided in Section 7.2 below, this Agreement may be terminated and the Acquisition abandoned at any time prior to the Closing Date: (a) by mutual consent of Seller and Buyer; (b) by Buyer or Seller if: (i) the Closing has not occurred by June 15, 1996; (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Acquisition; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Acquisition by any Governmental Entity that would make consummation of the Acquisition illegal; (c) by Buyer if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Acquisition by any Governmental Entity, which would: (i) prohibit Buyer's ownership or operation of all or a substantial portion of the Business or the Assets or (ii) compel Buyer to dispose of or hold separate all or a substantial portion of the Business or the Assets of Buyer as a result of the Acquisition; (d) by Buyer if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Seller and such breach has not been cured within five (5) business days after written notice to Seller (provided that, no cure period shall be required for a breach which by its nature cannot be cured); (e) by Seller if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement -33- 41 contained in this Agreement on the part of Buyer and such breach has not been cured within five (5) business days after written notice to Buyer (provided that, no cure period shall be required for a breach which by its nature cannot be cured). 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Buyer or Seller, or their respective officers, directors or shareholders, provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 4.2, 4.3, 5.3, 5.4, 5.5 and Article 8 of this Agreement shall remain in full force and effect and survive any termination of this Agreement. 7.3 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 7.4 Extension; Waiver. At any time prior to the Closing Date, Buyer on the one hand, and Seller, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE VIII INDEMNITY AGREEMENT 8.1 Agreement to Indemnify; Offset. (a) Each of Seller and Seller's Affiliates and Shareholders hereby agree, jointly and severally, to indemnify and hold Buyer, and its directors, officers and affiliates (collectively, the "Indemnitees"), harmless against and in respect of any loss, cost, expense (including expenses of investigation), claim, liability, deficiency, judgment or damage, including reasonable legal and accounting fees and expenses, which exceed $15,000 in the aggregate (hereinafter, individually, a "Loss", and collectively, "Losses") incurred by Buyer, its officers, directors, or affiliates, directly or indirectly, (i) as a result of any inaccuracy in or breach of a representation or warranty of Seller or any of Seller's Affiliates and Shareholders contained in this Agreement or any failure by Seller or any of Seller's Affiliates and Shareholders to perform or comply with any covenant or condition contained in this Agreement and (ii) by reason of Seller's failure to satisfy or discharge in a timely manner any liability or obligation of Seller that is not an Assumed Liability. Notwithstanding the foregoing, Seller and Seller's Affiliates and Shareholders shall only be liable to Indemnitees for any and all Losses in excess of an aggregate total of $15,000 from the sum of all Losses combined. (b) Prior to the earlier to occur (the "Offset Date") of (i) the closing of an initial public offering of the Buyer that triggers the automatic conversion of the Series E Preferred Stock of -34- 42 Buyer into Common Stock of the Buyer (an "IPO") or (ii) twenty-four (24) months from the date of this Agreement, Buyer, for purposes of calculating the amount of interest payable to Kirk G. Ward and Stephen P. Blanding under the $250,000 Note, only and not as a permanent reduction of the principal balance thereof, shall offset the amount of any Losses for which Seller and Seller's Affiliates and Shareholders are liable to any of the Indemnitees against the amount of principal outstanding under the $250,000 Note. (c) At the Offset Date, in addition to any rights of offset or other rights that Buyer or any of the other Indemnitees may have at Common Law or otherwise, Seller shall have the option to either: (i) cause Buyer to withhold and deduct any sum that may be owed to any Indemnitee under this Agreement from any amount otherwise payable by Buyer to Kirk G. Ward and Stephen P. Blanding under the $250,000 Note or (ii) deliver to Buyer the number of shares equal to the quotient of (1) the amount of such Losses, (2) divided by the greater of (x) $7.94 per share (as adjusted for stock splits and stock dividends) or (y) the most recent purchase price per share of the Company's Capital Stock. The withholding and deduction of any such sum against the $250,000 Note shall first be used to pay down any principal, if any owed and any accrued interest or other fees or sums owed thereafter by Buyer to Seller or any of Seller's Affiliates and Shareholders and shall operate as a complete discharge (to the extent of such sum) of the obligation to pay the amount from which such sum was deducted. 8.2 Expiration of Indemnification and Representations and Warranties. (a) Except as otherwise provided in Sections 8.1(c) and 8.2(b) hereof, the indemnification obligations under Section 8.1 hereof and the representations and warranties contained in this Agreement (except for those referred to in Section 8.2(b) hereof) shall terminate eighteen (18) months from the date of this Agreement, but shall not terminate as to any Loss (or a potential claim by an appropriate party) asserted in good faith prior to such date by Delivery (as defined below) of an Officer's Certificate (as defined below) pursuant to Section 8.3 hereof. (b) The indemnification obligations under Section 8.1 hereof with respect to a breach of the representations and warranties contained in (i) Section 2.8(c) of this Agreement shall not terminate until twenty-four (24) months; and (ii) Section 2.11(c) of this Agreement shall terminate forty-eight (48) months after the date of this Agreement, but shall not terminate as to any Loss (or a potential claim by an appropriate party) asserted in good faith prior to such date. The representations and warranties contained in Sections 2.8(c) and 2.11(c) shall survive until expiration of the respective periods set forth in the foregoing clauses (i) and (ii), respectively. In addition, the representations and warranties of Buyer in this Agreement or in any instrument delivered pursuant to this Agreement shall survive for a period of one (1) year from the Closing Date. 8.3 Claims. Upon Delivery (as defined below) of notice to Seller by the Buyer at any time on or before the last day prior to expiration of indemnification as set forth in Section 8.2 herein of a certificate signed by any officer of Buyer (an "Officer's Certificate"): -35- 43 (a) stating that Buyer (or any of its directors, officers or affiliates) has paid or properly accrued or reasonably anticipates that it will have to pay or accrue Losses in an aggregate stated amount to which such party is entitled to indemnity pursuant to this Agreement, and (b) specifying in reasonable detail the individual items of Losses included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated liability, and the nature of the misrepresentation, breach of warranty or covenant or condition to which such item is related, the Seller or any of Seller's Affiliates or Shareholders shall, subject to the provisions of Section 8.4 hereof, either (i) deliver to Buyer as promptly as practicable but in no event later than thirty (30) calendar days from the date of Delivery, the amount of cash equal to such Losses as indemnity payable by wire transfer or certified check, or, in the event any amounts remain due under the $250,000 Note and/or any of Seller or Seller's shareholders are the beneficial holders of any of the Shares, (ii) notify Indemnitees as promptly as practical but in no event later than thirty (30) calendar days from the date of Delivery, that such indemnification shall be offset in accordance with Sections 8.1(b) and (c) hereof. 8.4 Objections to Claims. At the time of delivery of any Officer's Certificate to Seller (the "Delivery"), a duplicate copy of such certificate shall be delivered to Seller's Affiliates and Shareholders. After the expiration of such thirty (30) day period, Seller or any of Seller's Affiliates and Shareholders shall make payment to Buyer in accordance with Section 8.3 hereof; provided that, no such payment may be made if Seller shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to Buyer prior to the expiration of such thirty (30) day period. Notwithstanding any other provision of this Agreement, the parties hereto hereby agree that, upon receipt of reasonable evidence of any claimed or asserted Tax liability which attaches or may attach to the Assumed Assets by operation of law or otherwise or for which Buyer is liable in connection with the purchase of the Assumed Assets and which is an Indemnifiable Loss hereunder, the Seller or any of Seller's Affiliates and Shareholders shall deliver to Buyer, as promptly as practicable, an amount sufficient for Buyer to discharge such Tax liability. In the event Seller objects or disputes the payment or satisfaction of any such Tax liability, Seller's sole recourse shall be to file a claim of refund or such other appropriate claim with the governmental body to which such payment is made by Buyer. 8.5 Resolution of Conflicts; Arbitration. (a) In case Seller shall so object in writing to any claim or claims made in any Officer's Certificate, Seller and Buyer shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims; provided, however, that there shall be no presumption that Buyer has not attempted to agree in good faith if Buyer chooses to demand arbitration of the matter in the manner set forth in paragraph (b) below after fifteen (15) days following Seller's objection. If Seller and Buyer should so agree, a memorandum setting forth such agreement shall be prepared and signed by each of Buyer and Seller. -36- 44 (b) If no such agreement can be reached after good faith negotiation, either Buyer or Seller may demand arbitration of the matter unless the amount of the Loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and, in either such event, the matter shall be settled by arbitration conducted by three arbitrators. Buyer and Seller shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of a majority of the arbitrators so selected as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement. (c) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Alameda County, California under the rules then in effect of the American Arbitration Association. For purposes of this Section 8.5, in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, Buyer shall be deemed to be the "Non-Prevailing Party" in the event that the arbitrators award Buyer less than fifty percent (50%) of the disputed amount (in addition to any amount not in dispute); otherwise, Seller shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and the expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration. 8.6 Third Party Claims. In the event Buyer becomes aware of a third-party claim that Buyer believes may result in a demand of indemnification, Buyer shall notify Seller of such claim, and the Seller shall be entitled, at its expense, to participate in any defense of such claim. Buyer shall have the right in its sole discretion to settle any such claim; provided, however, that except with the written consent of Seller (which shall not be unreasonably withheld), no settlement of any such claim with third party claimants shall alone be determinative of the amount of liability of Seller. In the event that Seller has not consented in writing to any such settlement, Buyer and Seller shall resolve by arbitration any dispute as to the amount to which Buyer is entitled under Section 8.1 hereof in respect of such settlement in the manner set forth in this Section 8. 8.7 Remedies. Seller and each of Seller's Affiliates and Shareholders hereby acknowledge that Buyer may seek any available remedy to enforce the indemnity obligations of Seller and Seller's Affiliates and Shareholders set forth in Section 8.1 hereof. 8.8 Representative. Seller and the Seller's Affiliates and Shareholders hereby agree that effective upon the execution of this Agreement, they shall be collectively represented by Stephen P. Blanding (the "Representative") in accordance with the following terms: (i) The Representative is hereby empowered to give and receive notices and communications, to agree to the reimbursable amount of any Loss, to negotiate, enter into settlements and compromises of and to take all actions on behalf of the Seller and the Seller's Affiliates and Shareholders necessary for the accomplishment of the foregoing. -37- 45 (ii) In the event that the Representative shall die, become incapacitated, resign or otherwise be unable to fulfill his duties or terminate his status as such, his successor shall be elected by the vote or consent of the majority in interest of the Seller's Affiliates and Shareholders as soon as reasonably practicable thereafter. (iii) The Representative shall receive no compensation for his services but shall be reimbursed by the Seller's Affiliates and Shareholders for reasonable expenses incurred in the course of performance of such services. (iv) A decision, act, consent or instruction of the Representative shall constitute a decision of the Seller and Seller's Affiliates and Shareholders and shall be conclusive and binding upon the Seller and Seller's Affiliates and Shareholders, and Buyer may rely upon any decision, act, consent or instruction of the Representative as being the decision, act, consent or instruction of the Seller and Seller's Affiliates and Shareholders. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via telecopy (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Buyer, to: ProBusiness, Inc. 5934 Gibraltar Pleasanton, California 94588 Attention: Chief Financial Officer Telecopy No.: (510) 847-3817 with a copy to: Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Alan K. Austin, Esq. Telecopy No.: (415) 493-6811 -38- 46 (b) if to Seller, to: Dimension Solutions 39899 Balentine Drive Suite 335 Newark, California 94560 Attention: Dwight Jackson Telecopy No.: (510) 623-0550 with a copy to: Morgan, Miller & Blair 1676 North California Blvd. Suite 200 Walnut Creek, California 94596 Attention: Bruce Ring Telecopy No.: (510) 943-1106 9.2 Interpretation. When a reference is made in this Agreement to Schedules or Exhibits, such reference shall be to a Schedule or Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.4 Entire Agreement. This Agreement, the Schedules and Exhibits hereto: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder, unless expressly provided otherwise; and (c) shall not be assigned by operation of law or otherwise; provided, however, that Seller may assign its rights and obligations hereunder to its shareholders. 9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. -39- 47 9.6 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 9.8 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. -40- 48 IN WITNESS WHEREOF, each of Buyer, Seller and Seller's Affiliates and Shareholders has caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above. PROBUSINESS, INC. By: --------------------------------- Name: Thomas H. Sinton Title: President DIMENSION SOLUTIONS By: --------------------------------- Name: Dwight L. Jackson Title: President Seller's Shareholders --------------------------------- Dwight L. Jackson --------------------------------- Stephen P. Blanding --------------------------------- Kirk G. Ward --------------------------------- Stephen P. Blanding and Mayno W. Blanding Family Trust By: ---------------------------- Title: -------------------------- --------------------------------- Ward Family Revocable Trust dated 3/28/94 By: ---------------------------- Title: -------------------------- -41- EX-2.2 4 STOCK ACQUISITION AGREEMENT DATED JANUARY 1, 1997 1 Exhibit 2.2 STOCK ACQUISITION AGREEMENT AMONG PROBUSINESS, INC., BENESPHERE ADMINISTRATORS, INC., AND ALISON ELDER, BEN REPPOND AND LOUIS BARANSKY DATED AS OF JANUARY 1, 1997 2 INDEX OF EXHIBITS Exhibit Description - ------- ----------- Exhibit A Warrant to Purchase Common Stock Exhibit B-1 Form of Legal Opinion of Steinhart & Falconer LLP, Special Counsel to the Company Exhibit B-2 Form of Legal Opinion of Peter Lewicki, Counsel to the Company and Ben Reppond and Louis Baransky 3 INDEX OF SCHEDULES COMPANY SCHEDULE DESCRIPTION - ----------------------------------- 1.6(b) Statement of Operations 1.6(c) Accounting Policies of Buyer 2.1 Jurisdictions Where Qualified to do Business 2.2(a) Stockholder List 2.2(b) Option List 2.4 Governmental and Third Party Consents 2.5 Company Financials 2.6 Undisclosed Liabilities 2.7 No Changes 2.8 Tax Returns and Audits 2.9 Restrictions on Business Activities 2.10(a) Leased Real Property 2.10(b) Liens on Property 2.10(c) Equipment 2.11 Intellectual Property; Form of Confidentiality Agreement 2.12(a) Agreements, Contracts and Commitments 2.12(b) Breaches 2.13 Interested Party Transactions 2.14 Governmental Authorizations 2.15 Litigation 2.18 Environmental Matters 2.19 Expenses of Transaction 2.20(b) Employee Benefit Plans and Employees 2.20(d) Employee Plan Compliance 2.20(g) Post Employment Obligations 2.20(h)(i) Effect of Transaction 2.20(h)(ii) Excess Parachute Payments 2.20(j) Labor 2.21 Insurance 2.24 Warranties; Indemnities 2.25 1997 Calendar Year Financial Forecast and 1998 Calendar Year Financial Forecast 2.26 Customer List 2.27 Individual Representations and Warranties 5.2 Contracts 7.1 Participating Persons 4 TABLE OF CONTENTS PAGE ARTICLE I THE PURCHASE AND SALE .................................... 1 1.1 The Purchase and Sale .............................. 1 1.2 Purchase Price ..................................... 1 1.3 The Closing ........................................ 2 1.4 Deliveries by the Sellers and the Company .......... 2 1.5 Deliveries by the Buyer............................. 3 1.6 Earnout Payments ................................... 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS ............... 5 2.1 Organization of the Company ........................ 5 2.2 Company Capital Structure........................... 5 2.3 Subsidiaries ....................................... 6 2.4 Authority .......................................... 6 2.5 Company Financial Statements ....................... 7 2.6 No Undisclosed Liabilities.......................... 7 2.7 No Changes.......................................... 7 2.8 Tax and Other Returns and Reports .................. 9 2.9 Restrictions on Business Activities ................ 10 2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment ............... 11 2.11 Intellectual Property............................... 11 2.12 Agreements, Contracts and Commitments .............. 13 2.13 Interested Party Transactions ...................... 14 2.14 Governmental Authorization ......................... 15 2.15 Litigation ......................................... 15 2.16 Accounts Receivable ................................ 15 2.17 Minute Books ....................................... 15 2.18 Environmental Matters............................... 15 2.19 Brokers' and Finders' Fees; Third Party Expenses ... 16 2.20 Employee Benefit Plans.............................. 17 2.21 Insurance .......................................... 20 2.22 Compliance with Laws ............................... 20 2.23 Complete Copies of Materials........................ 20 2.24 Warranties; Indemnities............................. 20 2.25 Financial Forecasts................................. 20 2.26 Customer Lists...................................... 20 2.27 Individual Representatives and Warranties........... 20 2.28 Representations Complete............................ 21 -i- 5 TABLE OF CONTENTS (continued) Page ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYERS............21 3.1 Organization, Standing and Power....................21 3.2 Authority...........................................22 3.3 Cash Consideration..................................22 ARTICLE IV CONDUCT PRIOR TO THE CLOSING.........................22 4.1 Conduct of Business of the Company..................22 4.2 No Solicitation.....................................24 4.3 S Status............................................25 ARTICLE V ADDITIONAL AGREEMENTS.................................25 5.1 Access to Information...............................25 5.2 Confidentiality.....................................25 5.3 Expenses............................................25 5.4 Public Disclosure...................................26 5.5 Consents............................................26 5.6 FIRPTA Compliance...................................26 5.7 Reasonable Best Efforts.............................26 5.8 Notification of Certain Matters.....................26 5.9 Additional Documents and Further Assurances.........26 5.10 Tax Matters.........................................26 5.11 Intercompany Line of Credit.........................27 5.12 Financial Information...............................28 5.13 Release of Obligations..............................28 5.14 Insurance...........................................28 ARTICLE VI CONDITIONS TO THE ACQUISITION........................28 6.1 Conditions to Obligations of Each Party to Effect the Acquisition...........................28 6.2 Additional Conditions to Obligations of Company and Sellers.........................................29 6.3 Additional Conditions to the Obligations of Buyer...29 ARTICLE VII REMEDIES FOR BREACHES OF THE AGREEMENT..............31 7.1 Survival of Representations and Warranties; Liability Threshold.................................31 7.2 Indemnification.....................................31 7.3 Matters Involving Third Parties.....................32 7.4 Procedure for Asserting Claims......................32 7.5 No Indemnity for Corporate Agents...................32 7.6 Resolution of Conflicts: Arbitration................33 7.7 Right to Set Off....................................33 -ii- 6 TABLE OF CONTENTS (continued) Page ---- ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER ...................... 33 8.1 Termination ......................................... 33 8.2 Effect of Termination ............................... 34 8.3 Amendment ........................................... 34 8.4 Extension; Waiver ................................... 34 ARTICLE IX GENERAL PROVISIONS ....................................... 35 9.1 Notices ............................................. 35 9.2 Interpretation ...................................... 36 9.3 Counterparts ........................................ 36 9.4 Entire Agreement; Assignment ........................ 36 9.5 Severability ........................................ 36 9.6 Other Remedies ...................................... 36 9.7 Governing Law ....................................... 37 9.8 Rules of Construction ............................... 37 -iii- 7 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of May 23, 1996 by and between ProBusiness, Inc., a California corporation ("Buyer"), Dimension Solutions, a California corporation ("Seller"), Dwight L. Jackson, Stephen P. Blanding, Kirk G., Ward, Stephen P. Blanding and Mayno W. Blanding Family Trust dated 8/3/92 and Ward Family Revocable Trust dated 3/28/94 ("Seller's Affiliates and Shareholders"). RECITALS A. The Boards of Directors of each of Seller and Buyer believe it is in the best interests of each company and their respective shareholders that Buyer acquire all of the assets of, and assume certain of the liabilities of Seller (the "Acquisition") in exchange for 40,000 shares of Series E Preferred Stock of Buyer and to enter into an employment agreement with Dwight L. Jackson, President of Seller, as Vice President, Human Resources Systems of Buyer. B. Seller is engaged in the business of developing, manufacturing and licensing computer software programs for the human resource market (the "Business"). C. Immediately after the Closing (as defined below), Buyer will enter into a License Agreement with Cara Information Technology Ltd. to license a file server version of specified software modules acquired by Buyer pursuant to this Agreement. NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE ACQUISITION 1.1 Purchase of Assets. (a) Purchase and Sale of Assets. On the terms and subject to the conditions set forth in this Agreement, Seller agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer agrees to purchase and acquire from Seller on the Closing Date (as defined in Section 1.4(a)), all of Seller's right, title and interest in and to all of the assets and properties of Seller (collectively the "Assets" and specifically excluding those assets set forth on Schedule 1.1(a) (the "Excluded Assets")) in their current condition and free and clear of all liens, 8 pledges, charges, claims, security interests or other encumbrances of any sort (collectively, "Liens"), including without limitation, the following: (i) all cash, cash equivalents and accounts receivable of Seller; (ii) all patents, patent applications, copyrights, trademarks, service marks, trade names, trade secrets, proprietary information, technology rights and licenses, proprietary rights and processes, customer lists, know-how, research and development in progress, and any and all other intellectual property including, without limitation, all things authored, discovered, developed, made, perfected, improved, designed, engineered, devised, acquired, produced, conceived or first reduced to practice by Seller or any of its employees in the course of their employment by Seller and that pertain to or are used in the Business, or that are relevant to an understanding or to the development of the Business or to the performance by the products of the Business of their intended functions or purposes, whether tangible or intangible, in any stage of development, including without limitation enhancements, designs, technology, improvements, inventions, works of authorship, formulas, processes, routines, subroutines, techniques, concepts, object code, flow charts, diagrams, coding sheets, source code, listings and annotations, programmers' notes, information, work papers, work product and other materials of any types whatsoever, and all rights of any kind in or to any of the foregoing (collectively, the "Intellectual Property") used or held for use in the Business. All Intellectual Property is listed on Schedule 1.1(a)(ii) hereto, as well as all licenses used for such Intellectual Property; (iii) all rights and ownership of all existing software products of Seller (the "Products"), including but not limited to those listed on Schedule 1.1(a)(iii), any other computer programs developed or under development by Seller, and all copies of the Products (including revisions and updates in process), and all technical, design, development, installation, operation and maintenance information concerning the Products, including source code, source documentation, source listings and annotations, engineering notebooks, test data and test results, all in sufficient detail to permit a reasonably skilled software developer not involved in the development of the Products to maintain, enhance and correct errors in the Products without assistance from or reference to any other persons or materials as well as all reference manuals and support materials normally distributed to end-users and potential end-users in connection with the distribution of the Products (collectively, the foregoing shall be hereinafter referred to as, the "Software Products"). Notwithstanding the foregoing, Seller shall not be required to prepare or produce any documentation to satisfy the provisions of this subparagraph; (iv) all of Seller's claims against any parties relating to any right, property or asset included in the Assets, or against any party to a Contract (as defined in Section 2.12 herein) if Seller's rights under such Contracts are assigned and transferred to Buyer at the Closing, including without limitation, unliquidated rights under manufacturers' and vendors' warranties or guaranties; -2- 9 (v) all of Seller's rights (including, without limitation, any leasehold interests) under any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound, including without limitation, those set forth in Schedule 2.12 if Seller's rights under such Contracts are assigned and transferred to Buyer at the Closing; (vi) all inventory, wherever located, owned by Seller; the inventory referred to herein shall include, but is not limited to, those items described in Schedule 1.1(a)(vi) hereto; (vii) all fixed assets, equipment and supplies of the Seller wherever located (including leasehold improvements); (viii) all governmental permits, licenses or approvals owned or held by Seller associated with the ownership, use or operation of the Assets; and (ix) the corporate name "Dimension Solutions," "First Resource" and "First Resource Development"; provided, that for a period of one year following the Closing Date, the Seller shall be authorized to use such names for the purpose of winding down the corporation. (b) Assumption of Liabilities. (i) Buyer shall not assume any liabilities or obligations of Seller (other than those expressly assumed pursuant to this Section 1.1(b)), including without limitation, any liabilities for employment, income, sales, property or other taxes incurred or accrued by Seller, except as provided in Section 1.2(c). It is further expressly agreed that Buyer shall not assume any liabilities for third party claims of infringement of intellectual property rights on products sold by the Seller through the Closing Date or the damages, if any, as set forth in Section 1.1(b)(iii). At the Closing, Buyer shall assume the following obligations and liabilities of Seller (collectively, the "Assumed Liabilities"): (A) all obligations and liabilities of Seller under or related to any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound as set forth on Schedule 2.12 if Seller's rights under such contracts are assigned and transferred to Buyer at the Closing (B) those obligations and liabilities of Seller set forth in Schedule 1.1(b) hereto (including the promissory notes set forth in Section 1.1(b)(ii) below, which are expressly agreed to be assumed subject to the conditions specified in Section 1.1(b)(ii) and the lease agreement set forth in Section 1.1(b)(iii) below, which is expressly agreed to be assumed subject to the conditions specified in Section 1.1(b)(iii)), and (C) all obligations pursuant to Sections 1.2(c), 1.3(a)(iv) and 5.13 hereunder. Buyer expressly is not assuming any obligations or liabilities, whether accrued, absolute, contingent, matured, unmatured or other, of Seller except for the Assumed Liabilities. -3- 10 (ii) Buyer specifically assumes the promissory notes between Seller and Kirk G. Ward and Stephen P. Blanding dated April 30, 1996 for an aggregate principal amount of $250,000 (the "$250,000 Note") and BARW dated October 15, 1995 for an aggregate principal amount of $25,000 as set forth in Schedule 1.1(b), subject to Seller's delivery to Buyer of a Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding, attached hereto as Exhibit A binding each of Mr. Ward and Mr. Blanding and their successors and assignees, to subordinate payment by Buyer of any and all indebtedness, liabilities, guarantees and other obligations of Buyer to Mr. Ward and Mr. Blanding now existing or hereinafter arising to the payment to Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and Loan Association and other creditors who are banking and equipment leasing institutions ("Institutional Creditors") of Buyer, of all indebtedness, liabilities, guarantees and other obligations of Buyer to Coast and such other Institutional Creditors, now existing or hereinafter arising and including such terms and conditions as more specifically set fourth in Exhibit A attached hereto. (iii) Buyer specifically assumes the obligations under the lease agreement by and between Seller and AJ Partners Limited Partnership ("Lessor"), managed by Draper and Kramer of California, Incorporated dated July 18, 1994 (the "Lease Agreement") and both parties will use their best efforts to obtain a consent to a formal assignment pursuant to the Lease Agreement. It is expressly agreed that Buyer shall not assume any liabilities for damages arising out of any failure on the part of Buyer or Seller to obtain written consent under Section 12 of the Lease Agreement of Lessor to Seller's assignment of the rights and obligations under the Lease Agreement to Buyer prior to the Closing Date and Assumed Liabilities under this Agreement expressly excludes any such damages. (c) Risk of Loss. In the event any of the Assets are unavailable for delivery to Buyer on the Closing Date as a result of risks for which such Assets were insured by Seller, Buyer may at its option elect (i) to require Seller to deliver to Buyer assignments of such Seller's rights under its insurance policies, if any, applicable to such Assets and to close on that basis, or (ii) to not close due to the failure of a condition to closing if the amount of the loss reasonably can be expected to be in excess of $25,000. Seller hereby agrees to make such assignment of rights if Buyer so elects. 1.2 Consideration. (a) Consideration for Assets. Subject to the terms and conditions set forth in this Agreement (including, without limitation, the provisions of Article VI hereof), as full payment for the transfer of the Assets by Seller to Buyer, Buyer shall issue to Seller at the Closing 40,000 shares of Series E Preferred Stock of Buyer (the "Shares") with a fair market value of $7.94 per share for an aggregate purchase price of $317,600 (the "Purchase Price"). As of the Closing Date, the shares are convertible into 80,000 shares of Common Stock of Buyer and shall have rights, privileges and preferences as set forth in the Seller's Articles of Incorporation, as amended and in effect as of the date hereof. In addition, Buyer shall grant Seller registration rights with respect to the Shares pursuant to Eighteenth Amendment to the Registration Rights -4- 11 Agreement dated as of December 1, 1989, as amended (the "Registration Rights Agreement") attached hereto as Exhibit B whereby the Common Stock issuable upon the conversion of the Shares shall be deemed "Registrable Securities" and Seller shall be deemed a "Holder" under the Registration Rights Agreement. (b) Seller's C Reorganization. Seller intends for the transactions contemplated by this Agreement to (i) constitute a "sale of assets reorganization" within the meaning of Section 181(c) of the California Corporations Code, and (ii) qualify as a non-taxable stock for assets reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). Buyer and Seller desires to adopt this Agreement as a plan of reorganization in accordance with the provisions of Section 368(a)(1)(C) of the Code. Seller will, pursuant to the plan of reorganization, and immediately after the receipt of the Shares, distribute the Shares to the shareholders of Seller. The Shares will be distributed to the shareholders of Seller in proportion to the number of shares each holds in Seller. In addition, Seller shall, pursuant to the plan of reorganization, and as soon as practicable following the Closing Date, and in no event later than December 31, 1996, distribute all of its remaining assets to its shareholders in liquidation and therefore formally dissolve pursuant to Section 1900 et seq. of the California Corporations Code. Buyer makes no representations or warranties as to whether the transactions contemplated by this Agreement constitute a "sale of assets reorganization" within the meaning of Section 181(c) of the California Corporations Code, or that such transactions qualify as a non-taxable stock for assets reorganization within the meaning of Section 368(a)(1)(C) of the Code. The parties agree that such qualifications are for the benefit of Seller, and are not conditions to this Agreement. (c) Transfer Taxes. Buyer shall pay and promptly discharge when due sales and use tax ("Sales Taxes") imposed or levied by the State of California by reason of the sale of the Assets to Buyer. 1.3 Instruments of Transfer. (a) Transfer of Customers. (i) Intent. It is the intent of parties hereto that all of the Business and all of Seller's backlog, if any, relating to the Business be transferred to Buyer. Accordingly, the parties agree to use their best efforts to facilitate such transfer of customers as soon as possible. (ii) Purchase Order Data. Seller shall provide or make available to Buyer, at the closing (A) a list of all outstanding written customer orders, purchase orders and other customer commitments from Seller's current customers, (B) the names of all customers (the "Current Customers") and (C) data regarding Seller's standard cost of sales for the items covered by such orders and shall provide upon request such other information as is (AA) relevant to profitability on such items, (BB) available to Seller without incurring undue effort or expense and (CC) requested by Buyer. -5- 12 (iii) Transfer of Orders; Assignments. Prior to such Closing, Seller and Buyer agree to cooperate with each other in conducting joint contacts with the Current Customers (as appropriate) for the purpose of attempting to obtain such customers' consent to transfer orders from Seller to Buyer (or to issue new orders to Buyer for the same or similar items) and to assign Seller's rights and obligations under the Contracts to Buyer, if such Contracts are assigned to Buyer, as of the Closing. (iv) Assumption of Obligation. To the extent that Seller's backlog is transferred or assigned to Buyer or that Buyer accepts a new purchase order from a Current Customer, Buyer agrees to assume and perform all obligations thereunder and to use reasonable efforts to fill the order in accordance with its terms. (b) Instruments of Transfer. The sale, assignment, transfer, conveyance and delivery of the Assets shall be made by such bills of sale and other recordable instruments of assignment, transfer and conveyance as Buyer shall reasonably request. 1.4 Closing. (a) Closing. Unless this Agreement is earlier terminated pursuant to Section 7.1, the closing of the transactions contemplated by this Agreement shall be consummated (the "Closing") at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, at 5:00 p.m., Pacific Daylight Savings time, on May 23, 1996, or at such other time or place as the parties shall mutually agree (the "Closing Date"). (b) Delivery. At the Closing: (i) Seller shall deliver to Buyer a copy of the Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding pursuant to Section 1.1(b)(ii) in the form attached hereto as Exhibit A; (ii) Buyer shall deliver to Seller an instrument of assumption of liabilities by which Buyer shall assume the Assumed Liabilities as of the Closing in the form attached hereto as Exhibit C; (iii) Seller shall deliver to Buyer all bills of sale, endorsements, assignments, consents to assignments to the extent obtained and other instruments and documents as Buyer may reasonably request to sell, convey, assign, transfer and deliver to Buyer good title to all the Assets free and clear of any and all Liens in the form attached hereto as Exhibit D; (iv) Seller shall deliver to Buyer a Trademark Assignment in the form attached hereto as Exhibit E; -6- 13 (v) Seller shall deliver to Buyer a Copyright Assignment in the form attached hereto as Exhibit F; (vi) Seller shall deliver to Buyer UCC termination statements duly executed by the holders of all security interests of record with respect to all outstanding UCC-1 financing statements evidencing security interests in any of the Assets excluding the tax liens filed by the Internal Revenue Service (the "IRS") on November 10, 1994 and November 16, 1994 in the amount of $17,998.57 and $4,026.46, respectively, and the tax liens filed by the State of California Employment Development Department on March 23, 1995 in the amount of $4,586.97, with respect to liens on the assets of First Resource, a California corporation ("First Resource") and including the UCC-1 financing statement filed by Scott Valley Bank on October 12, 1994 with respect to a lien on substantially all of the assets of Seller; (vii) Buyer shall deliver a stock certificate issued in the name of Buyer representing the Shares; (viii) Seller shall deliver to Buyer evidence satisfactory to Buyer that the loan agreement with Scott Valley Bank has been assigned to the shareholders of the Seller and that Scott Valley Bank has terminated all security interests, security agreements and guaranties affecting or relating to the Assets; and (ix) Seller and Buyer shall deliver or cause to be delivered to one another such other instruments and documents necessary or appropriate to evidence the due execution, delivery and performance of this Agreement. (c) Taking of Necessary Action; Further Action. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest Buyer with full right, title and possession to all Assets, the officers and directors of Seller are fully authorized in the name Seller or otherwise to take, and will take, all such lawful and necessary and/or desirable action. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER, SELLER'S AFFILIATES AND SHAREHOLDERS Each of Seller and each of Seller's Affiliates and Shareholders, jointly and severally represents and warrants to Buyer as follows that, except as set forth in the disclosure schedules dated as of the date hereof and supplied by Seller to Buyer and attached hereto as Exhibit G (the "Seller Schedules" and Seller Schedules shall specifically reference the Sections of this Agreement to which the disclosure therein applies): -7- 14 2.1 Organization of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller has the corporate power to own its property and to carry on its business as now being conducted and as proposed to be conducted. Seller is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the Business, the Assets (or Buyer's interest therein or use thereof following the Closing), or the financial condition or results of operations of Seller (any of which is hereinafter referred to as a "Material Adverse Effect"). Schedule 2.1 includes a complete and correct list of all foreign jurisdictions in which the Seller is qualified to do business. Seller has delivered a true and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, to Buyer, copies of each are attached to Schedule 2.1. 2.2 Seller Capital Structure. Seller's authorized and outstanding capital stock, and the number, type and holder of outstanding securities carrying the right to acquire any of Seller's capital stock, at the date hereof is correctly stated in Schedule 2.2. All the outstanding shares of Seller's capital stock are duly authorized and validly issued. All outstanding securities carrying the right to acquire any of Seller's capital stock issued by Seller are validly outstanding, and the shares of Seller's capital stock reserved for issuance upon the exercise thereof are duly authorized and, upon issuance in accordance with the terms thereof (including due payment of the exercise price set forth therein) will be validly issued, fully paid and nonassessable. Except as set forth in Schedule 2.2, there are no securities of Seller issued or outstanding, and there are no options, calls, subscriptions, warrants, rights, agreements or commitments of any character obligating Seller, contingently or otherwise, to issue shares of its capital stock or to register shares of its capital stock under the Securities Act of 1933, or any other applicable securities laws (Federal or state), or holders of any such securities. 2.3 Subsidiaries. Seller does not have and has never had any subsidiaries or affiliated companies and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. 2.4 Authority; Consents. Subject only to the approval of the Acquisition and this Agreement by Seller's shareholders as contemplated by Section 6.1(a) hereof, Seller has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Seller, subject only to the approval of the Acquisition by Seller's shareholders as contemplated by Section 6.1(a). This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligation of Seller, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy and similar laws and general principles of equity. Except as set forth on Schedule 2.4, subject only to the approval of the Acquisition and this Agreement by Seller's shareholders as contemplated by Section 6.1(a) hereof, the execution and delivery of this Agreement by Seller does not, and, as of -8- 15 the Closing, the consummation of the transactions contemplated hereby will not, materially conflict with, or result in any material violation of, or material default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict") (i) any provision of the Articles of Incorporation or Bylaws of Seller or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Seller or its properties or assets. To Seller's knowledge, no consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or Commission having jurisdiction over Seller ("Governmental Entity") or any third party (so as to enable Seller to assign Buyer all of its rights and benefits under the Contracts), is required by or with respect to Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for such consents, waivers, authorizations, filings, approvals and registrations which are set forth on Schedule 2.4. 2.5 Seller Financial Statements. Schedule 2.5 sets forth Seller's unaudited balance sheet as of December 31, 1995 and the related unaudited statement of income for the twelve-month period then ended; Seller's unaudited balance sheet as of March 31, 1996 and the related unaudited statement of income for the three-month period then ended; and Seller's unaudited balance sheet as of April 30, 1996 (the "Balance Sheet") and the related unaudited statement of income for the four-month period then ended (collectively, all such balance sheets and related statement of income shall hereinafter be referred to as "Seller Financials"). Except as set forth in Schedule 2.5, Seller Financials have been internally prepared by Seller in good faith and compiled by an accountant on an accrual basis and on a basis consistent with financial statements prepared by Seller for prior periods. Seller is not aware that the Seller Financials are inconsistent with generally accepted accounting principles applied on a basis consistent throughout the periods indicated (except that they do not contain footnotes); however, the Seller Financials have not been reviewed or audited by an accountant. 2.6 No Undisclosed Liabilities. Except as set forth in Schedule 2.6, Seller does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other (whether or not required to be reflected in financial statements consistent with generally accepted accounting principles), which individually or in the aggregate, (i) has not been reflected in the Balance Sheet, or (ii) has not arisen in the ordinary course of Seller's business since April 30, 1996. 2.7 No Changes. Except as set forth in Schedule 2.7, since April 30, 1996, there has not been, occurred or arisen any: (a) transaction by Seller except in the ordinary course of business as conducted on that date; -9- 16 (b) capital expenditure or commitment by Seller, either individually or in the aggregate, exceeding $5,000; (c) material adverse change in the condition (financial or otherwise), liabilities, assets, business or prospects of Seller; (d) destruction of, damage to or loss of any assets, business or customer of Seller (whether or not covered by insurance); (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of Seller, or any direct or indirect redemption, purchase or other acquisition by Seller of any of its capital stock; (g) increase in the salary or other compensation payable or to become payable by Seller to any of its officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment, by Seller, of a bonus or other additional salary or compensation to any such person. (h) acquisition, sale or transfer of any Asset except in the ordinary course of business as conducted on that date; (i) amendment or termination of any contract, agreement or license to which Seller was/is a party or by which it was/is bound, except in the ordinary course; (j) loan by Seller to any person or entity, incurring by Seller of any indebtedness, guaranteeing by Seller of any indebtedness, issuance or sale of any debt securities of Seller or guaranteeing of any debt securities of others; (k) waiver or release of any right or claim of Seller, including any write-off or other compromise of any account receivable of Seller; (l) the commencement or notice or, to the knowledge of Seller, threat of commencement of any lawsuit or proceeding against or investigation of Seller or its affairs; (m) notice to Seller of any claim of ownership by a third party of Seller's Intellectual Property or of infringement by Seller of any third party's Intellectual Property rights; (n) issuance or sale by Seller of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities; -10- 17 18 (o) change in pricing or royalties set or charged by Seller; (p) to Seller's knowledge, any event or condition of any character that has or could be reasonably expected to have a Material Adverse Effect; or (q) negotiation or agreement by Seller or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (p) (other than negotiations with Buyer and its representatives regarding the transactions contemplated by this Agreement). 2.8 Tax and Other Returns and Reports. (a) Definition of Taxes. For the purposes of this Agreement, "Tax" or, collectively, "Taxes", means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. Except as set forth in Schedule 2.8(b) and Section 2.8(c) below: (i) Seller has prepared and timely filed all federal, state, local and foreign returns, estimates, information statements and reports ("Returns") relating to any and all Taxes concerning or attributable to Seller, the Assets or Seller's business operations which, as of the date hereof, it is required to file and such Returns were true and accurate and were completed in accordance with applicable law when filed. (ii) Seller (A) has paid all Taxes it is required to pay and (B) has collected or withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld. (iii) Seller has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against Seller. (iv) No audit or other examination of any Return of Seller is presently in progress, nor has Seller been notified of any request for such an audit or other examination. (v) Seller does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved against on the Balance Sheet, whether asserted or unasserted, contingent or otherwise, and Seller has no knowledge of any basis for the assertion of any such liability attributable to Seller, the Assets or Seller's business operations. -11- 19 (vi) There are (and as of immediately following the Closing there will be) no Liens on the Assets of Seller relating to or attributable to Taxes. (c) First Resource IRS Liens. On August 26, 1994 Seller purchased the assets and assumed certain liabilities, excluding the First Resource Tax Liabilities (as defined below), of First Resource pursuant to the Asset Purchase Agreement by and among First Resource and Seller dated July 15, 1994 (the "First Resource Acquisition Agreement"). On November 10, 1994 and November 16, 1994, the IRS filed Notices of Federal Tax Liens (as defined below) on the assets of First Resource in the amounts of $17,998.57 and $4,026.46, respectively (the "First Resource Tax Liabilities"). Seller acquired the assets and assumed certain liabilities, excluding the First Resource Tax Liabilities, of First Resource as a purchaser within the meaning of Section 6323(h)(6) of the Internal Revenue Code of 1986, as amended (the "Code") on August 26, 1994 (i) prior to the filing by the IRS of any notice ("Notice of Federal Tax Lien") of the liens relating to the First Resource Tax Liabilities, meeting the requirements of Section 6323(f) of the Code and (ii) without actual notice of the First Resource Tax Liabilities or the filing or potential filing of any Notice of Federal Tax Lien by the IRS with respect to the First Resource Tax Liabilities. Furthermore, the First Resource Tax Liabilities or any fact related thereto was not brought to the attention of Seller until after August 26, 1994 and would not have been brought to Seller's attention if Seller had exercised due diligence through reasonable routines for communicating significant information to Seller and compliance with such routines (including the performance of a title search). (d) For purposes of this Section, references to Seller include any predecessor or transferror with respect to Seller and any person with whom Seller files or has filed a consolidated or combined Tax return or with respect to whom Seller may have transferee, secondary or other shared liability for Taxes. 2.9 Restrictions on Business Activities. There is no agreement, commitment, judgment, injunction, order or decree binding upon Seller or the Assets which has or could reasonably be expected to have the effect of prohibiting or impairing any use by Buyer of the Assets following the Closing or the conduct of the Business as currently conducted. 2.10 Title of Properties; Absence of Liens and Encumbrances. (a) Title to Assets. Except as set forth in Schedule 2.10(a), Seller has good and marketable title to all of the Assets, all of the Assets are free and clear of restrictions on or conditions to transfer or assignment, and at the Closing, Seller will sell, convey, assign, transfer and deliver to Buyer good title to all of the Assets, free and clear of any mortgages, liens, pledges, encumbrances, claims, conditions and restrictions, of any contingent or otherwise. The assets constitute all of the assets owned by Seller, other than the Excluded Assets, and include all of the assets which are reasonably necessary for the continued conduct of the operations of Seller. The Assets are all located at Seller's principal place of business in Newark, California. -12- 20 (b) Assets, Property, Plant and Equipment. Schedule 2.10(b) hereto contains a true and complete list of all assets, properties, improvements, machinery, equipment, furniture and fixtures, office supplies and other tangibles included in the Assets. Between the date hereof and the Closing Date, none of such Assets shall have been disposed of other than in the ordinary course of business or due to normal wear and tear. All real and tangible personal property material to the business or financial condition of Seller, including machinery, equipment and fixtures, included in the Assets and currently used by Seller in its manufacturing operations is, and at the Closing Date will be, in good operating condition and repair, ordinary wear and tear excepted. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge the present use of Seller's premises conforms, and at the Closing Date will conform, with all applicable ordinances and regulations and all building, zoning, health, safety, air and water pollution and other laws and regulations, and all permits necessary thereunder have been obtained and are, and immediately prior to the Closing will be, in full force and effect. Seller does not own any real property. 2.11 Intellectual Property. Except as set forth in Schedule 2.11, (a) Schedule 1.1(a)(ii) lists all Intellectual Property, as well as all licenses for such Intellectual Property, which are used in or necessary to Seller's business as it is now conducted or contemplated to be conducted. Seller owns a valid right or license to use the Intellectual Property being used or held for use to conduct the Business, and the conduct of the Business currently and in the past does not conflict with and has not conflicted with valid intellectual property rights of others. All Intellectual Property used or held for use in the conduct of the Business owned by Seller is so owned free and clear of all Liens and no other person, including without limitation any present or former employee, officer or director of Seller, has any right whatsoever therein. Seller has not infringed or otherwise violated and is not infringing or violating any intellectual property rights of any other person or entity. Seller has taken appropriate steps to protect its Intellectual Property and Seller does not have any obligation to compensate any person or entity for the use of any Intellectual Property used in the conduct of the Business nor has Seller granted to any person or entity any license, option or other rights to use in any manner any of the Intellectual Property so used in the Business, whether requiring the payment of royalties or not. No former or current employee of Seller has any right whatsoever to any Intellectual Property being used or held for use by Seller. No proceedings have been instituted or, to the knowledge of Seller or any of its directors or officers, threatened, nor has any claim been made, against Seller alleging any such infringement or violation. For the Intellectual Property which Seller uses, but does not own, Seller is licensed to use such Intellectual Property and is not in breach or, or default under, such license agreements. Such licensed Intellectual Property is so indicated with an asterisk on Schedule 1.1(a)(ii). (b) Seller has all right, title and interest in and to the Software Products. No person or entity other than Seller owns any right, title or interest in the Software Products including, without limitation, any right to manufacture, use, copy, distribute or sublicense any object code or source code thereof. The Software Products are (i) not subject to any Liens, -13- 21 (ii) not subject to any pending or, to Seller's knowledge, threatened challenge of infringement of the rights of others, nor to the knowledge of Seller is there any basis for a challenge of infringement of any such rights of others, and (iii) freely transferable and assignable to Buyer and will not be rendered invalid or adversely affected in any way by virtue of the execution, delivery and performance of this Agreement. (c) Pursuant to Section 1.5 of the First Resource Acquisition Agreement, Buyer is not and will not be in the future liable to First Resource for any royalties under Sections 1.5.2.2. and 1.5.2.3. of the First Resource Acquisition Agreement in excess of the Assumed Liabilities (as defined in Section 1.5 of the First Resource Acquisition Agreement) as may be increased by any Indemnifiable Losses (as defined in Section 1.5 of the First Resource Acquisition Agreement). In addition, the escrow has been terminated pursuant to Section 1.6 of the First Resource Acquisition Agreement. 2.12 Agreements, Contracts and Commitments. Set forth on Schedule 2.12 is a list of all agreements, contracts and commitments, written or oral, to which Seller is a party or by which it is bound (the "Contracts"). Those Contracts, if any, marked with an asterisk on Schedule 2.12 shall not be assigned by Seller to Buyer at the Closing. (a) Except for such (i) breaches, violations and defaults, (ii) alleged breaches, violations and defaults, and (iii) events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, noted in Schedule 2.12 and those which reasonably would not be expected to have a Material Adverse Effect, Seller has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any Contract. Each Contract is in full force and effect and, except as otherwise disclosed in Schedule 2.12, is not subject to any default thereunder of which Seller has knowledge by any party obligated to Seller pursuant thereto. Each Contract represents the entire understanding between the Seller on the one hand and the party(s) with whom the Contract is entered into on the other hand and there are no promises, agreements or understandings between such parties other than those that are expressly set forth in the Contracts. (b) Seller has no contract or commitment which may restrict the use of or adversely affect an Asset and has no contract which will or is expected to result in a loss to Buyer in operating the Assets or which will or is expected to have an adverse effect on the assets or the Buyer after the Closing. (c) Seller has not given a power of attorney, which is currently in effect, to any person, firm, entity or corporation for any purpose whatsoever in connection or associated with or in any way affecting any of the Assets or the Business, except pursuant to this Agreement or documents required hereby. 2.13 Interested Party Transactions. Except as set forth on Schedule 2.13, no officer, director or shareholder of Seller (nor any ancestor, sibling, descendant or spouse of any of such -14- 22 persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) material interest in any entity which furnished or sold, or furnishes or sells, services or products that Seller furnishes or sells, or proposes to furnish or sell, or (ii) any material interest in any entity that purchases from or sells or furnishes to Seller any goods or services or (iii) a beneficial interest in any contract or agreement set forth in Schedule 2.12. 2.14 Governmental Authorization. Schedule 2.14 accurately lists each consent, license, permit, grant or other authorization issued to Seller by a Governmental Entity (i) pursuant to which Seller currently operates or holds any interest in any of the Assets or (ii) which is required for the operation of the Business or the holding of any such interest (herein collectively called "Seller Authorizations"), which Seller Authorizations are in full force and effect and constitute all Seller Authorizations required to permit Seller to operate or conduct its Business or hold any interest in the Assets. 2.15 Litigation. Except as set forth in Schedule 2.15, there is no action, suit or proceeding of any nature pending or, to Seller's knowledge, threatened against Seller, the Assets or any of its officers or directors in their respective capacities as such, nor, to the knowledge of Seller, is there any basis therefor. Except as set forth in Schedule 2.15, there is no investigation pending or threatened against Seller, its properties or any of its officers or directors (nor, to the knowledge of Seller, is there any basis therefor) by or before any Governmental Entity. Schedule 2.15 sets forth, with respect to any pending or threatened action, suit, proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Entity has at any time notified Seller of any challenge or question regarding the legal right of Seller to manufacture, offer or sell any of its products in the present manner or style thereof. 2.16 Accounts Receivable. (a) Seller has made available to Buyer a list of all accounts receivable of Seller reflected on the Balance Sheet ("Accounts Receivable") along with a range of days elapsed since invoice. (b) All Accounts Receivable of Seller arose in the ordinary course of business, are carried at values determined in accordance with generally accepted accounting principles consistently applied. Seller has no reason to believe that the Accounts Receivable are not collectible except to the extent of reserves therefor set forth in the Balance Sheet. No person has any Lien on any of such Accounts Receivable and no request or agreement for deduction or discount has been made with respect to any of such Accounts Receivable. 2.17 Minute Books. The minute books of Seller made available to Buyer contain accurate summaries of the meetings of directors (or committees thereof) and shareholders and actions by written consent which such summaries purport to summarize. -15- 23 2.18 Environmental Matters. (a) Hazardous Material. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge, as of the Closing and with the exception of common toxic office supplies such as glue or toner for photocopy machines, no substance (a "Hazardous Material") that has been designated by any Governmental Entity to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, and ureaformaldehyde is present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that Seller has at any time owned, operated, occupied or leased ("Seller Facility"). (b) Hazardous Materials Activities. At no time prior to the Closing has Seller transported, stored, used, sold, disposed of, manufactured, released or exposed its employees or others to Hazardous Materials ("Hazardous Materials Activities") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity ("Environmental Laws). (c) Permits. No environmental approvals, permits, licenses, clearances or consents ("Environmental Permits") are necessary for the conduct of Seller's Hazardous Material Activities, if any. (d) Environmental Liabilities. Except as disclosed on Schedule 2.18, no action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending or, to the knowledge of Seller, threatened concerning or relating to any Seller Facility, any Environmental Permit or any Hazardous Materials Activity involving Seller. Seller is not aware of any fact or circumstance which could involve Seller in any environmental litigation or impose upon Seller any environmental liability. (e) Capital Expenditures. Except as set forth on Schedule 2.18, Seller is not aware of any capital expenditures which are required in order to comply with Environmental Laws. 2.19 Brokers' and Finders' Fees; Third Party Expenses. Seller has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Schedule 2.19 sets forth the principal terms and conditions of any agreement, written or oral, with respect to such fees. 2.20 Employee Benefit Plans. (a) Schedule 2.20(a) contains a complete and correct description of all employment, compensation, confidentiality, non-competition, invention and consulting agreements relating to persons employed by Seller ("Business Employees"), whether written or oral (other -16- 24 than oral employment agreements terminable at will by either Seller or the employees without liability to Seller) and a list of each Business Employee and such Business Employee's aggregate annual compensation. Except as set forth in Schedule 2.20(a) Seller does not have any outstanding commitment or agreement to effect any general wage or salary increase for any of the Business Employees. (b) Seller is not a party to or otherwise subject to any collective bargaining agreement, nor is Seller a party to or otherwise subject to any contract or other agreement for the employment of any employee which is not terminable (without liability) on notice of thirty (30) days or less, except as indicated on Schedule 2.20(b). Except as set forth in Schedule 2.20(b), there are no suits, actions or administrative, arbitration or other proceedings pending or threatened against Seller or affecting Seller or its business concerning labor disputes, grievances, petitions for union recognition or organization or charges of unfair labor practices. (c) Schedule 2.20(c) contains a true and correct list of employee benefit plans maintained by or on behalf of Seller with respect to Business Employees including (but not limited to) any pension, profit sharing and other retirement plans, severance pay, vacation pay, medical, dental and life insurance plans, bonus, compensation and deferred compensation plans, and stock options or other stock benefit plans (collectively, the "Plans"). Each Plan described in Schedule 2.20(c) is and has been administered in accordance with the terms and is in material compliance with all applicable requirements of applicable laws, including (but not limited to) the requirements imposed by the Internal Revenue Code of 1986, as amended, and the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Except for Seller's 401(k) plan listed in Schedule 2.20(c), Seller has no Plan that is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All filings, and all contributions or other payments required by applicable law with respect to the participation of the Business Employees in any Plan or to be made by Seller with respect to any Plan have been timely made. In no event shall Buyer have any liability in connection with the administration of any Plans or practices. Seller has no liabilities to any Business Employee or beneficiary of a Business Employee other than as specifically set forth in Schedule 2.20(c) to this Agreement. Except as set forth on Schedule 2.20(c), the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Seller compensation or employment plan or agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (d) Employment Matters. Except as set forth on Schedule 2.20(d), Seller (i) is in compliance in all material respects with all applicable federal and state laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to -17- 25 comply with any of the foregoing; and (iv) (other than routine payments to be made in the normal course of business and consistent with past practice) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits for Employees. 2.21 Insurance. Schedule 2.21 lists all insurance policies and fidelity bonds covering the Assets or the Business. There is no claim by Seller pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid and Seller is otherwise in full compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). Such policies of insurance and bonds are of the type and in amounts customarily carried by persons conducting businesses similar to those of Seller and to the best of Seller's and Seller's Affiliates' and Shareholders' knowledge meet applicable federal, state and local requirements, if any, for such insurance. Seller has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 2.22 Compliance with Laws. To the best of Seller's and Seller's Affiliates' and Shareholders' knowledge, Seller is in compliance with all statutes, laws, rules and regulations with respect to or affecting the conduct of its business and the ownership and operation of the Assets where failure to comply would have a material adverse affect on Seller, Seller's business or the Assets. Seller is not subject to any order, injunction or decree issued by any governmental body, agency, authority or court which could impair the ability of Seller to consummate the transactions contemplated hereby or which could have a material adverse effect on Seller's financial condition. 2.23 Complete Copies of Materials. Seller has delivered or made available true and complete copies of each document (or summaries of same) that has been requested by Buyer or its counsel. 2.24 Inventories. All of the inventories of Seller reflected on the Balance Sheet and Seller's books and records on the date hereof were purchased, acquired or produced in the ordinary and regular course of business and in a manner consistent with Seller's regular inventory practices and are set forth on Seller's books and records in accordance with the practices and principles of Seller consistent with the method of treating said items in prior periods. None of the inventory of Seller reflected on the Balance Sheet or on Seller's books and records as of the date hereof (in either case net of the reserve therefor) is obsolete, defective or in excess of the needs of the business of Seller reasonably anticipated during the next six months. The presentation of inventory on the Balance Sheet conforms to generally accepted accounting principles and such inventory is stated at the lower of cost (determined using the first-in, first-out method) or net realizable value. Notwithstanding the foregoing, Seller represents to Buyer that it carries no inventory on the Balance Sheet and on its books and records as of the date hereof, as it only maintains a master set of disks for its Products. -18- 26 2.25 No Insolvency. No petition has been filed by or against Seller for relief under any applicable bankruptcy, insolvency or similar law; no decree or order for relief has been entered in respect of Seller, voluntarily or involuntarily, under any such law; and, no receiver, liquidator, sequestrator, trustee, custodian or other officer has been appointed with respect to the Seller or its assets and liabilities pursuant to any such law. No warrant of attachment, execution or similar process has ben executed against Seller or any of its assets or properties. Seller has not made any assignment for the benefit of creditors. 2.26 Issuance of Shares. (a) Seller will acquire the Shares for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and Seller has no present intention of selling, granting any participation in or otherwise distributing the same. Seller understands and acknowledges that the issuance of the Shares pursuant to this Agreement will not, and any issuance of Common Stock upon conversion thereof may not, be registered under the Securities Act of 1933, as amended (the "Act") on the ground that the issuance provided for in this Agreement is exempt pursuant to Section 4(2) of the Act and that the Buyer's reliance on such exemption is predicated on Seller's representations set forth herein. The Seller covenants that in no event will it make any disposition of any of the Shares, or any Common Stock acquired upon the conversion thereof, except in accordance with the Registration Rights Agreement, which Seller shall become a party to upon the execution of Seller and Buyer of the Eighteenth Amendment to the Registration Rights Agreement. The Seller understands and acknowledges that there is no public market for the trading of the Shares, or the Common Stock acquired upon conversion thereof, and therefore, such Shares, and the Common Stock acquired upon conversion thereof, must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available, and except for the Registration Rights Agreement, the Buyer is under no obligation to register either the Shares or the Common Stock. (b) Seller has business or financial experience or a financial advisor, who is not affiliated with Buyer and who is not being compensated by Buyer or any affiliate or selling agent of Buyer, directly or indirectly, who has business or financial experience, that could be reasonably assumed to have the capacity to protect Seller's own interest in connection with the issuance of the Shares pursuant to this Agreement. 2.27 Representations Complete. None of the representations or warranties made by Seller and Seller's Affiliates and Shareholders (as modified by Seller Schedules), nor any statement made in any Exhibit or certificate furnished by Seller and Seller's Affiliates and Shareholders pursuant to this Agreement, contains or will contain at the Closing Date, any untrue statement of a material fact, or omits or will omit at the Closing Date to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. There is no fact, circumstance or condition of any kind or nature whatsoever known to Seller which reasonably would be expected to have a -19- 27 Material Adverse Effect on the Business as conducted by the Seller through the Closing, which has not been set forth in this Agreement, except those facts concerning general economic, legislative, regulatory or other matters such as may generally impact all businesses of the type operated by Seller. 2.28 Only Representations. Other than as set forth in this Agreement, the Exhibits and Schedules hereto, Seller makes no representations or warranties to Buyer. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 3.1 Organization, Standing and Power. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. 3.2 Authority; Consents. Buyer has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy or similar laws and general principles of equity. The consummation of the transactions contemplated by this Agreement will not materially conflict with any provision of the Articles of Incorporation or Bylaws of Buyer. To Buyer's knowledge, no consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party, is required by or with respect to Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby except for filings made in compliance with federal or state securities laws. 3.3 Litigation. There is no action, suit or proceeding of any nature pending or, to Buyer's knowledge, threatened against Buyer that would in any material way impair Buyer's ability to execute this Agreement and consummate the transactions contemplated hereunder. 3.4 Brokers' and Finders' Fees; Third Party Expenses. Buyer has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. -20- 28 3.5 Authorization of Shares. The Buyer has authorized and reserved the issuance of the Shares and the Common Stock acquired upon conversion thereof. 3.6 Amendments to Registration Rights Agreement. The Second, Third and Fifth amendments to the Registration Rights Agreement were entered into by Buyer and the parties set forth therein for the sole purpose of including additional shares of Buyer's Preferred Stock as "Registerable Securities" and the Purchasers (as defined therein) as "Holders" under the Registration Rights Agreement. 3.7 Representations Complete. None of the representations or warranties made by Buyer, nor any statement made in any Exhibit or certificate furnished by Buyer pursuant to this Agreement, contains or will contain at the Closing Date, any untrue statement of a material fact, or omits or will omit at the Closing Date to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV COVENANTS OF SELLER 4.1 Conduct of Business of Seller. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, Seller agrees (except to the extent that Buyer shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, maintain insurance against loss or damage to the Assets and such other insurance with respect to the Assets as heretofore been maintained, to pay or perform other obligations when due, and, to the extent consistent with such business, use all reasonable efforts consistent with past practice and policies to preserve intact Seller's present business organizations, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired the Assets, including without limitation, Seller's goodwill and the Business at the Closing Date. Seller shall promptly notify Buyer of any event or occurrence or emergency not in the ordinary course of business of Seller, and any event which could have a Material Adverse Effect. Except as expressly contemplated by this Agreement, Seller shall not, without the prior written consent of Buyer (which shall be given, or reasonably withheld, in the cases of clauses (f), (g) and (h) below, within one business day after receipt of written request therefor): (a) Enter into any commitment or transaction not in the ordinary course of business; (b) Transfer to any person or entity any rights to Seller's Intellectual Property; -21- 29 (c) Enter into or amend any agreements pursuant to which any other party is granted marketing, distribution or similar rights of any type or scope with respect to any products of Seller; (d) Amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of the agreements set forth or described in Seller Schedules; (e) Commence any litigation; (f) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of Seller, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock (or options, warrants or other rights exercisable therefor); (g) Except for the issuance of shares of capital stock of Seller upon exercise or conversion of options described in Schedule 2.2, issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities; (h) Cause or permit any amendments to its Articles of Incorporation or Bylaws; (i) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Seller; (j) Sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business; (k) Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities of Seller or guarantee any debt securities of others; (l) Grant any severance or termination pay (i) to any director or officer or (ii) to any other employee; -22- 30 (m) Adopt or amend any employee benefit plan, or enter into any employment contract, pay or agree to pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its employees; (n) Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (o) Pay, discharge or satisfy, in an amount in excess of $5,000 (in any one case) or $15,000 (in the aggregate), any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in Seller Financials (or the notes thereto); (p) Enter into any strategic alliance or joint marketing arrangement or agreement; or (q) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (p) above, or any other action that would (i) prevent Seller from performing or cause Seller not to perform its covenants hereunder or (ii) result in making the representations and warranties in Article II untrue. 4.2 No Solicitation. Until (i) the Closing Date, (ii) 60 days following the date of termination of this Agreement pursuant to the provisions of Section 7.1(b)(i) or 7.1(d) hereof or (iii) the date of termination of this Agreement pursuant to any other provision of Section 7.1 hereof, as the case may be, Seller will not (nor will Seller permit any of Seller's officers, directors, agents, representatives or Affiliates to) directly or indirectly, take any of the following actions with any party other than Buyer and its designees: (a) solicit, encourage, initiate or participate in any negotiations or discussions with respect to, any offer or proposal to acquire all or any portion of Seller's business and properties or capital stock whether by merger, purchase of assets, tender offer or otherwise, (b) except as required by law (in the opinion of outside counsel), including fiduciary duties required by law, disclose any information not customarily disclosed to any person other than its attorneys or financial advisors concerning Seller's business and properties or afford to any person or entity access to its properties, books or records, or (c) assist or cooperate with any person to make any proposal to purchase all or any part of Seller's capital stock or assets, other than selling products of Seller in the ordinary course of business. -23- 31 In the event Seller shall receive any offer or proposal, directly or indirectly, of the type referred to in clause (a) or (c) above, or any request for disclosure or access pursuant to clause (b) above, Seller shall immediately inform Buyer as to any such offer or proposal. 4.3 Covenant Not to Compete. For a period of three (3) years from the Closing, Seller will not directly or indirectly engage in any Competitive Activities (as hereinafter defined). 4.3.1 The term "Competitive Activities" as used herein shall mean: (a) Directly or indirectly engaging in, continuing in or carrying on in the Business (as defined in the Recitals hereof), including owning or controlling any financial interest in any corporation, partnership, firm or other form of business organization which competes with or is engaged in or carries on any aspect of the Business; (b) Consulting with, advising or assisting in any way, whether or not for consideration, any corporation which is now, becomes or may become a competitor of Buyer in any aspect with respect to the Business, including, without limitation, advertising or otherwise endorsing the products of any such competitor or otherwise serving as an intermediary for any such competitor; soliciting customers or sales representatives or otherwise soliciting orders for the sale of any products associated with the Business (other than solely for the benefit of Buyer at its request); loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arms' length basis with any such competitor; soliciting, inducing or attempting to induce any employee of Buyer to leave his or her employment with Buyer; and (c) Engaging in any practice the purpose of which is to evade the provisions of this covenant not to compete or commit any act which is detrimental to the successful use and operation of the Assets by Buyer after Closing or which may adversely affect the Assets; provided, however, that the term "Competitive Activities" shall not include the ownership of securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of such corporation. The parties agree that the geographic scope of this covenant not to compete shall extend worldwide. The parties agree that Buyer may sell, assign or otherwise transfer this covenant not to compete, in whole or in part, to any person, corporation, firm or entity that purchases all or a substantial part of the Assets. 4.4 Discharge of Debts. To the extent necessary and required to transfer, convey, assign and deliver the Assets to Buyer on the Closing Date free and clear of all liens and encumbrances, Seller shall hereafter promptly and fully satisfy and discharge all of its debts, liabilities and obligations when due, or shall obtain full releases from the same or make sufficient provisions to pay the same or to be released therefrom, all to the satisfaction of Buyer. Seller shall not make any distribution to its shareholders until all liabilities and obligations incurred on or prior to the Closing, and all liabilities and obligations arising out of any contract, agreement or other arrangement entered -24- 32 into on or prior to the Closing, have been paid and discharged in full or an amount sufficient therefor has been set aside for payment thereof. ARTICLE V ADDITIONAL AGREEMENTS 5.1 Seller Shareholder Approval. As promptly as practicable after the execution of this Agreement, Seller shall submit this Agreement and the transactions contemplated hereby to its shareholders for approval and adoption as provided by California Law and its Articles of Incorporation and Bylaws. Seller shall use its best efforts to solicit and obtain the written consent, or vote at a duly convened meeting, of its shareholders sufficient to approve the Acquisition and this Agreement and to enable the Closing to occur as promptly as practicable. The materials submitted to Seller's shareholders shall include information regarding Seller, the terms of the Acquisition and this Agreement and the recommendation of the Board of Directors of Seller in favor of the Acquisition and this Agreement (subject to applicable fiduciary duties). 5.2 Access to Information. Seller shall afford Buyer and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Closing Date to (a) all of Seller's properties, books, contracts, commitments and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of Seller as Buyer may reasonably request. Seller agrees to maintain and retain any and all information regarding its business operations on or prior to the Closing Date necessary for Buyer to calculate the availability to it of tax credits for research activities under Section 41 of the Code. Seller agrees to provide to Buyer and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 5.2 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Acquisition. 5.3 Confidentiality. In addition to the obligations of each party pursuant to the existing mutual confidentiality agreement, each of the parties hereto hereby agrees to keep such information or knowledge obtained in any investigation pursuant to Section 1.3 or 5.2, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential; provided, however, that the foregoing shall not apply to information or knowledge which (a) a party can demonstrate was already lawfully in its possession prior to the disclosure thereof by the other party, (b) is generally known to the public and did not become so known through any violation of law or this Agreement, (c) became known to the public through no fault of such party, (d) is later lawfully acquired by such party from other sources, (e) is required to be disclosed by order of court or government agency with subpoena powers or (f) which is disclosed in the course of any litigation between any of the parties hereto. -25- 33 5.4 Expenses. Whether or not the Acquisition is consummated, all fees and expenses incurred in connection with the Acquisition including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties ("Third Party Expenses") incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses, except Buyer shall pay up to $20,000 of legal and accounting fees incurred by Seller. 5.5 Public Disclosure. Unless otherwise required by law or a court of competent jurisdiction, for a period of five years from the Closing Date, no disclosure (whether or not in response to an inquiry) of any of the specific details of this Agreement and the transactions contemplated thereby, including without limitation, disclosure of the consideration paid for the assets purchased and the indemnification arrangements provided for herein, shall be made by Seller, (other than to Seller's legal counsel and other advisers as shall be reasonably necessary) unless such disclosure is specifically approved by Buyer and Buyer may, at its sole discretion, withhold such approval. 5.6 Consents. Seller shall use its best efforts to obtain all necessary consents, waivers and approvals under any of the Contracts as may be required in connection with the Acquisition so as to transfer to Buyer all rights of Seller thereunder as of the Closing. 5.7 Best Efforts. Subject to the terms and conditions provided in this Agreement and to the fiduciary duties of the board of directors of Seller under applicable law as advised by outside counsel, each of the parties hereto shall use its best efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations: to consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Buyer shall not be required to agree to any divestiture by Buyer or any of Buyer's subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Buyer or its subsidiaries or affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets (including without limitation the Assets), properties and stock. 5.8 Notification of Certain Matters. Seller shall give prompt notice to Buyer, and Buyer shall give prompt notice to Seller, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of Seller and Buyer, respectively, contained in this Agreement to be untrue or inaccurate at or prior to the Closing Date and (ii) any failure of Seller or Buyer, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, -26- 34 however, that the delivery of any notice pursuant to this Section 5.8 shall not limit or otherwise affect any remedies available to the party receiving such notice. 5.9 Additional Documents and Further Assurances. Each party hereto, at the request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 5.10 Employee Benefits. Except as provided in Section 5.13 immediately prior to the closing, Seller will terminate each of its Business Employees and will discharge all of its obligations to such employees with respect to accrued salary, accrued vacation and sick time, benefit plans and insurance plans, other than accrued vacation and sick time of Business Employees who accept offers of employment from Buyer as set forth below in this Section. Seller shall use its best efforts to assist Buyer in hiring and retaining the services of Business Employees of Seller whom Buyer desires to employ. Seller understands and agrees that (a) Buyer is under no obligation to offer employment with Buyer to any Business Employees of Seller, (b) it is within the sole discretion of Buyer to determine to whom offers of employment with Buyer will be extended and from whom such offers will be withheld, and (c) those Business Employees of Seller who are given offers of employment with Buyer will become, upon their acceptance of such offers, new employees of Buyer with their employment commencing on the Closing Date for all purposes, including but not limited to that of determining their eligibility for Buyer's employment benefits; provided, however, that Buyer will waive all applicable pre-existing condition clauses relating to insurance-based employment benefits, and will assume all vacation and sick time accrued for such Business Employees immediately prior to the Closing Date. Any Business Employee accepting employment with Buyer will be required as a condition precedent to such employment to execute Buyer's standard form of confidentiality and proprietary information agreement and take such other actions generally required by Buyer of its new employees. 5.11 Tax Returns. Except for the Sales Taxes and other Taxes Buyer agrees to pay pursuant to Sections 1.1(b) and 1.2(c) hereof, Seller shall be responsible for and pay when due (i) all of Taxes of Seller attributable to or levied or imposed upon the Assets relating or pertaining to the period (or that portion of any period) ending on or prior to the Closing Date and (ii) all Taxes attributable to, levied or imposed upon, or incurred in connection with the Seller's business operations. Seller shall continue to timely file within the time period for filing, or any extension granted with respect thereto, all of Seller's Tax Returns required to be filed in connection with the Assets and any portion of any such Tax Returns connected therewith shall be true and correct and completed in accordance with applicable laws. 5.12 Bulk Sales. Seller shall, promptly upon request by Buyer, provide all such information and execute and deliver such documents as Buyer may reasonably request in order to enable Seller, through the efforts of Buyer, to comply with the bulk sales laws of any jurisdiction. -27- 35 5.13 Employment Agreements. Buyer shall offer the persons listed in Schedule 6.3(n) the opportunity to enter into employment and noncompetition agreements with Buyer to become effective following the Closing. Effective upon the Closing, Dwight L. Jackson shall be offered employment pursuant to the terms set forth in the Employment and Noncompetition Agreement attached hereto as Exhibit F. Pursuant to action to be taken by the Board of Directors of Buyer at its next Board meeting at which stock options are granted (and, in any event, within sixty (60) days of the Closing Date), Dwight L. Jackson shall be granted a stock option to purchase 10,000 shares of the Buyer's Common Stock at an exercise price equal to the then-current fair market value of the stock as determined by the Buyer's Board of Directors. 5.14 Securities Laws. (a) Securities Laws Representations and Covenants of Buyer. (1) This Agreement is made with Seller in reliance upon Seller's representation to Buyer, which by Seller's execution of this Agreement Seller hereby confirms, that the Shares to be received by Seller will be acquired for investment for Seller's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that Seller has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, Seller further represents that Seller has no contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation to such person or to any third person, with respect to any of the Shares. (2) Seller acknowledges and understands that the Shares, and any Common Stock acquired upon the conversion thereof, must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Registration Rights Agreement, Buyer is under no obligation to register either the Shares of Common Stock. (3) Seller understands and acknowledges that the offering of the Shares pursuant to this Agreement will not be registered under the Securities Act on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration pursuant to Section 4(2) of the Securities Act, and that the Buyer's reliance upon such exemption is predicated upon Seller's representations set forth in this Agreement. (4) Unless there is in effect a registration statement under the Securities Act covering the proposed transaction, Seller covenants that in no event will Seller dispose of any of the Shares (other than pursuant to Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act ("Rule 144") or any similar or analogous rule) unless and until (i) Seller shall have notified the Buyer of the proposed disposition and shall have furnished the Buyer with a statement of the circumstances surrounding the proposed disposition and (ii) if requested by the Buyer, Seller shall have furnished Buyer with an opinion of counsel satisfactory in form and substance to the Buyer and Buyer's counsel to the effect that (x) such disposition may -28- 36 legally be made in the manner proposed without registration under the Securities Act and (y) appropriate action necessary on the part of Seller for compliance with the Securities Act and any applicable state, local or foreign law has been taken; provided however, no such opinion need be obtained with respect to Seller's distribution of the Shares to its Shareholders pursuant to Section 1.2(b) hereof if such Shareholders agree to be subject to the terms hereof. Each certificate evidencing the Shares transferred as above provided shall bear the appropriate restrictive legend set forth below, except that such certificate shall not bear such legend if the transfer was made in compliance with Rule 144 or if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. (5) Seller represents that: (i) Seller has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of Seller's prospective investment in the Shares; (ii) Seller has received all the information it has requested from Buyer and considers necessary or appropriate for deciding whether to purchase the Shares; (iii) any financial information, financial projections or other forward-looking financial or statistical data received by Seller from Buyer has been reviewed by Seller with the knowledge and understanding that the foregoing constitutes no more than Buyer's reasonable belief as to results which may be achieved, and that no representation, warranty or assurance is, can be or has been made that any such results, financial or otherwise, will actually be achieved by Buyer; (iv) Seller has the ability to bear the economic risks of Seller's prospective investment; and (v) Seller is able, without materially impairing its financial condition, to hold the Shares for an indefinite period of time and to suffer complete loss on its investment. (b) Legends. (1) All certificates for the Shares shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii) PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION." (2) "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY -29- 37 CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." (3) The certificate evidencing the Shares shall also bear any legend required pursuant to any state, local or foreign law governing such securities. A permit to qualify the issuance of these Shares has been ordered by the California Department of Corporations (the "Permit") and the certificate evidencing the Shares shall bear the legend as set forth in Section 5.14(b)(2) required as a condition to the issuance of the Permit. Buyer shall file a Post-Effective Amendment No. 1 to the Permit immediately following the Closing to file an executed copy of this Agreement with the California Department of Corporations to allow the distribution of the Shares by Seller to its Shareholders pursuant to Section 1.2(b) hereof. (c) Seller understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached as Attachment 1. 5.15 Closing Statement. Within 45 days after the Closing Date, Seller shall prepare and deliver to the Buyer the following: (i) an income statement (the "Closing Income Statement") for the period from March 31, 1996 through the Closing Date (the "Stub Period") and (ii) a balance sheet as of the Closing Date (the "Closing Balance Sheet"; collectively, the Closing Income Statement and the Closing Balance Sheet shall be referred to as the "Closing Statement"). Such Closing Statement shall, among other things, set forth the net worth of the Company as of the Closing Date. The Closing Statement shall be prepared in good faith with Buyer's reasonable assistance to the extent of Buyer's ability and in accordance with generally accepted accounting principles applied on a consistent basis. 5.16 Settlement of Litigation and Other Disputes. Seller shall use its best efforts to settle any litigation matters arising between the date hereof and the Closing Date, prior to the Closing on terms and conditions satisfactory to Buyer. 5.17 Updating of Schedules. Seller shall deliver to Buyer at least one full day prior to the Closing Date Supplemental Schedules which shall reflect any changes or additions required to update the disclosure set forth in the Schedules to make it true and correct as of the Closing Date. -30- 38 ARTICLE VI CONDITIONS TO THE ACQUISITION 6.1 Conditions to Obligations of Each Party to Effect the Acquisition. The respective obligations of each party to this Agreement to effect the Acquisition shall be subject to the satisfaction at or prior to the Closing Date of the following conditions: (a) Corporate Approvals. This Agreement and the Acquisition shall have been approved and adopted by the requisite vote of the shareholders of Seller. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Acquisition shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Acquisition, which makes the consummation of the Acquisition illegal. 6.2 Additional Conditions to Obligations of Seller. The obligations of Seller to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Seller: (a) Representations, Warranties and Covenants. The representations and warranties of Buyer in this Agreement shall be true and correct on and as of the Closing Date as though such representations and warranties were made on and as of such time and Buyer shall have performed and complied with all covenants, obligations, agreements and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. (b) Certificate of Buyer. Seller shall have been provided with a certificate duly executed on behalf of Buyer by its President to the effect that, as of the Closing Date: (i) all representations and warranties made by Buyer in this Agreement are true and complete; and (ii) all covenants, obligations, agreements and conditions of this Agreement to be performed by Buyer on or before such date have been so performed. (c) Registration Rights Agreement. Buyer and Seller shall have executed and delivered the Eighteenth Amendment to the Registration Rights Agreement pursuant to Section 1.2(a) hereof and attached hereto as Exhibit B. -31- 39 (d) Employment and Noncompetition Agreement. Buyer and Dwight L. Jackson shall have executed and delivered the Employment and Noncompetition Agreement pursuant to Section 5.13 hereof and attached hereto as Exhibit H. 6.3 Additional Conditions to the Obligations of Buyer. The obligations of Buyer to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of each of the following conditions, any of which may be waived, in writing, exclusively by Buyer: (a) Representations, Warranties and Covenants. The representations and warranties of Seller and Seller's Affiliates and Shareholders in this Agreement shall be true and correct on and as of the Closing Date as though such representations and warranties were made on and as of such time and Seller and Seller's Affiliates and Shareholders shall have performed and complied with all covenants, obligations, agreements and conditions of this Agreement required to be performed and complied with by it as of the Closing Date. (b) Certificate of Seller and Seller's Affiliates and Shareholders. Buyer shall have been provided with a certificate executed on behalf of Seller by its President and by each of Seller's Affiliates and Shareholders to the effect that, as of the Closing Date: (i) all representations and warranties made by Seller and Seller's Affiliates and Shareholders in this Agreement are true and complete; and (ii) all covenants, obligations, agreements and conditions of this Agreement to be performed by Seller and Seller's Affiliates and Shareholders on or before such date have been so performed. (c) Claims. There shall not have occurred any claims (whether or not asserted in litigation) which may materially and adversely affect the consummation of the transactions contemplated hereby or the Business, the Assets or financial condition of Seller or Buyer. (d) Third Party Consents. Any and all consents, waivers, and approvals required from third parties relating to the Contracts so as to assign all rights of Seller thereunder to Buyer as of the Closing shall have been obtained except as set forth in 6.4(b) hereof and except for any consent, waiver and approval by Oracle Corporation, a California corporation ("Oracle") pursuant to Section 8.5 of the Business Alliance Program Agreement between Oracle and Seller dated February 15, 1996. (e) Payment of Outstanding Liabilities. To the extent necessary and required to transfer, convey, assign and deliver the Assets to Buyer on the Closing Date free and clear of all liens and encumbrances, Seller will have taken any and all necessary actions to pay off and/or obtain full releases from all of its liabilities and obligations, or will have made sufficient provisions to so pay or obtain releases, to the satisfaction of Buyer. -32- 40 (f) Bulk Sales Law Compliance. In connection with the transactions contemplated hereby, Seller shall have complied fully with its obligations pursuant to Section 5.12 of this Agreement and there shall have been no intervention by any creditor of Seller prior to the Closing, except as disclosed in Schedule 6.3(f). (g) Satisfaction of Bank Debt. Seller shall have delivered to Buyer evidence satisfactory to Buyer that the loan from Scott Valley Bank has been assigned to Stephen P. Blanding and Kirk G. Ward and that Scott Valley Bank has terminated all security interests, security agreements and guarantees affecting or relating to the Assets. (h) Termination of UCC Financing Statements. Buyer shall have been furnished with UCC termination statements with respect to all UCC-1 financing statements evidencing security interests in any of the Assets excluding the tax liens filed by the IRS on November 10, 1994 and November 16, 1994 in the amount of $17,998.57 and $4,026.46, respectively, and the tax liens filed by the State of California Employment Development Department on March 23, 1995 in the amount of $4,586.97, with respect to liens on the assets of First Resource, and including the UCC-1 financing statement filed by Scott Valley Bank on October 12, 1994 with respect to a lien on substantially all of the assets of Seller. (i) Subordination Agreement. Seller shall have delivered to Buyer a copy of the Subordination Agreement executed by each of Kirk G. Ward and Stephen P. Blanding pursuant to Section 1.1(b)(ii) hereof. (j) Settlement of Outstanding Disputes. Buyer shall have received evidence of the settlement of any litigations and/or disputes described in the Schedules, including a general release from each such litigant or disputant, as the case may be, on terms and in a form satisfactory to it. (k) No Injunctions or Restraints on Conduct of Business. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Buyer's proposed acquisition of the Assets, or limiting or restricting Buyer's conduct or operation of the Business (or its own business) following the Acquisition shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. (l) Governmental Approvals. All consents, approvals, orders and authorizations of, and registrations, declarations and filings with, and expirations of waiting periods imposed by, any governmental entity, domestic or foreign, necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed or have occurred. -33- 41 (m) No Material Adverse Changes. There shall not have occurred any material adverse change in the Business, the Assets or the results of operations or financial condition of Seller. (n) Employment and Noncompetition Agreements. Buyer and Dwight L. Jackson shall have entered into the Employment and Noncompetition Agreement in the form attached hereto as Exhibit H. Buyer and the persons listed in Schedule 6.3(n) shall have entered into the Buyer's standard form of confidentiality and proprietary information agreement. (o) Third Party Rights. No third party shall have any right of any nature whatsoever (including, without limitation, any right to receive royalty payments) in respect of any of the Assets, except rights to use Products pursuant to licenses granted by Seller in the ordinary course of business. (p) Certificates. Seller shall have obtained certificates of good standing from the California Secretary of State as to the good standing of the Seller and from the California Franchise Tax Board as to due payment by Seller of all taxes due, and shall have provided Buyer with true and correct certified copies thereof. (q) Due Diligence. Buyer shall have completed to its satisfaction the due diligence process outlined in Section 5.2 hereof. (r) Closing Documents. Buyer shall have received, in form and substance satisfactory to Buyer and its counsel, each and every other closing document required to be delivered to it pursuant to this Agreement. 6.4 Condition Subsequent to Obligations of Buyer. (a) Cara Agreement. Within twenty (20) days after the Closing, Buyer and Cara Information Technology LTD ("Cara") shall enter into a license agreement (the "Cara Agreement") substantially in the form attached hereto as Exhibit I and Cara shall pay by wire transfer, upon the written instructions from Buyer to Cara, an aggregate of $100,000 of the license fees as set forth in the Cara Agreement of which $75,000 shall be paid upon execution of the Cara Agreement and an additional $25,000 shall be paid upon delivery of the Documentation by Buyer to Cara at such respective times. In no event shall the Cara Agreement be entered into between Seller and Cara prior to the Closing. In addition, Seller hereby guarantees two payments of $50,000 each (for an aggregate of $100,000) by Cara to Buyer to be paid six (6) months and twelve (12) months, respectively, from the date of the Cara Agreement. (b) Third Party Consents. Within twenty (20) days after the Closing, Seller shall have obtained and delivered to Buyer all consents, waivers, and approvals required from Smithware, Inc., a Tennessee Corporation ("Smithware") in accordance with the Software Distribution Agreement dated as of April 19, 1996 by and between Seller and Smithware and from -34- 42 Programmed Intelligence Corporation, a Georgia corporation ("IQ") in accordance with the Software Distribution License Agreement dated as of October 19, 1989, as amended, by and between Seller and IQ to assign all rights of Seller thereunder to Buyer as of the Closing. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. Except as provided in Section 7.2 below, this Agreement may be terminated and the Acquisition abandoned at any time prior to the Closing Date: (a) by mutual consent of Seller and Buyer; (b) by Buyer or Seller if: (i) the Closing has not occurred by June 15, 1996; (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Acquisition; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Acquisition by any Governmental Entity that would make consummation of the Acquisition illegal; (c) by Buyer if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Acquisition by any Governmental Entity, which would: (i) prohibit Buyer's ownership or operation of all or a substantial portion of the Business or the Assets or (ii) compel Buyer to dispose of or hold separate all or a substantial portion of the Business or the Assets of Buyer as a result of the Acquisition; (d) by Buyer if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Seller and such breach has not been cured within five (5) business days after written notice to Seller (provided that, no cure period shall be required for a breach which by its nature cannot be cured); (e) by Seller if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Buyer and such breach has not been cured within five (5) business days after written notice to Buyer (provided that, no cure period shall be required for a breach which by its nature cannot be cured). 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Buyer or Seller, or their respective officers, directors or shareholders, provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 4.2, 4.3, 5.3, 5.4, 5.5 and -35- 43 Article 8 of this Agreement shall remain in full force and effect and survive any termination of this Agreement. 7.3 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 7.4 Extension; Waiver. At any time prior to the Closing Date, Buyer on the one hand, and Seller, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE VIII INDEMNITY AGREEMENT 8.1 Agreement to Indemnify; Offset. (a) Each of Seller and Seller's Affiliates and Shareholders hereby agree, jointly and severally, to indemnify and hold Buyer, and its directors, officers and affiliates (collectively, the "Indemnitees"), harmless against and in respect of any loss, cost, expense (including expenses of investigation), claim, liability, deficiency, judgment or damage, including reasonable legal and accounting fees and expenses, which exceed $15,000 in the aggregate (hereinafter, individually, a "Loss", and collectively, "Losses") incurred by Buyer, its officers, directors, or affiliates, directly or indirectly, (i) as a result of any inaccuracy in or breach of a representation or warranty of Seller or any of Seller's Affiliates and Shareholders contained in this Agreement or any failure by Seller or any of Seller's Affiliates and Shareholders to perform or comply with any covenant or condition contained in this Agreement and (ii) by reason of Seller's failure to satisfy or discharge in a timely manner any liability or obligation of Seller that is not an Assumed Liability. Notwithstanding the foregoing, Seller and Seller's Affiliates and Shareholders shall only be liable to Indemnitees for any and all Losses in excess of an aggregate total of $15,000 from the sum of all Losses combined. (b) Prior to the earlier to occur (the "Offset Date") of (i) the closing of an initial public offering of the Buyer that triggers the automatic conversion of the Series E Preferred Stock of Buyer into Common Stock of the Buyer (an "IPO") or (ii) twenty-four (24) months from the date of this Agreement, Buyer, for purposes of calculating the amount of interest payable to Kirk G. Ward and Stephen P. Blanding under the $250,000 Note, only and not as a permanent -36- 44 reduction of the principal balance thereof, shall offset the amount of any Losses for which Seller and Seller's Affiliates and Shareholders are liable to any of the Indemnitees against the amount of principal outstanding under the $250,000 Note. (c) At the Offset Date, in addition to any rights of offset or other rights that Buyer or any of the other Indemnitees may have at Common Law or otherwise, Seller shall have the option to either: (i) cause Buyer to withhold and deduct any sum that may be owed to any Indemnitee under this Agreement from any amount otherwise payable by Buyer to Kirk G. Ward and Stephen P. Blanding under the $250,000 Note or (ii) deliver to Buyer the number of shares equal to the quotient of (1) the amount of such Losses, (2) divided by the greater of (x) $7.94 per share (as adjusted for stock splits and stock dividends) or (y) the most recent purchase price per share of the Company's Capital Stock. The withholding and deduction of any such sum against the $250,000 Note shall first be used to pay down any principal, if any owed and any accrued interest or other fees or sums owed thereafter by Buyer to Seller or any of Seller's Affiliates and Shareholders and shall operate as a complete discharge (to the extent of such sum) of the obligation to pay the amount from which such sum was deducted. 8.2 Expiration of Indemnification and Representations and Warranties. (a) Except as otherwise provided in Sections 8.1(c) and 8.2(b) hereof, the indemnification obligations under Section 8.1 hereof and the representations and warranties contained in this Agreement (except for those referred to in Section 8.2(b) hereof) shall terminate eighteen (18) months from the date of this Agreement, but shall not terminate as to any Loss (or a potential claim by an appropriate party) asserted in good faith prior to such date by Delivery (as defined below) of an Officer's Certificate (as defined below) pursuant to Section 8.3 hereof. (b) The indemnification obligations under Section 8.1 hereof with respect to a breach of the representations and warranties contained in (i) Section 2.8(c) of this Agreement shall not terminate until twenty-four (24) months; and (ii) Section 2.11(c) of this Agreement shall terminate forty-eight (48) months after the date of this Agreement, but shall not terminate as to any Loss (or a potential claim by an appropriate party) asserted in good faith prior to such date. The representations and warranties contained in Sections 2.8(c) and 2.11(c) shall survive until expiration of the respective periods set forth in the foregoing clauses (i) and (ii), respectively. In addition, the representations and warranties of Buyer in this Agreement or in any instrument delivered pursuant to this Agreement shall survive for a period of one (1) year from the Closing Date. 8.3 Claims. Upon Delivery (as defined below) of notice to Seller by the Buyer at any time on or before the last day prior to expiration of indemnification as set forth in Section 8.2 herein of a certificate signed by any officer of Buyer (an "Officer's Certificate"): -37- 45 (a) stating that Buyer (or any of its directors, officers or affiliates) has paid or properly accrued or reasonably anticipates that it will have to pay or accrue Losses in an aggregate stated amount to which such party is entitled to indemnity pursuant to this Agreement, and (b) specifying in reasonable detail the individual items of Losses included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated liability, and the nature of the misrepresentation, breach of warranty or covenant or condition to which such item is related, the Seller or any of Seller's Affiliates or Shareholders shall, subject to the provisions of Section 8.4 hereof, either (i) deliver to Buyer as promptly as practicable but in no event later than thirty (30) calendar days from the date of Delivery, the amount of cash equal to such Losses as indemnity payable by wire transfer or certified check, or, in the event any amounts remain due under the $250,000 Note and/or any of Seller or Seller's shareholders are the beneficial holders of any of the Shares, (ii) notify Indemnitees as promptly as practical but in no event later than thirty (30) calendar days from the date of Delivery, that such indemnification shall be offset in accordance with Sections 8.1(b) and (c) hereof. 8.4 Objections to Claims. At the time of delivery of any Officer's Certificate to Seller (the "Delivery"), a duplicate copy of such certificate shall be delivered to Seller's Affiliates and Shareholders. After the expiration of such thirty (30) day period, Seller or any of Seller's Affiliates and Shareholders shall make payment to Buyer in accordance with Section 8.3 hereof; provided that, no such payment may be made if Seller shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to Buyer prior to the expiration of such thirty (30) day period. Notwithstanding any other provision of this Agreement, the parties hereto hereby agree that, upon receipt of reasonable evidence of any claimed or asserted Tax liability which attaches or may attach to the Assumed Assets by operation of law or otherwise or for which Buyer is liable in connection with the purchase of the Assumed Assets and which is an Indemnifiable Loss hereunder, the Seller or any of Seller's Affiliates and Shareholders shall deliver to Buyer, as promptly as practicable, an amount sufficient for Buyer to discharge such Tax liability. In the event Seller objects or disputes the payment or satisfaction of any such Tax liability, Seller's sole recourse shall be to file a claim of refund or such other appropriate claim with the governmental body to which such payment is made by Buyer. 8.5 Resolution of Conflicts; Arbitration. (a) In case Seller shall so object in writing to any claim or claims made in any Officer's Certificate, Seller and Buyer shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims; provided, however, that there shall be no presumption that Buyer has not attempted to agree in good faith if Buyer chooses to demand arbitration of the matter in the manner set forth in paragraph (b) below after fifteen (15) days following Seller's objection. If Seller and Buyer should so agree, a memorandum setting forth such agreement shall be prepared and signed by each of Buyer and Seller. -38- 46 (b) If no such agreement can be reached after good faith negotiation, either Buyer or Seller may demand arbitration of the matter unless the amount of the Loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and, in either such event, the matter shall be settled by arbitration conducted by three arbitrators. Buyer and Seller shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of a majority of the arbitrators so selected as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement. (c) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Alameda County, California under the rules then in effect of the American Arbitration Association. For purposes of this Section 8.5, in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, Buyer shall be deemed to be the "Non-Prevailing Party" in the event that the arbitrators award Buyer less than fifty percent (50%) of the disputed amount (in addition to any amount not in dispute); otherwise, Seller shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and the expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration. 8.6 Third Party Claims. In the event Buyer becomes aware of a third-party claim that Buyer believes may result in a demand of indemnification, Buyer shall notify Seller of such claim, and the Seller shall be entitled, at its expense, to participate in any defense of such claim. Buyer shall have the right in its sole discretion to settle any such claim; provided, however, that except with the written consent of Seller (which shall not be unreasonably withheld), no settlement of any such claim with third party claimants shall alone be determinative of the amount of liability of Seller. In the event that Seller has not consented in writing to any such settlement, Buyer and Seller shall resolve by arbitration any dispute as to the amount to which Buyer is entitled under Section 8.1 hereof in respect of such settlement in the manner set forth in this Section 8. 8.7 Remedies. Seller and each of Seller's Affiliates and Shareholders hereby acknowledge that Buyer may seek any available remedy to enforce the indemnity obligations of Seller and Seller's Affiliates and Shareholders set forth in Section 8.1 hereof. 8.8 Representative. Seller and the Seller's Affiliates and Shareholders hereby agree that effective upon the execution of this Agreement, they shall be collectively represented by Stephen P. Blanding (the "Representative") in accordance with the following terms: (i) The Representative is hereby empowered to give and receive notices and communications, to agree to the reimbursable amount of any Loss, to negotiate, enter into settlements and compromises of and to take all actions on behalf of the Seller and the Seller's Affiliates and Shareholders necessary for the accomplishment of the foregoing. -39- 47 (ii) In the event that the Representative shall die, become incapacitated, resign or otherwise be unable to fulfill his duties or terminate his status as such, his successor shall be elected by the vote or consent of the majority in interest of the Seller's Affiliates and Shareholders as soon as reasonably practicable thereafter. (iii) The Representative shall receive no compensation for his services but shall be reimbursed by the Seller's Affiliates and Shareholders for reasonable expenses incurred in the course of performance of such services. (iv) A decision, act, consent or instruction of the Representative shall constitute a decision of the Seller and Seller's Affiliates and Shareholders and shall be conclusive and binding upon the Seller and Seller's Affiliates and Shareholders, and Buyer may rely upon any decision, act, consent or instruction of the Representative as being the decision, act, consent or instruction of the Seller and Seller's Affiliates and Shareholders. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via telecopy (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Buyer, to: ProBusiness, Inc. 5934 Gibraltar Pleasanton, California 94588 Attention: Chief Financial Officer Telecopy No.: (510) 847-3817 with a copy to: Wilson, Sonsini, Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Alan K. Austin, Esq. Telecopy No.: (415) 493-6811 -40- 48 (b) if to Seller, to: Dimension Solutions 39899 Balentine Drive Suite 335 Newark, California 94560 Attention: Dwight Jackson Telecopy No.: (510) 623-0550 with a copy to: Morgan, Miller & Blair 1676 North California Blvd. Suite 200 Walnut Creek, California 94596 Attention: Bruce Ring Telecopy No.: (510) 943-1106 9.2 Interpretation. When a reference is made in this Agreement to Schedules or Exhibits, such reference shall be to a Schedule or Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.4 Entire Agreement. This Agreement, the Schedules and Exhibits hereto: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder, unless expressly provided otherwise; and (c) shall not be assigned by operation of law or otherwise; provided, however, that Seller may assign its rights and obligations hereunder to its shareholders. 9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the -41- 49 application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. 9.6 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 9.8 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. -42- 50 IN WITNESS WHEREOF, each of Buyer, Seller and Seller's Affiliates and Shareholders has caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above. PROBUSINESS, INC. By:________________________________________ Name: Thomas H. Sinton Title: President DIMENSION SOLUTIONS By:________________________________________ Name: Dwight L. Jackson Title: President Seller's Shareholders ___________________________________________ Dwight L. Jackson ___________________________________________ Stephen P. Blanding ___________________________________________ Kirk G. Ward ___________________________________________ Stephen P. Blanding and Mayno W. Blanding Family Trust By:________________________________________ Title:_____________________________________ Ward Family Revocable Trust dated 3/28/94 By:________________________________________ Title:_____________________________________ -43- EX-3.1 5 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PROBUSINESS SERVICES, INC. FIRST: The name of the corporation is ProBusiness Services, Inc. (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: This Corporation is authorized to issue two classes of shares to be designated, respectively, Common Stock and Preferred Stock. The total number of shares of capital stock that the Corporation is authorized to issue is sixty-eight million four hundred seventy- four thousand nine hundred eighteen (68,474,918). The total number of shares of Common Stock this corporation shall have authority to issue is sixty million (60,000,000), $0.001 par value, and the total number of shares of Preferred Stock this corporation shall have authority to issue is eight million four hundred seventy-four thousand nine hundred eighteen (8,474,918), $0.00l par value. Nine hundred twenty thousand (920,000) of the shares of Preferred Stock are designated Series A Preferred Stock ("SERIES A PREFERRED"), nine hundred nineteen thousand four hundred (919,400) of the shares of Preferred Stock are designated Series B Preferred Stock ("SERIES B PREFERRED"), two hundred sixty thousand seven hundred eighty-five (260,785) of the shares of Preferred Stock are designated Series C Preferred Stock ("SERIES C PREFERRED"), three hundred thousand (300,000) of the shares of Preferred Stock are designated Series D Preferred ("SERIES D PREFERRED"), five hundred thousand (500,000) of the shares of Preferred Stock are designated Series E Preferred Stock ("SERIES E PREFERRED"), and 574,733 shares shall be designated Series F Preferred Stock ("SERIES F PREFERRED"). The undesignated Preferred Stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being hereby expressly vested in the Board). The Board of Directors is further authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, may 2 increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. The powers, preferences and rights, and the qualifications, limitations, and restrictions relating to the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series F Preferred are as follows: 1. Dividends. (a) The holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series F Preferred shall be entitled to receive, when as and if declared by the Board of Directors, dividends in the amount of Two Cents ($.02) per share per annum out of funds legally available therefore. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Preferred Stock unless declared by the Board of Directors. (b) No dividends or other distributions shall be made with respect to the Common Stock, other than dividends payable solely in Common Stock, during any fiscal year of the Corporation unless at the same time all dividends with respect to the Preferred Stock for that fiscal year have been declared and paid or set apart. In the event dividends are paid on any share of Common Stock, an additional dividend shall be paid with respect to all outstanding shares of Series F Preferred in an amount equal per share of Series F Preferred (on an as-if-converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock. Except as set forth in this Section 1(b), no dividend shall be paid on or declared and set apart for the shares of any series of Preferred Stock for any dividend period unless at the same time a like proportionate dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor shall be paid on or declared and set apart for the shares of all other such series of Preferred Stock. (c) For purposes of this Section 1, unless the context otherwise requires, a "distribution" shall mean the transfer of cash or other property without consideration whether by way of dividend or otherwise, payable other than in Common Stock or the purchase or redemption of shares of the Corporation (other than purchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries on the termination of their employment or services pursuant to agreements providing for the right of said repurchase) for cash or property. 2. Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the Corporation, either voluntary or involuntary, distributions to the stockholders of the Corporation shall be made in the following manner: (a) The holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series F Preferred shall be entitled to receive the amount of $3.805, $3.804, $4.94, $5.94, $7.94, and $17.40 respectively per share for each share of Series A -2- 3 Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred, and Series F Preferred then held by them, adjusted for any combinations, consolidations, or stock distributions or dividends with respect to such shares and, in addition, an amount equal to all declared but unpaid dividends on the shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series F Preferred then held by them. The Preferred Stock shall rank on a parity as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. If the assets and funds legally available for distribution to the holders of Preferred Stock shall be insufficient to permit the payment to such holders of the preferential amounts to which each such series of Preferred Stock is entitled, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Preferred Stock pro rata according to their respective liquidation preferences. After payment has been made to the holders of the Preferred Stock of the full amounts to which they shall be entitled as aforesaid, the entire remaining assets and funds of the Corporation legally available for distribution, if any, shall be distributed ratably among the holders of the Preferred Stock and the Common Stock in a manner such that the amount distributed to each holder of capital stock of the Corporation shall equal the amount obtained by multiplying the entire assets and funds of the Corporation legally available for distribution hereunder by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock then held by the holder and the number of shares of Common Stock issuable upon conversion of the shares of Preferred Stock then held by the holder, and the denominator of which shall be the sum of the total number of shares of Common Stock then outstanding and the total number of shares of Common Stock issuable upon conversion of the total number of shares of Preferred Stock then outstanding. (b) For purposes of this Section 2, a merger or consolidation of the Corporation with or into any other corporation or corporations, or the merger of any other corporation or corporations into the Corporation, in which consolidation or merger the stockholders of the Corporation receive distributions in cash or securities of another corporation or corporations as a result of such consolidation or merger, or a sale of all or substantially all of the assets of the Corporation, shall not be treated as a liquidation, dissolution or winding up of the Corporation, unless both (i) the stockholders of this Corporation receive in such consolidation, merger or sale of assets less than fifty percent (50%) of the voting equity securities of the successor or surviving corporation and (ii) the amount of cash and/or securities received by the stockholders of this Corporation is less than the liquidation preference of the Preferred Stock, in which case such consolidation, merger or sale of assets shall be treated as a liquidation, dissolution or winding up. 3. Voting Rights. Except as otherwise required by law or by Section 4 hereof, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, -3- 4 however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Holders of Common Stock and Preferred Stock shall be entitled to notice of any stockholders; meeting in accordance with the Bylaws of the Corporation. 4. Conversion. The holders of the Preferred Stock have conversion rights as follows (the "CONVERSION RIGHTS"): (a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series A Preferred by dividing $3.805 by the Series A Conversion Price, in the case of Series B Preferred by dividing $3.804 by the Series B Conversion Price, in the case of the Series C Preferred by dividing $4.94 by the Series C Conversion Price, in the case of the Series D Preferred by dividing $5.94 by the Series D Conversion Price, in the case of the Series E Preferred by dividing $7.94 by the Series E Conversion Price, and in the case of Series F Preferred by dividing $17.40 by the Series F Conversion Price determined in each case as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred ("SERIES A CONVERSION PRICE") shall initially be $1.9025 per share of Common Stock. The price at which shares of Common Stock shall be delivered upon conversion of the Series B Preferred ("SERIES B CONVERSION PRICE") shall initially be $1.902 per share of Common Stock. The price at which shares of Common Stock shall be delivered upon conversion of the Series C Preferred ("SERIES C CONVERSION PRICE") shall initially be $2.47 per share of Common Stock. The price at which shares of Common Stock shall be delivered upon conversion of the Series D Preferred ("SERIES D CONVERSION PRICE") shall initially be $2.97 per share of Common Stock. The price at which shares of Common Stock shall be delivered upon conversion of the Series E Preferred ("SERIES E CONVERSION PRICE") shall initially be $3.97 per share of Common Stock. The price at which shares of Common Stock shall be deliverable upon conversion of the Series F Preferred ("SERIES F CONVERSION PRICE") shall initially be $8.70 per share of Common Stock. The term "Conversion Price" as used herein shall refer to the respective Conversion Price of each series of Preferred Stock. Upon conversion, all declared and unpaid dividends on the Preferred Stock shall be paid either in cash or in shares of Common Stock of the Corporation, at the election of the Corporation, wherein the shares of Common Stock shall be valued at the fair market value at the time of such conversion, as determined by the Board of Directors of the Corporation. (b) Automatic Conversion. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price: (i) Upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share (prior to underwriter commissions and offering expenses) of: (1) with respect to the -4- 5 Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, not less than $3.50 per share (appropriately adjusted for any recapitalization) and an aggregate offering price to the public of not less than $7,000,000 and (2) with respect to the Series F Preferred, $8.70 per share (appropriately adjusted for any recapitalization) and an aggregate offering price to the public of not less than $10,000,000. In the event of the automatic conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities; or (ii) With respect to the Series F Preferred on the date immediately after the Price (as defined below) of the Common Stock of the Corporation remains at or above $8.70 per share for thirty (30) consecutive trading days on any established stock exchange or national market system. "Price" shall be the closing sale price for the Corporation's Common Stock (or the closing bid, if no sales were reported) as quoted on any established stock exchange or a national market system including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, for the last market trading day prior to the time of determination as reported in the Wall Street Journal. (c) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value at the time of such conversion, as determined by the Board of Directors of the Corporation. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall -5- 6 be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, or in the case of automatic conversion on the date of closing of the offering, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (d) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 4(d), the following definitions shall apply: (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean October 13, 1989. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the 920,000 shares of Series A Preferred, 919,400 shares of Series B Preferred, 260,785 shares of Series C Preferred, 300,000 shares of Series D Preferred, 500,000 shares of Series E Preferred, or 574,333 shares of Series F Preferred authorized herein) or other securities convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable at any time: (A) upon conversion of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred, or Series F Preferred; (B) to officers, directors, and employees of, and consultants to, the Corporation on terms approved by the Board of Directors; (C) as a dividend or distribution on Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred, or Series F Preferred or any event for which adjustment is made pursuant to subparagraph (d)(vi) hereof; (D) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (A), (C), or this clause (D) or on shares of Common Stock so excluded. (E) upon conversion of any convertible notes which were issued by the Company prior to December 1, 1989. -6- 7 (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular share of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue, for such share of Preferred Stock. (iii) Deemed Issue of Additional Shares of Common Stock. (1) Options and Convertible Securities. Except as otherwise provided in Section 4(d)(ii), in the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities that shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if; -7- 8 (I) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount that exceeds the lower of (i) the Conversion Price on the original adjustment date or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options that expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (2) Stock Dividends. In the event the Corporation at any time or from time to time after the Original Issue Date shall declare or pay any dividend on the Common Stock payable in Common Stock, then and in any such event, Additional Shares of Common Stock shall be deemed to have been issued immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend; provided, however, that if such record date is fixed and such dividend is not fully paid, the only Additional Shares of Common Stock deemed to have been issued will be the number of shares of Common Stock actually issued in such dividend, and such shares will be deemed to have been issued as of the close of business on such record date, and the Conversion Price shall be recomputed accordingly. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this Corporation shall issue Additional Shares of Common Stock without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding -8- 9 immediately prior to such issue plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for purposes of this Section 4(d)(iv), all shares of Common Stock issuable upon conversion of all outstanding shares of Preferred Stock and all outstanding Convertible Securities, and upon exercise of all outstanding Options (excluding shares of Common Stock issuable upon the exercise of outstanding options granted to officers, directors, and employees of, and consultants to, the Corporation on terms approved by the Board of Directors), shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 4(d)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this Section 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common stock shall be computed as follows: (1) Cash and Property. Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration that covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (2) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the -9- 10 exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (3) Stock Dividends. Any Additional Shares of Common Stock relating to stock dividends shall be deemed to have been issued for no consideration. (vi) Adjustments for Subdivisions, Combinations or Consolidation of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock split or otherwise), into a greater number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (vii) Adjustments for Other Distributions. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of the Corporation other than shares of Common Stock and other than as otherwise adjusted in this Section 4 or as otherwise provided in Section l(b), then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Preferred Stock. (viii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock that the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before that change. -10- 11 (e) No Impairment. Except as provided in Section 5, the Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (g) Notices of Record Date. In the event that this Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all of its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and -11- 12 (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Preferred Stock at the address for each such holder as shown on the books of this Corporation. 5. Covenants (a) In addition to any other rights provided by law, so long as any shares of Preferred Stock shall be outstanding, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the then outstanding shares of Preferred Stock voting together as a class: (i) amend or repeal any provision of, or add any provision to, this Corporation's Certificate of Incorporation (except for the filing with the Delaware Secretary of State of any Certificate of Designation that is not within the meaning of Section 5(a)(ii) below) if such action would materially and adversely directly alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, any Preferred Stock; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends or assets superior to or on parity with any such preference or priority of the Preferred Stock; (iii) merge or consolidate with any other corporation or sell, lease or convey all or substantially all of the assets of the Corporation; or (iv) pay or declare any dividend on the shares of Common Stock. (b) In addition to any other rights provided by law, so long as any shares of Preferred Stock shall be outstanding, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the then outstanding shares of Preferred Stock and Common Stock voting together as a single class, issue shares of Preferred Stock of any series in excess of 920,000 shares of Series A Preferred, 919,400 shares of Series B Preferred, 260,785 shares of Series C Preferred, 300,000 shares of Series D Preferred, 500,000 shares of Series E Preferred and 574,333 shares of Series F Preferred. (c) In addition to any other rights provided by law, so long as any shares of Series F Preferred shall be outstanding, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the then outstanding shares of -12- 13 Series F Preferred voting as a single class, issue shares of Series F Preferred in excess of 574,333 shares of Series F Preferred. FIFTH: "Qualified Public Offering" as used in this Certificate of Incorporation shall mean the Corporation's initial firm commitment underwritten public offering pursuant to an effective registration under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the closing of a Qualified Public Offering, and at such time as the securities of the Corporation are (i) listed on the New York Stock Exchange or the American Stock Exchange or (ii) designated as qualified for trading as a national market security on the National Association of Securities Dealers Automatic Quotation System (or any successor national market system) if the Corporation has a least 800 holders of its equity securities as of the record date of its most recent annual meeting of stockholders: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors and not by the -13- 14 stockholders. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. 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 the vacancy occurred and until such director's successor shall have been elected and qualified. 2. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend, or repeal the Bylaws of the Corporation. 3. The directors of the Corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. 4. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. 5. Advance notice of stockholder nomination for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. 6. Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the President, (iii) the Chief Executive Officer, (iv) the Board of Directors or (v) the holders of shares entitled to cast not less than forty percent (40%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. SEVENTH: 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 upon the stockholders herein are granted subject to this right. EIGHTH: Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, this Certificate of Incorporation or any Certificate of Designation, the affirmative vote of the holders of at least sixty-six and two- thirds percent (66-2/3%) of the voting power of all of the -14- 15 then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Article Fifth or this Article Eighth. NINTH: The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. A director of the corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article Ninth shall be prospective and shall not affect the rights under this Article Ninth in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. -15- EX-3.2 6 FORM OF CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PROBUSINESS SERVICES, INC. FIRST: The name of the corporation is ProBusiness Services, Inc. (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: This Corporation is authorized to issue two classes of shares to be designated, respectively, Common Stock and Preferred Stock. The total number of shares of capital stock that the Corporation is authorized to issue is sixty-five million (65,000,000). The total number of shares of Common Stock this corporation shall have authority to issue is sixty million (60,000,000), $0.001 par value, and the total number of shares of Preferred Stock this corporation shall have authority to issue is five million (5,000,000), $0.00l par value. The undesignated Preferred Stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being hereby expressly vested in the Board). The Board of Directors is further authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, may increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. FIFTH: "Qualified Public Offering" as used in this Certificate of Incorporation shall mean the Corporation's initial firm commitment underwritten public offering pursuant to an effective registration under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and 2 regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the closing of a Qualified Public Offering, and at such time as the securities of the Corporation are (i) listed on the New York Stock Exchange or the American Stock Exchange or (ii) designated as qualified for trading as a national market security on the National Association of Securities Dealers Automatic Quotation System (or any successor national market system) if the Corporation has a least 800 holders of its equity securities as of the record date of its most recent annual meeting of stockholders: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. 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 the vacancy occurred and until such director's successor shall have been elected and qualified. -2- 3 2. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend, or repeal the Bylaws of the Corporation. 3. The directors of the Corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. 4. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent. 5. Advance notice of stockholder nomination for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. 6. Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the President, (iii) the Chief Executive Officer, (iv) the Board of Directors or (v) the holders of shares entitled to cast not less than forty percent (40%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. SEVENTH: 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 upon the stockholders herein are granted subject to this right. EIGHTH: Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, this Certificate of Incorporation or any Certificate of Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Article Fifth or this Article Eighth. NINTH: The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. A director of the corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability -3- 4 (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article Ninth shall be prospective and shall not affect the rights under this Article Ninth in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. -4- EX-3.3 7 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.3 BYLAWS OF PROBUSINESS SERVICES, INC. (A DELAWARE CORPORATION) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the Certificate of Incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 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 registered office of the corporation. 2.2 ANNUAL MEETING (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stock holders shall be held on the second Wednesday in November of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2 (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (B) otherwise properly brought before the meeting by or at the direction of the board of directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the -2- 3 corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 2.2. At the request of the board of directors, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrants, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by (i) the chairman of the Board of Directors, (ii) the president, (iii) the chief executive officer, (iv) the Board of Directors, or (v) the holders of shares entitled to cast not less than forty percent (40%) of the votes at the meeting, but such special meetings may not be called by any other person or persons. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the chief executive officer, the president, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.5 and 2.6, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than ten (10) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 ORGANIZATION Meetings of stockholders shall be presided over by the chairman of the board, if any, or in his absence by the vice chairman of the board, if any, or in his absence by the chief executive officer, if any, or in his absence by the president, if any, or in his absence a vice president, or in the absence of the -3- 4 foregoing persons by a chairman designated by the board of directors, or in the absence of such designation by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 2.5 NOTICE OF STOCKHOLDERS' MEETINGS Except as set forth in Section 2.3, all notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that stockholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The presence in person or by proxy of the holders of a majority the voting power of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of stockholders; provided, however, that in the case of any vote to be taken by classes, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class shall constitute a quorum for the transaction of business by such class. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action -4- 5 taken (other than adjournment) is approved by at least a majority of the voting power of the shares required to constitute a quorum. 2.8 ADJOURNED MEETING; NOTICE Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the voting power of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.7 of these Bylaws. When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than thirty (30) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.5 and 2.6 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.9 VOTING Voting at any meeting of stockholders need not be by ballot; provided, however, that elections for directors shall be by written ballot, unless otherwise provided for in the Certificate of Incorporation. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Each stockholder shall be entitled to that number of votes for each share held as it set forth in the Certificate of Incorporation of the corporation, as amended or restated, or in the resolution or resolutions adopted by the board of directors providing for the issuance of such stock, except as may otherwise be required by law. Any stockholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. If a quorum is present, the affirmative vote of the voting power of the shares represented, in person or by proxy, and voting at a duly held meeting (which shares voting affirmatively also -5- 6 constitute at least a majority of the voting power of the required quorum) shall be the act of the stockholders, unless the vote of a greater number or a vote by classes is required by law or by the Certificate of Incorporation. 2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of stockholders. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. The record date for any other purpose shall be as provided in Article VIII of these Bylaws. 2.12 PROXIES Every person entitled to vote for Directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and -6- 7 filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the secretary of the corporation. 2.13 INSPECTORS OF ELECTION Before any meeting of stockholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more stockholders or proxies, then the holders of a majority of the voting power of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. -7- 8 ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER AND TERM OF OFFICE The authorized number of directors shall be five (5). An indefinite number of directors may be fixed, or the definite number of directors may be changed, by a duly adopted amendment to the Certificate of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the voting power of the outstanding shares entitled to vote or by resolution of a majority of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. 3.3 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the chief executive officer, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Unless otherwise provided in the Certificate of Incorporation or these Bylaws: -8- 9 (i) Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. (ii) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (iii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the then outstanding shares having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.4 REMOVAL Subject to any limitations imposed by law, and unless otherwise provided in the Certificate of Incorporation, the board of directors, or any individual director, may be removed from office at any time by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding shares of the capital stock of the corporation entitled to vote at an election of directors. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE -9- 10 Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board of directors. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the chief executive officer, the president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least seven (7) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not -10- 11 specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.9 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.12 of these Bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the Certificate of Incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.10 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.11 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.12 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given if announced unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.8 of these Bylaws, to the directors who were not present at the time of the adjournment. 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board of directors individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a -11- 12 unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.14 ORGANIZATION Meetings of the board of directors shall be presided over by the chairman of the board, if any, or in his absence by the vice chairman of the board, if any, or in his absence by the chief executive officer, or in his absence, the president, or in their absence by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. 3.15 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.15 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.16 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board of directors. The board of directors may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the -12- 13 vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, but no such committee shall have the power or authority to (i) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251, 252, 255, 256, 257, 258, 263 or 264 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.5 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section 3.13 (action without meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. -13- 14 ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a chairman of the board, a chief executive officer, a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these Bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the chief executive officer to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. -14- 15 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall serve as the corporation's general manager, and shall have general supervision, direction and control of the corporation's business and its officers, and, if present, preside at meetings of the stockholders and the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. If there is no chief executive officer, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws. The chairman of the board shall report to the board of directors. 5.7 CHIEF EXECUTIVE OFFICER 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 chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these Bylaws. 5.8 PRESIDENT The president may assume and perform the duties of the chief executive officer in the absence or disability of the chief executive officer or chairman of the board or whenever the office of the chief executive officer or chairman of the board is vacant. The president of the corporation shall exercise and perform such powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. The president shall have authority to execute in the name of the corporation bonds, contracts, deeds, leases and other written instruments to be executed by the corporation. In the absence or nonexistence of the chairman of the board or chief executive officer, he shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board or the chief executive officer, at all meetings of the board of directors and shall perform such other duties as the board of directors may from time to time determine. 5.9 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president 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 powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these Bylaws, the chairman of the board or the chief executive officer. -15- 16 5.10 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these Bylaws. 5.11 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these Bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS -16- 17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the board of directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the General Corporation Law of Delaware or (iv) such indemnification is required to be made pursuant to an individual contract. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may 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 or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. -17- 18 6.4 EXPENSES The corporation shall advance to 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, by reason of the fact that he or she is or was a director or officer, of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to Section 6.5, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation 6.5 NON-EXCLUSIVITY OF RIGHTS The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, 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 office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the General Corporation Law of Delaware. 6.6 SURVIVAL OF RIGHTS The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -18- 19 6.7 AMENDMENTS Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) 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 business hours, for a period of at least ten (10) 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. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position -19- 20 as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS 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. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action (other than action by stockholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. -20- 21 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares 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 chief executive officer or the president or vice-president, and by the chief financial officer, the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. 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 has 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 or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. -21- 22 8.5 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, 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 that 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, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board of directors may require; the board of directors may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS Subject to Section 6.7 hereof, the Bylaws of the corporation may be adopted, amended or repealed and new Bylaws adopted by the affirmative vote of stockholders holding a majority of the voting power of stock entitled to vote or by the board of directors. -22- 23 ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the voting power of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever stockholders holding a majority of the voting power of stock entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: -23- 24 (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. -24- 25 BYLAWS OF PROBUSINESS SERVICES, INC. (A DELAWARE CORPORATION) 26 TABLE OF CONTENTS
PAGE ---- ARTICLE I CORPORATE OFFICES......................................................... 1 1.1 REGISTERED OFFICE................................................ 1 1.2 OTHER OFFICES.................................................... 1 ARTICLE II MEETINGS OF STOCKHOLDERS.................................................. 1 2.1 PLACE OF MEETINGS................................................ 1 2.2 ANNUAL MEETING................................................... 1 2.3 SPECIAL MEETING.................................................. 3 2.5 NOTICE OF STOCKHOLDERS' MEETINGS................................. 4 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..................... 4 2.7 QUORUM........................................................... 4 2.8 ADJOURNED MEETING; NOTICE........................................ 4 2.9 VOTING........................................................... 5 2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT................ 5 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS...... 6 2.12 PROXIES.......................................................... 6 2.13 INSPECTORS OF ELECTION........................................... 7 ARTICLE III DIRECTORS................................................................. 8 3.1 POWERS........................................................... 8 3.2 NUMBER AND TERM OF OFFICE........................................ 8 3.3 RESIGNATION AND VACANCIES........................................ 8 3.4 REMOVAL.......................................................... 9 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE......................... 9 3.6 FIRST MEETINGS................................................... 10 3.7 REGULAR MEETINGS................................................. 10 3.8 SPECIAL MEETINGS; NOTICE......................................... 10
-i- 27 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 3.9 QUORUM........................................................ 10 3.10 WAIVER OF NOTICE.............................................. 11 3.11 ADJOURNMENT................................................... 11 3.12 NOTICE OF ADJOURNMENT......................................... 11 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 11 3.14 ORGANIZATION.................................................. 11 3.15 FEES AND COMPENSATION OF DIRECTORS............................ 11 3.16 APPROVAL OF LOANS TO OFFICERS................................. 12 ARTICLE IV COMMITTEES............................................................. 12 4.1 COMMITTEES OF DIRECTORS....................................... 12 4.2 MEETINGS AND ACTION OF COMMITTEES............................. 13 ARTICLE V OFFICERS............................................................... 14 5.1 OFFICERS...................................................... 14 5.2 ELECTION OF OFFICERS.......................................... 14 5.3 SUBORDINATE OFFICERS.......................................... 14 5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... 14 5.5 VACANCIES IN OFFICES.......................................... 14 5.6 CHAIRMAN OF THE BOARD......................................... 15 5.7 CHIEF EXECUTIVE OFFICER....................................... 15 5.9 VICE PRESIDENTS............................................... 15 5.10 SECRETARY..................................................... 16 5.11 CHIEF FINANCIAL OFFICER....................................... 16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS..... 16 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 16 6.2 INDEMNIFICATION OF OTHERS..................................... 17 6.3 INSURANCE..................................................... 17 6.4 EXPENSES...................................................... 18 6.5 NONEXCLUSIVITY OF RIGHTS...................................... 18 6.6 SURVIVAL OF RIGHTS............................................ 18
-ii- 28 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 6.7 AMENDMENTS.................................................... 19 ARTICLE VII RECORDS AND REPORTS.................................................... 19 7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... 19 7.2 INSPECTION BY DIRECTORS....................................... 19 7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............................. 20 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ 20 ARTICLE VIII GENERAL MATTERS........................................................ 20 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING......... 20 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..................... 21 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED............ 21 8.4 STOCK CERTIFICATES; PARTLY PAID SHARES........................ 21 8.5 SPECIAL DESIGNATION ON CERTIFICATES........................... 22 8.6 LOST CERTIFICATES............................................. 22 8.7 CONSTRUCTION; DEFINITIONS..................................... 22 ARTICLE IX AMENDMENTS............................................................. 22 ARTICLE X DISSOLUTION............................................................ 23 ARTICLE XI CUSTODIAN.............................................................. 23 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................... 23 11.2 DUTIES OF CUSTODIAN........................................... 24
-iii- EX-4.2 8 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.2 PROBUSINESS, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of this 12th day of March, 1997, by and among ProBusiness, Inc., a California corporation (the "Company"), General Atlantic Partners 39, L.P. ("GAP L.P.") and GAP Coinvestment Partners, L.P. ("GAP Coinvestment") (collectively, the "Purchasers"), and the Holders (as defined in the Registration Rights Agreement, dated December 1, 1989, as amended, between the Company and the Original Holders) (the "Original Holders"). RECITALS A. The Company and the Original Holders entered into the Original Agreement which provided the Original Holders with certain registration rights on the Common Stock issued or issuable to such Original Holders upon conversion of Preferred Stock or warrants to purchase Preferred Stock of the Company held by such Original Holders. B. In connection with the purchase and sale of the Company's Series F Preferred Stock to the Purchasers pursuant to the Series F Preferred Stock Purchase Agreement (the "Stock Purchase Agreement") dated the date hereof between the Company and the Purchasers, the Company and the Purchasers desire to provide for certain registration rights on the Common Stock issuable to the Purchasers upon conversion of the Series F Preferred Stock issued to them under the Stock Purchase Agreement. C. Pursuant to Section 2.4 of the Original Agreement, the Original Agreement can be amended by a writing signed by the Company and the Original Holders of a majority of the Registerable Securities (as defined in the Original Agreement). D. The Company, the Purchasers and the Original Holders of a majority of the Registerable Securities (as defined in the Original Agreement) wish to amend and restate the Original Agreement. In consideration of the mutual covenants set forth herein, the parties hereby agree to amend and restate the Original Agreement as follows: 1. Restrictions on Transferability of Securities; Compliance with Securities Act. 1.1 Restrictions on Transferability. The Registrable Securities (as defined herein) shall not be transferable except upon the conditions specified in this Section 1, which conditions are 2 intended to ensure compliance with the provisions of the Securities Act. Each Holder (as defined herein) will cause any proposed transferee of the Registrable Securities held by a Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 1. 1.2 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Affiliate" shall mean, with respect to any Person, any other Person who controls, is controlled by or is under common control with such Person. In addition, the following shall be deemed to be Affiliates of GAP L.P.: (a) General Atlantic Partners, L.L.C. ("GAP LLC"), the members of GAP LLC and the limited partners of GAP L.P.; (b) any Affiliate of GAP LLC, the members of GAP LLC and the limited partners of GAP L.P.; and (c) any limited liability company or partnership a majority of whose members or partners, as the case may be, are members of GAP LLC. In addition, GAP L.P. and GAP Coinvestment shall be deemed to be Affiliates of one another. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Holder" shall mean (i) the Purchasers; (ii) the holders of Series A, Series B, Series C, Series D and Series E Preferred Stock or warrants to purchase Series E Preferred Stock except for Silicon Valley Bank and Coast Business Credit; (iii) any transferee under Section 1.15 hereof; or (iv) any person made a party to this Agreement pursuant to Section 2.6 hereof, as long as the aforementioned hold outstanding Registrable Securities or Registrable Securities that have not been transferred without complying with Section 1.15 hereof or of the Original Agreement, or have not been sold to the public. "Initial Public Offering" shall have the meaning as set forth in Section 1.11.2. "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Registrable Securities" means (i) shares of the Company's Common Stock issued or issuable pursuant to the conversion of the Company's Preferred Stock and (ii) any Common Stock of the Company issued or issuable in respect of the shares of the Company's Common Stock or other securities issued or issuable pursuant to the conversion of the Company's Preferred Stock, upon any stock split, stock dividend, recapitalization, or similar event; provided, however, Registerable Securities shall not include any such shares that were transferred by a Holder to a transferee that did not comply with Section 1.15 hereof or of the Original Agreement. -2- 3 The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred in complying with Sections 1.5, 1.6 and 1.7 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, 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). "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 1.3 hereof (or any similar legend). "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and all fees and disbursements of counsel for any Holder. 1.3 Restrictive Legend. Each certificate representing shares of Registrable Securities shall (unless otherwise permitted by the provisions of Section 1.4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION." 1.4 Notice of Proposed Transfers. The Holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this -3- 4 Section 1.4. Prior to any proposed transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder thereof shall give written notice to the Company of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Company so requests, be accompanied (except in transactions in compliance with Rule 144) by either (i) an unqualified written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the Holder to the Company; provided, however, that no opinion or no action letter need be obtained with respect to a transfer to (A) a partner, active or retired, of a Holder, (B) the estate of any such partner, or (C) an Affiliate of a Purchaser, if the transferee agrees to be subject to the terms hereof. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 1.3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. 1.5 Requested Registration. 1.5.1 Request for Registration. In case the Company shall receive from any Holder or Holders of greater than fifty percent (50%) of the Registrable Securities then outstanding a written request that the Company effect any registration, qualification or compliance with respect to thirty percent (30%) or more of the Registrable Securities, or with respect to a lesser number of shares of Registrable Securities if the reasonably anticipated aggregate sales price to the public of the shares proposed to be sold, net of underwriting discounts and commissions, exceeds $7,000,000, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its diligent efforts to effect such registration, qualification or compliance (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 and any other governmental requirements or regulations) 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 twenty (20) days after receipt of such written notice from the -4- 5 Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.5.1: (A) 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, Blue Sky or other state securities laws; (B) After the Company has effected two such registrations pursuant to this subparagraph 1.5.1, such registrations have been declared or ordered effective and the securities offered pursuant to such registrations have been sold; (C) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date one hundred eighty (180) days immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) If the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 1.5.1 shall be deferred for a period not to exceed 180 days from the date of receipt of written request from the Holders referred to in Section 1.5.1 above; or (E) If the Company and the Holders are unable to obtain the commitment of the underwriter selected by the Holders (subject to the consent of the Company, which shall not be unreasonably withheld) to firmly underwrite the offer. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Holder or Holders. 1.5.2 Purchasers' Request for Registration. In case the Company shall receive from any Purchaser or Purchasers holding Registerable Securities then outstanding a written request that the Company effect any registration, qualification or compliance with respect to Registrable Securities with a reasonably anticipated aggregate sales price to the public of shares proposed to be sold, net of underwriting discounts and commissions, exceeding $7,000,000, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and -5- 6 (ii) as soon as practicable, use its diligent efforts to effect such registration, qualification or compliance (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 and any other governmental requirements or regulations) 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 twenty (20) days after receipt of such written notice from the Company; Provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.5.2: (A) 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, Blue Sky or other state securities laws; (B) Prior to two (2) years after an Initial Public Offering of the Company; (C) After the Company has effected one (1) such registration pursuant to this subparagraph 1.5.2, such registration has been declared or ordered effective and the securities offered pursuant to such registration have been sold; (D) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date one hundred eighty (180) days immediately following the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (E) If the Company shall furnish to Purchasers a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 1.5.2 shall be deferred for a period not to exceed 180 days from the date of receipt of written request from Purchasers; or (F) If the Company and the Purchasers are unable to obtain the commitment of the underwriter selected by Purchasers (subject to the consent of the Company, which shall not be unreasonably withheld) to firmly underwrite the offer. -6- 7 Subject to the foregoing clauses (A) through (F), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request of the Purchasers. 1.5.3 Underwriting. In the event a registration pursuant to Section 1.5 is for a registered public offering involving an underwriting, the Company shall so advise the Holders in the written notice referred to in Sections 1.5.1(i) and 1.5.2(i). The right of any Holder to registration pursuant to Section 1.5 shall be conditioned upon such Holder's participation in such underwriting, and the inclusion of such Holder's Registrable Securities in the underwriting shall be limited to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by (i) a majority in interest of the Holders (subject to the consent of the Company which shall not be unreasonably withheld) in connection with a registration pursuant to Section 1.5.1, or (ii) the Purchasers (subject to the consent of the Company which shall not be unreasonably withheld) in connection with a registration pursuant to Section 1.5.2. Notwithstanding any other provision of this Section 1.5, if the managing underwriter advises the Holders or Purchasers, as the case may be, initiating the registration in writing that marketing factors require a limitation of the number of shares to be underwritten, then, subject to the provisions of Sections 1.5.1 and 1.5.2, the Company shall so advise all Holders and the number of shares that may be included in the registration and underwriting shall be allocated (i) in the case of a registration pursuant to Section 1.5.1, among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement and (ii) in the case of a registration pursuant to Section 1.5.2, (A) first among the Purchasers in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Purchasers at the time of filing the registration statement and (B) second to the extent available, to any Holder other than a Purchaser in proportion, as nearly as practicable, to the respective amounts of Registerable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder or holder to the nearest 100 shares. If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the other Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 1.5.3. Any securities excluded or withdrawn from such underwriting shall be withdrawn from -7- 8 such registration, and shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require; provided however, with respect to any Purchaser, for any registration after the date two years after an Initial Public Offering of the Company, such Purchaser shall only be subject to the transfer restrictions contained in this Section 1.5.3 if they register shares in such registration. 1.6 Company Registration. 1.6.1 Notice of Registration. If at any time after the completion of the Company's initial public offering the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) 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 within 20 days after receipt of such written notice from the Company, by any Holder or Holders, or by any other holders of the securities granted registration rights by the Company. 1.6.2 Underwriting. In the event the Company gives notice of a registered public offering pursuant to Section 1.6 involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.6.1. In such event the right of any Holder to registration pursuant to Section 1.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting shall be subject to the limitations provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.6, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of securities to be included in the secondary portion of such registration. The Company shall so advise all Holders and the other holders distributing their securities through such underwriting, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all holders thereof in proportion, as nearly as practicable, to the respective amounts of securities entitled to inclusion in such registration held by all such holders at the time of filing the registration statement. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Holder or holder to the nearest 100 shares. If any Holder or holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be -8- 9 withdrawn from such registration, and shall not be transferred in a public distribution prior to one hundred eighty (180) days after the effective date of the registration statement relating thereto, or such other shorter period of time as the underwriters may require; provided however, with respect to any Purchaser, for any registration after the date two years after an Initial Public Offering of the Company, such Purchaser shall only be subject to the transfer restrictions contained in this Section 1.6.2 if they register shares in such registration. 1.6.3 Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.6 prior to the effectiveness of such registration whether or not any Holder or holder has elected to include securities in such registration. 1.7 Registration on Form S-3. 1.7.1 If any Holder or Holders request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of Registrable Securities the reasonably anticipated aggregate price to the public of which would exceed $1,500,000 and the Company is entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than one registration pursuant to this Section 1.7 in any twelve (12) month period or in excess of two registrations under this Section 1.7. 1.7.2 Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 1.7: (i) 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, Blue Sky or other state securities laws; (ii) during the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date six (6) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) if the Company shall furnish to such Holder a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for registration statements to be filed in the near future, in which event the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed one hundred eighty (180) days from the receipt of the request to file such registration by such Holder. 1.8 Expenses of Registration. All Registration Expenses incurred in connection with two registrations, qualifications or compliance pursuant to Section 1.5.1 or pursuant to Sections 1.6 and 1.7, shall be borne by the Company. Registration Expenses incurred in connection -9- 10 with a registration, qualification or compliance pursuant to Section 1.5.2 shall be borne by the Purchasers unless either (i) the Company registers shares for its own account or (ii) Holders (other than the Purchasers) holding greater than 20% of the Registerable Securities register shares in connection with such registration, qualification or compliance, in which case the Company shall bear all Registration Expenses associated with the registration, qualification or compliance. Unless otherwise stated, all Selling Expenses relating to securities registered by the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 1.9 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: 1.9.1 Keep such registration, qualification or compliance effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and 1.9.2 Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. 1.10 Termination of Registration Rights. The registration rights granted pursuant to this Section 1 shall terminate as to each Holder at such time as all Registrable Securities acquired by such Holder pursuant to this Agreement can be sold within a given three-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 or other applicable exemption supported by a written opinion of legal counsel for the Company which shall be reasonably satisfactory in form and substance to legal counsel for such Holder. 1.11 Lock-up Agreement. 1.11.1 In consideration for the Company agreeing to its obligations under this Section 1, each Holder, other than a Purchaser, and each transferee of any such Holder pursuant to Section 1.15 hereof agrees (but only if each officer, director, shareholder owning beneficially ten percent (10%) or more of the Company's equity securities, and each shareholder selling shares in such offering also agrees), in connection with any registration of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities or other securities of the Company (other than those included in the registration) without the prior written consent of the underwriters, for one hundred eighty (180) days from the date of the final prospectus related to the offering. The Company may impose stop-transfer instructions with respect to such securities subject to the foregoing restriction until the end of said period. 1.11.2 In consideration for the Company agreeing to its obligations under this Section 1, each Purchaser and each transferee of such Purchaser pursuant to Section 1.15 hereof agrees (but only if each officer, director, shareholder owning beneficially ten percent (10%) or more -10- 11 of the Company's equity securities, and each shareholder selling shares in such offering also agrees), in connection with the first registration (an "Initial Public Offering") of the Company's securities for its own account to be offered to the general public (other than a registration relating to a Rule 145 transaction or with respect to an employee benefit plan) and in connection with any subsequent registration of the Company's securities that occurs within the two-year period after the closing of an Initial Public Offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities or other securities of the Company (other than those included in the registration) without the prior written consent of the underwriters, for one hundred eighty (180) days from the date of the final prospectus related to the offering. The Company may impose stop-transfer instructions with respect to such securities subject to the foregoing restriction until the end of said period. 1.12 Indemnification. 1.12.1 The Company will indemnify each Holder, each of its officers, directors and partners, such Holder's legal counsel and independent accountants, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, 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, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or of any rule or regulation promulgated under the Securities Act 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 such Holder, each of its officers, directors and partners, each person controlling such Holder, and each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or 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 or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. 1.12.2 Each Holder will, if Registrable Securities held by such Holder 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, its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of such Holder's officers and directors and each person controlling such Holder within the meaning of -11- 12 Section 15 of the Securities Act, 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, or 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, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters and 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 an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein, unless such liability arises out of or is based upon willful conduct of such Holder. 1.12.3 Each party entitled to indemnification under this Section 1.12 (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 claim or litigation, 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, 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 Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. 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. 1.13 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.14 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: -12- 13 1.14.1 Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after 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; 1.14.2 Use its best efforts then to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") (at any time after it has become subject to such reporting requirements); 1.14.3 So long as a Holder owns any Restricted Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of an Initial Public Offering) and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 1.15 Transfer of Registration Rights. The rights to cause the Company to register securities granted Holders under Sections 1.5, 1.6 and 1.7 may be assigned to a transferee or assignee in connection with transfer or assignment of not less than twenty percent (20%) of the Restricted Securities originally acquired by a Holder pursuant to this Agreement, provided that (i) the Company is given written notice of such assignment at least thirty (30) days prior to such assignment, and (ii) such proposed transferee or assignee is acceptable to the Company, which acceptance shall not be unreasonably withheld. In addition, rights to cause the Company to register securities may be freely assigned to any constituent partner of a Holder, where such Holder is a partnership, or to any parent or subsidiary corporation or any officer, director or principal shareholder thereof, where such Holder is a corporation, or to any Affiliate of a Holder. For the purposes of this Section 1.15, all shares of Restricted Securities transferred to former partners or Affiliates of any Holder that is an institutional investor may be aggregated in meeting any minimum number of shares required to be held by such Holder, or partners, former partners or Affiliates thereof. 2. Miscellaneous. 2.1 No Inconsistent Agreements. The Company shall not, after the date hereof, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or grant any additional registration rights to any Person or with respect to any securities which are not Registrable Securities which are prior in right to or inconsistent with the rights granted in this Agreement, except as provided in Section 2.6. 2.2 Remedies. The Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate -13- 14 compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate. 2.3 Governing Law. This Agreement shall be governed in all respects by and construed in all respects in accordance with the laws of the State of California. 2.4 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, transferees, executors and administrators of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The Company shall use commercially reasonable efforts to attempt to cause its successors or assigns (whether by merger, consolidation or otherwise) to enter into a new registration rights agreement with the Holders on terms substantially similar to this Agreement as a condition of such transaction. 2.5 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to registration rights and shall supersede all previous registration rights contained in any agreement(s) previously entered into between the parties hereto. 2.6 Amendment and Waiver. This Agreement, or any provision hereof, may be amended or waived only in writing signed by (i) the Company, (ii) each Purchaser and (iii) Holders of a majority of the Registrable Securities, and any amendment or waiver so approved shall be binding upon all Holders (including any transferee of Registerable Securities); provided, however, that during any twelve-month period, the Company may, upon approval by the Board of Directors of the Company, at any time and from time to time, amend this Agreement, without the consent of the Purchasers and the Holders of a majority of the Registrable Securities, to add as parties to and Holders under this Agreement any holders of the Company's Registrable Securities as long as (i) the number of securities held by such holders, in the aggregate does not exceed one percent (1%) of the Company's outstanding capital stock and (ii) such new Holder shall be granted identical rights provided to the Holders that are not Purchasers. Outstanding capital stock of the Company shall be calculated as if all of the Company's outstanding convertible securities (including preferred stock, options and warrants) had been exercised or converted into Common Stock. 2.7 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to the Company or to any Holder upon any breach or default of any party hereto under this Agreement shall impair any such right, power or remedy of the Company or such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of the Company or any Holder of any breach or default under this Agreement or any waiver on the part of the Company or -14- 15 any Holder of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to the Company or any Holder, shall be cumulative and not alternative. 2.8 Notices, etc. All notices and other communications required or permitted under this Agreement shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to a Holder or any other holder of any Registrable Securities, at such address as such Holder or holder shall have furnished the Company in writing, or, until any such Holder or holder so furnishes an address to the Company, then to and at the address of the last Holder or holder who has so furnished an address to the Company, (b) if to the Company, at the address of its principal executive officers and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Holder and (c) if to a Purchaser, at the address set forth in the Stock Purchase Agreement (including a copy to counsel as indicated therein). 2.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 2.10 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -15- 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. PROBUSINESS CENTERS, INC. By: ----------------------- Thomas H. Sinton President and Chief Executive Officer 17 PROBUSINESS, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT PURCHASERS' SIGNATURE PAGE GENERAL ATLANTIC PARTNERS, 39, L.P. GAP COINVESTMENT PARTNERS, L.P. General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, Connecticut 06830 - --------------------------------------------------- (Printed Name of Purchaser) - --------------------------------------------------- (Signature) - --------------------------------------------------- (Title, if Applicable) -17- 18 PROBUSINESS, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT ORIGINAL HOLDERS' SIGNATURE PAGE --------------------------- (Printed Name of Holder) --------------------------- (Signature) --------------------------- (Title, if Applicable) -18- EX-4.3 9 WARRANT TO PURCHASE STOCK DATED JANUARY 13, 1995 1 EXHIBIT 4.3 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK CORPORATION: PROBUSINESS CENTERS, INC, A CALIFORNIA CORPORATION NUMBER OF SHARES: 9,446 CLASS OF STOCK: SERIES E PREFERRED INITIAL EXERCISE PRICE: $7.94 PER SHARE ISSUE DATE: JANUARY 13, 1995 EXPIRATION DATE: JANUARY 13, 2000 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE. 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant Section 1.4. 1.3 INTENTIONALLY OMITTED. 1.4 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day 1 2 immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On 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, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company. 1.7.1. "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3. Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of his Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. 1.7.4. Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon 2 3 the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 3 4 2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the factional interest by the fair market value of a full Share. 2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any 4 5 class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements [or if the subjet loan(s) no longer are outstanding]), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached. ARTICLE 4. MISCELLANEOUS. 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, 5 6 PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder s notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 6 7 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" PROBUSINESS CENTERS, INC. By: /s/ Thomas H. Sinton ------------------------------------- Name: Thomas H. Sinton ----------------------------------- (Print) Title: Chairman of the Board, President, or Vice President By: /s/ Mitchell Everton ------------------------------------- Title: EVP - OPERATIONS & ASST SECRETARY ---------------------------------- (Print) Title: Chief Financial Officer, Secretary Assistant Treasurer, or Assistant Secretary 7 8 APPENDIX I NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase ____________ shares of the Common/Series _________ Preferred [strike one) Stock of ________________________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _______________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: __________________________ (Name) __________________________ __________________________ (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ________________________________________ (Signature) _________________________ (Date) 8 9 APPENDIX 2 Notice that Warrant Is About to Expire ____________________, ______ (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear _____________________________ This is to advise you that the Warrant issued to you described below will expire on _____________________, 19_________. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. ________________________________________ (Name of Issuer) By______________________________________ Its_____________________________________ 9 10 EXHIBIT A Anti-Dilution Provisions (For Common Stock Warrants Where Exercise Price Equals Price of Preferred Stock Which Has Anti-Dilution Protection) In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series _ Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Company's Series _ Preferred Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the "Provisions") of the Company's Articles (Certificate) of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances. The Company agrees that the Provisions, as in effect on the Issue Date, shall be deemed to remain in full force and effect during the term of the Warrant notwithstanding (a) any subsequent amendment, waiver or termination thereof by the Company's shareholders or (b) the conversion of the Preferred Stock. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. 10 11 EXHIBIT "A" SILICON VALLEY BANK ANTIDILUTION AGREEMENT THIS ANTIDILUTION AGREEMENT is entered into as of January 13, 1995, by and between Silicon Valley Bank ("Purchaser") and the Company whose name appears on the last page of this Antidilution Agreement. RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the Warrant). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; 1 12 or common stock Issued as incentive or in a nonfinancing transaction to employees, officers, directors, or consultants to the Company. (e) The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. 2. Deemed Issuance of Additional Common Shares. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. Adjustment of Warrant Price for Diluting Issuances. 3.1 Ratchet Adjustment. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced to the lesser of: (a) the amount of such consideration per Additional Common Share; or (b) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 Adjustment of Number of Shares. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 Securities Deemed Outstanding. For the purpose of this Section 3, all securities issuable upon exercise of any outstanding Convertible Securities or Options, warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 2 13 4. No Adjustment for Issuances Following Deemed Issuances. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. Adjustment Following Changes in Terms of Options or Convertible Securities. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. Recomputation Upon Expiration of Options or Convertible Securities. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. Limit on Readjustments. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 Day Options. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. Computation of Consideration. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) Cash shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) Property. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. 3 14 (c) Mixed Consideration. The consideration for Additional common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) Options and Convertible Securities. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. General. 10.1 Governing Law. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 Entire Agreement. Except as set forth below, this Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. 10.5 Severability. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 4 15 10.6 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 Counterparts. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER COMPANY SILICON VALLEY BANK PROBUSINESS CENTERS, INC. By: /s/ Illegible By: /s/ Mitchell Everton ------------------------------- ------------------------------------- Name: /s/ Illegible Name: EVP - Operations ----------------------------- ----------------------------------- (Print) (Print) Title: Vice President Title: Chairman of the Board, ---------------------------- President or Vice President Address: 3000 Lakeside Drive Address: 5934 Gibraltar -------------------------- -------------------------------- Santa Clara, CA Pleasanton, CA 94588 -------------------------- -------------------------------- 95054 -------------------------- -------------------------------- 5 16 EXHIBIT "B" SILICON VALLEY BANK REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is entered into as of January 13, 1995, by and between Silicon Valley Bank ("Purchaser") and the Company whose name appears on the last page of this Agreement. RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (if Common Stock) or all shares of Common Stock of the Company issuable or issued upon conversion of the Shares and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 1 17 1.2 Company Registration. (a) Registration. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which 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: (i) promptly give to each Holder 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 (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection 1.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. 1.3 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders participating in the offering and the Company. 2 18 1.4 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Registration Rights Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or 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. 1.5 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Rights Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, 3 19 damages and liabilities (or actions in respect thereto) arising 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 statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended, ("Exchange Act") or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder 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, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, 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, or 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, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling 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 an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall not in any event 4 20 exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this subsection 1.5 (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 claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; 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 hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. 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. 1.6 Information by Holder. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC 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 (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general 5 21 public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 Transfer of Registration Rights. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under subsections 1.2 and 1.7 may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. The Company may prohibit the transfer of any Holders' rights under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 2. General. 2.1 Waivers and Amendments. With the written consent of the record or beneficial holders of at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders of the Registrable Securities under this agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1. 2.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 2.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 Entire Agreement. Except as set forth below, this Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 6 22 2.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement or any provision of the other Agreements shall not in any way be affected or impaired thereby. 2.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 7 23 2.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER COMPANY SILICON VALLEY BANK PROBUSINESS CENTERS, INC. By: /s/ Illegible By: /s/ Mitch Everton ------------------------------- ------------------------------------- Name: Illegible Name: Mitch Everton ------------------------------- ------------------------------------- (Print) (Print) Title: Vice President Title: Chairman of the Board, President or Vice President Address: 3000 Lakeside Dr. Address: 5934 Gibraltal -------------------------- -------------------------------- Santa Clara, CA 95054 Pleasanton, CA 94588 -------------------------- -------------------------------- 8 EX-4.4(A) 10 WARRANT TO PURCHASE STOCK DATED APRIL 30, 1996 1 EXHIBIT 4.4(a) THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: ProBusiness, Inc, a California corporation Number of Shares: 9,500 Class of Stock: Series E Preferred Initial Exercise Price: $7.94 per share Issue Date: April 30, 1996 Expiration Date: April 30, 2001 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, COAST BUSINESS CREDIT ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of ProBusiness, Inc. (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 1. EXERCISE. 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 INTENTIONALLY OMITTED. 1.4 Fair Market Value. If the Shares (or the Company's Common Stock into which the Shares are convertible) are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's Common Stock into which the 2 Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares (or the Company's Common Stock into which the Shares are convertible) are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On 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, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company. 1.7.1 For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2 Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3 Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. -2- 3 1.7.4 Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time in the manner set forth on Exhibit A. In addition, the number of shares of Common Stock issuable upon -3- 4 conversion of the Shares is subject to adjustment as provided in the Company's Articles of Incorporation, as amended (the "Articles"). 2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the factional interest by the fair market value of a full Share. 2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. -4- 5 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) to offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements (or if the subject loan(s) no longer are outstanding)), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as Amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B. ARTICLE 4. MISCELLANEOUS. 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. -5- 6 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in SEC Rule 144(c), Holder represents that it has complied with SEC Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with SEC Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, as amended, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. -6- 7 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. -7- 8 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" PROBUSINESS, INC. By: ______________________________ Name: ____________________________ (Print) Title: ___________________________ -8- 9 APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase ______ shares of the Common/Series ________ Preferred [strike one] Stock of _______________________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _____________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: __________________________ (Name) __________________________ __________________________ (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. _______________________________ (Signature) __________________________ (Date) 10 APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE (Date) (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear _____________________ This is to advise you that the Warrant issued to you described below will expire on ______________________, 19___. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. _________________________________________ (Name of Issuer) By ______________________________________ Its _____________________________________ 11 EXHIBIT A ANTIDILUTION AGREEMENT THIS ANTIDILUTION AGREEMENT is entered into as of April 30, 1996, by and between Coast Business Credit ("Purchaser") and the Company whose name appears on the last page of this Antidilution Agreement. RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant in the event the Company issues Additional Common Shares (as defined below). C. Capitalized terms used herein, but not otherwise defined herein, shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; or common stock Issued as 12 incentive or in a nonfinancing transaction to employees, officers, directors, or consultants to the Company. 2. Deemed Issuance of Additional Common Shares. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. Adjustment of Warrant Price for Diluting Issuances. 3.1 Ratchet Adjustment. The number of shares of common stock into which the Shares are convertible is subject to adjustment as provided in the Company's Articles of Incorporation, as amended (the "Articles"). The adjustments provided for in this Section 3 shall be made after giving effect to any adjustment made pursuant to the Articles. For purposes of this Section 3, the term "Converted Warrant Price" shall mean the Series E Conversion Price (as defined in the Company's Articles) in effect immediately after an Issuance of Additional Common Shares. As of the date of this Antidilution Agreement the Series E Conversion Price is $3.97 per share of Common Stock. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Converted Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced to an amount equal to the product of (a) the quotient of the Warrant Price divided by Converted Warrant Price and (b) the lesser of: (i) the amount of such consideration per Additional Common Share; or (ii) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 Adjustment of Number of Shares. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price; provided however, the maximum number of Shares issuable upon exercise of the Warrant, as a result of an adjustment pursuant to this Section 3.2, shall not exceed 11,400 Shares. -2- 13 3.3 Attached as Annex 1 hereto is a copy of an example demonstrating the adjustment formulas set forth in Sections 3.1 and 3.2. 4. No Adjustment for Issuances Following Deemed Issuances. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. Adjustment Following Changes in Terms of Options or Convertible Securities. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. Recomputation Upon Expiration of Options or Convertible Securities. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. Limit on Readjustments. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 Day Options. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. Computation of Consideration. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) Cash shall be valued at the amount of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends. -3- 14 (b) Property. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) Mixed Consideration. The consideration for Additional Common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) Options and Convertible Securities. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. General. 10.1 Governing Law. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 Entire Agreement. This Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. -4- 15 10.5 Severability. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 10.6 Titles and Subtitles. The titles of the sections and subsections of this Antidilution Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 Counterparts. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -5- 16 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be executed as of the date hereof. "PURCHASER" "COMPANY" COAST BUSINESS CREDIT PROBUSINESS CENTERS, INC. By: __________________________ By: _____________________________ Name: ________________________ Name: ___________________________ (Print) (Print) Title: _______________________ Title: __________________________ Address: 12121 Wilshire Boulevard, Suite 1111 Address: 5934 Gibralter, Suite 201 Los Angeles, California 90025 Pleasanton, California 94588
-6- 17 EXHIBIT B REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of April 30, 1996, by and between Coast Business Credit ("Purchaser") and the Company whose name appears on the last page of this Agreement. RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (if Common Stock) or all shares of Common Stock of the Company issuable or issued upon conversion of the Shares and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 18 1.2 Company Registration. (a) Registration. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which 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: (i) promptly give to each Holder 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 (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, subject to such Holder's or Holders' entering into an underwriting agreement as provided in Subsection 1.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. 1.3 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except the Company shall not be required to pay underwriters fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders Participating in the offering and the Company. 1.4 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification -2- 19 and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or 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. 1.5 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and -3- 20 liabilities (or actions in respect thereto) arising 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 statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder 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, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, 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, or 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, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling 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 an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without, the consent of the Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall -4- 21 not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this subsection 1.5 (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 claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; 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 hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. 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. 1.6 Information by Holder. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC 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 -5- 22 (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after 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), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 Transfer of Registration Rights. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under this Agreement may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned. The Company may prohibit the transfer of any Holders' rights under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 2. General. 2.1 Waivers and Amendments. With the written consent of the record or beneficial Holders owning at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Registrable Securities under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1 2.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. -6- 23 2.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 Entire Agreement. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 2.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 2.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -7- 24 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be executed as of the date hereof. "PURCHASER" "COMPANY" COAST BUSINESS CREDIT PROBUSINESS, INC. By: _________________________________ By: _____________________________ Name: _______________________________ Name: ___________________________ (Print) (Print) Title: ______________________________ Title: __________________________ Address: 12121 Wilshire Boulevard, Suite 1111 Address: 5934 Gibralter, Suite 201 Los Angeles, California 90025 Pleasanton, California 94588
-8- EX-4.4(B) 11 WARRANT TO PURCHASE STOCK DATED OCTOBER 25, 1996 1 EXHIBIT 4.4(b) THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: ProBusiness, Inc, a California corporation Number of Shares: 9,500 Class of Stock: Series E Preferred Initial Exercise Price: $7.94 per share Issue Date: October 25, 1996 Expiration Date: October 25, 2001 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, COAST BUSINESS CREDIT ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of ProBusiness, Inc. (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant. ARTICLE 3. EXERCISE. 3.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 3.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 3.3 INTENTIONALLY OMITTED. 3.4 Fair Market Value. If the Shares (or the Company's Common Stock into which the Shares are convertible) are traded in a public market, the fair market value of the Shares -1- 2 shall be the closing price of the Shares (or the closing price of the Company's Common Stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares (or the Company's Common Stock into which the Shares are convertible) are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 3.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 3.6 Replacement of Warrants. On 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, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 3.7 Repurchase on Sale, Merger, or Consolidation of the Company. 3.7.1 For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 3.7.2 Assumption of Warrant. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 3.7.3 Nonassumption. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. -2- 3 3.7.4 Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 4. ADJUSTMENTS TO THE SHARES. 4.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 4.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 4.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 4.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment, from time to time in the manner set forth on Exhibit A. In addition, the number of shares of Common Stock issuable upon -3- 4 conversion of the Shares is subject to adjustment as provided in the Company's Articles of Incorporation, as amended (the "Articles"). 4.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 4.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder an amount computed by multiplying the factional interest by the fair market value of a full Share. 4.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 5. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 5.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. -4- 5 5.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) to offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 5.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements (or if the subject loan(s) no longer are outstanding)), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 5.4 Registration Under Securities Act of 1933, as Amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B. ARTICLE 6. MISCELLANEOUS. 6.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. -5- 6 6.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 6.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in SEC Rule 144(c), Holder represents that it has complied with SEC Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with SEC Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 6.4 Transfer Procedure. Subject to the provisions of Section 4.3, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, as amended, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 6.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time. 6.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. -6- 7 6.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. -7- 8 6.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" PROBUSINESS, INC. By: ____________________________ Name: __________________________ (Print) Title: _________________________ -8- 9 APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase ______ shares of the Common/Series ________ Preferred [strike one] Stock of _______________________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _____________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: _________________________ (Name) _________________________ _________________________ (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. ___________________________________ (Signature) _________________________ (Date) 10 APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE (Date) (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear __________________________ This is to advise you that the Warrant issued to you described below will expire on ______________________, 19___. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. _________________________________________ (Name of Issuer) By ______________________________________ Its _____________________________________ 11 EXHIBIT A ANTIDILUTION AGREEMENT THIS ANTIDILUTION AGREEMENT is entered into as of October 25, 1996, by and between Coast Business Credit ("Purchaser") and the Company whose name appears on the last page of this Antidilution Agreement. RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant in the event the Company issues Additional Common Shares (as defined below). C. Capitalized terms used herein, but not otherwise defined herein, shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; or common stock Issued as 12 incentive or in a nonfinancing transaction to employees, officers, directors, or consultants to the Company. 2. Deemed Issuance of Additional Common Shares. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. Adjustment of Warrant Price for Diluting Issuances. 3.1 Ratchet Adjustment. The number of shares of common stock into which the Shares are convertible is subject to adjustment as provided in the Company's Articles of Incorporation, as amended (the "Articles"). The adjustments provided for in this Section 3 shall be made after giving effect to any adjustment made pursuant to the Articles. For purposes of this Section 3, the term "Converted Warrant Price" shall mean the Series E Conversion Price (as defined in the Company's Articles) in effect immediately after an Issuance of Additional Common Shares. As of the date of this Antidilution Agreement the Series E Conversion Price is $3.97 per share of Common Stock. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Converted Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced to an amount equal to the product of (a) the quotient of the Warrant Price divided by Converted Warrant Price and (b) the lesser of: (i) the amount of such consideration per Additional Common Share; or (ii) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 Adjustment of Number of Shares. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price; provided however, the maximum number of Shares issuable upon exercise of the Warrant, as a result of an adjustment pursuant to this Section 3.2, shall not exceed 11,400 Shares. -2- 13 3.3 Attached as Annex 1 hereto is a copy of an example demonstrating the adjustment formulas set forth in Sections 3.1 and 3.2. 4. No Adjustment for Issuances Following Deemed Issuances. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. Adjustment Following Changes in Terms of Options or Convertible Securities. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. Recomputation Upon Expiration of Options or Convertible Securities. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. Limit on Readjustments. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 Day Options. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. Computation of Consideration. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) Cash shall be valued at the amount of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends. -3- 14 (b) Property. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) Mixed Consideration. The consideration for Additional Common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) Options and Convertible Securities. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. General. 10.1 Governing Law. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 Entire Agreement. This Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. -4- 15 10.5 Severability. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 10.6 Titles and Subtitles. The titles of the sections and subsections of this Antidilution Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 Counterparts. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -5- 16 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be executed as of the date hereof. "PURCHASER" "COMPANY" COAST BUSINESS CREDIT PROBUSINESS CENTERS, INC. By: ______________________________ By: ____________________________ Name: ____________________________ Name: __________________________ (Print) (Print) Title: ___________________________ Title: _________________________ Address: 12121 Wilshire Boulevard, Suite 1111 Address: 5934 Gibralter, Suite 201 Los Angeles, California 90025 Pleasanton, California 94588
-6- 17 EXHIBIT B REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of October 25, 1996, by and between Coast Business Credit ("Purchaser") and the Company whose name appears on the last page of this Agreement. RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (if Common Stock) or all shares of Common Stock of the Company issuable or issued upon conversion of the Shares and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 18 1.2 Company Registration. (a) Registration. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which 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: (i) promptly give to each Holder 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 (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, subject to such Holder's or Holders' entering into an underwriting agreement as provided in Subsection 1.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. 1.3 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except the Company shall not be required to pay underwriters fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders Participating in the offering and the Company. 1.4 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification -2- 19 and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or 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. 1.5 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and -3- 20 liabilities (or actions in respect thereto) arising 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 statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder 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, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, 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, or 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, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling 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 an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without, the consent of the Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall -4- 21 not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this subsection 1.5 (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 claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; 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 hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. 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. 1.6 Information by Holder. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC 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 -5- 22 (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after 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), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 Transfer of Registration Rights. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under this Agreement may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned. The Company may prohibit the transfer of any Holders' rights under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 2. General. 2.1 Waivers and Amendments. With the written consent of the record or beneficial Holders owning at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Registrable Securities under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1 2.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. -6- 23 2.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 Entire Agreement. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 2.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 2.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -7- 24 IN WITNESS HEREOF, the parties hereto have caused this Agreement to be executed as of the date hereof. "PURCHASER" "COMPANY" COAST BUSINESS CREDIT PROBUSINESS, INC. By: _____________________________ By: ___________________________ Name: ___________________________ Name: _________________________ (Print) (Print) Title: __________________________ Title: _________________________ Address: 12121 Wilshire Boulevard, Suite 1111 Address: 5934 Gibralter, Suite 201 Los Angeles, California 90025 Pleasanton, California 94588
-8- EX-4.5 12 WARRANT TO PURCHASE SERIES E PREFERRED STOCK 1 Exhibit 4.5 THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE ISSUER, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, SUCH EXEMPTION BEING AVAILABLE. THIS WARRANT IS NOT TRANSFERABLE WITHOUT THE CONSENT OF THE ISSUER. July 31, 1996 WARRANT TO PURCHASE SERIES E PREFERRED STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to LINC Capital Management, a division of Scientific Leasing, Inc., a Delaware corporation (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company"). Unless otherwise stated, all capitalized terms herein have the meaning provided in the Master Lease Financing Agreement No. 6403 between the Warrantholder and the Company dated as of July 31, 1996. 1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company 10,000 fully paid and nonassessable shares of Series E Preferred Stock of the Company (the "Shares") at an exercise price of $7.94 per share, subject to adjustment as provided in Section 7 hereof (the "Warrant Price"), payable in cash or by check unless exercised pursuant to Section 4 hereof. 2. Exercise Period. The purchase rights represented by this Warrant, to the extent not previously exercised, shall expire five years from the date of the Warrant (the "Expiration Date"). 3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Warrantholder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: 2 (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly completed and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased, unless exercised pursuant to Section 4 hereof. 4. Cashless Exercise. Prior to the Expiration Date and in lieu of exercising this Warrant as specified in Section 3, the Warrantholder may from time to time convert this Warrant, in whole or in part (but not for a fraction of a share), into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 5. 5. Fair Market Value. The fair market value per share of the Shares shall be equal to: (i) if the Shares or shares of Common Stock issuable upon conversion of the Shares are traded in a public market, the closing price (reported for the business day immediately before the Warrantholder delivers its Form of Subscription to the Company) per Share or the price per share of the Common Stock multiplied, as applicable, by the quotient of (x) $7.94 divided by (y) the Series E Conversion Price (as defined in the Company's Articles of Incorporation), as applicable, or (ii) if the Shares or Common Stock issuable upon the conversion of the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value per share of the Shares in its reasonable good faith judgment, which amount shall equal the fair market value per share of the Common Stock on an as converted basis. 6. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued as soon as practicable thereafter. In the case of a partial exercise, unless the purchase rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant for the number of Shares, if any, which remain exercisable hereunder. 7. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Series E Preferred Stock, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. -2- 3 (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Series E Preferred Stock purchasable hereunder shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reclassification, Consolidation or Merger. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 7(i)) the Company shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of Series E Preferred Stock theretofore purchasable hereunder at such time, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change, by a holder of one share of Series E Preferred Stock. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7(iii) shall apply similarly to successive reclassifications and changes. 8. Notice of Adjustments. Whenever the Warrant Price shall be adjusted pursuant to Section 7 hereof, the Company shall deliver to the Warrantholder a certificate signed by its chief financial officer describing, in reasonable detail, the event requiring the adjustment and the Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 9. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 10. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Series E Preferred Stock and Common Stock issuable upon conversion of such Series E Preferred Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant and Common Stock issuable upon conversion of the Shares, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 11. Rights Prior to Exercise. Prior to exercise of this Warrant, except as set forth in paragraphs (i) and (ii) below, the Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall the Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company. (i) Liquidating Dividends. If the Company declares or pays a dividend upon the Series E Preferred Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) (a "Liquidating -3- 4 Dividend"), then the Company shall pay to the Warrantholder at the time of payment thereof the Liquidating Dividend which would have been paid to such Warrantholder on the Shares had this Warrant been fully exercised immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Series E Preferred Stock entitled to such dividends are to be determined. (ii) Purchase Rights. If at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Series E Preferred Stock (the "Purchase Rights"), then the Warrantholder shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Warrantholder could have acquired if such Warrantholder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Series E Preferred Stock are to be determined for the grant, issue or sale of such Purchase Rights. 12. Representations of Warrantholder. The Warrantholder hereby represents and warrants to the Company, with respect to its purchase of the Warrant and the underlying securities issuable upon the exercise of the Warrant, that the representations and warranties made by the Warrantholder to the Company in the Investment Representation Statement attached hereto as Exhibit 2 are true and correct in all material respects as of the date of this Warrant. 13. Registration Rights. The registration rights of the Warrantholder with respect to this Warrant and the underlying securities are set forth in the Registration Rights Agreement dated December 1, 1989 between the Company and the persons named therein as amended by the Nineteenth Amendment to the Registration Rights Agreement, dated as of the date hereof, by and between the Company and the Warrantholder (collectively the "Registration Rights Agreement"). 14. Assignment and Transfer. This Warrant may be assigned or otherwise transferred by the Warrantholder with prior written notice to the Company, provided, however, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company, unless the Company has a class of stock registered under the Securities Exchange Act of 1934, as amended. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and its successors and assigns. 15. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 16. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Series E Preferred Stock issued upon exercise of this Warrant, referred to in Sections 13 and 14 shall survive the exercise of this Warrant. -4- 5 17. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 18. Notices. Any notice, request or other document required or permitted to be given or delivered to the Warrantholder hereof or to the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such Warrantholder or the Company at the address indicated therefor underneath the signatures of the respective parties on the last page of this Warrant or such other address as either may from time to time provide to the other. 19. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Series E Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 20. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 21. Legends. This Warrant and the Shares (and the securities issuable directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THE SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 22. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS -5- 6 OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. -6- 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers, thereunto duly authorized this 31st day of July, 1996. WARRANTHOLDER: COMPANY: LINC CAPITAL MANAGEMENT, PROBUSINESS, INC. A DIVISION OF SCIENTIFIC 5934 Gibraltar, Suite 201 LEASING, INC. Pleasanton, CA 94566 303 East Wacker Drive Chicago, IL 60601 By:___________________________ By:___________________________ Thomas H. Sinton, President Title:________________________ -7- 8 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" PROBUSINESS CENTERS, INC. By: /s/ 9 EXHIBIT 1 FORM OF SUBSCRIPTION (TO be signed only upon exercise of Warrant) TO:______________ The undersigned, the Warrantholder, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, _____________, (______)(1) shares of Series E Preferred Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of _____________ Dollars ($________ ) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, ____________, whose address is __________________. The undersigned represents that it is acquiring such Series E Preferred Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof and in order to induce the issuance of such Series E Preferred Stock certifies to the Company that the representation and warranties made by Warrantholder set forth in the Investment Representation Statement attached as Exhibit A to the Warrant are true and correct as of the date hereof. DATED: ______________ _____________________________________ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) _____________________________________ _____________________________________ _____________ (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Series E Preferred Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. EX-4.6(A) 13 WARRANT PURCHASE AGREEMENT DATED NOVEMBER 14, 1996 1 Exhibit 4.6(a) WARRANT PURCHASE AGREEMENT This Warrant Purchase Agreement (the "Agreement") is made and entered into as of November 14, 1996 by ProBusiness, Inc., a California corporation (the "Company") and T. J. Bristow and Elizabeth S. Bristow (collectively, "Bristow"), Magdalena Shushan and Laurence Shushan (collectively, "Shushan"), and SDK Incorporated, a Delaware corporation ("SDK") (collectively, "Purchasers" and individually, a "Purchaser"). 1. Issuance of Warrant. In consideration for the execution by Britannia Hacienda V Limited Partnership, a Delaware limited partnership ("Landlord") of the Build-to-Suit Lease dated September 27, 1996 between the Company and Landlord (the "Lease Agreement"), the Company shall issue to each Purchaser, as assignee of part of Landlord's rights under Section 17.19 of the Lease Agreement, concurrently with the execution of this Agreement, a Warrant in the form attached to this Agreement as Exhibit A ("Warrant") exercisable for up to 1,800 shares (in the case of Bristow), 450 shares (in the case of Shushan) or 20,250 shares (in the case of SDK), respectively, of the Company's Series E Preferred Stock ("Shares") at a price of $7.94 per share, beginning on the date that Landlord notifies the Company that the work to be constructed by Landlord pursuant to Section 2.4 and Exhibit C of the Lease Agreement on the shell and core of the Building (as that term is defined in the Lease Agreement) and the first phase of the interior improvements of the Building (as more particularly described in the Lease Agreement) is substantially complete (as that term is defined in the Lease Agreement) and such work is, in fact, substantially complete. The period during which the purchase rights represented by the Warrants are exercisable (the "Exercise Period") shall end on the earlier of: (i) five (5) years after the date of the consummation of a public offering of the Company that triggers the automatic conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") or (ii) eight (8) years from the date of the Warrants. The terms for exercise of the Warrants are set forth in the Warrants. The Warrant issued to Bristow shall be registered, for record purposes, in favor of "T. J. Bristow and Elizabeth S. Bristow, husband and wife, as community property;" the Warrant issued to Shushan shall be registered, for record purposes, in favor of "Laurence Shushan and Magdalena Shushan, husband and wife, as community property." 2. Investment Representations. 2.1 Each Purchaser severally represents and warrants to the Company as follows: (a) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire its Warrant and the Shares or underlying securities issuable thereunder. The Purchaser is acquiring its Warrant and will acquire the Shares or underlying securities issuable thereunder for its own account for investment purposes only and not with a view to, or for resale in connection with, any "distribution" for purposes of the Securities Act of 1933, as amended (the "Act"). 2 (b) The Purchaser understands that its Warrant and the Shares or underlying securities issuable thereunder have not been registered under the Act in reliance upon a specific exemption, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in the view of the Securities and Exchange Commission ("SEC"), the statutory basis for such exemption may be unavailable if the Purchaser's representation was predicated solely upon a present intention to hold its Warrant or the Shares or underlying securities issuable thereunder for a period of one year or any other fixed period in the future. (c) The Purchaser further understands that its Warrant and the Shares or underlying securities issuable thereunder must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. Moreover, the Purchaser understands that the Company is under no obligation to register the Warrants or the Shares or underlying securities issuable thereunder except as provided in the Twentieth Amendment to Registration Rights Agreement attached hereto as Exhibit B and executed concurrently herewith. In addition, the Purchaser understands that its Warrant and the Shares or underlying securities issuable thereunder will be imprinted with a legend which prohibits the transfer of the Warrant or the Shares or underlying securities issuable thereunder unless they are registered or such registration is not required in the opinion of counsel reasonably satisfactory to the Company. (d) The Purchaser is aware of the provisions of Rule 144, promulgated under the Act, which in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer (or from an affiliate of the issuer), in a non-public offering subject to the satisfaction of certain conditions, including, in case the Purchaser has held the securities less than three years or is an affiliate of the Company: (1) the resale occurring not less than two years after the party has purchased and paid for the securities to be sold; (2) the availability of certain public information about the Company; (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said terms are defined under the Securities Exchange Act of 1934); (4) the amount of securities being sold during any three-month period not exceeding certain specified limitations and (5) the filing of a Notice of Sale on Form 144 as appropriate. (e) The Purchaser further understands that at the time it wishes to sell its Warrant or the Shares or underlying securities issuable thereunder there may be no public market upon which to make such a sale, and that, even if such a public market then exists the Company may not be satisfying the current public information requirements of Rule 144, and that, in such event, the Purchaser would be precluded from selling its Warrant or Shares or underlying securities issuable thereunder under Rule 144 unless (1) a three-year minimum holding period had been satisfied and (2) the Purchaser was not at the time of sale nor at any time during the three-month period prior to such sale an affiliate of the Company. (f) The Purchaser further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with -2- 3 Regulation A or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and their respective brokers who participate in such transaction do so at their own risk. 2.2 Legends. (a) Each Warrant shall be endorsed with the following legend (in addition to any legend required by applicable state securities laws): THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. (b) Each certificate representing Shares or underlying securities shall be endorsed with the following legend (in addition to any legend required by applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. The Company need not register a transfer of any Warrant or of Shares or underlying securities issued thereunder unless the conditions specified in the foregoing legend are satisfied. The Company may also instruct its transfer agent not to register the transfer of any Warrant or any of the Shares or underlying securities issued thereunder unless the conditions specified in the foregoing legends are satisfied. -3- 4 2.3 Removal of Legends and Transfer Restrictions. The legend relating to the Act endorsed on each Warrant or stock certificate pursuant to Section 2.2 and the stop transfer instructions with respect to the Warrants or the Shares or underlying securities represented by such certificate shall be removed and the Company shall issue a certificate without such legend to the holder of the applicable Warrant or Shares or underlying securities if such Shares or underlying securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available, or if such holder provides to the Company an opinion of counsel for such holder of the Warrant or Shares or underlying securities reasonably satisfactory to the Company or a no-action letter or interpretive opinion of the staff of the SEC to the effect that a public sale, transfer or assignment of such Shares or underlying securities may be made without registration and without compliance with any restriction such as Rule 144. 3. Lock-Up Agreement. Each Purchaser hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any of the underlying securities issuable upon exercise of its Warrant for a period of up to 180 days after a firm commitment underwritten initial public offering of the Company, other than a transfer or distribution to Landlord, to any partner of Landlord, or to any affiliate of such Purchaser or of Landlord or of any such partner of Landlord, and then only so long as such transferee agrees in writing to be bound by the restrictions set forth in this Section and so long as the number of any such partners or affiliates who are transferees or distributees does not exceed five (5) in the aggregate (a "Permitted Transfer"). Moreover, in connection with any registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, each Purchaser hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any underlying securities issued or issuable upon exercise of its Warrant (other than those included in the registration or other than a Permitted Transfer) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as the Company or the underwriters may specify. Furthermore, each Purchaser hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the underlying securities issuable upon exercise of the Warrant held by such Purchaser except in compliance with this Lock-Up Agreement. 4. Notices. All notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person or by telecopy, electronic mail, overnight delivery service or by first-class U.S. mail, certified or registered, return receipt requested, postage prepaid, addressed (a) if to Purchasers, at 1939 Harrison Street, Suite 412, Oak land, California 94612, with a copy to 33 West Monroe Street, Suite 2610, Chicago, Illinois 60603, or at such other address as any Purchaser furnishes in writing to the Company or (b) if to the Company, at 5934 Gibraltar, Pleasanton, California 94566, or at such other address as the Company shall have furnished to Purchasers in writing. 5. Assignment. No Purchaser shall assign this Agreement or any rights or obligations under it without the prior consent of the Company, except as expressly provided below. Subject to -4- 5 the foregoing, this Agreement shall bind and benefit the respective parties to this Agreement and their successors and assigns. Notwithstanding the restrictions set forth above, each Purchaser shall be entitled to transfer its Warrant and/or to assign such Purchaser's rights under this Agreement, without the Company's consent but with prior or concurrent written notice to the Company, to Landlord or to any partner of Landlord or to any affiliate of such Purchaser or of Landlord or of any such partner of Landlord (so long as the number of such partners or affiliates does not exceed five (5) in the aggregate), subject to compliance with federal and state securities laws and to each transferee's agreement to be bound by the terms of this Agreement and the Warrant. 6. Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 7. Waiver. The waiver of one breach or default hereunder shall not constitute the waiver of any subsequent breach or default. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. 8. Amendment. Neither this Agreement nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a signed statement in writing by both parties. 9. Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter of this Agreement. 10. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall be an original, and all of which together shall be deemed to constitute one instrument. 11. Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 12. Attorneys Fees. In the event that any dispute arising out of or in connection with this Agreement should result in litigation, the prevailing party in such litigation shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals and of enforcement of any judgment issued in such litigation. 13. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION, IS UNLAWFUL UNLESS -5- 6 THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. -6- 7 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth at the beginning of this Agreement. PROBUSINESS, INC. BRISTOW By: - ------------------------- --------------------------------- T. J. Bristow Title - ------------------------- --------------------------------- Elizabeth S. Bristow Date: - ------------------------- SHUSHAN SDK INCORPORATED By: - ------------------------- --------------------------------- Magdalena Shushan Title: - ------------------------- --------------------------------- Laurence Shushan Date: --------------------------------- -7- EX-4.6(B) 14 WARRANT TO PURCHASE SERIES E PREFERRED STOCK 1 EXHIBIT 4.6(b) THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR SUCH EXEMPTION BEING AVAILABLE. November 14, 1996 WARRANT TO PURCHASE SERIES E PREFERRED STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to T.J. Bristow and Elizabeth S. Bristow, husband and wife, as community property (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company") located at 5934 Gibraltar, Pleasanton, California 94566. Unless otherwise stated, all capitalized terms herein have the meaning provided in the Warrant Purchase Agreement between the Warrantholder, SDK Incorporated, Magdalena Shushan, Laurence Shushan and the Company dated November 14, 1996 (the "Warrant Purchase Agreement"). 1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company, if and to the extent permitted by law, 1,800 fully paid and nonassessable shares of Series E Preferred Stock of the Company (the "Shares") at an exercise price of $7.94 per share, subject to adjustment as provided in Section 7 hereof (the "Warrant Price"), payable in cash or by check unless exercised pursuant to Section 4 hereof. 2. Exercise Period. The purchase rights represented by this Warrant shall become exercisable on the date that Britannia Hacienda V Limited Partnership ("Landlord") notifies the -1- 2 Company that the work to be constructed by Landlord pursuant to Section 2.4 and Exhibit C of the Build-to-Suit Lease dated September 27, 1996 between Landlord and the Company (the "Lease Agreement") on the shell and core of the Building (as that term is defined in the Lease Agreement) and the first phase of the interior improvements of the Building (as more particularly described in the Lease Agreement) is substantially complete (as that term is defined in the Lease Agreement) and such work is, in fact, substantially complete. The period during which the purchase rights represented by this Warrant are exercisable (the "Exercise Period") shall end on the earlier of (i) five (5) years after the date of the consummation of a public offering of the Company that triggers the automatic conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") or (ii) eight (8) years from the date of this Warrant as set forth on the first page hereof. 3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly filled in and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased, unless exercised pursuant to Section 4 hereof. 4. Conversion Right. During the Exercise Period (and subject to the conditions set forth in Section 2) and in lieu of exercising this Warrant as specified in Section 3, Warrantholder may from time to time convert this Warrant, in whole or in part (but not for a fraction of a share), into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. 5. Fair Market Value. The fair market value per share of the Shares shall be equal to: (i) if the Common Stock issuable upon conversion of the Shares is listed on a national stock exchange or over the counter market, then the price per share listed on such national stock exchange, or the average of the final "bid" and "asked" prices reported on such over the counter market, at the close of business on the date of exercise as reported in the Wall Street Journal multiplied by the quotient of (x) $7.94 divided by (y) the Series E Conversion Price (as defined in the Company's Articles of Incorporation); or (ii) if the Common Stock issuable upon the conversion of the Shares is not listed on a national stock exchange or over the counter market, the Board of Directors of the Company shall determine the fair market value per share of the Shares in its reasonable good faith judgment. 6. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued to the Warrantholder as soon as practicable thereafter. In the case of a partial exercise, unless the purchase -2- 3 rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant, dated as of the same date as this Warrant, for the number of Shares, if any, which remain exercisable hereunder. 7. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine the class of the Company's securities purchasable upon exercise of this Warrant, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of the class of the Company's securities purchasable upon exercise of this Warrant shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reorganization, Reclassification, Consolidation, Merger or Sale. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 7(i)) as a result of any reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of substantially all of the Company's assets to another corporation, the Company or its successor, as applicable, shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7(iii) shall apply similarly to successive reclassifications and changes. (iv) Dividends in Stock or Property. If at any time or from time to time prior to commencement of the Exercise Period the holders of the Company's Common Stock or of any other class of the Company's securities purchasable upon exercise of this Warrant shall, as a class, receive or become entitled to receive, without payment therefor, any shares of stock or other securities of the Company, any rights or options to acquire or subscribe for any such shares of stock or other securities, or any other property (including cash) distributable other than as a cash dividend (collectively, a "Distribution"), and if no adjustment is made pursuant to Section 7(i), (ii) or (iii) above with respect to such Distribution, then in each such case, the Warrantholder shall, upon exercise of this Warrant, be entitled to receive, in addition to the shares otherwise purchasable upon exercise of this Warrant and without payment of any additional consideration therefor, the amount of stock, other securities and other -3- 4 property (other than cash distributed as a cash dividend) which the Warrantholder would hold or be entitled to receive on the date of such exercise had the Warrantholder been the holder of record, as of the date of such Distribution, of the shares purchased by the Warrantholder upon such exercise. (v) Certain Other Events. If any change in the shares of the class of the Company's securities purchasable upon exercise of this Warrant or any other event occurs as to which the other provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the reasonable expectations of Warrantholder with respect to its purchase rights under this Warrant, then the Board of Directors of the Company shall make an adjustment in the number and class of shares purchasable under this Warrant, the Warrant Price or the other terms and provisions of this Warrant, so as to protect such reasonable expectations of Warrantholder by giving Warrantholder, upon exercise of this Warrant for the same aggregate Warrant Price payable for full exercise of this Warrant prior to such event, the total number, class and kind of shares (or the closest then available equivalent thereto) as Warrantholder would have owned had this Warrant been exercised prior to such event and had Warrantholder continued to hold such shares until after the event requiring such adjustment. 8. Notice of Adjustments. Whenever the Warrant Price or other terms of this Warrant shall be adjusted pursuant to Section 7 hereof, the Company shall deliver to the Warrantholder a certificate signed by the Company's chief financial officer describing, in reasonable detail, the event requiring the adjustment and the newly adjusted Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 9. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor in an amount equal to the difference between the fair market value of such fractional Share as of the date of exercise and the Warrant Price then in effect with respect to such fractional Share. 10. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Series E Preferred Stock and Common Stock issuable upon conversion of such Series E Preferred Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, and the Common Stock issuable upon conversion of the Shares, when issued pursuant to such conversion, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 11. Rights Prior to Exercise. Prior to exercise of this Warrant, this Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall this Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company except as set forth in Section 22 hereof. -4- 5 12. Representations of Warrantholder. Warrantholder hereby represents and warrants to the Company, with respect to its purchase of this Warrant and the underlying securities issuable upon the exercise of this Warrant, that the representations and warranties made by Warrantholder to the Company in Section 2 of the Warrant Purchase Agreement are true and correct in all material respects as of the date of this Warrant. 13. Registration Rights. The registration rights of the Warrantholder with respect to this Warrant and the underlying securities are set forth in the Registration Rights Agreement dated December 1, 1989 between the Company and the persons named therein as amended by the Twentieth Amendment to Registration Rights Agreement, dated the date hereof, by and among the Company and the Warrantholders set forth therein. 14. Non-Assignability and Non-Transferability of Warrant. This Warrant is not assignable or otherwise transferable by the Warrantholder without the prior written consent of the Company, except that Warrantholder shall be entitled to transfer this Warrant, without the Company's consent but with prior or concurrent written notice to the Company, to Landlord or to any partner of Landlord or to any affiliate of Warrantholder or of Landlord or of any such partner of Landlord (so long as the number of such partners or affiliates does not exceed five (5) in the aggregate), subject to compliance with federal and state securities laws and to each transferee's agreement to be bound by the terms of the Warrant Purchase Agreement and this Warrant. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, Warrantholder and the Company and their respective permitted successors and assigns. 15. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 16. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Series E Preferred Stock issued upon exercise of this Warrant, referred to in Sections 12 and 13 shall survive the exercise of this Warrant. 17. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 18. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 19. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets in any one transaction or series of related transactions. All of the obligations of the -5- 6 Company relating to the Series E Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 20. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company (such as an affidavit of the registered holder) of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, dated as of the date of the lost, stolen, destroyed or mutilated Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 21. Lock-Up Agreement. Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any of the underlying securities issuable upon exercise of this Warrant for a period of up to 180 days after a firm commitment underwritten initial public offering of the Company, other than a transfer or distribution to Landlord, to any partner of Landlord, or to any affiliate of Warrantholder, of Landlord or of any such partner of Landlord, and then only so long as such transferee agrees in writing to be bound by the restrictions set forth in this Section and so long as the number of any such partners or affiliates who are transferees or distributees does not exceed five (5) in the aggregate (a "Permitted Transfer"). Moreover, in connection with any registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any underlying securities issued or issuable upon exercise of this Warrant (other than those included in the registration or other than a Permitted Transfer) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as the Company or the underwriters may specify. Furthermore, Warrantholder hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the underlying securities issuable upon exercise of the Warrant held by the Warrantholder except in compliance with this Lock-Up Agreement. 22. Information Rights. Upon written request delivered to the Chief Financial Officer of the Company, the Company shall provide to Warrantholder copies of the following documents within a reasonable time after receipt of such request and on or after such documents have been distributed or made available to the Company's shareholders: (i) unaudited quarterly financial statements for each quarter (other than the Company's fourth quarter) of the Company's fiscal year since the date of the Company's most recent audited annual financial statements; (ii) the Company's most recent audited annual financial statements; -6- 7 (iii) after an Initial Public Offering of the Company, registration statements, annual reports on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission; and (iv) letters distributed to holders of the class of the Company's securities purchasable under this Warrant along with the Company's quarterly and annual financial statements, as well as any proxy statements or other information distributed to such holders in connection with any annual or special meeting of the shareholders within the last twelve (12) months preceding such request by Warrantholder. 23. Other Notices. If at any time the Company proposes: (i) To declare any cash dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant; (ii) To declare any dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant payable in stock or make any special dividend or other distribution to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant; (iii) To offer for subscription pro rata to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant any additional shares of stock of any class or other rights; (iv) To engage in any capital reorganization or reclassification of the capital stock of the Company; or consolidation or merger of the Company with, or sale of all or substantially all of its assets (in any one transaction or series of related transactions) to another corporation; or (v) To engage in a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Warrantholder of this Warrant at the address of such Holder as shown on the books of the Company, (a) 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 (b) 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; provided, however, that the Warrantholder shall make a best efforts attempt to respond to such notice as early as possible after the receipt thereof. Any notice given in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of the -7- 8 applicable class of the Company's securities shall be entitled thereto. Any notice given in accordance with the foregoing clause (b) shall also specify the date on which the holders of the applicable class of the Company's securities shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. 24. Attorneys' Fees. In the event that any dispute arising out of or in connection with this Warrant should result in litigation, the prevailing party in such litigation shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Warrant, including without limitation, reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals and of enforcement of any judgment issued in such litigation. IN WITNESS WHEREOF, the parties have caused this Warrant to be executed by their respective officers or managers (if applicable), thereunto duly authorized, this 14th day of November, 1996. PROBUSINESS, INC. By: --------------------------------- Thomas H. Sinton, President ------------------------------------- T. J. Bristow ------------------------------------- Elizabeth S. Bristow, husband and wife, as community property -8- 9 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: ProBusiness, Inc. The undersigned, the Warrantholder, hereby irrevocably elects to exercise the purchase right represented by its Warrant for, and to purchase thereunder, _________ , (______)(2) shares of Series E Preferred Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of ______________________ Dollars ($__________ ) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, ___________________________ , whose address is __________________________. The undersigned represents that it is acquiring such Series E Preferred Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof, and in order to induce the issuance of such Series E Preferred Stock the undersigned makes to the Company the representations and warranties set forth in Section 2 of the Warrant Purchase Agreement between the Company and Warrantholder. DATED: ----------------- ------------------------------------------ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) ------------------------------------------ ------------------------------------------ - -------- (2) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Series E Preferred Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. -9- EX-4.6(C) 15 WARRANT TO PURCHASE SERIES E PREFERRED STOCK 1 EXHIBIT 4.6(c) THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR SUCH EXEMPTION BEING AVAILABLE. November 14, 1996 WARRANT TO PURCHASE SERIES E PREFERRED STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to SDK Incorporated (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company") located at 5934 Gibraltar, Pleasanton, California 94566. Unless otherwise stated, all capitalized terms herein have the meaning provided in the Warrant Purchase Agreement between the Warrantholder, T. J. Bristow, Elizabeth S. Bristow, Magdalena Shushan, Laurence Shushan and the Company dated November 14, 1996 (the "Warrant Purchase Agreement"). 14. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company, if and to the extent permitted by law, 20,250 fully paid and nonassessable shares of Series E Preferred Stock of the Company (the "Shares") at an exercise price of $7.94 per share, subject to adjustment as provided in Section 7 hereof (the "Warrant Price"), payable in cash or by check unless exercised pursuant to Section 4 hereof. 15. Exercise Period. The purchase rights represented by this Warrant shall become exercisable on the date that Britannia Hacienda V Limited Partnership ("Landlord") notifies the Company that the work to be constructed by Landlord pursuant to Section 2.4 and Exhibit C of the -1- 2 Build-to-Suit Lease dated September 27, 1996 between Landlord and the Company (the "Lease Agreement") on the shell and core of the Building (as that term is defined in the Lease Agreement) and the first phase of the interior improvements of the Building (as more particularly described in the Lease Agreement) is substantially complete (as that term is defined in the Lease Agreement) and such work is, in fact, substantially complete. The period during which the purchase rights represented by this Warrant are exercisable (the "Exercise Period") shall end on the earlier of (i) five (5) years after the date of the consummation of a public offering of the Company that triggers the automatic conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") or (ii) eight (8) years from the date of this Warrant as set forth on the first page hereof. 16. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly filled in and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased, unless exercised pursuant to Section 4 hereof. 17. Conversion Right. During the Exercise Period (and subject to the conditions set forth in Section 2) and in lieu of exercising this Warrant as specified in Section 3, Warrantholder may from time to time convert this Warrant, in whole or in part (but not for a fraction of a share), into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. 18. Fair Market Value. The fair market value per share of the Shares shall be equal to: (i) if the Common Stock issuable upon conversion of the Shares is listed on a national stock exchange or over the counter market, then the price per share listed on such national stock exchange, or the average of the final "bid" and "asked" prices reported on such over the counter market, at the close of business on the date of exercise as reported in the Wall Street Journal multiplied by the quotient of (x) $7.94 divided by (y) the Series E Conversion Price (as defined in the Company's Articles of Incorporation); or (ii) if the Common Stock issuable upon the conversion of the Shares is not listed on a national stock exchange or over the counter market, the Board of Directors of the Company shall determine the fair market value per share of the Shares in its reasonable good faith judgment. 19. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued to the Warrantholder as soon as practicable thereafter. In the case of a partial exercise, unless the purchase rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant, -2- 3 dated as of the same date as this Warrant, for the number of Shares, if any, which remain exercisable hereunder. 20. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine the class of the Company's securities purchasable upon exercise of this Warrant, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of the class of the Company's securities purchasable upon exercise of this Warrant shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reorganization, Reclassification, Consolidation, Merger or Sale. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 7(i)) as a result of any reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of substantially all of the Company's assets to another corporation, the Company or its successor, as applicable, shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7(iii) shall apply similarly to successive reclassifications and changes. (iv) Dividends in Stock or Property. If at any time or from time to time prior to commencement of the Exercise Period the holders of the Company's Common Stock or of any other class of the Company's securities purchasable upon exercise of this Warrant shall, as a class, receive or become entitled to receive, without payment therefor, any shares of stock or other securities of the Company, any rights or options to acquire or subscribe for any such shares of stock or other securities, or any other property (including cash) distributable other than as a cash dividend (collectively, a "Distribution"), and if no adjustment is made pursuant to Section 7(i), (ii) or (iii) above with respect to such Distribution, then in each such case, the Warrantholder shall, upon exercise of this Warrant, be entitled to receive, in addition to the shares otherwise purchasable upon exercise of this Warrant and without payment of any additional consideration therefor, the amount of stock, other securities and other property (other than cash distributed as a cash dividend) which the Warrantholder would hold or be -3- 4 entitled to receive on the date of such exercise had the Warrantholder been the holder of record, as of the date of such Distribution, of the shares purchased by the Warrantholder upon such exercise. (v) Certain Other Events. If any change in the shares of the class of the Company's securities purchasable upon exercise of this Warrant or any other event occurs as to which the other provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the reasonable expectations of Warrantholder with respect to its purchase rights under this Warrant, then the Board of Directors of the Company shall make an adjustment in the number and class of shares purchasable under this Warrant, the Warrant Price or the other terms and provisions of this Warrant, so as to protect such reasonable expectations of Warrantholder by giving Warrantholder, upon exercise of this Warrant for the same aggregate Warrant Price payable for full exercise of this Warrant prior to such event, the total number, class and kind of shares (or the closest then available equivalent thereto) as Warrantholder would have owned had this Warrant been exercised prior to such event and had Warrantholder continued to hold such shares until after the event requiring such adjustment. 21. Notice of Adjustments. Whenever the Warrant Price or other terms of this Warrant shall be adjusted pursuant to Section 7 hereof, the Company shall deliver to the Warrantholder a certificate signed by the Company's chief financial officer describing, in reasonable detail, the event requiring the adjustment and the newly adjusted Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 22. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor in an amount equal to the difference between the fair market value of such fractional Share as of the date of exercise and the Warrant Price then in effect with respect to such fractional Share. 23. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Series E Preferred Stock and Common Stock issuable upon conversion of such Series E Preferred Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, and the Common Stock issuable upon conversion of the Shares, when issued pursuant to such conversion, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 24. Rights Prior to Exercise. Prior to exercise of this Warrant, this Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall this Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company except as set forth in Section 22 hereof. 25. Representations of Warrantholder. Warrantholder hereby represents and warrants to the Company, with respect to its purchase of this Warrant and the underlying securities issuable upon the -4- 5 exercise of this Warrant, that the representations and warranties made by Warrantholder to the Company in Section 2 of the Warrant Purchase Agreement are true and correct in all material respects as of the date of this Warrant. 26. Registration Rights. The registration rights of the Warrantholder with respect to this Warrant and the underlying securities are set forth in the Registration Rights Agreement dated December 1, 1989 between the Company and the persons named therein as amended by the Twentieth Amendment to Registration Rights Agreement, dated the date hereof, by and among the Company and the Warrantholders set forth therein. 27. Non-Assignability and Non-Transferability of Warrant. This Warrant is not assignable or otherwise transferable by the Warrantholder without the prior written consent of the Company, except that Warrantholder shall be entitled to transfer this Warrant, without the Company's consent but with prior or concurrent written notice to the Company, to Landlord or to any partner of Landlord or to any affiliate of Warrantholder or of Landlord or of any such partner of Landlord (so long as the number of such partners or affiliates does not exceed five (5) in the aggregate), subject to compliance with federal and state securities laws and to each transferee's agreement to be bound by the terms of the Warrant Purchase Agreement and this Warrant. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, Warrantholder and the Company and their respective permitted successors and assigns. 28. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 29. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Series E Preferred Stock issued upon exercise of this Warrant, referred to in Sections 12 and 13 shall survive the exercise of this Warrant. 30. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 31. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 32. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets in any one transaction or series of related transactions. All of the obligations of the Company relating to the Series E Preferred Stock issuable upon the exercise of this Warrant shall survive -5- 6 the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 33. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company (such as an affidavit of the registered holder) of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, dated as of the date of the lost, stolen, destroyed or mutilated Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 34. Lock-Up Agreement. Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any of the underlying securities issuable upon exercise of this Warrant for a period of up to 180 days after a firm commitment underwritten initial public offering of the Company, other than a transfer or distribution to Landlord, to any partner of Landlord, or to any affiliate of Warrantholder, of Landlord or of any such partner of Landlord, and then only so long as such transferee agrees in writing to be bound by the restrictions set forth in this Section and so long as the number of any such partners or affiliates who are transferees or distributees does not exceed five (5) in the aggregate (a "Permitted Transfer"). Moreover, in connection with any registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any underlying securities issued or issuable upon exercise of this Warrant (other than those included in the registration or other than a Permitted Transfer) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as the Company or the underwriters may specify. Furthermore, Warrantholder hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the underlying securities issuable upon exercise of the Warrant held by the Warrantholder except in compliance with this Lock-Up Agreement. 35. Information Rights. Upon written request delivered to the Chief Financial Officer of the Company, the Company shall provide to Warrantholder copies of the following documents within a reasonable time after receipt of such request and on or after such documents have been distributed or made available to the Company's shareholders: (i) unaudited quarterly financial statements for each quarter (other than the Company's fourth quarter) of the Company's fiscal year since the date of the Company's most recent audited annual financial statements; (ii) the Company's most recent audited annual financial statements; -6- 7 (iii) after an Initial Public Offering of the Company, registration statements, annual reports on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission; and (iv) letters distributed to holders of the class of the Company's securities purchasable under this Warrant along with the Company's quarterly and annual financial statements, as well as any proxy statements or other information distributed to such holders in connection with any annual or special meeting of the shareholders within the last twelve (12) months preceding such request by Warrantholder. 36. Other Notices. If at any time the Company proposes: (i) To declare any cash dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant; (ii) To declare any dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant payable in stock or make any special dividend or other distribution to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant; (iii) To offer for subscription pro rata to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant any additional shares of stock of any class or other rights; (iv) To engage in any capital reorganization or reclassification of the capital stock of the Company; or consolidation or merger of the Company with, or sale of all or substantially all of its assets (in any one transaction or series of related transactions) to another corporation; or (v) To engage in a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Warrantholder of this Warrant at the address of such Holder as shown on the books of the Company, (a) 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 (b) 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; provided, however, that the Warrantholder shall make a best efforts attempt to respond to such notice as early as possible after the receipt thereof. Any notice given in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of the -7- 8 applicable class of the Company's securities shall be entitled thereto. Any notice given in accordance with the foregoing clause (b) shall also specify the date on which the holders of the applicable class of the Company's securities shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. 37. Attorneys' Fees. In the event that any dispute arising out of or in connection with this Warrant should result in litigation, the prevailing party in such litigation shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Warrant, including without limitation, reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals and of enforcement of any judgment issued in such litigation. IN WITNESS WHEREOF, the parties have caused this Warrant to be executed by their respective officers or managers (if applicable), thereunto duly authorized, this 14th day of November, 1996. SDK INCORPORATED PROBUSINESS, INC. By: By: - ---------------------------- --------------------------------- Thomas H. Sinton, President Name: ----------------------- Title: ----------------------- -8- 9 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: ProBusiness, Inc. The undersigned, the Warrantholder, hereby irrevocably elects to exercise the purchase right represented by its Warrant for, and to purchase thereunder, ___________, (________)(1) shares of Series E Preferred Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of ______________________ Dollars ($___________) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to,___________, whose address is _______________. The undersigned represents that it is acquiring such Series E Preferred Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof, and in order to induce the issuance of such Series E Preferred Stock the undersigned makes to the Company the representations and warranties set forth in Section 2 of the Warrant Purchase Agreement between the Company and Warrantholder. DATED:___________________ __________________________________________ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) __________________________________________ __________________________________________ ________________ (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Series E Preferred Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. -9- EX-4.6(D) 16 WARRANT TO PURCHASE SERIES E PREFERRED STOCK 1 EXHIBIT 4.6(d) THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR SUCH EXEMPTION BEING AVAILABLE. November 14, 1996 WARRANT TO PURCHASE SERIES E PREFERRED STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to Laurence Shushan and Magdalena Shushan, husband and wife, as community property (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company") located at 5934 Gibraltar, Pleasanton, California 94566. Unless otherwise stated, all capitalized terms herein have the meaning provided in the Warrant Purchase Agreement between the Warrantholder, SDK Incorporated, T.J. Bristow, Elizabeth S. Bristow and the Company dated November 14, 1996 (the "Warrant Purchase Agreement"). 1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company, if and to the extent permitted by law, 450 fully paid and nonassessable shares of Series E Preferred Stock of the Company (the "Shares") at an exercise price of $7.94 per share, subject to adjustment as provided in Section 7 hereof (the "Warrant Price"), payable in cash or by check unless exercised pursuant to Section 4 hereof. 2. Exercise Period. The purchase rights represented by this Warrant shall become exercisable on the date that Britannia Hacienda V Limited Partnership ("Landlord") notifies the -1- 2 Company that the work to be constructed by Landlord pursuant to Section 2.4 and Exhibit C of the Build-to-Suit Lease dated September 27, 1996 between Landlord and the Company (the "Lease Agreement") on the shell and core of the Building (as that term is defined in the Lease Agreement) and the first phase of the interior improvements of the Building (as more particularly described in the Lease Agreement) is substantially complete (as that term is defined in the Lease Agreement) and such work is, in fact, substantially complete. The period during which the purchase rights represented by this Warrant are exercisable (the "Exercise Period") shall end on the earlier of (i) five (5) years after the date of the consummation of a public offering of the Company that triggers the automatic conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") or (ii) eight (8) years from the date of this Warrant as set forth on the first page hereof. 3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly filled in and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased, unless exercised pursuant to Section 4 hereof. 4. Conversion Right. During the Exercise Period (and subject to the conditions set forth in Section 2) and in lieu of exercising this Warrant as specified in Section 3, Warrantholder may from time to time convert this Warrant, in whole or in part (but not for a fraction of a share), into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. 5. Fair Market Value. The fair market value per share of the Shares shall be equal to: (i) if the Common Stock issuable upon conversion of the Shares is listed on a national stock exchange or over the counter market, then the price per share listed on such national stock exchange, or the average of the final "bid" and "asked" prices reported on such over the counter market, at the close of business on the date of exercise as reported in the Wall Street Journal multiplied by the quotient of (x) $7.94 divided by (y) the Series E Conversion Price (as defined in the Company's Articles of Incorporation); or (ii) if the Common Stock issuable upon the conversion of the Shares is not listed on a national stock exchange or over the counter market, the Board of Directors of the Company shall determine the fair market value per share of the Shares in its reasonable good faith judgment. 6. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued to the Warrantholder as soon as practicable thereafter. In the case of a partial exercise, unless the purchase -2- 3 rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant, dated as of the same date as this Warrant, for the number of Shares, if any, which remain exercisable hereunder. 7. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine the class of the Company's securities purchasable upon exercise of this Warrant, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of the class of the Company's securities purchasable upon exercise of this Warrant shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reorganization, Reclassification, Consolidation, Merger or Sale. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 7(i)) as a result of any reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of substantially all of the Company's assets to another corporation, the Company or its successor, as applicable, shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of the class of the Company's securities theretofore purchasable upon exercise of this Warrant. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7(iii) shall apply similarly to successive reclassifications and changes. (iv) Dividends in Stock or Property. If at any time or from time to time prior to commencement of the Exercise Period the holders of the Company's Common Stock or of any other class of the Company's securities purchasable upon exercise of this Warrant shall, as a class, receive or become entitled to receive, without payment therefor, any shares of stock or other securities of the Company, any rights or options to acquire or subscribe for any such shares of stock or other securities, or any other property (including cash) distributable other than as a cash dividend (collectively, a "Distribution"), and if no adjustment is made pursuant to Section 7(i), (ii) or (iii) above with respect to such Distribution, then in each such case, the Warrantholder shall, upon exercise of this Warrant, be entitled to receive, in addition to the shares otherwise purchasable upon exercise of this Warrant and without payment of any additional consideration therefor, the amount of stock, other securities and other -3- 4 property (other than cash distributed as a cash dividend) which the Warrantholder would hold or be entitled to receive on the date of such exercise had the Warrantholder been the holder of record, as of the date of such Distribution, of the shares purchased by the Warrantholder upon such exercise. (v) Certain Other Events. If any change in the shares of the class of the Company's securities purchasable upon exercise of this Warrant or any other event occurs as to which the other provisions of this Section 7 are not strictly applicable or if strictly applicable would not fairly protect the reasonable expectations of Warrantholder with respect to its purchase rights under this Warrant, then the Board of Directors of the Company shall make an adjustment in the number and class of shares purchasable under this Warrant, the Warrant Price or the other terms and provisions of this Warrant, so as to protect such reasonable expectations of Warrantholder by giving Warrantholder, upon exercise of this Warrant for the same aggregate Warrant Price payable for full exercise of this Warrant prior to such event, the total number, class and kind of shares (or the closest then available equivalent thereto) as Warrantholder would have owned had this Warrant been exercised prior to such event and had Warrantholder continued to hold such shares until after the event requiring such adjustment. 8. Notice of Adjustments. Whenever the Warrant Price or other terms of this Warrant shall be adjusted pursuant to Section 7 hereof, the Company shall deliver to the Warrantholder a certificate signed by the Company's chief financial officer describing, in reasonable detail, the event requiring the adjustment and the newly adjusted Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 9. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor in an amount equal to the difference between the fair market value of such fractional Share as of the date of exercise and the Warrant Price then in effect with respect to such fractional Share. 10. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Series E Preferred Stock and Common Stock issuable upon conversion of such Series E Preferred Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, and the Common Stock issuable upon conversion of the Shares, when issued pursuant to such conversion, will be duly and validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. 11. Rights Prior to Exercise. Prior to exercise of this Warrant, this Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall this Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company except as set forth in Section 22 hereof. -4- 5 12. Representations of Warrantholder. Warrantholder hereby represents and warrants to the Company, with respect to its purchase of this Warrant and the underlying securities issuable upon the exercise of this Warrant, that the representations and warranties made by Warrantholder to the Company in Section 2 of the Warrant Purchase Agreement are true and correct in all material respects as of the date of this Warrant. 13. Registration Rights. The registration rights of the Warrantholder with respect to this Warrant and the underlying securities are set forth in the Registration Rights Agreement dated December 1, 1989 between the Company and the persons named therein as amended by the Twentieth Amendment to Registration Rights Agreement, dated the date hereof, by and among the Company and the Warrantholders set forth therein. 14. Non-Assignability and Non-Transferability of Warrant. This Warrant is not assignable or otherwise transferable by the Warrantholder without the prior written consent of the Company, except that Warrantholder shall be entitled to transfer this Warrant, without the Company's consent but with prior or concurrent written notice to the Company, to Landlord or to any partner of Landlord or to any affiliate of Warrantholder or of Landlord or of any such partner of Landlord (so long as the number of such partners or affiliates does not exceed five (5) in the aggregate), subject to compliance with federal and state securities laws and to each transferee's agreement to be bound by the terms of the Warrant Purchase Agreement and this Warrant. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, Warrantholder and the Company and their respective permitted successors and assigns. 15. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 16. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Series E Preferred Stock issued upon exercise of this Warrant, referred to in Sections 12 and 13 shall survive the exercise of this Warrant. 17. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 18. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 19. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets in any one transaction or series of related transactions. All of the obligations of the -5- 6 Company relating to the Series E Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 20. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company (such as an affidavit of the registered holder) of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, dated as of the date of the lost, stolen, destroyed or mutilated Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 21. Lock-Up Agreement. Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any of the underlying securities issuable upon exercise of this Warrant for a period of up to 180 days after a firm commitment underwritten initial public offering of the Company, other than a transfer or distribution to Landlord, to any partner of Landlord, or to any affiliate of Warrantholder, of Landlord or of any such partner of Landlord, and then only so long as such transferee agrees in writing to be bound by the restrictions set forth in this Section and so long as the number of any such partners or affiliates who are transferees or distributees does not exceed five (5) in the aggregate (a "Permitted Transfer"). Moreover, in connection with any registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, Warrantholder hereby agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any underlying securities issued or issuable upon exercise of this Warrant (other than those included in the registration or other than a Permitted Transfer) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as the Company or the underwriters may specify. Furthermore, Warrantholder hereby agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the underlying securities issuable upon exercise of the Warrant held by the Warrantholder except in compliance with this Lock-Up Agreement. 22. Information Rights. Upon written request delivered to the Chief Financial Officer of the Company, the Company shall provide to Warrantholder copies of the following documents within a reasonable time after receipt of such request and on or after such documents have been distributed or made available to the Company's shareholders: (i) unaudited quarterly financial statements for each quarter (other than the Company's fourth quarter) of the Company's fiscal year since the date of the Company's most recent audited annual financial statements; (ii) the Company's most recent audited annual financial statements; -6- 7 (iii) after an Initial Public Offering of the Company, registration statements, annual reports on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission; and (iv) letters distributed to holders of the class of the Company's securities purchasable under this Warrant along with the Company's quarterly and annual financial statements, as well as any proxy statements or other information distributed to such holders in connection with any annual or special meeting of the shareholders within the last twelve (12) months preceding such request by Warrantholder. 23. Other Notices. If at any time the Company proposes: (i) To declare any cash dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant; (ii) To declare any dividend upon its Common Stock or upon any other class of its securities purchasable upon exercise of this Warrant payable in stock or make any special dividend or other distribution to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant; (iii) To offer for subscription pro rata to the holders of its Common Stock or to the holders of any other class of its securities purchasable upon exercise of this Warrant any additional shares of stock of any class or other rights; (iv) To engage in any capital reorganization or reclassification of the capital stock of the Company; or consolidation or merger of the Company with, or sale of all or substantially all of its assets (in any one transaction or series of related transactions) to another corporation; or (v) To engage in a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Warrantholder of this Warrant at the address of such Holder as shown on the books of the Company, (a) 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 (b) 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; provided, however, that the Warrantholder shall make a best efforts attempt to respond to such notice as early as possible after the receipt thereof. Any notice given in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of the -7- 8 applicable class of the Company's securities shall be entitled thereto. Any notice given in accordance with the foregoing clause (b) shall also specify the date on which the holders of the applicable class of the Company's securities shall be entitled to exchange their shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. 24. Attorneys' Fees. In the event that any dispute arising out of or in connection with this Warrant should result in litigation, the prevailing party in such litigation shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Warrant, including without limitation, reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals and of enforcement of any judgment issued in such litigation. IN WITNESS WHEREOF, the parties have caused this Warrant to be executed by their respective officers or managers (if applicable), thereunto duly authorized, this 14th day of November, 1996. PROBUSINESS, INC. By: ---------------------------------- Thomas H. Sinton, President -------------------------------------- Laurence Shushan -------------------------------------- Magdalena Shushan, husband and wife, as community property -8- 9 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: ProBusiness, Inc. The undersigned, the Warrantholder, hereby irrevocably elects to exercise the purchase right represented by its Warrant for, and to purchase thereunder, _________ , (______)(3) shares of Series E Preferred Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of ______________________ Dollars ($__________ ) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, ___________________________ , whose address is __________________________. The undersigned represents that it is acquiring such Series E Preferred Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof, and in order to induce the issuance of such Series E Preferred Stock the undersigned makes to the Company the representations and warranties set forth in Section 2 of the Warrant Purchase Agreement between the Company and Warrantholder. DATED: ----------------- ------------------------------------------ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) ------------------------------------------ ------------------------------------------ - -------- (3) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Series E Preferred Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. -9- EX-4.7(A) 17 WARRANT TO PURCHASE COMMON STOCK 1 Exhibit 4.7(a) THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES ACT OF WASHINGTON CHAPTER 21.20 RCW. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR SUCH EXEMPTION BEING AVAILABLE. THIS WARRANT IS NOT TRANSFERABLE WITHOUT THE CONSENT OF THE ISSUER. January 7, 1997 WARRANT TO PURCHASE COMMON STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to Louis R. Baransky (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company"), with its principal address of 5934 Gibraltar Drive, Pleasanton, California 94588. Unless otherwise stated, all capitalized terms herein have the meaning provided in the Stock Acquisition Agreement between the Warrantholder and the Company effective as of January 1, 1997 (the "Stock Acquisition Agreement"). 1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company, if and to the extent permitted by law, 25,000 fully paid and nonassessable shares of Common Stock of the Company (the "Shares") at an exercise price of $9.00 per share, subject to adjustment as provided in Section 5 hereof (the "Warrant Price"), payable in cash or by check. 2. Exercise Period. The purchase rights represented by this Warrant, to the extent not previously exercised, shall expire upon five (5) years from the date hereof (the "Expiration Date"). 2 3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly completed and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased. 4. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued as soon as practicable thereafter. In the case of a partial exercise, unless the purchase rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant for the number of Shares, if any, which remain exercisable hereunder. 5. Legends. Upon exercise of the Warrant, the certificates representing shares of Common Stock of the Company shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES ACT OF WASHINGTON CHAPTER 21.20 RCW. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE OPINION OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT." 6. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. -2- 3 (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Common Stock purchasable hereunder shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reclassification, Consolidation or Merger. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 5(i)) the Company shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of Common Stock theretofore purchasable hereunder at such time, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change, by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The provisions of this Section 5(iii) shall apply similarly to successive reclassifications and changes. 7. Notice of Adjustments. Whenever the Warrant Price shall be adjusted pursuant to Section 6 hereof, the Company shall deliver to the Warrantholder a certificate signed by its chief financial officer describing, in reasonable detail, the event requiring the adjustment and the Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 8. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 9. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Common Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 10. Rights Prior to Exercise. Prior to exercise of this Warrant, the Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall the Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company. -3- 4 11. Representations of Warrantholder. Warrantholder hereby represents and warrants to the Company, with respect to its purchase of the Warrant and the Shares as follows: (i) Investment Representations and Covenants of the Warrantholder. (a) The Warrantholder represents that the Shares to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. The Warrantholder further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. (b) The Warrantholder understands and acknowledges that the offering of the Warrant pursuant to the Agreement will not, and any issuance of the Shares may not, be registered under the Securities Act of 1933, as amended (the "Securities Act"), on the ground that the sale provided for in the Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on the Warrantholder's representations set forth herein. (c) The Warrantholder covenants that it will not make any sale, transfer or other disposition of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934 (the "Securities Exchange Act"), or the rules of the Securities and Exchange Commission (the "Commission") promulgated thereunder. (d) The Warrantholder represents that it is experienced in evaluating companies similar to the Company, is able to fend for itself in transactions such as the one contemplated hereby, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in the Company, has the ability to bear the economic risks of the investment and is an "accredited investor" as defined by Regulation D promulgated under the Securities Act. (e) The Warrantholder acknowledges and understands that the Shares acquired upon the exercise of this Warrant must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available, and that the Company is under no obligation to register the Common Stock. (f) The Warrantholder acknowledges that it has reviewed a copy of Rule 144 promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. The Warrantholder understands that before the Shares may be sold under Rule 144, the following conditions must be fulfilled: (i) certain public information about the Company must be available, (ii) the sale must occur at least two (2) years after the Warrantholder purchased and paid for the Shares, (iii) the sale must be made in a broker's -4- 5 transaction and (iv) the number of Shares sold must not exceed certain volume limitations. The Warrantholder understands that the current information referred to above is not now available and the Company has no present plans to make such information available. (g) The Warrantholder acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act, compliance with the Commission's Regulation D or another exemption from registration will be required for any disposition of its stock. The Warrantholder understands that although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. 12. Nonassignability and Nontransferability of Warrant. This Warrant is not assignable or otherwise transferable by the Warrantholder without the written consent of the Company. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and its successors and assigns. 13. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 14. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Common Stock issued upon exercise of this Warrant, referred to in Section 12 shall survive the exercise of this Warrant. 15. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 16. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 17. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. -5- 6 18. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. -6- 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers, thereunto duly authorized this 7th day of January, 1997. WARRANTHOLDER PROBUSINESS, INC. By: - --------------------------- --------------------------------- Louis R. Baransky Thomas H. Sinton, President -7- 8 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: _______________________ The undersigned, Warrantholder, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ____________, (_____)(1) shares of Common Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of ______________________ Dollars ($___________) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, _________________, whose address is _______________________. The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof and in order to induce the issuance of such Common Stock makes to the Company the representation and warranties set forth in Section 10 of the Warrant. Dated: ___________________ ___________________________________________ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) ___________________________________________ ___________________________________________ __________________ (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. EX-4.7(B) 18 WARRANT TO PURCHASE COMMON STOCK 1 Exhibit 4.7(b) THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES ACT OF WASHINGTON CHAPTER 21.20 RCW. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE VIEW OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THESE SECURITIES ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR SUCH EXEMPTION BEING AVAILABLE. THIS WARRANT IS NOT TRANSFERABLE WITHOUT THE CONSENT OF THE ISSUER. January 7, 1997 WARRANT TO PURCHASE COMMON STOCK This Warrant is issued, for good and valuable consideration of $1.00, receipt of which is hereby acknowledged, to Ben W. Reppond (the "Warrantholder"), by ProBusiness, Inc., a California corporation (the "Company"), with its principal address of 5934 Gibraltar Drive, Pleasanton, California 94588. Unless otherwise stated, all capitalized terms herein have the meaning provided in the Stock Acquisition Agreement between the Warrantholder and the Company effective as of January 1, 1997 (the "Stock Acquisition Agreement"). 1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the Warrantholder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company, if and to the extent permitted by law, 25,000 fully paid and nonassessable shares of Common Stock of the Company (the "Shares") at an exercise price of $9.00 per share, subject to adjustment as provided in Section 5 hereof (the "Warrant Price"), payable in cash or by check. 2. Exercise Period. The purchase rights represented by this Warrant, to the extent not previously exercised, shall expire upon five (5) years from the date hereof (the "Expiration Date"). 2 3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (i) the surrender of this Warrant, together with the Form of Subscription attached hereto as Exhibit 1, duly completed and executed by the Warrantholder, to the Secretary of the Company at its principal offices; and (ii) the payment to the Company of an amount equal to the aggregate purchase price for the Shares being purchased. 4. Certificates for Shares; Partial Exercise. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the Shares so purchased shall be issued as soon as practicable thereafter. In the case of a partial exercise, unless the purchase rights evidenced hereby have expired, the Company shall issue to the Warrantholder a new Warrant for the number of Shares, if any, which remain exercisable hereunder. 5. Legends. Upon exercise of the Warrant, the certificates representing shares of Common Stock of the Company shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES ACT OF WASHINGTON CHAPTER 21.20 RCW. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, IN A TRANSACTION THAT, IN THE OPINION OF COUNSEL TO THE COMPANY, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT PURSUANT TO RULE 144 THEREUNDER OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT." 6. Adjustment of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the purchase rights evidenced by this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (i) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, whether by way of stock split, stock dividend, recapitalization or otherwise, the Warrant Price shall, in the case of a subdivision, be proportionately decreased or, in the case of a combination, be proportionately increased. -2- 3 (ii) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Common Stock purchasable hereunder shall, in the case of an increase in the Warrant Price, be proportionately decreased or, in the case of a decrease in the Warrant Price, be proportionately increased, in either case to the nearest whole share. (iii) Reclassification, Consolidation or Merger. In case of any reclassification or change of outstanding securities of the class purchasable upon exercise of this Warrant (other than as set forth in Section 5(i)) the Company shall execute a new Warrant providing that the Warrantholder shall have the right to exercise such new Warrant for, in lieu of each share of Common Stock theretofore purchasable hereunder at such time, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change, by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The provisions of this Section 5(iii) shall apply similarly to successive reclassifications and changes. 7. Notice of Adjustments. Whenever the Warrant Price shall be adjusted pursuant to Section 6 hereof, the Company shall deliver to the Warrantholder a certificate signed by its chief financial officer describing, in reasonable detail, the event requiring the adjustment and the Warrant Price and, as applicable, the kind and amount of shares of stock, other securities, money or property purchasable hereunder after giving effect to such adjustment. 8. Fractional Shares. No fractional shares shall be issued in connection with any exercise hereunder, but in lieu of any such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 9. Reservation of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its Common Stock, free from all preemptive rights with respect thereto, as will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. 10. Rights Prior to Exercise. Prior to exercise of this Warrant, the Warrant shall not entitle the Warrantholder to any rights of a shareholder with respect to the Shares, including (without limitation) the right to vote such Shares, receive preemptive rights or be notified of shareholder meetings, nor shall the Warrant entitle such Warrantholder to any notice or other communication concerning the business or affairs of the Company. -3- 4 11. Representations of Warrantholder. Warrantholder hereby represents and warrants to the Company, with respect to its purchase of the Warrant and the Shares as follows: (i) Investment Representations and Covenants of the Warrantholder. (a) The Warrantholder represents that the Shares to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. The Warrantholder further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. (b) The Warrantholder understands and acknowledges that the offering of the Warrant pursuant to the Agreement will not, and any issuance of the Shares may not, be registered under the Securities Act of 1933, as amended (the "Securities Act"), on the ground that the sale provided for in the Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on the Warrantholder's representations set forth herein. (c) The Warrantholder covenants that it will not make any sale, transfer or other disposition of the Shares in violation of the Securities Act, the Securities Exchange Act of 1934 (the "Securities Exchange Act"), or the rules of the Securities and Exchange Commission (the "Commission") promulgated thereunder. (d) The Warrantholder represents that it is experienced in evaluating companies similar to the Company, is able to fend for itself in transactions such as the one contemplated hereby, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in the Company, has the ability to bear the economic risks of the investment and is an "accredited investor" as defined by Regulation D promulgated under the Securities Act. (e) The Warrantholder acknowledges and understands that the Shares acquired upon the exercise of this Warrant must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available, and that the Company is under no obligation to register the Common Stock. (f) The Warrantholder acknowledges that it has reviewed a copy of Rule 144 promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. The Warrantholder understands that before the Shares may be sold under Rule 144, the following conditions must be fulfilled: (i) certain public information about the Company must be available, (ii) the sale must occur at least two (2) years after the Warrantholder purchased and paid for the Shares, (iii) the sale must be made in a broker's -4- 5 transaction and (iv) the number of Shares sold must not exceed certain volume limitations. The Warrantholder understands that the current information referred to above is not now available and the Company has no present plans to make such information available. (g) The Warrantholder acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act, compliance with the Commission's Regulation D or another exemption from registration will be required for any disposition of its stock. The Warrantholder understands that although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. 12. Nonassignability and Nontransferability of Warrant. This Warrant is not assignable or otherwise transferable by the Warrantholder without the written consent of the Company. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and its successors and assigns. 13. Governing Law. This Warrant shall be governed by the laws of the State of California, excluding the conflicts of laws provisions thereof. 14. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Warrantholder and of the holder of shares of Common Stock issued upon exercise of this Warrant, referred to in Section 12 shall survive the exercise of this Warrant. 15. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the Warrantholder. 16. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 17. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. -5- 6 18. Lost Warrants. The Company represents and warrants to the Warrantholder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. -6- 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers, thereunto duly authorized this 7th day of January, 1997. WARRANTHOLDER PROBUSINESS, INC. - ------------------------ -------------------------------- Ben W. Reppond By: Thomas H. Sinton, President -7- 8 FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To: _______________________ The undersigned, Warrantholder, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ,_________________ (_______)(1) shares of Common Stock of ProBusiness, Inc. (the "Company") and herewith makes payment of ___________________ Dollars ($___________ ) therefor, and requests that the certificates for such shares be issued in the name of, and delivered to, _____________, whose address is ____________. The undersigned represents that it is acquiring such Common Stock for its own account for investment and not with a view to or for sale in connection with any distribution thereof and in order to induce the issuance of such Common Stock makes to the Company the representation and warranties set forth in Section 10 of the Warrant. Dated: ___________________ ___________________________________________ (Signature must conform in all respects to name of Warrantholder as specified on the face of the Warrant) ___________________________________________ ___________________________________________ ______________________ (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. EX-4.8 19 FORM OF NOTE ISSUED BY PROBUSINESS 1 Exhibit 4.8 THIS NOTE IS BEING ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THIS NOTE MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS THE HOLDER THEREOF RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. October 20, 1995 $ _________ PROBUSINESS, INC. PROMISSORY NOTE WHEREAS, ProBusiness, Inc. (the "Borrower") and the Lenders, as defined in the Loan Agreement (defined hereinafter) have entered into a Loan Agreement dated October 20, 1995 (the "Loan Agreement") pursuant to which Lenders will make up to $2,500,000 available to Borrower; WHEREAS, Borrower requires funds to continue the operation of its business; and WHEREAS, the Lenders desire to provide funds to Borrower on the terms and under the conditions set forth below; NOW, THEREFORE, in consideration of the promises, conditions and representations herein contained, the parties agree as follows: For value received, the undersigned, PROBUSINESS, INC., a California corporation (the "Borrower") promises to pay ____________________________ (the "Lender") the principal sum of __________________ ($_______), plus accrued interest. The principal amount of this Note and interest accrued thereon shall be due and payable on demand on the earlier of (i) three years from the date of the Loan Agreement or (ii) at the option of Lender or Borrower within thirty days after the closing of a public offering of the Company that triggers the conversion of the Company's outstanding Preferred Stock into the Company's Common Stock under the Company's Articles of Incorporation, as amended. The principal amount shall accrue interest at the rate of 8% per annum or if less, the maximum rate permitted by applicable law commencing on the date of the Loan Agreement. Borrower shall make quarterly payments to Lender for the amount of interest accrued on the principal sum outstanding under this Note beginning on December 31, 1995. All payments on this Note will be credited first against accrued interest and then against the remaining principal. This Note may be prepaid at any time without penalty after one year from the date of the Loan Agreement, pursuant to the terms of the Loan Agreement. 2 1. Events of Default; Remedies. 1.1 Events of Default. The occurrence of any one or more of the following events after the date of the Loan Agreement shall constitute an "Event of Default": (a) Borrower fails to make timely payment of any principal, interest, fees or other charges when due hereunder; (b) Any material warranty, representation or other statement made to Lender by Borrower under the Loan Agreement proves to have been false or misleading in any material respect when made or furnished; (c) Borrower fails or neglects to perform, keep or observe any other material term, provision, condition, covenant, warranty or representation contained in the Loan Agreement, which is required to be performed, kept or observed by Borrower; (d) Borrower shall commence any proceeding or other action relating to it in bankruptcy or seek reorganization, arrangement, readjustment of its debts, dissolution, liquidation, winding-up, composition or any other relief under the Bankruptcy Act, as amended, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; (e) Borrower shall admit the material allegations of any petition or pleading in connection with any such proceeding; (f) Borrower shall apply for, or consent to or acquiesce in, the appointment of a receiver, conservator, trustee or similar officer for it or for all or a substantial part of its property; (g) Borrower shall make a general assignment for the benefit of creditors; or (h) Borrower shall admit in writing its inability to pay its debts as they mature. 1.2 Acceleration of the Obligations. Upon the occurrence of an Event of Default as above provided, all or any portion of the obligations due or to become due from Borrower to Lender shall, at the option of Lender, and without notice or demand by Lender, become at once due and payable. Borrower will forthwith pay to Lender, in addition to any and all sums and charges due, the entire outstanding principal balance and interest accrued thereon. -2- 3 2. Subordination. To the extent there is any conflict between the provisions of this Section 2 and the other provisions of this Note, the provisions of this Section 2 shall control. (a) Lender hereby subordinates to Silicon Valley Bank ("Bank") any security interest or lien that Lender may have or in the future obtain in any property of Borrower. Notwithstanding any respective dates of attachment or perfection of the security interest of Lender and the security interest of Bank, the security interest of Bank in the property of Borrower shall at all times be prior to the security interest of Lender. (b) All indebtedness hereunder (the "Subordinated Debt") is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding (the "Senior Debt"). (c) Lender will not demand or receive from Borrower (and Borrower will not pay to Lender) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Lender exercise any remedy with respect to any of Bank's collateral, nor will Lender commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Lender shall be entitled to receive each regularly scheduled payment of interest that constitutes Subordinated Debt, provided that an event of default, as defined in the financing agreements between Borrower and Bank, has not occurred and is not continuing and would not exist immediately after such payment. (d) Lender shall promptly deliver to Bank in the form received (except for endorsement or assignment by Lender where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Lender with respect to the Subordinated Debt other than in accordance with this Section 2. (e) In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, the provisions of this Section 2 shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Lender. (f) For so long as any of the Senior Debt remains unpaid, Lender irrevocably appoints Bank as Lender's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Lender or in the name of Bank, for the use and benefit of Bank, without notice to Lender, to perform at Bank's option the following acts in any bankruptcy, insolvency or similar proceeding involving Borrower: (i) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Lender if Lender does not do so prior to 30 days before the expiration of the time to -3- 4 file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims; and (ii) To accept or reject any plan of reorganization or arrangement on behalf of Lender and to otherwise vote Lender's claims in respect of any Subordinated Debt in any manner that Bank deems appropriate for the enforcement of its rights hereunder. (g) This Section 2 shall remain effective for so long as Borrower owes any amounts to Bank. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Section 2 and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made and Lender shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, without notice to Lender, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Bank's rights hereunder. Lender waives the benefits, if any, of California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. (h) The provisions of this Section 2 shall bind any successors or assignees of Lender and shall benefit any successors or assigns of Bank, and, if Borrower refinances a portion of the Senior Debt with a new lender, such new lender shall be deemed a successor of Bank for the purposes of this Section 2. This Section 2 is solely for the benefit of Lender and Bank and not for the benefit of Borrower or any other party. (i) The provisions of this Section 2 may be amended only by written instrument signed by Lender and Bank. (j) In the event of any legal action to enforce the rights of a party under this Section 2, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 3. Conditions to Which Note is Subject. The acceptance of this Note by Lender and the issuance of this Note by Borrower are subject to the fulfillment of the following conditions: 3.1 Representations and Warranties Correct. The representations and warranties made by Borrower and Lender in Section 4 and Section 5, respectively, of the Loan Agreement shall be true and correct in all material respects as of the Closing Date (as defined in the Loan Agreement). -4- 5 3.2 Covenants. All covenants, agreements and conditions contained in the Loan Agreement to be performed by Borrower and Lender, respectively, on or prior to the Closing Date shall have been performed or complied with in all material respects. 4. Governing Law. This Note is issued in and shall be interpreted under the laws of the State of California. 5. Assignment. This Note may not be assigned or transferred without the written consent of Borrower. The terms and provisions of this Note shall inure to the benefit of, and be binding upon, Borrower and its successors and assigns. 6. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. Issued this 20th day of October, 1995. PROBUSINESS, INC. By: ----------------------------------- Thomas H. Sinton, President -------------------------------------- (Lender) By: ----------------------------------- Title: ------------------------------- -5- 6 THIS NOTE IS BEING ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. THIS NOTE MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS THE HOLDER THEREOF RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. __________, 1995 $_________ PROBUSINESS, INC. PROMISSORY NOTE WHEREAS, ProBusiness, Inc. (the "Borrower") and the Lenders, as defined in the Loan Agreement (defined hereinafter) have entered into a Loan Agreement dated October 20, 1995 as amended by the First Amendment to the Loan Agreement dated ___________, 1995 (collectively, the "Loan Agreement") pursuant to which Lenders will make up to $4,000,000 available to Borrower; WHEREAS, Borrower requires funds to continue the operation of its business; and WHEREAS, the Lenders desire to provide funds to Borrower on the terms and under the conditions set forth below; NOW, THEREFORE, in consideration of the promises, conditions and representations herein contained, the parties agree as follows: For value received, the undersigned, PROBUSINESS, INC., a California corporation (the "Borrower") promises to pay _______________________________ (the "Lender") the principal sum of __________________ ($_______), plus accrued interest. The principal amount of this Note and interest accrued thereon shall be due and payable on demand on the earlier of (i) three years from the date of the Loan Agreement or (ii) at the option of Lender or Borrower within thirty days after the closing of a public offering of the Company that triggers the conversion of the Company's outstanding Preferred Stock into the Company's Common Stock under the Company's Articles of Incorporation, as amended. The principal amount shall accrue interest at the rate of 8% per annum or if less, the maximum rate permitted by applicable law commencing on the date of the Loan Agreement. Borrower shall make quarterly payments to Lender for the amount of interest accrued on the principal sum outstanding under this Note beginning on December 31, 1995. All 7 payments on this Note will be credited first against accrued interest and then against the remaining principal. This Note may be prepaid at any time without penalty after the earlier of (i) one year from the date of the Loan Agreement, or (ii) a public offering of the Borrower that triggers the conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") pursuant to the terms of the Loan Agreement. 7. Events of Default; Remedies. 7.1 Events of Default. The occurrence of any one or more of the following events after the date of the Loan Agreement shall constitute an "Event of Default": (a) Borrower fails to make timely payment of any principal, interest, fees or other charges when due hereunder; (b) Any material warranty, representation or other statement made to Lender by Borrower under the Loan Agreement proves to have been false or misleading in any material respect when made or furnished; (c) Borrower fails or neglects to perform, keep or observe any other material term, provision, condition, covenant, warranty or representation contained in the Loan Agreement, which is required to be performed, kept or observed by Borrower; (d) Borrower shall commence any proceeding or other action relating to it in bankruptcy or seek reorganization, arrangement, readjustment of its debts, dissolution, liquidation, winding-up, composition or any other relief under the Bankruptcy Act, as amended, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; (e) Borrower shall admit the material allegations of any petition or pleading in connection with any such proceeding; (f) Borrower shall apply for, or consent to or acquiesce in, the appointment of a receiver, conservator, trustee or similar officer for it or for all or a substantial part of its property; (g) Borrower shall make a general assignment for the benefit of creditors; or (h) Borrower shall admit in writing its inability to pay its debts as they mature. 7.2 Acceleration of the Obligations. Upon the occurrence of an Event of Default as above provided, all or any portion of the obligations due or to become due from Borrower to -7- 8 Lender shall, at the option of Lender, and without notice or demand by Lender, become at once due and payable. Borrower will forthwith pay to Lender, in addition to any and all sums and charges due, the entire outstanding principal balance and interest accrued thereon. 8. Subordination. To the extent there is any conflict between the provisions of this Section 2 and the other provisions of this Note, the provisions of this Section 2 shall control. (a) Lender hereby subordinates to Silicon Valley Bank ("Bank") any security interest or lien that Lender may have or in the future obtain in any property of Borrower. Notwithstanding any respective dates of attachment or perfection of the security interest of Lender and the security interest of Bank, the security interest of Bank in the property of Borrower shall at all times be prior to the security interest of Lender. (b) All indebtedness hereunder (the "Subordinated Debt") is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding (the "Senior Debt"). (c) Lender will not demand or receive from Borrower (and Borrower will not pay to Lender) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Lender exercise any remedy with respect to any of Bank's collateral, nor will Lender commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Lender shall be entitled to receive each regularly scheduled payment of interest that constitutes Subordinated Debt, provided that an event of default, as defined in the financing agreements between Borrower and Bank, has not occurred and is not continuing and would not exist immediately after such payment. (d) Lender shall promptly deliver to Bank in the form received (except for endorsement or assignment by Lender where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Lender with respect to the Subordinated Debt other than in accordance with this Section 2. (e) In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, the provisions of this Section 2 shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Lender. (f) For so long as any of the Senior Debt remains unpaid, Lender irrevocably appoints Bank as Lender's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Lender or in the name of Bank, for the use and benefit of Bank, without notice to Lender, to perform at Bank's option the following acts in any bankruptcy, insolvency or similar proceeding involving Borrower: -8- 9 (i) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Lender if Lender does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims; and (ii) To accept or reject any plan of reorganization or arrangement on behalf of Lender and to otherwise vote Lender's claims in respect of any Subordinated Debt in any manner that Bank deems appropriate for the enforcement of its rights hereunder. (g) This Section 2 shall remain effective for so long as Borrower owes any amounts to Bank. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Section 2 and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made and Lender shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, without notice to Lender, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Bank's rights hereunder. Lender waives the benefits, if any, of California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. (h) The provisions of this Section 2 shall bind any successors or assignees of Lender and shall benefit any successors or assigns of Bank, and, if Borrower refinances a portion of the Senior Debt with a new lender, such new lender shall be deemed a successor of Bank for the purposes of this Section 2. This Section 2 is solely for the benefit of Lender and Bank and not for the benefit of Borrower or any other party. (i) The provisions of this Section 2 may be amended only by written instrument signed by Lender and Bank. (j) In the event of any legal action to enforce the rights of a party under this Section 2, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 9. Conditions to Which Note is Subject. The acceptance of this Note by Lender and the issuance of this Note by Borrower are subject to the fulfillment of the following conditions: 9.1 Representations and Warranties Correct. The representations and warranties made by Borrower and Lender in Section 4 and Section 5, respectively, of the Loan Agreement shall -9- 10 be true and correct in all material respects as of the Closing Date (as defined in the Loan Agreement). 9.2 Covenants. All covenants, agreements and conditions contained in the Loan Agreement to be performed by Borrower and Lender, respectively, on or prior to the Closing Date shall have been performed or complied with in all material respects. 10. Governing Law. This Note is issued in and shall be interpreted under the laws of the State of California. 11. Assignment. This Note may not be assigned or transferred without the written consent of Borrower. The terms and provisions of this Note shall inure to the benefit of, and be binding upon, Borrower and its successors and assigns. 12. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. Issued this ___ day of _______, 1995. PROBUSINESS, INC. By: -------------------------------- Thomas H. Sinton, President LENDER ----------------------------------- (Lender) By: -------------------------------- Title: ----------------------------- -10- 11 PROBUSINESS, INC. FIRST AMENDMENT TO NOTE This First Amendment to the note issued on October 20, 1995 (the "Note") by ProBusiness, Inc., a California corporation (the "Borrower") to __________________ (the "Lender") is made as of December 12, 1995 between the Borrower and the Lender. WHEREAS, the Borrower and the Lenders, as defined in the Loan Agreement (defined hereinafter) have entered into a Loan Agreement dated October 20, 1995, as amended by the First Amendment to the Loan Agreement dated December 12, 1995 (collectively, the "Loan Agreement"); WHEREAS, the Borrower issued the Note to the Lender for good and valuable consideration; WHEREAS, the Lender possesses certain rights under the Note; NOW, THEREFORE, pursuant to the terms of the Note, and in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree to amend the last sentence of the first paragraph of the Note to read in its entirety as follows: "This Note may be prepaid at any time without penalty after the earlier of (i) one year from the date of the Loan Agreement, or (ii) a public offering of the Borrower that triggers the conversion of Series E Preferred Stock of the Company into Common Stock under the Company's Articles of Incorporation (an "Initial Public Offering") pursuant to the terms of the Loan Agreement." 12 IN WITNESS WHEREOF, the parties have duly executed this First Amendment to Note on the day and year first above written. LENDER PROBUSINESS, INC. ___________________________ By: _______________________ By: _____________________________________ Thomas H. Sinton, Title: ____________________ President and Chief Executive Officer EX-5.1 20 OPINION OF WILSON SONSINI GOODRICH & ROSATI 1 EXHIBIT 5.1 March 12, 1997 PROBUSINESS SERVICES, INC. 5934 Gibraltar Drive Pleasanton, CA 94588 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by you with the Securities and Exchange Commission on March 12, 1997 (Registration No. 333-____), as amended (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of up to 2,300,000 shares of your Common Stock, $0.001 par value per share (the "Shares"). The Shares include an over-allotment option granted to the underwriters of the offering to purchase up to 300,000 shares. We understand that the Shares are to be sold to the underwriters of the offering for resale to the public as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Shares to be sold by you. It is our opinion that upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, including the proceedings being taken in order to permit such transaction to be carried out in accordance with applicable state securities laws, the Shares, when issued and sold in the manner described in the Registration Statement, will be legally issued, fully paid and non-assessable. We are members of the Bar of the State of California only and express no opinion as to any matter relating to the laws of any jurisdiction other than the laws of the State of California and the federal laws of the United States. Without limiting the foregoing, we express no opinion as to the securities laws of the State of Delaware. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.1 21 LEASE AGREEMENT DATED AUGUST 12, 1992 1 EXHIBIT 10.1 [CB LOGO] OFFICE BUILDING LEASE CB COMMERCIAL REAL ESTATE GROUP, INC. BROKERAGE AND MANAGEMENT LICENSED REAL ESTATE BROKER TABLE OF CONTENTS PAGE Article 1 LEASE OF PREMISES............................ 1 Article 2 DEFINITIONS.................................. 1 Article 3 EXHIBITS AND ADDENDA......................... 2 Article 4 DELIVERY OF POSSESSION....................... 2 Article 5 RENT......................................... 2 Article 6 INTEREST AND LATE CHARGES.................... 4 Article 7 SECURITY DEPOSIT............................. 4 Article 8 TENANT'S USE OF THE PREMISES................. 4 Article 9 SERVICES AND UTILITIES....................... 5 Article 10 CONDITION OF THE PREMISES.................... 5 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE........ 5 Article 12 ALTERATIONS AND ADDITIONS.................... 6 Article 13 LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY.... 6 Article 14 RULES AND REGULATIONS........................ 7 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD.......... 7 Article 16 ASSIGNMENT AND SUBLETTING.................... 7 Article 17 HOLDING OVER................................. 8 Article 18 SURRENDER OF PREMISES........................ 8 Article 19 DESTRUCTION OR DAMAGE........................ 8 Article 20 EMINENT DOMAIN............................... 8 Article 21 INDEMNIFICATION.............................. 9 Article 22 TENANT'S INSURANCE........................... 9 Article 23 WAIVER OF SUBROGATION........................ 10 Article 24 SUBORDINATION AND ATTORNMENT................. 10 Article 25 TENANT ESTOPPEL CERTIFICATES................. 10 Article 26 TRANSFER OF LANDLORD'S INTEREST.............. 10 Article 27 DEFAULT...................................... 10 Article 28 BROKERAGE FEES............................... 11 Article 29 NOTICES...................................... 11 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS........ 11 Article 31 RELOCATION OF PREMISES....................... 11 Article 32 QUIET ENJOYMENT.............................. 12 Article 33 OBSERVANCE OF LAW............................ 12 Article 34 FORCE MAJEURE................................ 12 Article 35 CURING TENANT'S DEFAULTS..................... 12 Article 36 SIGN CONTROL................................. 12 Article 37 MISCELLANEOUS................................ 12 2 [CB COMMERCIAL LOGO] This Lease between Hacienda Park Associates , ----------------------------------------------------------- a California General Partnership ---------------------------------------------------------------------------- ("Landlord"), and Pro Business Payroll , ------------------------------------------------------------ a California corporation , ("Tenant"), is -------------------------------------------------------------- dated August 12 , 1992. ---------------------------------------------------------------- --- 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A", and further described at Section 2l. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. Base Rent (initial): $ refer to 2j ---------------------------------------------------- b. Base Year: The calendar year of 1992 , ------------------------------------------- c. Broker(s) Landlord's: CB Commercial , ---------------------------------------------------------- Tenant's: CB Commercial , ------------------------------------------------------------- In the event that CB Commercial Real Estate Group, Inc. represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. d. Commencement Date: October 1, 1992 , ---------------------------------------------------------- e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. Expense Stop: (fill in if applicable): $ 6.68 per square foot, per year , ------------------------------------- g. Expiration Date: September 30, 1998 , unless otherwise ------------------------------------------ sooner terminated in accordance with the provisions of this Lease. h. Index (Section 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, -------------------- Average, Subgroup "All Items" (1967 = 100). i. Landlord's Mailing Address: CB Commercial Real Estate Group, Inc. ------------------------------------------------ 5667 B Gibraltar Drive, Pleasanton, CA 94588 Tenant's Mailing Address: 5934 Gibraltar Drive, Pleasanton, CA 94588 ------------------------------------------------ ----------------------------------------------------------------------------- Mos. 1 - 9 $14,047.20 1.20 5/12/92 j. Monthly Installments of Base Rent (initial): 5/13 Mos. 10-15 $15,803.10 1.35 5/12/93 - 11/15/93 per month. ------------------------------------------------------ 11/23 Mos. 16-72 $16,973.70 1.45
k. Parking: Tenant shall be permitted, upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park 46 cars on a -- non-exclusive basis in the area(s) designated by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. l. Premises: that portion of the Building containing approximately 11,706 ------ square feet of Rentable Area, shown by diagonal lines on Exhibit "A", located on the second floor of the Building and known as Suite 201. ------ --- m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 5934 Gibraltar Drive, 4696 Willow Road and 4698 Willow Road, ----------------------------------------------------------------- Pleasanton, California and further described at Exhibit "8." The Project ---------------------- is known as Saratoga Center. ---------------- n. Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. (1) 3 p. State: the State of California ------------------------------------------------------- q. Tenant's First Adjustment Date (Section 5.2): the first day of the calendar month following the Commencement Date plus months. -------- r. Tenant's Proportionate Share: Upon completion of tenant improvements described in Exhibit "C", Tenant's proportionate share of the building containing the Premises shall be 28.10%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Gross Area of the Building, as determined by the Landlord from time to time. The Building consists of 41,656 square feet. Tenant's proportionate share of the Project shall be 14.06%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Project, as determined by the Landlord from time to time. The project consists of two buildings containing a total Rentable Area of 83,230 square feet. s. Tenant's Use Clause (Article 8): Payroll Services ----------------------------------------- t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A" - Floor Plan showing the Premises. b. Exhibit "B" - Site Plan of the Project. c. Exhibit "C" - Space Plan dated August 12, 1992 d. Exhibit "D" - Rules and Regulations. e. f. Addenda - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C." If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including, without limitation, the payment of Rent. 5. RENT 5.1 Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly Installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. (2) 4 (a) All taxes, assessments, water and sewer charges and other similar government charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. 2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). (3) 5 (f) If this Lease sets forth an Expense Stop at Section 2f, then during the lease, Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 Definition of Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money of the United States of America. 5.5 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due. Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall (4) 6 comply with the provisions or this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, or on about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant and Tenant shall pay Landlord's charges therefor on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered. Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C". Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. Tenant's Obligations. (1) Tenant shall perform Tenant's Work to the Premises as described in Exhibit "C". (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures. Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. (5) 7 (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. (6) 8 b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. (7) 9 d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptanace of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision thereof. Consent to one assignment or subletting's shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate the Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. (8) 10 b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor, Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancellable except after (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad from property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. (9) 11 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are not uncured defaults in Landlord's performance and that Tenant has no right to offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT 27.1. Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2. Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. (10) 12 If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due, if that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the Premises to another part of the Building in accordance with the following: (11) 13 a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days written notice of Landlord's intention to relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. (12) 14 f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements; Tenant's Representations. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonably be cured within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. The parties hereto have executed this Lease as of the dates set forth below. Date: 9/21/92 Date: 8/14/92 -------------------------------- ---------------------------------- Landlord: Hacienda Park Associates, Tenant: Pro Business Payroll, ---------------------------- -------------------------------- a California General a California Corporation Partnership By: /s/ Peter P. Canny, Jr. By: /s/ John M. Hulina ---------------------------------- ------------------------------------ Title: Vice President Title: President CEO ------------------------------- --------------------------------- By: By: ---------------------------------- ------------------------------------ Title: Title: ------------------------------- --------------------------------- CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made by CB Commercial as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. (13) 15 THIS ADDENDUM IS MADE A PART OF THE OFFICE BUILDING LEASE DATED AUGUST 12, 1992 BY AND BETWEEN HACIENDA PARK ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP ("LESSOR") AND PRO BUSINESS PAYROLL, A CALIFORNIA CORPORATION ("LESSEE"): 38. REMOVAL OF TENANT'S FURNITURE AND FIXTURES: Tenant agrees, at its sole cost and expense, to remove all furniture and fixtures to accommodate tenant improvement construction. In the event Tenant fails to do so, Landlord shall move Tenant's furniture and charge Tenant for the cost associated with doing so. 39. NOTIFICATION OF AVAILABLE SPACE: In the event space comes available within the building during tenant's lease term, Landlord shall notify Tenant in writing of the availability. Landlord shall have no obligation to hold available space off the market and shall only be obligated to notify Tenant of the availability of the space. 40. OPTION TO RENEW: Provided that Tenant is not in default hereunder either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the Lease for one (1) extended five (5) year term on the same terms, covenants and conditions provided herein, except that upon such renewal the monthly base rent due hereunder shall be determined pursuant to Paragraph B. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least one hundred eighty (180) days prior to the expiration of the initial term of this Lease. B. Option Period Monthly Rent. The Monthly Rent for the Option Period, which shall include the initial Monthly Rent and all adjustments, shall be determined as follows: (i) The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period based upon the then fair market rental value of the Premises as defined in Paragraph B (iii). If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. (ii) If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option Period shall be the then current fair market rental value of the Premises as determined in accordance with Paragraph B (iv). (iii) The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Pleasanton. In no event shall the fair market monthly value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. (iv) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 51.B (ii), each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full time commercial appraisal experience in the area in which the Premises are located to appraise and set the then fair market rental value of the Premises for the Option Period. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the then fair market rental value of the Premises. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) 16 days' notice to the other party, can apply to the then President of the Alameda County Real Estate Board or to the then President Judge of the Alameda County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the then fair market value of the Premises. If a majority of the appraisers are unable to set the then fair market rental value of the Premises within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the then fair market rental value of the Premises. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the then fair market rental value of the Premises. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the then fair market rental value of the Premises. After the then fair market rental value of the Premises has been set, the appraisers shall immediately notify the parties and the Monthly Rent for the Option Period shall be such amount. Except as expressly provided herein, the Lease shall remain in full force and effect. LANDLORD: TENANT: Hacienda Park Associates Pro Business Payroll A California General Partnership A California Corporation By: Peter P. Canny, Jr. By: John M. Hulina ------------------- -------------------- Its: Vice President Its: President CEO ------------------- -------------------- 17 EXHIBIT "A" GROUND FLOOR PLAN 2ND FLOOR PLAN SARATOGA ONE (Two Story) 18 SARATOGA CENTER SITE 30A 5934 GIBRALTAR DRIVE PLEASANTON, CALIFORNIA EXHIBIT "B" [SITE MAP] 19 EXHIBIT C [FLOOR PLAN] FLOOR PLAN - ------------------------------------------------------------------------------- DATE: 8-12-92 PRO-BUSINESS PAYROLL 5934 GIBRALTAR DR. PLEASANTON, CA 20 27. Tenant's request for assistance will be attended to only upon appropriate application to Landlord by an authorized individual. Employees of Landlord shall not perform any work on the Premises, other than that associated with the provision of services to Tenant required of Landlord under the Lease for the Premises, or implement a request of Tenant, unless that employee receives written instructions from Landlord. 28. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight, nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space. 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other Tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of Premises in the Building. 31. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety, security, care and cleanliness of the Building and the Property and the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are published by Landlord. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 33. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends or at other times as Landlord may designate. Landlord shall have right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. If Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 34. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 35. Canvassing, soliciting, and distribution of handbills or other written material and peddling in the Building are prohibited and each Tenant shall cooperate to prevent these activities. 36. As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall: (a) On Monday through Friday, except holidays, from 7:00 a.m. to 6:30 p.m. (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and Page 4 (Rev. 5/31/88) (E-Exh) 21 furnish air conditioning or heating on such days and hours when in the judgment of Landlord it may be required for the comfortable occupancy of the Premises. After hours usage shall be monitored by the override meter which shall be installed in the Premises and the actual cost of such usage shall be paid by Tenant. (b) Furnish to the Premises, Monday through Friday, from 7:30 a.m. to 6:30 p.m., electric current as required by the Building Standard office lighting and fractional horsepower office business machines in the amount of approximately two and one-half (2.5) watts per square foot. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the terms, classifications and rate charges to similar consumers by the public utility serving the neighborhood in which the Building is located. Page 5 (Rev. 5/31/88) (E-Exh) 22 SECOND AMENDMENT TO LEASE This Amendment dated this 4th day of February, 1992, between Hacienda Park Associates, a California General Partnership ("Landlord"), and Pro Business Payroll, a California Corporation, ("Tenant"), for the premises located in the City of Pleasanton, County of Alameda, State of California, commonly known as 5934 Gibraltar Drive, Suite 201. 1. RECITALS. Landlord and Tenant being parties to that certain Lease dated April 17, 1990, hereby express their mutual desire and intent to amend by this writing those terms, covenants and conditions contained in Paragraph 1.7. MONTHLY RENT as hereinafter provided. 2. AMENDMENTS. 1.7. MONTHLY RENT shall hereinafter additionally provide as follows:
Operating Expense PERIOD Base Rent Base (yr-1990) Total ------ --------- ----------------- ----- 12/15/91-04/26/92 $2,667.71 $3,431.68 $6,099.39 04/27/92-10/14/92 $3,961.52 $3,431.68 $7,393.20
3. INCORPORATION. Except as modified herein, all other terms and conditions of the Lease between the parties above described shall continue in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed the Amendment as of the day and year first written above. Landlord: Tenant: HACIENDA PARK ASSOCIATES, a PRO BUSINESS PAYROLL, a California General Partnership California Corporation By: Peter P. Canny, Jr. By: John M. Hulina ---------------------------- ------------------------------- Its: Vice President Its: President --------------------------- ------------------------------ 23 FIRST ADDENDUM TO LEASE That certain Lease dated April 17, 1990 by and between Hacienda Park Associates, a California General Partnership ("Landlord"), and Pro Business Payroll, a California Corporation ("Tenant") whose address is 5934 Gibraltar Drive, Suite 201, is hereby amended to reflect the following: Paragraph 1.3. Premises: Commencing December 15, 1991 and ending October 14, 1992, Tenant leases an additional 1,852 sq.ft. known as Suite 105 (additional Premises), more particularly described in "Exhibit G" attached hereto. The total leased square footage is 6,161. Paragraph 1.7. Monthly Rent:
Period Total Monthly Rent ------ ------------------ Dec. 15, 1991 - April 26, 1992 $6,099.39 April 27, 1992 - Oct. 14, 1992 $7,393.20
Paragraph 1.10. Tenant's Building Percentage: The Tenant's building percentage shall be modified to 14.73 percent. Paragraph 1.11. Tenant's Project Percentage: Tenant's project percentage shall be modified to 7.43 percent. Paragraph 1.13. Broker(s) CB Commercial Real Estate Group, Inc. Paragraph 43. Tenants Right To Terminate Additional Premises: Should space contiguous to Suite 201 become available prior to October 14, 1992, Tenant shall have the right to terminate the lease on Suite 105 and relocate to the available contiguous space for the balance of the base lease term described in Paragraph 1.5 of the lease. The monthly rental rate for the contiguous space shall be based on the monthly rental schedule per square foot as described in Paragraph 1.7.1. of the lease. The Landlord shall provide a tenant improvement allowance of not to exceed $10.00 per useable square foot for said available contiguous space. All other terms and conditions of the original lease shall remain unchanged and in full force and effect. Landlord: Tenant: HACIENDA PARK ASSOCIATES PRO BUSINESS PAYROLL a California General Partnership a California Corporation By: Peter P. Canny, Jr. By: John M. Hulina ----------------------------- ----------------------------- Its: Vice President Its: President CEO ----------------------------- ----------------------------- 24 EXHIBIT G [FLOOR PLAN] 25 LEASE TERMINATION AGREEMENT Upon occupancy of the Premises described in that certain Lease dated August 12, 1992 by and between Pro Business Payroll, a California corporation ("Tenant") and Hacienda Park Associates, a California general partnership ("Landlord"), the lease dated April 17, 1990 and amended by the first, second and third amendments between the parties described herein shall be null and void and of no further effect. Tenant's Security Deposit in the amount of Six Thousand Two Hundred Forty Eight and no/100 dollars ($6,248.00) shall be transferred to Tenant's new lease dated August 12, 1992. LANDLORD TENANT HACIENDA PARK ASSOCIATES, Pro Business Payroll a California General Partnership a California Corporation By: /s/ Peter P. Canny, Jr. By: /s/ John M. Hulina ----------------------------- ------------------------ Its: Vice President Its: President CEO ---------------------------- ----------------------- 26 FIRST AMENDMENT TO LEASE This First Amendment to Lease ("Amendment") is entered into this 23rd day of March, 1994 and amends that certain Lease by and between HACIENDA PARK ASSOCIATES, a California General Partnership, ("Landlord") and PRO BUSINESS PAYROLL, a California Corporation, ("Tenant") dated August 12, 1992 attached hereto as Exhibit A. Now therefore, the parties agree as follows: Expiration Date: March 31, 1999 Monthly Installments of Base Rent: Mos. 01 - 09: $14,047.20 Mos. 10 - 15: $15,803.10 Mos. 16 - 78: $16,973.70 All other terms and conditions of the Lease between the parties shall remain in full force and effect. LANDLORD TENANTS HACIENDA PARK ASSOCIATES PRO BUSINESS PAYROLL By: /s/ Peter P. Canny, Jr. By: /s/ Mitchell Everton ----------------------------- --------------------------- Its: Vice President Its: EVP - OPERATIONS ---------------------------- -------------------------- 27 LEASE TERMINATION AGREEMENT Upon occupancy of the Premises described in that certain Lease dated August 12, 1992 by and between Pro Business Payroll, a California corporation ("Tenant") and Hacienda Park Associates, a California general partnership ("Landlord"), the lease dated April 17, 1990 and amended by the first, second and third amendments between the parties described herein shall be null and void and of no further effect. Tenant's Security Deposit in the amount of Six Thousand Two Hundred Forty Eight and no/100 dollars ($6,248.00) shall be transferred to Tenant's new lease dated August 12, 1992. LANDLORD TENANT HACIENDA PARK ASSOCIATES, Pro Business Payroll a California General Partnership a California Corporation By: /s/ Peter P. Canny, Jr. By: /s/ John M. Hulina ----------------------------- ------------------------ Its: Vice President Its: President CEO ---------------------------- ----------------------- 28 Suite 206 SECOND AMENDMENT TO LEASE This Second Amendment to Lease ("Amendment") is entered into this 9th day of December, 1994 and amends that certain Lease by and between Hacienda Park Associates, a California General Partnership, ("Landlord") and Pro Business Payroll, a California Corporation, ("Tenant"), dated August 12, 1992 as amended by the First Amendment to Lease dated March 23, 1994 attached hereto as Exhibit A. Now therefore, the parties agree as follows: 1. PREMISES: Commencing July 1, 1995, the rentable square footage shall be increased by 5,259 square feet to a total of 16,965 square feet by adding the space known as Suite 206, as defined on Exhibit E attached hereto, to tenant's existing Premises. 2. MONTHLY RENT: Effective July 1, 1995 the monthly rental rate shall increase by $7,152.24 per month. 3. OPERATING EXPENSES: The base year operating expenses for Suite 206 shall be 1995. 4. TENANT'S PROPORTIONATE SHARE: Upon completion of tenant improvements, Tenant's proportionate share of the building containing the Premises shall be 40.73% Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Gross Area of the Building (Building A), as determined by the Landlord from time to time. The Building consists of 41,656 square feet. Tenant's proportionate share of the Project shall be 20.37%. The Project's land value, related assessments and Outside Area Expenses are allocated 50.01% to Building A and 49.99% to Building B. Tenant's share is a product of Tenant's Building share multiplied by Building A's share of the Project. The Project consists of two buildings containing a total Rentable Area of 83,230 square feet. 5. TENANT IMPROVEMENT ALLOWANCE: The Landlord shall contribute up to $21,036 to complete modifications to the space, which includes all architectural costs and permit fees. 6. CONTINGENCY: This Second Amendment to Lease is contingent upon Future Innovations executing a termination agreement with the Landlord and vacating Suite 206. Landlord to give notice to Tenant on or before March 3, 1995 of Future Innovations intent to terminate its lease and to vacate Suite 206 by June 1, 1995. Failure of Future Innovations to provide intent to terminate by 3/3/95 nullifies this amendment. All other terms and conditions of the Lease between the parties shall remain in full force and effect. LANDLORD TENANT Hacienda Park Associates, Pro Business Payroll By: /s/ Peter P. Canny, Jr. By: /s/ Mitchell Everton ----------------------------- ------------------------ Its: Vice President Its: EVP - OPERATIONS ---------------------------- ----------------------- Date: 12/20/94 Dated: 12/12/94 --------------------------- --------------------- 29 THIRD AMENDMENT TO LEASE This Third Amendment to Lease ("Amendment") is entered into this 16th day of March, 1995 and amends that certain Lease by and between Hacienda Park Associates, a California General Partnership, ("Landlord") and Pro Business Payroll, a California Corporation, ("Tenant"), dated August 12, 1992 as amended by the Second Amendment to Lease dated December 9, 1994, as amended by the First Amendment to Lease dated March 23, 1994 attached hereto as Exhibit A. Now therefore, the parties agree as follows: 6. CONTINGENCY: This Third Amendment to Lease is contingent upon Future Innovations executing a termination agreement with the Landlord and vacating Suite 206. Landlord to give notice to Tenant on or before March 24, 1995 by 5:00 P.M. PST. of Future Innovations intent to terminate its lease and to vacate Suite 206 by June 1, 1995. Failure of Future Innovations to provide intent to terminate by 3/21/95 nullifies this Amendment. All other terms and conditions of the Lease between the parties shall remain in full force and effect. LANDLORD TENANT Hacienda Park Associates Pro Business Payroll By: /s/ Peter P. Canny, Jr. By: Mitchell Everton ----------------------- ------------------------ Its: VP Its: EVP-Operations ----------------------- ------------------------ Dated: 3/20/95 Dated: 3/17/95 ---------------------- ----------------------- EX-10.2 22 LEASE AGREEMENT DATED AUGUST 26, 1993 1 [CB COMMERCIAL LETTERHEAD] EXHIBIT 10.2 TABLE OF CONTENTS PAGE Article 1 LEASE OF PREMISES.......................................... 1 Article 2 DEFINITIONS................................................ 1 Article 3 EXHIBITS AND ADDENDA....................................... 2 Article 4 DELIVERY OF POSSESSION..................................... 2 Article 5 RENT....................................................... 2 Article 6 INTEREST AND LATE CHARGES.................................. 4 Article 7 SECURITY DEPOSIT........................................... 4 Article 8 TENANTS USE OF THE PREMISES................................ 4 Article 9 SERVICES AND UTILITIES..................................... 5 Article 10 CONDITION OF THE PREMISES.................................. 5 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE...................... 5 Article 12 ALTERATIONS AND ADDITIONS.................................. 6 Article 13 LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY.................. 6 Article 14 RULES AND REGULATIONS...................................... 7 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD........................ 7 Article 16 ASSIGNMENT AND SUBLETTING.................................. 7 Article 17 HOLDING OVER............................................... 8 Article 18 SURRENDER OF PREMISES...................................... 8 Article 19 DESTRUCTION OR DAMAGE...................................... 8 Article 20 EMINENT DOMAIN............................................. 8 Article 21 INDEMNIFICATION............................................ 9 Article 22 TENANT'S INSURANCE......................................... 9 Article 23 WAIVER OF SUBROGATION...................................... 10 Article 24 SUBORDINATION AND ATTORNMENT............................... 10 Article 25 TENANT ESTOPPEL CERTIFICATES............................... 10 Article 26 TRANSFER OF LANDLORD'S INTEREST............................ 10 Article 27 DEFAULT.................................................... 10 Article 28 BROKERAGE FEES............................................. 11 Article 29 NOTICES.................................................... 11 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS...................... 11 Article 31 RELOCATION OF PREMISES..................................... 11 Article 32 QUIET ENJOYMENT............................................ 12 Article 33 OBSERVANCE OF LAW.......................................... 12 Article 34 FORCE MAJEURE.............................................. 12 Article 35 CURING TENANT'S DEFAULTS................................... 12 Article 36 SIGN CONTROL............................................... 12 Article 37 MISCELLANEOUS.............................................. 12 2 [CB COMMERCIAL LETTERHEAD] This Lease between Hacienda Park Associates , ------------------------------------------------------------ a California general partnership ----------------------------------------------------------------------------- ("Landlord"), and Pro Business Payroll , ------------------------------------------------------------- a California corporation , ("Tenant"), is ------------------------------------------------------------- dated August 26 , 1993 ------------------------------------------------------------------ 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A," and further described at Section 2l. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. Base Rent (initial): $ refer to 2j (This section deleted. Initialed by __.) . ----------------------------------------------------- b. Base Year: The calendar year of 1994 . ------------------------------------------ c. Broker(s) Landlord's: CB Commercial Real Estate Group, Inc. . ----------------------------------------------------------- Tenant's: CB Commercial Real Estate Group, Inc. . ----------------------------------------------------------- In the event that CB Commercial Real Estate Group, Inc. represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. d. Commencement Date: October 1, 1993 . ------------------------------------------------------- e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. g. Expiration Date: September 30, 1998 , unless otherwise ---------------------------------------- sooner terminated in accordance with the provisions of this Lease. i. Landlord's Mailing Address: c/o CB Commercial Real Estate Group, Inc. ----------------------------------------------- 5667 B Gibraltar Drive, Pleasanton, CA 94588 . --------------------------------------------------------------------------- Tenant's Mailing Address: 5934 Gibraltar Drive ------------------------------------------------ . --------------------------------------------------------------------------- mos. 01-03: $4,799.25 j. Monthly Installments of Base Rent (initial): $ mos. 04-60: $5,154.75 ------------------------------- per month. k. Parking: Tenant shall be permitted, upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park fourteen (14) ------------- cars on a non-exclusive basis in the area(s) designated by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. l. Premises: that portion of the Building containing approximately 3,555 ------- square feet of Rentable Area, shown by diagonal lines on Exhibit "A," located on the first (1st) floor of the Building and known as Suite 102. ----------- ---- m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 5934 Gibraltar Drive, 4696 Willow Road and 4698 ----------------------------------------------- Willow Road, Pleasanton, California and further described at Exhibit "B." ----------------------------------- The Project is known as Saratoga Center. --------------- n. Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. 3 o. Security Deposit (Section 7): $ Five Thousand Two Hundred and No/100 -------------------------------------- Dollars ($5,200.00). ------------------- p. State: the State of California . ------------------------------------------------------ q. Tenant's First Adjustment Date (Section 5.2): the first day of the calendar month following the Commencement Date plus January 1, 1995 months. --------------- r. s. Tenant's Use Clause (Article 8): Payroll services ----------------------------------------- . --------------------------------------------------------------------------- t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBIT AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A" - Floor Plan showing the Premises. b. Exhibit "B" - Site Plan of the Project. c. Exhibit "C" - Space Plan dated August 19, 1993 d. Exhibit "D" - Rules and Regulations. f. Addenda: Addendum Number One - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C." If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including, without limitation, the payment of Rent. 5. RENT. 5.1. Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly Installments of Base Rent shall be payable in advance on the first day of each calender month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. 4 (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency,(iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses, it is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owned, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). 5 (f) If this Lease sets forth an Expense Stop at Section 2f, then during the Term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 Definition of Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money of the United States of America. 5.5 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall 6 promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant and Tenant shall pay Landlord's charges therefor on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system. Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C." Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. Tenant's Obligations. (1) Tenant shall perform Tenant's Work to the Premises as described in Exhibit "C." (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures, Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. 7 (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANTS PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. 8 b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of any assignment, to terminate this Lease, if Landlord does not exercise such option. Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. 9 d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. 10 b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgage of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancellable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. 11 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1 Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, of if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2 Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. 12 If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth to the payment of Rent due and unpaid hereunder; and the balances, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within the thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment, if, after notice to Landlord of default. Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the Premises to another part of the Building in accordance with the following: 13 a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days written notice of Landlord's intention to relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addends. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. 14 h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements; Tenant's Representations. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonably be cured within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. t. Compliance. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. The parties hereto have executed this Lease as of the dates set forth below. Date: September 7, 1993 Date: August 31, 1993 ------------------------------ --------------------------------- Landlord: Hacienda Park Associates Tenant: Pro Business Payroll -------------------------- ------------------------------- a California general a California corporation partnership By: /s/ Peter P. Canny, Jr. By: /s/ Mitchell Everton -------------------------------- ----------------------------------- Title: Vice President Title: Exec VP - Operations ----------------------------- -------------------------------- By: By: -------------------------------- ----------------------------------- Title: Title: ----------------------------- -------------------------------- CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made by CB Commercial as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. 15 ADDENDUM NUMBER ONE THIS ADDENDUM IS MADE A PART OF THE OFFICE BUILDING LEASE DATED AUGUST 26, 1993 BY AND BETWEEN HACIENDA PARK ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP ("LESSOR") AND PRO BUSINESS PAYROLL, A CALIFORNIA CORPORATION ("LESSEE"): 38. TENANT'S PROPORTIONATE SHARE: Tenant's proportionate share of the building containing the Premises shall be 8.53%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Gross Area of the Building, as determined by the Landlord from time to time. The Building consists of 41,656 square feet. Tenant's proportionate share of the Project shall be 4.27%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Project, as determined by the Landlord from time to time. The Project consists of two buildings containing a total Rentable Area of 83,230 square feet. 39. TENANT IMPROVEMENT ALLOWANCE: Landlord shall provide up to $24,885 for the completion of the tenant improvements. In the event the tenant improvements cost less than $24,885, Landlord shall allow Tenant to use up to $7,100 for the purchase and installation of data cabling. Should there be any additional remaining tenant improvement allowance, Tenant shall have a credit for future alterations to any of the space under lease by Tenant at 5934 Gibraltar Drive. 40. OPTION TO RENEW: Provided that Tenant is not in default hereunder either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the Lease for one (1) extended five (5) year term on the same terms, covenants and conditions provided herein, except that upon such renewal the monthly base rent due hereunder shall be determined pursuant to Paragraph B. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least one hundred eighty (180) days prior to the expiration of the initial term of this Lease. B. Option Period Monthly Rent. The Monthly Rent for the Option Period, which shall include the inital Monthly Rent and all adjustments, shall be determined as follows: (i) The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on then Monthly Rent for the Option Period based upon the then fair market rental value of the Premises as defined in Paragraph B (iii). If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. (ii) If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option Period shall be the then current fair market rental value of the Premises as determined in accordance with Paragraph B (iv). (iii) The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Pleasanton. In no event shall the fair market monthly value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. (iv) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 51.B (ii), each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full time commercial appraisal experience in the area in which the Premises are located to appraise and set the then fair market rental value of the Premises for the Option Period. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the then fair market rental value of the Premises. If the two 16 (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then President of the Alameda County Real Estate Board or to the then President Judge of the Alameda County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the then fair market value of the Premises. If a majority of the appraisers are unable to set the then fair market rental value of the Premises within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the then fair market rental value of the Premises. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the then fair market rental value of the Premises. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the then fair market rental value of the Premises. After the then fair market rental value of the Premises has been set, the appraisers shall immediately notify the parties and the Monthly Rent for the Option Period shall be such amount. Except as expressly provided herein, the Lease shall remain in full force and effect. LANDLORD: TENANT: Hacienda Park Associates Pro Business Payroll A California General Partnership A California Corporation By: Peter P. Canny, Jr. By: Mitchell Everton ------------------------------ ---------------------------------- Its: Vice President Its: EXEC VP - OPERATIONS ----------------------------- --------------------------------- 17 EXHIBIT A [FLOOR PLAN] 18 EXHIBIT B SARATOGA CENTER SITE 30A 5934 GIBRALTAR DRIVE PLEASANTON, CALIFORNIA [SARATOGA ONE FLOOR PLAN] [SARATOGA TWO FLOOR PLAN] 19 EXHIBIT C [FLOOR PLAN] 20 EXHIBIT D RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. Except as consented to in writing by Landlord, or in accordance with Building Standard Improvements, no curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. No Tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof penetrations without the prior written consent of Landlord. 4. The main lobby directory of the Building will be provided exclusively for the display of the name and location of the Building's tenants only, and Landlord reserves the right to exclude any other names therefrom. Landlord shall provide Tenant with a building standard wall or door mounted sign at or adjacent to Tenant's main entrance to its Premises which shall identify Tenant and its suite number. 5. All cleaning and janitorial services for the Building shall be provided by Landlord in accordance with Landlord's specifications for said services, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises or the Building. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any of Tenant's property by the janitor or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with two keys to each door in the Premises that contains a lock set. Landlord may make a reasonable charge for any additional keys and for having the locks changed. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any additional locks or bolts on any door of its Premises without the prior written consent of Landlord. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. If Tenant requires telegraphic, telephonic burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The elevators shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 1 21 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate the impacts of noise or vibration on the Building. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or flammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animals, with the exception of seeing eye dogs when in the company of their masters, may be brought into or kept in the Building. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall cooperate with Landlord to assure the most effective operation of the Building's heating and air-conditioning and shall comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from attempting to adjust the Building's heating, ventilating or air-conditioning controls other than the room thermostats installed for Tenant's use. Tenant shall keep all corridor access doors to its Premises closed and shall close window coverings at the end of each business day. 13. Tenant shall be responsible for all persons for whom it requests access to the Building's security system, and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages resulting from the admission to or exclusion from the Building of any person. 14. Tenant shall close and lock the doors of its Premises an entirely shut off all water faucets or other water apparatus, and turn off all lights and other equipment which are not required to be continuously run at the close of its business day. Tenant shall be responsible for any damages or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this rule. 15. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant, or its employees or invitees. 16. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 17. Except as required to facilitate normal office occupancy, Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without the prior written consent of Landlord. Tenant shall not cut or bore holes for wires in any part of the Premises. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule at its sole cost and expense. 18. Tenant shall not install, maintain or operate upon the Premises any vending machine without the prior written consent of Landlord. In the event Landlord so 2 22 approves such installation Tenant shall be responsible for all costs associated with such installation and shall remove the vending machines at the end of such Term. 19. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or other substance or who is in violation of any of the Rules or Regulations of the Building. 20. Tenant shall store all its trash and garbage within its Premises or in such central facilities as may be provided by Landlord for Tenant's non-exclusive use in the Outside Area. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 21. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral, illegal or objectional purpose. 22. Use of Underwriters' Laboratory (UL) approved equipment for brewing coffee, tea, hot chocolate and similar beverages, (and refrigeration of such products) shall be permitted provided that Tenant may utilize a UL approved microwave oven to prepare prepackaged foods for its employees. No other than as expressly provided herein no other food preparation shall be permitted. Tenant's use of such equipment shall be in accordance with all applicable federal, state, country and city laws, codes, ordinances, rules and regulations and shall not cause a nuisance to other Tenants in the building due to odors. 23. Tenant shall not use in any space or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 24. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant without the written consent of Landlord except as to Tenant's address for its Premises. 25. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency having jurisdiction over the Property. Tenant shall be responsible for any increased insurance premiums attributable to Tenant's use of the Premises, Building, or Property. 26. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked during non-business hours and said means of entry to the Premises closed during normal business entrance hours. 27. Tenant's request for assistance will be attended to only upon appropriate application to Landlord by an authorized individual. Employees of Landlord shall not perform any work on the Premises, other than that associated with the provision of services to Tenant required of Landlord under the Lease for the Premises, or implement a request of Tenant, unless that employee receives written instructions from Landlord. 28. Tenant shall not park its vehicles in any parking area designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight, nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any 3 23 one (1) vehicle in more than one (1) parking space. 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other Tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of Premises in the Building. 31. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety, security, care and cleanliness of the Building and the Property and preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are published by Landlord. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 33. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends or at other times as Landlord may designate. Landlord shall have right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. If Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 34. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 35. Canvassing, soliciting, and distribution of handbills or other written material and peddling in the Building are prohibited and each Tenant shall cooperate to prevent these activities. 36. As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall: (a) On Monday through Friday, except holidays, from 7:00 a.m. to 7:00 p.m. (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours when in the judgment of Landlord it may be required for the comfortable occupancy of the Premises. After hours usage shall be monitored by the override meter which shall be installed in the Premises and the actual cost of such usage shall be paid by Tenant. (b) Furnish to the Premises, Monday through Friday, from 7:00 a.m. to 7:00 p.m. electrical current as required by the Building Standard office lighting and fractional horsepower office business machines in the amount of approximately two and one-half (2.5) watts per square foot. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the terms, classifications and rate charges to similar consumers by the public utility serving the neighborhood in which the Building is located. 4 24 FIRST AMENDMENT TO LEASE This First Amendment to Lease ("Amendment") is entered into this 23rd day of March, 1994 and amends that certain Lease by and between Hacienda Park Associates, a California General Partnership, ("Landlord") and Pro Business Payroll, a California Corporation, ("Tenant") dated August 26, 1993 attached hereto as Exhibit A. Now therefore, the parties agree as follows: Expiration Date: March 31, 1999 Monthly Installments of Base Rent: Mos. 01 - 03: $4,799.25 Mos. 04 - 66: $5,154.75 All other terms and conditions of the Lease between the parties shall remain in full force and effect. LANDLORD TENANTS HACIENDA PARK ASSOCIATES PRO BUSINESS PAYROLL By: Peter P. Canny, Jr. By: Mitchell Everton -------------------------- -------------------------- Its: Vice President Its: EVP - Operations -------------------------- -------------------------- EX-10.3 23 LEASE AGREEMENT DATED MARCH 23, 1994 1 EXHIBIT 10.3 [CB COMMERCIAL REAL ESTATE GROUP, INC. LETTERHEAD] This Lease between Hacienda Park Associates ------------------------------------------------------------, a California General Partnership -----------------------------------------------------------------------------, ("Landlord"), and Pro Business Payroll -------------------------------------------------------------- a California Corporation , ("Tenant"), is -------------------------------------------------------------- dated March 23 , 1994. ------------------------------------------------------------------ ---- 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A," and further described at Section 2l. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. Base Rent (initial): $ Refer to 2.j. per year. ----------------------------------------- b. Base Year: The calendar year of 1995 ------------------------------------------- . c. Broker(s) Landlord's: CB Commercial Real Estate Group, Inc. ----------------------------------------------------------- . Tenant's: CB Commercial Real Estate Group, Inc. ------------------------------------------------------------- . In the event that CB Commercial Real Estate Group, Inc. represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. d. Commencement Date: January 1, 1995 -------------------------------------------------------- . e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. (Section deleted and initialized by ME) g. Expiration Date: , unless otherwise ----------------------------------------- sooner terminated in accordance with the provisions of this Lease. h. Index (Section 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, Average, Subgroup "All Items" (1967 = 100). -------------------- i. Landlord's Mailing Address: c/o CB Commercial Real Estate Group, Inc. ------------------------------------------------- 5667-B Gibraltar Drive, ------------------------------------------------ Pleasanton, CA 94588 ------------------------------------------------ Tenant's Mailing Address: 5934 Gibraltar Drive, Pleasanton, CA 94588 --------------------------------------------------- ---------------------------------------------------------------------------- j. Monthly Installments of Base Rent (initial): $ Months 01 - 08: $ 9,070.92 Months 09 - 27: $15,322.50 Months 28 - 54: $17,774.10 per month. ---------------------------------------- k. Parking: Tenant shall be permitted, upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park forty-eight (48) cars on a non-exclusive basis in the area(s) designated by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. l. Premises: that portion of the Building containing approximately 12,258 square feet of Rentable Area, shown by diagonal lines on Exhibit "A," located on the first floor of the Building and known as Suite 101. m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 5934 Gibraltar Drive, 4696 Willow Road and 4698 Willow Road, Pleasanton, CA and further described at Exhibit "B." The Project is known as Saratoga Center. n. Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. (1) 2 o. Security Deposit (Section 7): Eighteen Thousand and No/100 Dollars --------------------------------------------- ($18,000.00) ------------. p. State: the State of California ------------------------------------------------------. q. (Section deleted and initialed by ME and PC). r. (Section deleted and initialed by ME and PC). s. Tenant's Use Clause (Article 8): Payroll services ------------------------------------------ --------------------------------------------------------------------------. t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A" -- Floor Plan showing the Premises. b. Exhibit "B" -- Site Plan of the Project. c. Exhibit "C" -- (deleted). Revised Space Plans Dated March 22, 1994. d. Exhibit "D" -- Rules and Regulations. e. (deleted). f. Addenda: EXHIBIT "C-1" - Other Improvements Made to Other Premises Under Lease --------------------------------------------------------------------------- by Tenant Subject To Paragraph #39 of Addendum To Lease --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- 4. DELIVERY OF POSSESSION. If for any reason Landlord does not deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability for such failure, the Expiration Date shall not change and the validity of this Lease shall not be impaired, but Rent shall be abated until delivery of possession. "Delivery of possession" shall be deemed to occur on the date Landlord completes Landlord's Work as defined in Exhibit "C." If Landlord permits Tenant to enter into possession of the Premises before the Commencement Date, such possession shall be subject to the provisions of this Lease, including, without limitation, the payment of Rent. 5. RENT. 5.1. Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly Installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.2 (Section deleted and initialed by ME and PC). 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. 3 (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). (3) 4 (f) If this Lease sets forth an Expense Stop at Section 2f, then during the Term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 Definition of Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money of the United States of America. 5.5 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of the fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall (4) 5 promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable efforts to furnish such service upon reasonable notice from Tenant and Tenant shall pay Landlord's charges therefor on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall perform Landlord's Work to the Premises as described in Exhibit "C." Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. Tenant's Obligations. (1) Tenant shall perform Tenant's Work to the Premises as described in Exhibit "C." (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures, Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. (5) 6 (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. (6) 7 b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. (7) 8 d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed in ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. (8) 9 b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease. Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name the Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancellable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on the Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as set forth in Section 5.2 hereof for the adjustment of the Base Rent. (9) 10 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default, stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1. Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2. Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. (10) 11 If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the Premises to another part of the Building in accordance with the following: (11) 12 a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days written notice of Landlord's intention to relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. (12) 13 38. TENANTS PROPORTIONATE SHARE: Upon completion of tenant improvements described in Exhibit "C", Tenant's proportionate share of the building containing the Premises shall be 29.45%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Gross Area of the Building (Building A), as determined by the Landlord from time to time. The Building consists of 41,656 square feet, Tenant's proportionate share of the Project shall be 14.73%. The Project's land value, related assessments and Outside Area Expenses are allocated 50.01% to Building A and 49.99% to Building B. Tenant's share is a product of Tenant's Building share multiplied by Building A's share of the Project. The Project consists of two buildings containing a total Rentable Area of 83,230 square feet. 39. TENANT IMPROVEMENT ALLOWANCE: Landlord shall make the alterations to the Premises described on the Tenant Improvement Plans and Specifications drawn by Interform, dated April 4, 1994 (Tenant Improvements). Landlord shall provide Tenant an allowance up to $170,000.00 for said tenant improvements, including space plans, construction drawings and permits, to Tenant's Premises at 5934 Gibraltar Drive, Pleasanton, under lease with Landlord. Landlord shall allow Tenant to use up to $25,000.00 of the tenant improvement allowance for data cabling. Should there be any remaining tenant improvement allowance after completion of said tenant improvements, Tenant shall receive a credit for such remaining allowance to use within twenty-four (24) months of completion of said tenant improvements for future alterations to any space under lease at 5934 Gibraltar Drive. In the event the tenant improvements, including space plans, construction drawings and permits cost in excess of $170,000.00, Tenant shall, within ten (10) business days of receipt of a detailed cost breakdown from Landlord, reimburse Landlord for said costs in excess of $170,000.00. Landlord's work shall be performed by Landlord's contractor in accordance with the plans approved by Landlord and Tenant. Changes in the mutually approved working drawings and specifications shall be made only by mutual consent, which shall not be unreasonably withheld or delayed. 40. REMOVAL OF TENANT'S FURNITURE AND FIXTURES: Tenant agrees to cooperate in the removal of all furniture and fixtures and to relocate employees and employee work areas, if necessary, to accommodate tenant improvement construction. In connection with Landlord's work, Landlord and Tenant agree that time is of the essence and that each will cooperate in adhering to the construction schedule. Landlord shall charge Tenant for any delays caused by Tenant's failure to do so. 41. OPTION TO RENEW: Provided that Tenant is not in default hereunder either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the Lease for one (1) extended five (5) year term on the same terms, covenants and conditions provided herein, except that upon such renewal the monthly base rent due hereunder shall be determined pursuant to Paragraph B. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least one hundred eighty (180) days prior to the expiration of the initial term of this Lease. B. Option Period Monthly Rent. The Monthly Rent for the Option Period, which shall include the initial Monthly Rent and all adjustments, shall be determined as follows: (i) The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period based upon the then fair market rental value of the Premises as defined in Paragraph B(iii). If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. 14 fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Pleasanton. In no event shall the fair market monthly value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. (iv) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 51.B (ii), each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full time commercial appraisal experience in the area in which the Premises are located to appraise and set the then fair market rental value of the Premises for the Option Period. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the then fair market rental value of the Premises. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then President of the Alameda County Real Estate Board or to the then President Judge of the Alameda County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the then fair market value of the Premises. If a majority of the appraisers are unable to set the then fair market rental value of the Premises within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the then fair market rental value of the Premises. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the then fair market rental value of the Premises. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the then fair market rental value of the Premises. After the then fair market rental value of the Premises has been set, the appraisers shall immediately notify the parties and the Monthly Rent for the Option Period shall be such amount. Except as expressly provided herein, the Lease shall remain in full force and effect. LANDLORD: TENANT: Hacienda Park Associates Pro Business Payroll A California General Partnership A California Corporation By: /s/ Peter P. Canny, Jr. By: /s/ Mitch Everton ------------------------------- --------------------------------- Its: Vice President Its: EVP-OPERATIONS 15 EXHIBIT "A" GROUND FLOOR PLAN [LAYOUT OF GROUND FLOOR] 16 EXHIBIT "B" SARATOGA CENTER SITE 30A 5934 GIBRALTAR DRIVE PLEASANTON, CALIFORNIA [LAYOUT OF SITE] 17 [FIRST FLOOR PRELIMINARY FLOOR PLAN] 18 EXHIBIT C-1 [SECOND FLOOR PRELIMINARY FLOOR PLAN] 19 [CB COMMERCIAL LETTERHEAD] September 22, 1993 Mr. Mitch Everton Pro Business 5934 Gibraltar Drive, Suite 201 Pleasanton, CA 94588 RE: 5934 Gibraltar Drive, Suite 102 Pleasanton, CA Dear Mitch: When reviewing the lease for your new space downstairs, suite 102, I discovered a discrepancy. Paragraph 2.q. should have been deleted. Instead a date was typed in which does not apply. In order to clarify the lease, I am asking that you approve the deletion of paragraph 2.q. If you agree, would you please indicate by signing and dating below. If you have any questions concerning the interpretation of the paragraph, please call me. Very truly yours, /s/ Judith Yemma Judith Yemma Building Manager (510) 734-0903 JY/pat /s/ Mitch Everton - -------------------------- Approved 9/27/93 - -------------------------- Date 20 EXHIBIT D RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. Except as consented to in writing by Landlord, or in accordance with Building Standard Improvements, no curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. No Tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof penetrations without the prior written consent of Landlord. 4. The main lobby directory of the Building will be provided exclusively for the display of the name and location of the Building's tenants only, and Landlord reserves the right to exclude any other names therefrom. Landlord shall provide Tenant with a building standard wall or door mounted sign at or adjacent to Tenant's main entrance to its Premises which shall identify Tenant and its suite number. 5. All cleaning and janitorial services for the Building shall be provided by Landlord in accordance with Landlord's specifications for said services, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises or the Building. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any of Tenant's property by the janitor or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with two keys to each door in the Premises that contains a lock set. Landlord may make a reasonable charge for any additional keys and for having the locks changed. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any additional locks or bolts on any door of its Premises without the prior written consent of Landlord. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. If Tenant requires telegraphic, telephonic burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The elevators shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 1 21 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allows by law. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate the impacts of noise or vibration on the Building. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or flammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animals, with the exception of seeing eye dogs when in the company of their masters, may be brought into or kept in the Building. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall cooperate with Landlord to assure the most effective operation of the Building's heating and air-conditioning and shall comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from attempting to adjust the Building's heating, ventilating or air-conditioning controls other than the room thermostats installed for Tenant's use. Tenant shall keep all corridor access doors to its Premises closed and shall close window coverings at the end of each business day. 13. Tenant shall be responsible for all persons for whom it requests access to the Building's security system, and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages resulting from the admission to or exclusion from the Building of any person. 14. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and turn off all lights and other equipment which are not required to be continuously run at the close of its business day. Tenant shall be responsible for any damages or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this rule. 15. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant, or its employees or invitees. 16. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 17. Except as required to facilitate normal office occupancy, Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without the prior written consent of Landlord. Tenant shall not cut or bore holes for wires in any part of the Premises. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule at its sole cost and expense. 18. Tenant shall not install, maintain or operate upon the Premises any vending machine without the prior written consent of Landlord. In the event Landlord so 2 22 approves such installation Tenant shall be responsible for all costs associated with such installation and shall remove the vending machines at the end of such Term. 19. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or other substance or who is in violation of any of the Rules or Regulations of the Building. 20. Tenant shall store all its trash and garbage within its Premises or in such central facilities as may be provided by Landlord for Tenant's non-exclusive use in the Outside Area. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 21. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral, illegal or objectional purpose. 22. Use of Underwriters' Laboratory (UL) approved equipment for brewing coffee, tea, hot chocolate and similar beverages, (and refrigeration of such products) shall be permitted provided that Tenant may utilize a UL approved microwave oven to prepared prepackaged foods for its employees. No other than as expressly provided herein no other food preparation shall be permitted. Tenant's use of such equipment shall be in accordance with all applicable federal, state, country and city laws, codes, ordinances, rules and regulations and shall not cause a nuisance to other Tenants in the building due to odors. 23. Tenant shall not use in any space or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve, Tenant shall not bring any other vehicles of any kind into the building. 24. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant without the written consent of Landlord except as to Tenant's address for its Premises. 25. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency having jurisdiction over the Property. Tenant shall be responsible for any increased insurance premiums attributable to Tenant's use of the Premises, Building, or Property. 26. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked during non-business hours and said means of entry to the Premises closed during normal business hours. 27. Tenant's request for assistance will be attended to only upon appropriate application to Landlord by an authorized individual. Employees of Landlord shall not perform any work on the Premises, other than that associated with the provision of services to Tenant required of Landlord under the Lease for the Premises, or implement a request of Tenant, unless that employee receives written instructions from Landlord. 28. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight, nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles of four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any 3 23 one (1) vehicle in more than one (1) parking space. 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other Tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of Premises in the Building. 31. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety, security, care and cleanliness of the Building and the Property and preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are published by Landlord. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 33. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends or at other times as Landlord may designate. Landlord shall have right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. If Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 34. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 35. Canvassing, soliciting, and distribution of handbills or other written material and peddling in the Building are prohibited and each Tenant shall cooperate to prevent these activities. 36. As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall: (a) On Monday through Friday, except holidays, from 7:00 a.m. to 7:00 p.m. (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours when in the judgment of Landlord it may be required for the comfortable occupancy of the Premises. After hours usage shall be monitored by the override meter which shall be installed in the Premises and the actual cost of such usage shall be paid by Tenant. (b) Furnish to the Premises, Monday through Friday, from 7:00 a.m. to 7:00 p.m. electrical current as required by the Building Standard office lighting and fractional horsepower office business machines in the amount of approximately two and one-half (2.5) watts per square foot. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the terms, classifications and rate charges to similar consumers by the public utility serving the neighbor- hood in which the Building is located. 4 24 PRO BUSINESS TENANT IMPROVEMENTS 5934 GIBRALTAR SUITES #101, #201, #202 CONSTRUCTION START: AUGUST 15, 1994 CONSTRUCTION COSTS: - -------------------
NET TOTAL ITEM DESCRIPTION LANDLORD TENANT CHANGE COST - ---- ----------- -------- ------- ------------------ ------- (To Contract Only) ================================================================================================================================= BASE CONTRACT 156,550 156,550 - --------------------------------------------------------------------------------------------------------------------------------- SPACE PLANNING/ WORKING DRAWINGS 10,945 167,495 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE ORDER #1 - 4" CONDUIT SLEEVE 563 563 168,058 08-24-94 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE ORDER #2 - INSULATE 1ST FLOOR WALLS @ P.O.'s, TRAINING 08-31-94 AND CONFERENCE ROOMS @ 1ST FLOOR. - CHANGE CARPET TO SHAW "CANYON LAKES" (NO CHARGE). 2,329 2,892 170,387 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE ORDER #3 - CHANGE SLOT RETURN AIR TO 2' X 2' GRILLS W/SOUND 09-28-94 ATTENUATION BOOT @ PRIVATES, CONF & TRAINING RMS FIRST FLOOR - ADD SINK FIRST FLOOR - SEISMIC UPGRADE @ FIRST FLOOR CEILING (REQUIRED) 1,161 - ADD 14 L.F. OF 9' HIGH CHAIN LINK W/3' X 7' DOOR ADD 27 L.F. OF 25 GA METAL FRAMING W/WIRE ABOVE CEILING @ STAGING AREA - CREDIT FOR WALLS NOT REMOVED @ SECOND FLOOR - CREDIT FOR DELETING OFFICES #209 & #210 6,727 10,780 178,275 - --------------------------------------------------------------------------------------------------------------------------------- CHANGE ORDER #4 - CREDIT FOR DELETING MOVING WALL & DOOR #22 10-10-94 - INSTALL 7 DEADBOLTS - INSTALL MINI-BLINDS @ 2 OFFICES @ 2ND FLR & 5 OFFICES @ 1ST FLR - INSTALL NEW GLASS DOORS W/PANIC HARDWARE 1ST FLR - ADD 5 FT. HIGH SCREEN WALL W/CAP @ WAITING RM #121 - ADD DEDICATED DUPLEX OUTLET FOR COPIER @ RM #223 5,232 16,012 183,507 - ---------------------------------------------------------------------------------------------------------------------------------
CONTINUED ON PAGE 2 25 PAGE 2 PROBUSINESS TENANT IMPROVEMENTS 5934 GIBRALTAR SUITES #101, #201, #202 CONSTRUCTION START: AUGUST 15, 1994 CONSTRUCTION COSTS: - -------------------
NET LANDLORD TENANT CHANGE TOTAL ITEM DESCRIPTION (To Contract Only) COST ================================================================================================================================= CHANGE ORDER #5 - REPLACE EXIT SIGNS PER CITY 1,500 17,512 185,007 10-19-94 (REQUIRED) - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- TOTAL 2,661 182,346 17,512 185,007 - --------------------------------------------------------------------------------------------------------------------------------- TENANT IMPROVEMENT ALLOWANCE (180,000) ----------------------------------------------------------------- DUE FROM TENANT 2,346 ----------------------------------------------------------------
26 FIRST AMENDMENT TO LEASE DATED MARCH 23, 1994 This Amendment, dated the 25th day of May, 1994, between Hacienda Park Associates, a California general partnership, ("Landlord") and Pro Business Payroll, a California Corporation, ("Tenant"), is for the premises located in the City of Pleasanton, County of Alameda, State of California, commonly known as 5934 Gibraltar Drive, Suite 101. Landlord and Tenant being parties to that certain Lease dated March 23, 1994 hereby expresses their mutual desire and intent to amend the Lease as herein after provided. 1. EXPIRATION DATE: March 31, 1999 2. MONTHLY INSTALLMENTS OF BASE RENT (INITIAL): Months 01-05: $ 9,070.92 Months 06-24: 15,322.50 Months 25-51: 17,774.10 3. CONTINUING OBLIGATIONS: Except as expressly set forth to the contrary in this First Amendment, the Lease remains unmodified and in full force and effect. To the extent of any conflict between the terms of the First Amendment and the terms of the Lease, the terms of the First Amendment shall control. In witness whereof, the parties have executed this First Amendment on the date(s) set forth below, effective as of the day and year first above written in one (1) or more copies. AGREED AND ACCEPTED LESSOR: Hacienda Park Associates, a Lessee: Pro Business Payroll, a California General Partnership California Corporation By: /s/ Peter P. Canny, Jr. By: /s/ Mitch Everton ----------------------------- -------------------------- Peter P. Canny, Jr. Vice President Its: V.P. Its: EVP - Operations ----------------------------- ------------------------- Dated: 7/25/94 Dated: 5-27-94 ----------------------------- ------------------------- 27 SECOND AMENDMENT TO LEASE DATED MARCH 23, 1994 This Amendment, dated the 5th day of October, 1994, between Hacienda Park Associates, a California general partnership, ("Landlord") and Pro Business Payroll, a California Corporation, ("Tenant"), is for the premises located in the City of Pleasanton, County of Alameda, State of California, commonly known as 5934 Gibraltar Drive, Suite 101. Landlord and Tenant being parties to that certain Lease dated March 23, 1994 as amended by the First Amendment to Lease hereby expresses their mutual desire and intent to amend the Lease as herein after provided. 1. MONTHLY INSTALLMENTS OF BASE RENT (INITIAL): Months 01-05: $ 9,316.08 Months 06-24: 15,567.66 Months 25-51: 18,019.26 2. TENANT IMPROVEMENT ALLOWANCE: The tenant improvement allowance described in Article 39, is hereby increased by $10,000.00 to $180,000.00. 3. CONTINUING OBLIGATIONS: Except as expressly set forth to the contrary in this Second Amendment, the Lease remains unmodified and in full force and effect. To the extent of any conflict between the terms of the Second Amendment and the terms of the Lease, the terms of the Second Amendment shall control. In witness whereof, the parties have executed this Second Amendment on the date(s) set forth below, effective as of the day and year first above written in one (1) or more copies. AGREED AND ACCEPTED LESSOR: Hacienda Park Associates, a Lessee: Pro Business Payroll, a California General Partnership California Corporation By: /s/ Peter P. Canny, Jr. By: /s/ Mitch Everton --------------------------------- ------------------------------------ Peter P. Canny, Jr. Vice President Its: Vice President Its: EVP - Operations --------------------------------- ------------------------------------ Dated: 11/28/94 Dated: 10-7-94 ------------------------------- ------------------------------------ EX-10.4 24 LEASE AGREEMENT DATED NOVEMBER 13, 1995 1 EXHIBIT 10.4 [CB COMMERCIAL LETTERHEAD] TABLE OF CONTENTS
PAGE ---- Article 1 LEASE OF PREMISES . . . . . . . . . . . . . . . . . . . . 1 Article 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 Article 3 EXHIBITS AND ADDENDA . . . . . . . . . . . . . . . . . . 2 Article 4 DELIVERY OF POSSESSION . . . . . . . . . . . . . . . . . 2 Article 5 RENT . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Article 6 INTEREST AND LATE CHARGES . . . . . . . . . . . . . . . . 4 Article 7 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . 4 Article 8 TENANTS USE OF THE PREMISES . . . . . . . . . . . . . . . 4 Article 9 SERVICES AND UTILITIES . . . . . . . . . . . . . . . . . 5 Article 10 CONDITION OF THE PREMISES . . . . . . . . . . . . . . . . 5 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE . . . . . . . . . . 5 Article 12 ALTERATIONS AND ADDITIONS . . . . . . . . . . . . . . . . 6 Article 13 LEASEHOLD IMPROVEMENTS; TENANTS PROPERTY . . . . . . . . 6 Article 14 RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . 7 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD . . . . . . . . . . . 7 Article 16 ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . 7 Article 17 HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . 8 Article 18 SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . 8 Article 19 DESTRUCTION OR DAMAGE . . . . . . . . . . . . . . . . . . 8 Article 20 EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . 8 Article 21 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 9 Article 22 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . . 9 Article 23 WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . 10 Article 24 SUBORDINATION AND ATTORNMENT. . . . . . . . . . . . . . . 10 Article 25 TENANT ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . 10 Article 26 TRANSFER OF LANDLORD'S INTEREST . . . . . . . . . . . . 10 Article 27 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 10 Article 28 BROKERAGE FEES . . . . . . . . . . . . . . . . . . . . . 11 Article 29 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . 11 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS . . . . . . . . . . 11 Article 31 RELOCATION OF PREMISES. . . . . . . . . . . . . . . . . . 11 Article 32 QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . 12 Article 33 OBSERVANCE OF LAW . . . . . . . . . . . . . . . . . . . . 12 Article 34 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . 12 Article 35 CURING TENANT'S DEFAULTS . . . . . . . . . . . . . . . . 12 Article 36 SIGN CONTROL . . . . . . . . . . . . . . . . . . . . . . 12 Article 37 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 12
2 [CB COMMERCIAL LETTERHEAD] This Lease between Hacienda Park Associates -------------------------------------------------------- a California general partnership -------------------------------------------------------------------------- ("Landlord"), and Pro Business, Inc. --------------------------------------------------------- a California corporation , ("Tenant"), is ------------------------------------------------------------- dated November 13 , 1995 ---------------------------------------------------------------- -- 1. LEASE OF PREMISES. In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A", and further described at Section 2l. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease, the following terms shall have the following meanings: a. Base Rent (initial): $ 166,047.12 per year. ----------------------------------------- b. Base Year: The calendar year of 1996 . ----------------------------------------- c. Broker(s) Landlord's: CB Commercial Real Estate Group, Inc. . ---------------------------------------------------------- Tenant's: Colliers Parrish International . ---------------------------------------------------------- In the event that CB Commercial Real Estate Group, Inc. represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. d. Commencement Date February 1, 1996 . -------------------------------------------------------- e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. g. Expiration Date: January 31, 2001 , unless otherwise ---------------------------------------- sooner terminated in accordance with the provisions of this Lease. i. Landlord's Mailing Address: c/o CB Commercial Real Estate Group, Inc. ---------------------------------------------- 5667-B Gibraltar Drive, Pleasanton, CA 94588 --------------------------------------------------------------------------- Tenant's Mailing Address: 5934 Gibraltar Drive, Pleasanton, CA 94588 ---------------------------------------------- ---------------------------------------------------------------------------. j. Monthly Installments of Base Rent (initial): $ 13,837.26 per month. ----------------- k. Parking: Tenant shall be permitted, upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park forty-one (41) cars on a non-exclusive basis in the area(s) designated by Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. l. Premises: that portion of the Building containing approximately 10,027 ------ square feet of Rentable Area, shown by diagonal lines on Exhibit "A" located on the first floor of the Building, and known as 4696 Willow Road. m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 4696 and 4698 Willow Road and further described at Exhibit "B." ------------------------- The Project is known as Saratoga Center, which includes the building located ---------------------------------------------------- at 5934 Gibraltar Drive. ----------------------- n. Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project respectively, as determined by Landlord and applied on a consistent basis throughout the Project. 3 o. Security Deposit (Section 7): $14,000.00 p. State: the State of California q. Tenant's First Adjustment Date (Section 5.2): the first day of the calendar month following the Commencement Date plus ___________ months. r. See Addendum #1. s. Tenant's Use Clause (Article 8): Payroll services. t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A" -- Floor Plan showing the Premises. b. Exhibit "B" -- Site Plan of the Project. d. Exhibit "D" -- Rules and Regulations. f. Addenda: Addendum #1 5. RENT. 5.1 Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly Installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated on a per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to the Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. (2) 4 (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or charges levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State or federal government or their agencies, branches or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at least eighty-five percent (85%) occupied. (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) common area utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, painters, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all Building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in the maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by a governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of the Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been incurred if the Project had been at least eighty-five percent (85%) occupied. * (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses, Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year after the first Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's Proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as to the amount of any additional rent due hereunder, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by more than five percent (5%). * (12) repair, maintenance and replacement of the HVAC system, roof system, and parking areas. Tenant shall contract for and pay for its own janitorial service and supplies for the Premises. Landlord shall separately meter the Premises for electricity and gas. Tenant shall pay for electricity and gas service for the Premises directly to the utility supplier. (3) 5 (f) If this Lease sets forth an Expense Stop at Section 2f, then during the Term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess costs during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 DEFINITION OF RENT. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefor and without deduction or offset, in lawful money to the United States of America. 5.5 RENT CONTROL. If the amount of Rent or any other payment due under this Lease violates the terms or any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 TAXES PAYABLE BY TENANT. In addition to the Rent and any other charges to be paid by Tenant hereunder. Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenants equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof: or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax or other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefor, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANTS USE OF THE PREMISES. Tenant shall use the Premise solely for the purposes set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall (4) 6 promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purposes, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Tenant shall pay for the electricity and gas for office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required for the comfortable use and occupancy of the Premises. Landlord shall maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services, if Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained the HVAC system. Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord use any apparatus or device in the Premises including without limitation, electronic data processing machines, punch card machines or machines using in excess of 120 volts. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water in excess of that usually furnished or supplied for the use of premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent. Landlord may have installed a water meter in the Premises to measure the amount of water consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water so consumed. If a separate meter is not installed, the excess cost for such water shall be established by an estimate made by a utility company at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Tenant shall furnish janitorial services and supplies for the leased Premises. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except of such matters as to which Tenant gave Landlord notice on or before the Commencement Date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, Project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or its Broker or Sales Agent, other than as may be contained herein or in a separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS AND MAINTENANCE. a. Landlord's Obligations. Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building, including the heating, ventilating and air conditioning systems subject to reimbursement as provided for in Article 5.3. b. Tenant's Obligations. (This section deleted. Initialed by _____.) (2) Tenant at Tenant's sole expense shall, except for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior surfaces of the ceilings, walls, and floors, all interior windows, all plumbing pipes and fixtures, electrical wiring, switches and fixtures. Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repairs and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the Premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. *Landlord shall furnish window washing services subject to reimbursement as provided for in Article 5.3. (5) 7 (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease. Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS. a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss, damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at least one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and, Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. (6) 8 b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term: provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modifications thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises or the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises. Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on the other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be unreasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. (7) 9 d. No subletting or assignment shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied). Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. If Landlord elects to remove all or any part of such Tenant's Property, the cost of removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements of other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days. Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. (8) 10 b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of; (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord, defend Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor. Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancellable except after twenty (20) days written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (i) shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. (9) 11 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee or first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee. Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease, provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rent and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed to be in default stating the nature of any claimed default. Any such statement may be relied upon by a purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that; (1) this Lease is in full force and effect and has not been modified except as represented by Landlord: (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid Rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1 Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2 Remedies. In the event of Tenant's default hereunder, then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. (10) 12 If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with such reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by Landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default. If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right, title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord of default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the event of imposition of federal, state or local government controls, rules, regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the Premises to another part of the Building in accordance with the following: (11) 13 a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if the relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days written notice of Landlord's intention to relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performance of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect or inscribe any sign, projection awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provision contained in an addendum to this Lease is inconsistent with any other provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. (12) 14 h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements; Tenant's Representations. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection. Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; provided that if such default cannot reasonably be cured within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. t. Compliance. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a wavier of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. The parties hereto have executed this Lease as of the dates set forth below. Date: Date: 11-16-95 ----------------------------------- ---------------------------- Landlord: Hacienda Park Associates, a Tenant: Pro Business, Inc., a ------------------------------ --------------------------------- California general partnership California corporation ------------------------------ --------------------------------- By: Peter Canny, Jr. By: Mitch Everton ----------------------------------- --------------------------- Title: Vice President Title: EVP - Operations ----------------------------------- --------------------------- By: By: ----------------------------------- --------------------------- Title: Title: ----------------------------------- --------------------------- CONSULT YOUR ADVISORS - This document has been prepared for approval by your attorney. No representation or recommendation is made by CB Commercial as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. (13) 15 ADDENDUM #1 TO LEASE 38. TENANT'S PROPORTIONATE SHARE: Upon completion of tenant improvements, Tenant's proportionate share of the building containing the Premises shall be 24.10%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Gross Area of the Building (Building B), as determined by the Landlord from time to time. The Building consists of 41,574 square feet. Tenant's proportionate share of the Project shall be 12.05%. The Project consists of two buildings situated on a total land area of 5.575 acres. The Project's land value, related assessments, Outside Area Expenses and other expenses allocated on the basis of land are allocated 50.01% to Building A and 49.99% to Building B. Tenant's proportionate share of the Project is a product of Tenant's Building share multiplied by Building B's share of the Project. 39. TENANT IMPROVEMENT ALLOWANCE: (a) Landlord shall enter into a contract with a contractor of Landlord's choice for the construction of the tenant improvements in accordance with the Space Plan to be completed by Tenant. All tenant improvement work shall be completed in accordance with all applicable laws and in compliance with the Americans with Disabilities (ADA) as interpreted by the City of Pleasanton in its review of the construction documents for said tenant improvement work. Landlord shall provide a tenant improvement allowance of Twelve and No/100 Dollars ($12.00) per rentable square foot for said tenant improvement work. The tenant improvement costs shall include all space planning fees, architectural and engineering drawings and governmental permit fees which will be deducted from the tenant improvement allowance. Except for Tenant change-orders, Landlord shall not charge Tenant a supervision fee or administrative fee in connection with the tenant improvements. In the event that Tenant requests change-orders, Landlord will charge Tenant as supervision fee for work connected to the change-order(s). In the event that the actual tenant improvement cost is greater than the Twelve and No/100 Dollars ($12.00) per rentable square foot tenant improvement allowance, Tenant shall pay to Landlord the difference between the allowance and the actual cost. Tenant shall pay Landlord said difference at the completion of tenant improvement work. Tenant accepts the Premises in its current condition and Landlord has no obligation to Tenant with respect to the Premises except as defined herein. The Landlord shall diligently complete the tenant improvements, however, in the event the space is not substantially completed by the lease commencement date, the lease term shall still commence as defined in paragraph 2.d. and rent shall be payable pursuant to paragraph 2.j. 16 FIRST AMENDMENT TO LEASE DATED NOVEMBER 13, 1995 This Amendment, dated the 23rd day of February, 1996, between Hacienda Park Associates, a California general partnership, ("Landlord") and Pro Business, Inc., a California Corporation, ("Tenant"), is for the premises located in the City of Pleasanton, County of Alameda, State of California, commonly known as 4696 Willow Road. Landlord and Tenant being parties to that certain Lease dated November 13, 1995 hereby express their mutual desire and intent to amend the Lease as herein after provided. 1. COMMENCEMENT: February 15, 1996 2. TERMINATION: January 31, 2001 3. BASE RENT: PERIOD (RATE/SQ.FT./MO. RENT/MO. February 15, 1996 to January 31, 2001 $1.38 $13,837.26 4. CONTINUING OBLIGATIONS: Except as expressly set forth to the contrary in this First Amendment, the Lease remains unmodified and in full force and effect. To the extent of any conflict between the terms of the First Amendment and the terms of the Lease, the terms of the First Amendment shall control. In witness whereof, the parties have executed this First Amendment on the date(s) set forth below, effective as of the day and year first above written in one (1) or more copies. AGREED AND ACCEPTED LESSOR: Hacienda Park Associates, LESSEE: ProBusiness, Inc., a a Delaware limited partnership California corporation By: Peter Canny, Jr. By: Mitch Everton ----------------------- --------------------------- Its: Vice President Its: EVP-OPERATIONS ----------------------- --------------------------- Dated: 4-29-96 Dated: 4-24-96 ----------------------- --------------------------- 17 EXHIBIT A THE PREMISES SARATOGA CENTER 4696 WILLOW ROAD PLEASANTON, CALIFORNIA 18 EXHIBIT B GIBRALTAR DRIVE NORTH PAINEWEBBER PROPERTIES HACIENDA PARK ASSOCIATES SARATOGA CENTER (30A) 5934 GIBRALTAR DR. (2 STORY) 4696 - 4698 WILLOW RD. (1 STORY) PLEASANTON, CA 19 EXHIBIT D RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. Except as consented to in writing by Landlord, or in accordance with Building Standard Improvements, no curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use, No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. No Tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof penetrations without the prior written consent of Landlord. 4. The main lobby directory of the Building will be provided exclusively for the display of the name and location of the Building's tenants only, and Landlord reserves the right to exclude any other names therefrom. Landlord shall provide Tenant with a building standard wall or door mounted sign at or adjacent to Tenant's main entrance to its Premises which shall identify Tenant and its suite number. 5. All cleaning and janitorial services for the Building shall be provided by Landlord in accordance with Landlord's specifications for said services, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purposes of cleaning. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises or the Building. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any of Tenant's property by the janitor or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with two keys to each door in the Premises that contains a lock set. Landlord may make a reasonable charge for any additional keys and for having the locks changed. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any additional locks or bolts on any door of its Premises without the prior written consent of Landlord. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. If Tenant requires telegraphic, telephonic burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The elevators shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise 1 20 or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate the impacts of noise or vibration on the Building. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or flammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animals, with the exception of seeing eye dogs when in the company of their masters, may be brought into or kept in the Building. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall cooperate with Landlord to assure the most effective operation of the Building's heating and air-conditioning and shall comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from attempting to adjust the Building's heating, ventilating or air-conditioning controls other than the room thermostats installed for Tenant's use. Tenant shall keep all corridor access doors to its Premises closed and shall close window coverings at the end of each business day. 13. Tenant shall be responsible for all persons for whom it requests access to the Building's security system, and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages resulting from the admission to or exclusion from the Building of any person. 14. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and turn off all lights and other equipment which are not required to be continuously run at the close of its business day. Tenant shall be responsible for any damages or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this rule. 15. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expenses of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant, or its employees or invites. 16. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 17. Except as required to facilitate normal office occupancy, Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without the prior written consent of Landlord. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule at its sole cost and expense. 2 21 18. Tenant shall not install, maintain or operate upon the Premises any vending machine without the prior written consent of Landlord. In the event Landlord so approves such installation Tenant shall be responsible for all costs associated with such installation and shall remove the vending machines at the end of such Term. 19. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or other substance or who is in violation of any of the Rules or Regulations of the Building. 20. Tenant shall store all its trash and garbage within its Premises or in such central facilities as may be provided by Landlord for Tenant's non-exclusive use in the Outside Area. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 21. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral, illegal or objectional purpose. 22. Use of Underwriters' Laboratory (UL) approved equipment for brewing coffee, tea, hot chocolate and similar beverages, (and refrigeration of such products) shall be permitted provided that Tenant may utilize a UL approved microwave oven to prepare prepackaged foods for its employees. No other than as expressly provided herein no other food preparation shall be permitted. Tenant's use of such equipment shall be in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations and shall not cause a nuisance to other Tenants in the building due to odors. 23. Tenant shall not use in any space or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve, Tenant shall not bring any other vehicles of any kind into the Building. 24. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant without the written consent of Landlord except as to Tenant's address for its Premises. 25. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency having jurisdiction over the Property. Tenant shall be responsible for any increased insurance premiums attributable to Tenant's use of the Premises, Building, or Property. 26. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked during non-business hours and said means of entry to the Premises closed during normal business entrance hours. 27. Tenant's request for assistance will be attended to only upon appropriate application to Landlord by an authorized individual. Employees of Landlord shall not perform any work on the Premises, other than that associated with the provision of services to Tenant required of Landlord under the Lease for the Premises, or implement a request of Tenant, unless that employee receives written instructions from Landlord. 28. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the building parking areas overnight, nor park any vehicles in the Building parking areas other than 3 22 automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space. 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other Tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of Premises in the Building. 31. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety, security, care and cleanliness of the Building and the Property and preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are published by Landlord. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 33. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends or at other times as Landlord may designate. Landlord shall have right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. if Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 34. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 35. Canvassing, soliciting, and distribution of handbills or other written material and peddling in the Building are prohibited and each Tenant shall cooperate to prevent these activities. 36. As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall: (a) On Monday through Friday, except holidays, from 7:00 a.m. to 7:00 p.m. (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours when in the judgment of Landlord it may be required for the comfortable occupancy of the Premises. After hours usage shall be monitored by the override meter which shall be installed in the Premises and the actual cost of such usage shall be paid by Tenant. (b) Furnish to the Premises, Monday through Friday, from 7:00 a.m. to 7:00 p.m. electrical current as required by the Building Standard office lighting and fractional horsepower office business machines in the amount of approximately two and one-half (2.5) watts per square foot. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the terms, classifications and rate charges to similar consumers by the public utility serving the neighborhood in which the Building is located. 4 23 COMPREHENSIVE DISCLOSURE AND AGREEMENT DATE: November 13, 1995 ------------------- LESSOR: Hacienda Park Associates --------------------------------------------------------------------- LESSEE: Pro Business, Inc. --------------------------------------------------------------------- PROPERTY: 4696 Willow Road, Pleasanton, CA --------------------------------------------------------------------- Street Address, City, State Also known as: Saratoga Center ----------------------------------------------------- BROKERS: CB Commercial Real Estate Group, Inc. representing Lessor ----------------- Colliers Parrish International representing Lessee ------------------------------- ----------------------- BROKER REPRESENTATION - -- Check if applicable. Lessor and Lessee hereby acknowledge that Broker represents both parties hereto; and both parties consent thereto. NOTIFICATION RE: NATIONAL FLOOD INSURANCE PROGRAM This property is or may be located in a Special Flood Hazard Area on United States Department of Housing and Urban Development (HUD) "Special Flood Zone Area Maps." Federal law requires that as a condition of obtaining federally related financing on most properties located in "flood zones," banks, savings and loan associations, and some insurance lenders require flood insurance to be carried where the property, real or personal, is security for a loan. This requirement is mandated by the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. The purpose of the program is to provide flood insurance to property owners at a reasonable cost. Cities or counties participating in the National Flood Insurance Program may have adopted building or zoning restrictions, or other measures, as part of their participation in the program. You should contact the city or county in which the property is located to determine any such restrictions. The extent of coverage available in your area and the cost of this coverage may vary, and for further information, you should consult your lender or insurance carrier. FLOOD ZONE DESIGNATION: ZONE B SOURCE F.I.R.M. Panel #060012 0001 D, --- -------------------------------------- September 19, 1984 - -------------------------------------------------------------------------------- HAZARDOUS WASTES OR SUBSTANCES AND UNDERGROUND STORAGE TANKS Comprehensive federal and state laws and regulations have been enacted in the past several years in an effort to control the use, storage, handling, clean-up, removal and disposal of hazardous wastes or substances. Some of these laws and regulations (such as, for example, the Comprehensive Environmental Response Compensation and Liability Act [CERCLA]) provide for broad liability on the part of owners, tenants, or other users of property for clean-up costs and damages, regardless of fault. Other laws and regulations set standards for the handling of asbestos, and establish requirements for the use, modification, abandonment, and closure of underground storage tanks. It is not practical or possible to list all such laws and regulations in this Notice. Therefore, Lessors and Lessees are urged to consult legal counsel to determine their respective rights and liabilities with respect to the issues described in this Notice, as well as all other aspects of the proposed transaction. If hazardous wastes or substances have been, or are going to be used, stored, handled or disposed on the Property, or if the Property has been or may have underground storage tanks, it is essential that legal and technical advice be obtained to determine, among other things, the nature of permits and approvals which have been obtained or may be required; the estimated costs and expenses associated with the use, storage, handling, clean-up, disposal or removal of hazardous wastes or substances; and the nature and extent of contractual provisions necessary or desirable in this transaction. Broker recommends expert assistance and site investigation to determine past uses of the property, which may provide valuable information as to the likelihood of hazardous wastes or substances, or underground storage tanks, being on the Property. Lessor agrees to disclose to Broker and to Lessee any and all information which he/she/it has regarding present and future zoning and environmental matters affecting the Property and regarding the condition of the Property, including, but not limited to structural, mechanical and soils conditions, the presence and location of asbestos, PCB transformers, other toxic, hazardous or contaminated substances, and underground storage tanks, in, on, or about the Property. Broker has conducted no investigation regarding the subject matter hereof, except as may be contained in a separate written document signed by Broker. Broker makes no representations concerning the existence or nonexistence of hazardous wastes or substances, or underground storage tanks, in, on, or about the Property. Lessee should contact a professional, such as a civil engineer, industrial hygienist or other persons with experience in these matters, to advise on these matters. The term "hazardous wastes or substances" is used herein in its very broadest sense and includes, but is not limited to, petroleum based products, paints and solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium compounds, asbestos, PCBs and other chemical products. Hazardous wastes or substances and underground storage tanks -1- 24 may be present on all types of real property. This Notice is intended to apply to any transaction involving any type of real property, whether improved or unimproved. BROKER DISCLOSURE The parties hereby expressly acknowledge that Broker has made no independent determination or investigation regarding the following: present or future use or zoning of the property; environmental matters affecting the Property; the condition of the Property, including, but not limited to structural, mechanical and soils conditions, as well as issues surrounding hazardous wastes or substances as set out above; violations of the Occupational Safety and Health Act or any other federal, state, county or municipal laws, ordinances, or statutes; measurements of land and/or buildings. Lessee agrees to make its own investigation and determination regarding such items. A REAL ESTATE BROKER IS QUALIFIED TO ADVISE ON REAL ESTATE. IF YOU DESIRE LEGAL ADVICE, CONSULT YOUR ATTORNEY. AMERICANS WITH DISABILITIES ACT (ADA) Owners or tenants of real property may be subject to the Americans with Disabilities Act (ADA), a federal law codified at 42 USC Section 12101 et seq. Among other requirements of the ADA that could apply to your property, Title III of the Act requires owners and tenants of "public accommodations" to remove barriers to access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons. The regulations under Title III of the ADA are codified at 28 CFR Part 36. Broker recommends that you and your attorney review the ADA and the regulations, and, if appropriate, your proposed lease agreement, to determine if this law would apply to you and the nature of the requirements. These are legal issues. You are responsible for conducting your own independent investigation of these issues. COMPLIANCE WITH LAWS The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. ALQUIST-PRIOLO NOTIFICATION: ALQUIST-PRIOLO SPECIAL EARTHQUAKE STUDIES ZONE ACT (CALIFORNIA ONLY) The Property described above is or may be situated in a Special Studies Zone as designated under the Alquist-Priolo Special Studies Zone Act, Sections 2621-2630, inclusive, of the California Public Resources Code; and, as such, the construction or development on the Property of any structure for human occupancy may be subject to the findings of a geologic report prepared by a geologist registered in the State of California, unless such report is waived by the city or county under the terms of that Act. No representations on the subject are made by Lessor or by CB COMMERCIAL REAL ESTATE GROUP, INC. or its agents or employees, and the Lessee should make his/her/its own inquiry or investigation. SPECIAL STUDIES ZONE YES XX NO SOURCE Special Studies Zone Map, Dublin --- --- ------------------------------------ Quadrangle, Jan. 1, 1982 - -------------------------------------------------------------------------------- For further information you may wish to contact appropriate city or county agencies: - -------------------------------------------------------------------------------- RECEIPT OF A COPY OF THIS NOTICE AND AGREEMENT IS HEREBY ACKNOWLEDGED. Dated November 13, 1995 ProBusiness, Inc. ----------------- ------------------------------------------------------- By: Mitch Everton --------------------------------------------------- Dated , 199 ----------- -- ------------------------------------------------------- By: PD --------------------------------------------------- CONSULT YOUR ADVISORS: NO REPRESENTATION OR RECOMMENDATION IS MADE BY CB COMMERCIAL REAL ESTATE GROUP, INC. OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT, INTERPRETATION, OR ECONOMIC CONSEQUENCES OF THE NATIONAL FLOOD INSURANCE PROGRAM AND RELATED LEGISLATION, NOR OF OTHER LEGISLATION REFERRED TO HEREIN. THESE ARE QUESTIONS THAT YOU SHOULD ADDRESS WITH YOUR CONSULTANTS AND ADVISORS. -2- EX-10.5 25 BUILT-TO-SUIT LEASE DATED SEPTEMBER 27, 1996 1 EXHIBIT 10.5 BUILD-TO-SUIT LEASE Landlord: Britannia Hacienda V Limited Partnership Tenant: ProBusiness, Inc. Date: September 27, 1996 TABLE OF CONTENTS 1. PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Premises . . . . . . . . . . . . . . . . . 1 1.2 Landlord's Reserved Rights . . . . . . . . 1 1.3 First Refusal Right . . . . . . . . . . . . 2 2. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Term . . . . . . . . . . . . . . . . . . . 3 2.2. Early Possession . . . . . . . . . . . . . 3 2.3. Delay In Possession . . . . . . . . . . . . 4 2.4. Construction . . . . . . . . . . . . . . . 4 2.5 Acknowledgement Of Lease Commencement . . . 5 2.6 Holding Over . . . . . . . . . . . . . . . 5 2.7 Option To Extend Term . . . . . . . . . . . 6 3. RENTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1. Minimum Rental . . . . . . . . . . . . . . 6 3.2. Late Charge . . . . . . . . . . . . . . . . 9 4 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1. Personal Property. . . . . . . . . . . . . 10 4.2. Real Property . . . . . . . . . . . . . . . 10 5. OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . . . . . 10 5.1. Payment Of Operating Expenses . . . . . . . 10 5.2. Definition Of Operating Expenses . . . . . 11 5.3. Determination Of Operating Expenses . . . . 13 5.4. Final Accounting For Lease Year . . . . . . 13 5.5. Proration . . . . . . . . . . . . . . . . . 14 6. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.1. Payment . . . . . . . . . . . . . . . . . . 14 6.2. Interruption . . . . . . . . . . . . . . . 14 7. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.1. Right To Make Alterations . . . . . . . . . 14 7.2. Title To Alterations . . . . . . . . . . . 15 7.3. Tenant Fixtures . . . . . . . . . . . . . . 15 7.4. No Liens . . . . . . . . . . . . . . . . . 15 8. MAINTENANCE AND REPAIRS . . . . . . . . . . . . . . . . . . . 15 8.1. Landlord's Work . . . . . . . . . . . . . . 15 8.2. Tenant's Obligation For Maintenance . . . . 16 (a) Good Order, Condition And Repair . . . 16 (b) Landlord's Remedy . . . . . . . . . . . 16 (c) Condition Upon Surrender . . . . . . . 16 9. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . 17 9.1. Permitted Use . . . . . . . . . . . . . . . 17 9.2. [Omitted.] . . . . . . . . . . . . . . . . 17 9.3. No Nuisance . . . . . . . . . . . . . . . . 17 9.4. Compliance With Laws . . . . . . . . . . . 17 2 9.5. Liquidation Sales . . . . . . . . . . . . . 17 9.6. Environmental Matters . . . . . . . . . . . 17 10. INSURANCE AND INDEMNITY . . . . . . . . . . . . . . . . . . . . 18 10.1. Insurance . . . . . . . . . . . . . . . . . 18 10.2. Quality Of Policies And Certificates . . . 18 10.3. Workers' Compensation . . . . . . . . . . . 19 10.4. Waiver Of Subrogation . . . . . . . . . . . 19 10.5. Increase In Premiums . . . . . . . . . . . 19 10.6. Indemnification . . . . . . . . . . . . . . 19 10.7. Blanket Policy . . . . . . . . . . . . . . 20 11. SUBLEASEAND ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . 20 11.1. Assignment And Sublease Of Premises . . . . 20 11.2. Rights Of Landlord . . . . . . . . . . . . 20 12. RIGHT OF ENTRY AND QUIET ENJOYMENT . . . . . . . . . . . . . . 21 12.1. Right Of Entry . . . . . . . . . . . . . . 21 12.2. Quiet Enjoyment. . . . . . . . . . . . . . 21 13. CASUALTY AND TAKING . . . . . . . . . . . . . . . . . . . . . . 21 13.1. Termination Or Reconstruction . . . . . . . 21 13.2. Tenant's Rights . . . . . . . . . . . . . . 22 13.3. Lease To Remain In Effect . . . . . . . . . 22 13.4. Reservation Of Compensation . . . . . . . . 23 13.5. Restoration Of Fixtures . . . . . . . . . . 23 14. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14.1. Events Of Default . . . . . . . . . . . . . 23 (a) Abandonment . . . . . . . . . . . . . . 23 (b) Nonpayment . . . . . . . . . . . . . . 23 (c) Other Obligations . . . . . . . . . . . 23 (d) General Assignment . . . . . . . . . . 23 (e) Bankruptcy . . . . . . . . . . . . . . 24 (f) Receivership . . . . . . . . . . . . . 24 (g) Attachment . . . . . . . . . . . . . . 24 (h) Insolvency . . . . . . . . . . . . . . 24 14.2. Remedies Upon Tenant's Default . . . . . . 24 14.3. Remedies Cumulative . . . . . . . . . . . . 25 15. SUBORDINATION, ATTORNMENT AND SALE . . . . . . . . . . . . . . 25 15.1. Subordination To Mortgage . . . . . . . . . 25 15.2. Sale Of Landlord's Interest . . . . . . . . 25 15.3. Estoppel Certificates . . . . . . . . . . . 26 15.4. Subordination to CC&R's . . . . . . . . . . 26 16. SECURITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 16.1. Deposit . . . . . . . . . . . . . . . . . . 26 17. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 27 17.1. Notices . . . . . . . . . . . . . . . . . . 27 17.2. Successors And Assigns . . . . . . . . . . 28 17.3. No Waiver . . . . . . . . . . . . . . . . . 28 17.4. Severability . . . . . . . . . . . . . . . 28 17.5. Litigation Between Parties . . . . . . . . 28 17.6. Surrender . . . . . . . . . . . . . . . . . 28 17.7. Interpretation . . . . . . . . . . . . . . 28 17.8. Entire Agreement . . . . . . . . . . . . . 28 17.9. Governing Law . . . . . . . . . . . . . . . 28 17.10. No Partnership . . . . . . . . . . . . . . 28 17.11. Financial Information . . . . . . . . . . . 28 -ii- 3 17.12. [Omitted.] . . . . . . . . . . . . . . . . 29 17.13. Time . . . . . . . . . . . . . . . . . . . 29 17.14. Rules And Regulations . . . . . . . . . . . 29 17.15. Brokers . . . . . . . . . . . . . . . . . . 29 17.16. Memorandum Of Lease . . . . . . . . . . . . 29 17.17. Corporate Authority . . . . . . . . . . . . 29 17.18. Execution and Delivery . . . . . . . . . . 30 17.19. Stock Warrants . . . . . . . . . . . . . . 30 17.20. Survival . . . . . . . . . . . . . . . . . 30 17.21. Consents . . . . . . . . . . . . . . . . . 30 17.22. Landlord Defaults . . . . . . . . . . . . . 30
EXHIBITS EXHIBIT A Real Property Description EXHIBIT B Site Plan EXHIBIT C Construction C-1: First Floor Plan C-2: Second Floor Plan C-3: Finish Specifications EXHIBIT D Construction Timeline EXHIBIT E Acknowledgement of Lease Commencement -iii- 4 BUILD-TO-SUIT LEASE THIS BUILD-TO-SUIT LEASE ("Lease") is made and entered into as of the 27th day of September, 1996, by and between BRITANNIA HACIENDA V LIMITED PARTNERSHIP, a Delaware limited partnership (hereinafter called "Landlord") and PROBUSINESS, INC., a California corporation (hereinafter called "Tenant"). THE PARTIES AGREE AS FOLLOWS: 1. PREMISES 1.1 Premises. (a) Landlord leases to Tenant and Tenant hires and leases from Landlord, on the terms, covenants and conditions hereinafter set forth, the premises (the "Premises") consisting of a building, of approximately 129,322 square feet (the "Building") to be constructed by Landlord pursuant to the terms of this Lease on a portion of the real property described in Exhibit A attached hereto (the "Property"). The approximate location of the Building on the Property and the approximate layout of the other site improvements to be constructed by Landlord on the Property are depicted in the site plan attached hereto as Exhibit B (the "Site Plan"). The parking areas, driveways, sidewalks, landscaped areas and other portions of the Property that lie outside the exterior walls of the Building (excluding any additional buildings depicted on the Site Plan or otherwise constructed on the Property by Landlord from time to time), as depicted on the Site Plan and as hereafter modified by Landlord from time to time in accordance with the provisions of this Lease, are sometimes referred to herein as the "Common Areas"; provided, however, that the Common Areas shall not be construed to include any part of the portion of the Property designated as Phase V or Phase VII on the Site Plan until such time as (x) the construction of the Common Area improvements contemplated for and located on such Phase has been completed in all material respects and such improvements are ready and available for use, and (y) the construction of the building(s) contemplated for and located on such Phase is substantially complete (except for "punch list" items which do not materially impair or interfere with the use of such building(s)). (b) As an appurtenance to Tenant's leasing of the Premises pursuant to Section 1.1 (a), Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas (as they exist from time to time) and all easements, access rights and similar rights and privileges relating to or appurtenant to the Property and created or existing from time to time under any easement agreements, declarations of covenants, conditions and restrictions, or other written agreements now or hereafter of record with respect to the Property, subject however to any limitations applicable to such rights and privileges under applicable law and/or under the written agreements creating such rights and privileges. 1.2. Landlord's Reserved Rights. Landlord reserves, in addition to the right of entry set forth in Section 12.1 hereof, the following rights, exercisable from time to time in Landlord's discretion: (i) to install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and other equipment above the ceiling surfaces, below the floor surfaces or within the walls of the Building in locations which will not materially interfere with Tenant's use thereof; (ii) to relocate any pipes, ducts, conduits, wires and appurtenant meters and equipment located within or outside the Building; (iii) to construct, alter or add to other buildings or improvements on the Property; (iv) to build adjoining to the Property; (v) to lease any part of the Property for the construction of improvements or buildings; (vi) to make changes to the Common Areas, including (but not limited to) changes in the location, size or shape of any portion of the Common Areas, and to relocate parking spaces on the Property; (vii) to close temporarily any of the Common Areas for maintenance or other reasonable purposes, provided that reasonable parking and reasonable access to the Building remain available; (viii) to use the Common Areas while engaged in making additional improvements, repairs or alterations to the Property or any -1- 5 portion thereof; and (ix) to do and perform such other acts with respect to the Common Areas and the Property as may be necessary or appropriate; provided, however, that the exercise by Landlord of its rights under this Section 1.2 shall not, without Tenant's prior written consent, (x) materially reduce the parking ratio for the Property below that shown on the Site Plan, nor (y) reduce the number of parking spaces on the portion of the Property designated as Phase VI on the Site Plan (other than on a temporary basis incidental to construction or maintenance activities of Landlord on the Property, in which event Landlord shall exercise reasonable efforts to minimize the number of parking spaces affected by such temporary activities), nor (z) make any other change in the Site Plan that would have a material adverse effect on Tenant's use of the Premises. Moreover, Landlord shall not exercise rights reserved to it pursuant to this Section 1.2 in such a manner as to materially impair Tenant's ability to conduct its activities in the normal manner, or in such a manner as to cause any material diminution of Tenant's rights or any material increase in Tenant's obligations under this Lease; provided, however, that the foregoing shall not limit or restrict Landlord's right to undertake reasonable construction activity and Tenant's use of the Premises shall be subject to reasonable temporary disruption incidental to such activity diligently prosecuted. 1.3 First Refusal Right. (a) Beginning on the date on which Tenant takes occupancy of the entire Premises (including the second phase of approximately 40,000 square feet as described in Exhibit C) and continuing for the remaining term of this Lease (including any duly exercised extended terms), Landlord shall not lease any space in any building(s) existing or to be built from time to time on the portion of the Property designated as Phase V on the Site Plan, except in compliance with this Section 1.3; and beginning on the date of this Lease and continuing for the remaining term of this Lease (including any duly exercised extended terms), Landlord shall not lease any space in any building(s) existing or to be built from time to time on the portion of the Property designated as Phase VII on the Site Plan, except in compliance with this Section 1.3; provided, however, that the foregoing restrictions shall not apply during any period in which Tenant is in default under this Lease in any material respect. (b) If Landlord intends, during any applicable period described in Section 1.3(a), to lease any space in any of the buildings existing or to be built on Phase V or Phase VII of the Property from time to time, and if Tenant is not then in default under this Lease in any material respect, Landlord shall give written notice of such intention to Tenant, specifying the material terms on which Landlord proposes to lease such space (the "Offered Space"), and shall offer to Tenant the opportunity to lease the Offered Space on the terms specified in Landlord's notice. Landlord shall not need to have a bona fide written offer from a prospective tenant in order to give such a notice, and such notice may, in Landlord's discretion, identify a range of sizes, durations, rental rates, tenant improvement allowances and other material terms on which Landlord is willing to lease the Offered Space. Tenant shall have ten (10) business days after receipt of such notice from Landlord in which to accept such offer by written notice to Landlord; if Landlord's notice designated alternative terms or a range of terms, Tenant's acceptance shall specify which alternative, within the offered range, is being accepted by Tenant. Upon such acceptance by Tenant, the Offered Space (or applicable portion thereof) shall be leased to Tenant on the terms set forth in Landlord's notice and elected by Tenant (subject to the provisions of Section 1.3)(c)) and on the additional terms and provisions set forth herein (except to the extent inconsistent with the terms set forth in Landlord's said notice) and the parties shall promptly execute an amendment to this Lease adding the Offered Space to the Premises and making any appropriate amendments to provisions of this Lease to reflect different rent and other obligations applicable to the Offered Space under the terms of Landlord's said notice and Tenant's acceptance. If Tenant does not accept Landlord's offer within the allotted time, Landlord shall thereafter have the right to lease the Offered Space or any portion thereof to a third party, at any time within one hundred eighty (180) days after Tenant's failure to accept Landlord's offer, at a minimum rental and on other terms and conditions not more favorable to the lessee than the minimum rental and other terms offered to Tenant in Landlord's said notice. If Tenant does not accept Landlord's offer, then to the extent Landlord does not lease the Offered Space to a third party within such 180-day period, Landlord shall again be required to comply with the provisions of this Section 1.3 prior to any further leasing of the Offered Space or any portion thereof. -2- 6 (c) Notwithstanding any other provisions of this Section 1.3, if the terms (or range of terms) offered by Landlord to Tenant with respect to the Offered Space do not include an expiration date which is coterminous with the then current term of this Lease, then Tenant's acceptance (if any) of Landlord's offer may take any of the following three forms: (i) Tenant may accept the terms (or an alternative within the range of terms, if applicable) offered by Landlord, without regard to the non-coterminous nature of the respective lease terms for the Offered Space and for the initial Premises hereunder; or (ii) Tenant may accept the terms (or an alternative within the range of terms, if applicable) offered by Landlord with respect to the Offered Space and concurrently extend the then current term of this Lease with respect to the initial Premises to terminate concurrently with the lease term for the Offered Space, in which event such extension by Tenant shall be deemed to be a permissible early exercise of the extension option set forth in Section 2.7 hereof, without regard to the time limits set forth therein, and the rent for the initial Premises for such extended term shall be determined in accordance with Section 3.1(e) hereof for any portion of such extended term falling within the First five (5) years after the original expiration date of this Lease, and shall be determined in accordance with Section 3.1(f) hereof for any portion of such extended term falling more than five (5) years after the original expiration date of this Lease; or (iii) Tenant may elect to lease the Offered Space for a term coterminous with the then remaining term of this Lease with respect to the initial Premises, in which event (x) Landlord shall have no obligation to improve the Offered Space or provide any tenant improvement allowance for the Offered Space, regardless of any contrary terms set forth in Landlord's original notice to Tenant, (y) the "minimum rent" for the Offered Space shall be the fair market rental value thereof, in the then existing condition of such space, which fair market rental value shall be determined promptly in accordance with the procedure described in Section 3.1(e) hereof (but at 100% of fair market rental value rather than 95%), and (z) Tenant's lease of the Offered Space shall otherwise be on the terms set forth in Landlord's notice and on the additional terms and provisions set forth herein (except to the extent inconsistent with the terms set forth in Landlord's said notice). (d) To the extent Tenant elects, pursuant to clause (ii) of Section 1.3(c) hereof, an early exercise of one or both extended terms under Section 2.7 hereof in whole or in part, then (A) the determination of the rent for the initial Premises for the applicable extended term (or portion thereof) shall be made during the period commencing six (6) months before the commencement of the applicable extended term, pursuant to the procedure in Section 3.1(e) or 3.1(f) hereof, as applicable, and (B) to the extent Tenant has exercised its option as to only a portion of either extended term, then the unexercised portion of such extended term shall be deemed to remain subject to a continuing extension option by Tenant, which remaining option shall be exercisable in accordance with Section 2.7 hereof not more than eight (8) months and not less than six (6) months prior to the expiration of the initial portion of such extended term already elected by Tenant under clause (ii) of Section 1.3(c) hereof. 2. TERM 2.1. Term. The term of this Lease shall commence on the earlier to occur of (i) the date which is five (5) days after the date Landlord notifies Tenant that Landlord's work pursuant to Section 2.4 and Exhibit C on the Building shell and core and on the first phase (approximately 90,000 square feet) of interior improvements is substantially complete and such work is in fact substantially complete (but in no event earlier than July 1, 1997), or (ii) the date Tenant takes occupancy of the Premises (except as otherwise provided in Section 2.2), the earlier of such dates being herein called the "Commencement Date," and shall end on the day immediately preceding the date eleven (11) years thereafter, unless sooner terminated or extended as hereinafter provided. Assuming execution of this Lease by October 1, 1996 and approval of full plans, specifications and working drawings by December 1, 1996, the parties presently estimate that the Commencement Date will be no later than September 1, 1997. For purposes of this Section 2.1, Landlord's work shall be deemed to be "substantially complete" when all of the following have occurred: (A) all improvements to be constructed by Landlord as part of the Building shell and core and the first phase (approximately 90,000 square feet) of interior improvements, pursuant to Exhibit C, have been completed except for "punch list" items which do not materially, interfere with Tenant's ability to utilize the First phase (approximately 90,000 square feet) of the Premises for their intended purpose; (B) the City of Pleasanton has issued a certificate of occupancy for the first phase (approximately 90,000 square feet) of the Premises; (C) all utilities reasonably -3- 7 necessary for Tenant's use of the first phase approximately, 90,000 square feet) of the Premises for their intended purpose are connected and available for use at the Premises; and (D) all improvements to be constructed by Landlord as part of the Common Areas contemplated for and located on Phase VI of the Property as shown on the Site Plan have been completed, except for "punch list" items which do not materially interfere with Tenant's ability to utilize the Premises for their intended purpose, and are available for use by Tenant. 2.2. Early Possession. If Landlord permits Tenant to occupy, use or take possession of the Premises prior to the Commencement Date determined under Section 2.1, such occupancy, use or possession shall be subject to and upon all of the terms and conditions of this Lease, including the obligation to pay rent and other charges, unless Landlord and Tenant agree otherwise; provided, however, that such early possession shall not advance or otherwise affect the Commencement Date or termination date determined under Section 2.1; provided further, that if Tenant takes such early possession solely for the purpose of installing fixtures, equipment, furniture and furnishings and other similar work preparatory to the commencement of business in the Premises (which early possession Landlord shall be required to offer to Tenant at least three (3) weeks prior to the estimated date for substantial completion of Landlord's work as contemplated in Section 2.1 hereof), Tenant shall not be required to pay rent or Operating Expenses by reason of such possession until the Commencement Date otherwise occurs; and provided further, that Tenant shall not interfere with or delay Landlord's contractors by such early possession and shall indemnify, defend and hold harmless Landlord and its agents and employees from and against any and all claims, demands, liabilities, actions, losses, costs and expenses, including (but not limited to) reasonable attorneys' fees, arising out of or in connection with Tenant's early entry upon the Premises hereunder. 2.3 Delay In Possession. Landlord agrees to use its best reasonable efforts to pursue and complete the work described in Section 2.4 and Exhibit C promptly, diligently, and within the respective time periods set forth in the construction timeline attached hereto as Exhibit D and incorporated herein by this reference, as such timeline may be modified from time to time by mutual agreement of Landlord and Tenant, and subject to the effects of any delays caused by or attributable to Tenant or any other circumstances beyond Landlord's reasonable control (excluding any Financial inability); provided, however, that except to the extent caused by a material default by Landlord of its obligations set forth in this Lease (including, but not limited to, its obligations set forth in this Section 2.3 and in Section 2.4 and Exhibit C), Landlord shall not be liable for any damages caused by any delay in the completion of such work, nor shall any such delay affect the validity of this Lease or the obligations of Tenant hereunder. 2.4. Construction. (a) The obligation of Landlord to construct and improve the Premises for occupancy by Tenant hereunder, and to construct related site improvements in the Common Areas for use by Tenant, is set forth in Exhibit C attached hereto and incorporated herein by this reference. Except as set forth in this Section 2.4 and in Exhibit C, Landlord shall have no responsibilities or obligations with respect to preparation of the Premises or the Property for Tenant's occupancy. (b) Landlord shall deliver the Building core and shell and first phase (approximately 90,000 square feet) of interior improvements in the Building to Tenant clean and free of debris on the Commencement Date (subject to Tenant's right of early possession stated in the second proviso in Section 2.2), and Landlord warrants to Tenant, effective as of the Commencement Date, that (i) the Building core and shell and first phase (approximately 90,000 square feet) of interior improvements therein and the Common Areas contemplated for or located on Phase VI of the Property as designated on the Site Plan are substantially completed and are free from material defects in design and construction, (ii) the electrical, mechanical, plumbing, lighting, air conditioning and heating systems, and the loading doors, if any, on the Building are in good operating condition (to the extent necessary to serve the first phase of approximately 90,000 square feet of interior improvements) and are free of material defects in design, equipment and/or installation, and (iii) the Building core and shell and first phase (approximately 90,000 square feet) of interior improvements therein have been constructed in compliance in all material respects with the plans and specifications developed and approved pursuant to Exhibit C. If it is determined that this warranty has been violated in any respect, then it shall be the obligation -4- 8 of Landlord, after receipt of written notice from Tenant setting forth with specificity, the nature of the violation, to promptly, at Landlord's sole cost, correct the condition(s) constituting such Violation. Tenant's failure to give such written notice to Landlord within ninety (90) days after the Commencement Date shall give rise to a conclusive presumption that Landlord has complied with all Landlord's obligations under this Section 2.4 and Exhibit C, except with respect to latent defects. (c) Landlord warrants to Tenant that the Building core and shell and first phase (approximately 90,000 square feet) of interior improvements constructed by Landlord therein, as they exist on the Commencement Date, but without regard to any use for which Tenant will occupy the Premises other than general office use, shall not violate any covenants or restrictions of record or any applicable building code, regulation or ordinance in effect on the Commencement Date. If it is determined that this warranty has been violated, then it shall be the obligation of Landlord, after written notice from Tenant, to promptly, at Landlord's sole cost and expense, correct the condition(s) constituting such violation. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Tenant's business or proposed business thereon, except as expressly set forth in this Lease. (d) Landlord's obligations, representations and warranties with respect to the second phase (approximately 40,000 square feet) of interior improvements in the Premises shall be identical to the obligations, representations and warranties set forth in this Section 2.4 and in Exhibit C with respect to the first phase of interior improvements, but shall be deemed to be made as of the date on which Landlord's construction of such second phase of interior improvements is substantially complete (as defined in Section 2.1). (e) TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PHYSICAL CONDITION OF THE BUILDING AND IMPROVEMENTS TO BE CONSTRUCTED BY LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE. 2.5. Acknowledgement Of Lease Commencement. Upon commencement of the term of this Lease, Landlord and Tenant shall execute a written acknowledgement of the Commencement Date, date of termination, square footage of the Premises and of the first phase of interior improvements delivered to Tenant, excess cost of improvements (if applicable) and related matters, substantially in the form attached hereto as Exhibit E (with appropriate insertions), which acknowledgement shall be deemed to be incorporated herein by this reference. Notwithstanding the foregoing requirement, the failure of Tenant to execute such a written acknowledgement shall not affect Landlord's determination of the Commencement Date, date of termination, square footage of the Premises and of the first phase of interior improvements delivered to Tenant, excess cost of improvements (if applicable) and related matters in accordance with the provisions of this Lease. 2.6. Holding Over. If Tenant holds possession of the Premises after the term of this Lease with Landlord's written consent, then except as otherwise specified in such consent, Tenant shall become a tenant from month to month at one hundred twenty-five percent (125%) of the rental and otherwise upon the terms herein specified for the period immediately prior to such holding over and shall continue in such status until the tenancy is terminated by either party upon not less than thirty (30) days prior written notice. If Tenant holds possession of the Premises after the term of this Lease without Landlord's written consent, then Landlord in its sole discretion may elect (by written notice to Tenant) to have Tenant become a tenant either from month to month or at will, at one hundred twenty-five percent (125%) of the rental (prorated on a daily basis for an at-will tenancy, if applicable) and otherwise upon the terms herein specified for the period immediately prior to such holding over, or may elect to pursue any and all legal remedies available to Landlord under applicable law with respect to such unconsented holding over by Tenant. Tenant shall indemnify and hold Landlord harmless from any loss, damage, claim, liability, cost or expense (including reasonable attorneys' fees) resulting from any delay by Tenant in surrendering the Premises (except with Landlord's prior written consent), including but not limited to any claims made by a succeeding tenant by, reason of such delay. Acceptance -5- 9 of rent by Landlord following expiration or termination of this Lease shall not constitute a renewal of this Lease. 2.7 Option To Extend Term. Tenant shall have the option to extend the term of this Lease at the minimum rental set forth in Section 3.1 (e) and (f) and otherwise upon all the terms and provisions set forth herein with respect to the initial term of this Lease, for up to two (2) additional periods of five (5) years each, commencing upon expiration of the initial term hereof. Exercise of such option with respect to the first such extended term shall be by written notice to Landlord at least six (6) months and not more than eight (8) months prior to the expiration of the initial term hereof; exercise of such option with respect to the second such extended term, if the first extension options has been duly exercised, shall be by like written notice to Landlord at least six (6) months and not more than eight (8) months prior to the expiration of the first extended term hereof. If there exists a material event of default on the part of Tenant on the date of any such notice, then the notice shall not be effective. If Tenant properly exercises one or more extension options under this Section, then all references in this Lease (other than in this Section 2.7) to the "term" of this Lease shall be construed to include the extension term(s) thus elected by Tenant. Except as expressly set forth in this Section 2.7 (as modified by clause (ii) of Section 1.3(c), if applicable), Tenant shall have no right to extend the term of this Lease beyond its prescribed term. To the extent provided in Sections 1.3(c)(ii) and 1.3(d), Tenant may elect an early and/or partial exercise of one or both extended terms in connection with an acceptance of Offered Space; in the event of any such partial exercise, the remaining unexercised portion of the extended term(s) shall be subject to a continuing option under this Section 2.7, as provided in Section 1.3(d), and upon a proper exercise by Tenant of such remaining extended term(s), the rent for such remainder of the extended term(s) shall be determined, as of the commencement of such remainder of the extended term(s), in the manner provided in Section 3.1(e) or 3.1(f), as applicable. 3. RENTAL 3.1. Minimum Rental. (a) Tenant shall pay to Landlord as minimum rental for the Premises, in advance, without deduction, offset, notice or demand, on or before the Commencement Date and on or before the first day of each subsequent calendar month of the term of this Lease, the following amounts per month: for months 1-12, the sum of $99,000.00 per month; for months 13-24, the sum of $142,254.00 per month; and for months 25-132, the adjusted rent determined under Section 3.1(b) hereof. Notwithstanding the foregoing provisions of this Section 3.1, however, at any time after month 24 of the term of this Lease, Tenant in its sole discretion may elect, by written notice to Landlord, to convert its minimum rental obligation for the period from the date of such notice through the remainder of the initial term of this Lease to the following amounts per month (as applicable):
Months After Minimum Rental Commencement Date (per month) ------------------ ---------------- 25-36 $ 150,789.00 37-48 156,821.00 49-60 163,094.00 61-72 169,617.00 73-84 176,402.00 85-96 183,458.00 97-108 190,796.00 109-120 198,428.00 121-132 206,365.00
If the obligation to pay minimum rental hereunder commences on other than the first day of a calendar month or if the term of this Lease terminates on other than the last day of a calendar month, the minimum rental for such first or last month of the term of this Lease, as the case may be, shall be prorated based on the number of days the term of this Lease is in effect during such month. If an increase in minimum rental becomes effective on a day other than the first day, of -6- 10 a calendar month, the minimum rental for that month shall be the sum of the two applicable rates, each prorated for the portion of the month during which such rate is in effect. (b) If and only if Tenant does not exercise its election under Section 3.1(a) to convert its minimum rental obligation to the rent schedule set forth in Section 3.1(a), then and only then shall the minimum rental hereunder be subject to adjustment as set forth in this Section 3.1(b). To the extent Tenant does not exercise such election as of the end of month 24 of the term of this Lease, then for so long as such election remains unexercised minimum rental hereunder shall be subject to adjustment on the second anniversary of the Commencement Date effective for months 25-36 of the term of this Lease, and on each subsequent anniversary of the Commencement Date until the expiration of the initial term of this Lease, effective for the succeeding twelve (12) months of the term of this Lease (each such anniversary being herein called an "Adjustment Date"), in accordance with the provisions of this paragraph (b). The base for computing such adjustment shall be (i) for the first such adjustment, the Consumer Price Index for All Urban Consumers, San Francisco/Oakland/San Jose Metropolitan Area, All Items (1982-84 = 100), produced by the United States Department of Labor, Bureau of Labor Statistics ("Index") which is published for the month two (2) months prior to the month in which the Commencement Date occurs and (ii) for each subsequent adjustment, the Extension Index (as hereinafter defined) used for the immediately preceding adjustment (each such Index identified in clause (i) or (ii) of this sentence, as applicable, being hereinafter called the "Beginning Index"). If the Index which is published for the month two (2) months prior to the month in which the Adjustment Date occurs (the "Extension Index") has increased over the Beginning Index, the minimum rental payable thereafter shall be increased to the following amount(s): (i) For the first such Adjustment Date, to an amount equal to the minimum rental in effect immediately prior to such Adjustment Date multiplied by the lesser of (x) 1.06 or (y) a fraction, the numerator of which is equal to the sum of the Beginning Index for such first Adjustment Date plus the product of 2.5 times the difference between the Extension Index for such first Adjustment Date and the Beginning Index for such First Adjustment Date, and the denominator of which is the Beginning Index for such first Adjustment Date; and (ii) For each subsequent Adjustment Date, to an amount equal to the minimum rental in effect immediately prior to such Adjustment Date multiplied by the lesser of (x) 1.05 or (y) a fraction, the numerator of which is equal to the sum of the Beginning Index for such Adjustment Date plus the product of 2.5 times the difference between the Extension Index for such Adjustment Date and the Beginning Index for such Adjustment Date, and the denominator of which is the Beginning Index for such Adjustment Date. If the Extension Index is not available until after the Adjustment Date, Tenant shall continue to pay the then prevailing minimum rental until the Extension Index is published, whereupon the adjustment provided in this paragraph shall be made retroactive to the Adjustment Date and any accumulated excess of the adjusted minimum rental over the amounts actually paid by Tenant since the Adjustment Date shall be paid promptly by Tenant to Landlord upon notice by Landlord to Tenant of the adjusted minimum rental. If the Index is changed so that the base year differs from the base year used as of the Commencement Date, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or substantially revised during the term of this Lease, any comparable governmental index or computation with which it is replaced (or, if none is available, any privately published index which is comparable in coverage and purpose) shall be designated by Landlord in order to obtain substantially the same result as would have been obtained if the Index had not been discontinued or revised. Upon any adjustment of the monthly minimum rental in accordance with the provisions of this paragraph, Landlord and Tenant shall immediately execute a written acknowledgement of the new minimum rental as adjusted, which acknowledgement shall be deemed to be incorporated herein by this reference; provided, however, that any failure of one or both parties to execute and deliver such a written acknowledgement shall not limit or affect in any way the other obligations of the parties with respect to the applicable rental adjustment or any subsequent rental adjustments required under this paragraph (b). -7- 11 (c) The minimum rental amounts specified in this Section 3.1 are based upon an estimated area of 129,322 square feet for the Premises (except during months 1-12 when the estimated area of the Premises is assumed to be 90,000 square feet, reflecting the estimated area of the first phase of the build-out of interior improvements in the Premises). If the actual area of the Premises, when completed, is greater or less than such estimated area, then the minimum rentals specified in Sections 3.1(a) and/or (b), as applicable, shall be adjusted for each rental period in strict proportion to the ratio between the actual area of the Premises during the applicable period (which area shall be determined on the basis of measurement from the exterior faces of the exterior walls of the Building, excluding overhangs, and, for purposes of determining the amount of space occupied by Tenant during the first twelve months of the term of this Lease, shall be measured to the centerline of any interior demising walls) and the assumed area of 90,000 or 129,322 square feet, as applicable. If Tenant occupies more than 90,000 square feet of the Premises during any portion of the first twelve months of the term of this Lease (due to acceleration of Tenant's occupancy of the second phase of interior improvements or for any other reason), or if the actual area of the first phase of interior improvements is more or less than 90,000 square feet, then the minimum rental specified above for such portion of the first twelve months of the term of this Lease shall be adjusted in strict proportion to the ratio between the additional space occupied by Tenant in excess of 90,000 square feet or the actual area of the first phase of interior improvements, as applicable, as determined on the basis of measurement set forth in the immediately preceding sentence hereof, and the assumed area of 90,000 square feet. If Landlord's substantial completion of the second phase of interior improvements occurs later than twelve months after the Commencement Date, then to the extent such delayed completion results from any cause other than delays attributable to acts or omissions of Tenant or its agents, employees or contractors, the minimum rentals specified in Sections 3.1(a) and or (b), as applicable, shall be reduced, for the period from the beginning of the thirteenth month of the term of this Lease until the substantial completion and delivery by Landlord of the second phase of interior improvements, in strict proportion to the ratio between (i) the greater of the actual area of the space occupied by Tenant in the Premises or the actual area of the first phase of interior improvements, as determined in each case on the basis of measurement set forth in the second preceding sentence hereof, and (ii) the assumed area of 129,322 square feet. Measurements of building area under this paragraph shall be made initially by Landlord's architect, subject to review and approval by Tenant's architect. (d) The minimum rental amounts specified in Section 3.1(a) do not reflect any excess improvement costs that may be chargeable to Tenant in accordance with Exhibit C. If, upon completion of construction of the Premises, it is determined that there are any such excess improvement costs chargeable to Tenant in accordance with Exhibit C, then Tenant shall pay to Landlord as additional minimum rental for the Premises during the initial term of this Lease an amount each month equal to the amount necessary to amortize such excess improvement costs on a level payment basis over the initial term of this Lease with an imputed return at the rate of ten percent (10%) per annum. Upon determination of the amount of any additional minimum rental in accordance with the provisions of this paragraph, Landlord and Tenant shall incorporate such amount in the Acknowledgement of Lease Commencement in the form of Exhibit E or shall execute a separate written acknowledgement of such additional minimum rental, which acknowledgement shall be deemed to be incorporated herein by this reference; provided, however, that any failure of one or both parties to execute and deliver such a written acknowledgement shall not limit or affect in any way the other obligations of the parties with respect to the additional minimum rental (if any) due under this paragraph (d). Notwithstanding any other provisions of this Section 3.1, any additional minimum rental payable under this paragraph (d) shall not be subject to adjustment under Section 3.1 (a), (b) or (c), regardless of any adjustments that may otherwise be appropriate for other minimum rental components under such paragraphs (a), (b) or (c). (e) If Tenant properly exercises its right to extend the term of this Lease pursuant to Section 2.7 hereof, the minimum rental during the first extended term shall be equal to ninety-five percent (95%) of the fair market rental value of the Premises (in "as is" condition as theretofore improved under Section 2.4 and Exhibit C, but without regard to any tenant improvement allowance for the extended term and without regard to the value of any -8- 12 improvements which were installed by Tenant at its own cost and which Tenant has the right to remove from the Premises pursuant to Article 7 hereof upon expiration of the Lease), including any cost-of-living adjustments or other rental increase provisions then customary in the relevant market for comparable commercial leases, determined as of the commencement of such extended term in accordance with this paragraph. Upon Landlord's receipt of a proper notice of Tenant's exercise of its option to extend the term of this Lease, the parties shall have sixty (60) days in which to agree on the fair market rental (including any applicable rental increase provisions) for the Premises (as theretofore improved under Section 2.4 and Exhibit C) at the commencement of the first extended term for the uses permitted hereunder. If the parties agree on such fair market rental and rental increase provisions (if any), they shall execute an amendment to this Lease stating the amount of the applicable minimum monthly rental and any applicable rental increase provisions. If the parties are unable to agree on such rental (including any applicable rental increase provisions) within such sixty (60) day period, then within fifteen (15) days after the expiration of such period each party, by written notice to the other party, shall appoint a real estate appraiser with at least five (5) years experience appraising similar commercial properties in the City of Pleasanton or County of Alameda. If either party fails to appoint an appraiser within the allotted time, the single appraiser appointed by the other party shall be the sole appraiser. If an appraiser is appointed by each party, the two appraisers so appointed shall appoint a third qualified appraiser within fifteen (15) days after the appointment of the later of the two appraisers to be appointed; if the two appraisers are unable to agree upon a third appraiser, either party may, upon not less than five (5) days notice to the other party, apply to the Presiding Judge of the Superior Court for the county in which the Property is located for the appointment of a third qualified appraiser. Each party shall bear the fees and charges of the appraiser appointed by such party, shall bear its own legal fees in connection with appointment of the third appraiser and shall bear one-half of any other costs of appointment of the third appraiser and of such third appraiser's fee. Each appraiser designated under this paragraph, however selected, shall be a person who has not acted for either party (or for any person or entity which controls, is controlled by or is under common control with either party) in any capacity within five (5) years prior to the date of such designation hereunder. Within thirty (30) days after the appointment of the third appraiser, a majority of the three appraisers shall set the fair market rental and any applicable rental increase provisions for the first extended term and shall so notify the parties. If a majority are unable to agree within the allotted time, each of the three appraisers at the end of such 30-day period shall submit his or her written determination of the fair market rental and any applicable rental increase provisions and (i) the three appraised fair market rentals shall be added together and divided by three and the resulting quotient shall be the fair market rental for the first extended term (except that any fair market appraisal that differs by more than 10% from the "middle" appraisal shall be disregarded and the averaging process shall be adjusted accordingly to reflect only the remaining appraisal(s)), and (ii) the applicable rental increase provision (if any) shall be equal to the mathematical average (or the nearest reasonable approximation thereto) of the two rental increase provisions that are most closely comparable, which determinations shall be binding on the parties and shall be enforceable in any further proceedings relating to this Lease. (f) If Tenant properly exercises its right to a second extended term of this Lease pursuant to Section 2.7 hereof, the minimum rental during such second extended term shall be determined in the same manner provided in paragraph (e) of this Section for the first extended term, except that (i) the determination shall be made as of the commencement of the second extended term and (ii) the applicable percentage of fair market rental under clause (ii) of the first sentence of paragraph (e) of this Section shall be one hundred percent (100%) rather than ninety-five percent (95%). 3.2. Late Charge. If Tenant fails to pay when due rental or other amounts due Landlord hereunder, such unpaid amounts shall bear interest for the benefit of Landlord at a rate equal to the lesser of fifteen percent (15%) per annum or the maximum rate permitted by law, from the date due to the date of payment. In addition to such interest, Tenant shall pay to Landlord a late charge in an amount equal to five percent (5%) of any installment of minimum rental and any other amounts due Landlord if not paid in full on or before the third (3rd) day after written notice from Landlord to Tenant that such rental or other amount is past due; provided, however, that if any payment of rent or other amounts by Tenant is more than five (5) days late and Landlord gave written notice of delinquency to Tenant prior to such payment, than for the next twelve (12) calendar months after such written notice was given, Tenant shall be -9- 13 liable for late charges on any further payment of rental or other amount that is not paid on or before the fifth (5th) day after such rental or other amount is due, without any requirement of prior notice from Landlord to Tenant of such default or delinquency. Tenant acknowledges that late payment by Tenant to Landlord of rental or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, including, without limitation, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any loan relating to the Property. Tenant further acknowledges that it is extremely difficult and impractical to fix the exact amount of such costs and that the late charge set forth in this Section 3.2 represents a fair and reasonable estimate thereof. Acceptance of any late charge by Landlord shall not constitute a waiver of Tenant's default with respect to overdue rental or other amounts, nor shall such acceptance prevent Landlord from exercising any other rights and remedies available to it. Acceptance of rent or other payments by Landlord shall not constitute a waiver of late charges or interest accrued with respect to such rent or other payments or any prior installments thereof, nor of any other defaults by Tenant, whether monetary or non-monetary in nature, remaining uncured at the time of such acceptance of rent or other payments. 4. TAXES 4.1. Personal Property. Tenant shall be responsible for and shall pay prior to delinquency all taxes and assessments levied against or by reason of (a) any and all alterations, additions and items installed or placed on the Premises and taxed as personal property rather than as real property, and (b) all personal property, trade fixtures and other property installed or placed by Tenant on or about the Property. Upon request by Landlord, Tenant shall furnish Landlord with satisfactory evidence of Tenant's payment thereof. If at any time during the term of this Lease any of said alterations, additions or personal property, whether or not belonging to Tenant, shall be taxed or assessed as part of the Property, then such tax or assessment shall be paid by Tenant to Landlord immediately upon presentation by Landlord of copies of the tax bills in which such taxes and assessments are included and shall, for the purposes of this Lease, be deemed to be personal property taxes or assessments under this Section 4.1. 4.2. Real Property. To the extent any real property taxes and assessments on the Premises, on any improvements therein or on the portion of the Property identified as Phase VI in the Site Plan are assessed directly to Tenant, Tenant shall be responsible for and shall pay prior to delinquency all such taxes and assessments. Upon request by Landlord, Tenant shall furnish Landlord with satisfactory evidence of Tenant's payment thereof. To the extent the Property, the Premises and/or any improvements therein are taxed or assessed to Landlord following the Commencement Date, such real property taxes and assessments shall constitute Operating Expenses (as that term is defined in Section 5.2 of this Lease) and shall be paid in accordance with the provisions of Article 5 of this Lease. 5. OPERATING EXPENSES 5.1. Payment Of Operating Expenses. (a) Tenant shall pay to Landlord, at the time and in the manner hereinafter set forth, as additional rental, an amount equal to sixty-nine and fifty-nine hundredths percent (69.59%) ("Tenant's Building Operating Cost Share") or thirty-eight and fifty-seven hundredths percent (38.57%) ("Tenant's Land Operating Cost Share"), as applicable, of the Operating Expenses defined in Section 5.2. Tenant's Land Operating Cost Share shall be applicable in determining Tenant's share of (x) the taxes, assessments and other expenses described in clause (iii) of Section 5.2 (excluding personal property taxes and the portion of real property taxes, assessments and similar items allocable to buildings or improvements, as opposed to land), and (y) assessments and dues described in clause (vi) of Section 5.2 and payable to the Hacienda Business Park Owners' Association or otherwise payable under the governing covenants, conditions and restrictions for the Hacienda Business Park, including (but not limited to) the master Declaration as defined in Section 15.4 hereof. Tenant's Building Operating Cost Share shall be applicable in determining Tenant's share of all other Operating Expenses, including (but not limited to), under Section 5.2(iii), personal property taxes and the portion of real property taxes, assessments and similar items allocable to buildings or Improvements as opposed to land. -10- 14 (b) The parties acknowledge that Landlord intends to construct additional buildings on the Property, some of which may be constructed substantially concurrently with the Building and some of which may be constructed at a later time. Tenant's Building Operating Cost Share as specified in paragraph (a) of this Section is based upon an estimated area of 90,000 square feet for the Premises (that being the portion anticipated to be built out as the first phase of interior improvements and occupied by Tenant during the first twelve months of the term) and upon an aggregate area of 129,322 square feet for the buildings owned by Landlord on the Property. If the actual area of the first phase of interior improvements or of the entire Building (when completed), as determined on the basis of measurement set forth in Section 3.1 (c) hereof, differs from the assumed numbers set forth above, or when Tenant occupies more than 90,000 square feet of the Premises as contemplated in Section 3.1(c) and Exhibit C, then Tenant's Building Operating Cost Share shall be adjusted to reflect the actual areas so determined. If and when Landlord constructs additional buildings on the Property from time to time, then the denominator of the fraction by which Tenant's Building Operating Cost Share is determined shall be adjusted to include the gross square footage of each such additional building from and after the date on which construction of such additional building is substantially complete (as that term is defined in Section 2.1 hereof), and the good faith determination of the gross square footage of such additional building by Landlord's architects (in accordance with whatever basis of measurement is applied by Landlord in good faith in determining Operating Expense shares for tenants of such additional building pursuant to the terms of their leases) shall be final and binding upon the parties for purposes of this Section 5.1(b). (c) Tenant's Land Operating Cost Share as specified in paragraph (a) of this Section is based upon an estimated area of 7.46 acres for the portion of the Property designated as Phase VI on the Site Plan and a surveyed area of 19.339 acres for the entire Property. If the boundaries of the Phase VI land area (which is intended to be the land area reasonably allocable to the Building and its users, albeit on a nonexclusive basis) are changed at any time by mutual agreement of Landlord and Tenant, or if the actual area of Phase VI is determined to be greater or smaller than 7.46 acres, then Tenant's Land Operating Cost Share shall be adjusted accordingly. (d) If Landlord actually receives (and is not required to pay over to The Prudential Insurance Company of America), during the term of this Lease, any refund of real property taxes or assessments with respect to the Property and such refund is attributable or allocable in whole or in part to taxes or assessments paid during any period of time during which Tenant was paying a share of real property taxes and assessments on the Property or any portion thereof pursuant to this Lease, then the portion of such refund received by Landlord that is fairly allocable to the amounts actually paid by Tenant for such real property taxes and assessments during any portion of the refund period shall be applied as a credit against Tenant's remaining Operating Expense obligations under this Lease and, to the extent such credit exceeds the total amount of Tenant's remaining Operating Expense obligations under this Lease, shall be refunded in cash by Landlord to Tenant concurrently with the final reconciliation of Tenant's Operating Expense obligations under this Lease. 5.2. Definition Of Operating Expenses. Subject to the exclusions and provisions hereinafter contained, the term "Operating Expenses" shall mean the total costs and expenses incurred by or allocable to Landlord for management, operation and maintenance of the Property and the buildings and other improvements thereon, including, without limitation, the following costs and expenses: (i) insurance, property management, landscaping and operations, repairs and maintenance of buildings and Common Areas, except that property management expenses shall be excluded to the extent they exceed two percent (2%) of minimum rent, (ii) all utilities and services; (iii) real and personal property taxes and assessments or substitutes therefor, including (but not limited to) any possessory interest, use, business, license or other taxes or fees, any taxes imposed directly on rents or services, any assessments or charges for police or fire protection, housing, transit, open space, street or sidewalk construction or maintenance or other similar services from time to time by any governmental or -11- 15 quasi-governmental entity, and any other new taxes on landlords in addition to taxes now in effect, but excluding (aa) fees, exactions and taxes imposed as a condition to the issuance of any entitlements or building permits related to the Property and (bb) gift taxes, inheritance taxes, transfer taxes and net income taxes of Landlord; (iv) supplies, equipment, utilities and tools used in management, operation and maintenance of the Property; (v) capital improvements to the Property or the buildings and other improvements thereon, amortized over the reasonable useful life of the applicable improvement, (aa) which reduce or will cause future reduction of other items of Operating Expenses for which Tenant is otherwise required to contribute (provided that the amortizable costs for this category of improvement shall be limited to the amount of the reasonably estimated savings to be produced thereby), or (bb) which are required by law, ordinance, regulation or order of any governmental authority, or (cc) of which Tenant has use or which benefit Tenant (provided that amortizable improvements under this category shall be limited to those which are approved in writing by Tenant or which are merely a reasonably necessary repair or replacement of an existing improvement with one of like kind and quality, in which event no such approval by Tenant shall be required; and provided further that Tenant's obligation with respect to any amortization of capital expenditures under this Section 5.2(v) shall terminate on the earlier of (x) the expiration of the term of this Lease or (y) the next date as of which minimum rental under this Lease is adjusted or reset to a new rental based on fair market rental value (excluding, however, any CPI-based or stepped adjustments pursuant to Section 3.1 (a) or (b) or pursuant to a prior fair market rental determination)); and (vi) any other costs (including, but not limited to, any parking or utilities fees or surcharges) allocable to or paid by Landlord, as owner of the Property or the buildings and other improvements thereon, pursuant to any applicable laws, ordinances, regulations or orders of any governmental or quasi-governmental authority or pursuant to the terms of any declarations of covenants, conditions and restrictions now or hereafter affecting the Property. The distinction between items of ordinary operating maintenance and repair and items of a capital nature shall be made in accordance with generally accepted accounting principles applied on a consistent basis. Notwithstanding any other provisions of this Section 5.2, Operating Expenses shall not include any of the following: (A) any costs attributable to the work for which Landlord is required to pay under Section 2.4 or Exhibit C; (B) that portion of any Operating Expenses (other than Operating Expenses to which Tenant's Land Operating Expense Share is applicable) that is fairly allocable to any undeveloped portion of the Property (including, but not limited to, Phase V and Phase VII as designated on the Site Plan), until such time as the building(s) and improvements on such portion of the Property have been substantially completed and such portion of the Property is properly includable in determining Tenant's Building Operating Cost Share under Section 5.1(b) hereof; (C) the cost to repair damage caused by (i) fire, earthquake or other peril, or (ii) the negligence of Landlord, its agents, employees or contractors, or any other tenants of the Property or their respective agents, employees, contractors or invitees; (D) costs associated with procurement of new tenants, preparation of their spaces and enforcement of their leases, including (but not limited to) brokerage commissions, tenant improvement costs, and attorneys' fees; (E) the cost of maintenance and repair of structural elements of the buildings located on the Property from time to time, -12- 16 (F) the cost to repair any defects in design, construction or equipment for any building located on the Property from time to time, to the extent resulting from or attributable to work undertaken by Landlord or by its contractors on Landlord's behalf (including, but not limited to, costs to correct any building code violations caused by or attributable to Landlord's work); (G) the cost to investigate and/or remediate any contamination by hazardous or toxic substances or wastes, except to the extent caused by Tenant or its agents, employees or contractors; or (H) the cost to correct any violation of any declaration of covenants, conditions and restrictions applicable to the Property, except to the extent such violation is caused by Tenant or its agents, employees or contractors. 5.3. Determination Of Operating Expenses. On or before the Commencement Date and during the last month of each calendar year of the term of this Lease ("Lease Year"), or as soon thereafter as practical, Landlord shall provide Tenant notice of Landlord's estimate of the Operating Expenses for the ensuing Lease Year or applicable portion thereof. On or before the first day of each month during the ensuing Lease Year or applicable portion thereof, beginning on the Commencement Date, Tenant shall pay to Landlord Tenant's Land Operating Cost Share or Tenant's Building Operating Cost Share, as applicable, of the portion of such estimated Operating Expenses allocable (on a prorata basis) to such month; provided, however, that if such notice is not given in the last month of a Lease Year, Tenant shall continue to pay on the basis of the prior year's estimate, if any, until the month after such notice is given. If at any time or times it appears to Landlord that the actual Operating Expenses will vary from Landlord's estimate by more than five percent (5%), Landlord may, by notice to Tenant, revise its estimate for such year and subsequent payments by Tenant for such year shall be based upon such revised estimate. 5.4. Final Accounting For Lease Year. Within ninety (90) days after the close of each Lease Year, or as soon after such 90-day period as practicable, Landlord shall deliver to Tenant a statement of Tenant's Land Operating Cost Share and Tenant's Building Operating Cost Share, as applicable, of the Operating Expenses for such Lease Year prepared by Landlord from Landlord's books and records, which statement shall be final and binding on Landlord and Tenant, except as otherwise provided herein. Notwithstanding any other provisions of this Section 5.4, Tenant shall have the right to audit or review, directly or through its designated representative, Landlord's books and records relating to Operating Expenses for any period, subject to the following conditions: Such right shall be exercisable only by written request to Landlord within 180 days after Tenant's receipt from Landlord of a statement of actual Operating Expenses, shall be limited to the period covered by such statement, and shall be exercisable only during normal business hours, on not less than ten (10) days prior written notice to Landlord, and at Tenant's sole cost and expense, except as hereinafter provided. To the extent that Tenant, following any such review or audit, disputes any item in the applicable statement or in the calculation of Tenant's obligations thereunder, Tenant shall give Landlord written notice of the disputed items, in reasonable detail and with reasonable supporting information, and Landlord and Tenant shall negotiate diligently and in good faith to try to resolve the dispute. If Landlord and Tenant are unable to resolve the dispute within thirty (30) days after Landlord's receipt of Tenant's written notice specifying the disputed items, then either party may elect, by written notice to the other, to have the dispute resolved through a review and determination by an independent Certified Public Accountant who has not previously rendered professional services to either party. Such review and determination by the independent CPA shall be based on generally accepted accounting principles and tax accounting principles, consistently applied. The independent CPA shall be selected by mutual agreement of Landlord and Tenant; if they are unable to agree on such selection within twenty (20) days after a party's notice of desire to submit the dispute to a CPA review, then the independent CPA shall be appointed by the Presiding Judge of the Alameda County Superior Court upon application by either party (with notice to the other party). If it is determined, on the basis of Landlord's statement or by mutual agreement of Landlord and Tenant or by independent CPA review, as applicable, that Tenant owes an amount that is more or less than the estimated payments previously made by Tenant for the applicable period, then Tenant or Landlord, as the case may be, shall pay the deficiency or overpayment to the other party within thirty (30) days after final determination Of such -13- 17 underpayment or overpayment. The expenses of the independent CPA, if any, shall be borne by Tenant unless the CPA's determination reflects an overstatement or overpayment of five percent (5%) or more in Tenant's obligation for Operating Expenses for the applicable period, in which event the expenses of the independent CPA shall be borne by Landlord. Each party agrees to maintain the confidentiality of the findings of any audit or review in accordance with the provisions of this Section 5.4. Failure or inability of Landlord to deliver the annual statement within such ninety (90) day period shall not impair or constitute a waiver of Tenant's obligation to pay Operating Expenses, or cause Landlord to incur any liability for damages. 5.5. Proration. If the Commencement Date falls on a day other than the first day of a Lease Year or if this Lease terminates on a day other than the last day of a Lease Year, the amount of Tenant's Land Operating Cost Share and Tenant's Building Operating Cost Share, as applicable, payable by Tenant with respect to such first or last partial Lease Year shall be prorated on the basis which the number of days during such Lease Year in which this Lease is in effect bears to 365. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section 5.4 to be performed after such termination. 6. UTILITIES 6.1. Payment. Commencing with the Commencement Date and thereafter throughout the term of this Lease, Tenant shall pay, before delinquency, all charges for water, gas, heat, light, electricity, power, sewer, telephone, alarm system, janitorial and other services or utilities supplied to or consumed in or upon the Premises, including any taxes on such services and utilities. 6.2 Interruption. There shall be no abatement of rent or other charges required to be paid hereunder and Landlord shall not be liable in damages or otherwise for interruption or failure of any service or utility furnished to or used in the Premises because of accident, making of repairs, alterations or improvements, severe weather, difficulty or inability in obtaining services or supplies, labor difficulties or any other cause. Notwithstanding the foregoing provisions of this Section 6.2, however, in the event of any interruption or failure of any service or utility to the Premises which is caused in whole or in part by the negligence or willful misconduct of Landlord or its agents or employees, which continues for more than 48 hours and which materially impairs Tenant's ability to use the Premises for their intended purpose hereunder, then Tenant's rental obligations under this Lease shall be abated in proportion to the extent of the proportional fault of Landlord and its agents and employees and in proportion to the degree of impairment of Tenant's use of the Premises, and such abatement shall be retroactive to the commencement of the interruption or failure and shall continue until Tenant's use of the Premises is no longer materially impaired thereby. 7. ALTERATIONS 7.1. Right To Make Alterations. Tenant shall make no alterations, additions or improvements to the Premises, other than interior non-structural alterations costing less than Fifty Thousand Dollars ($50,000.00) in each instance, without the prior written consent of Landlord. All such alterations, additions and improvements shall be completed with due diligence in a first-class workmanlike manner, in compliance with plans and specifications approved in writing by Landlord and in compliance with all applicable laws, ordinances, rules and regulations. All such alterations, additions and improvements shall be performed solely by a licensed and bonded general contractor approved by Landlord, and Landlord shall be named as an additional insured on such contractor's bond. Landlord may also, at its election, require Tenant to furnish to Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of any such work, to ensure completion of the work and to protect Landlord against any liens or claims relating thereto. If Tenant wishes to know in advance whether it will be required to remove any specific alteration, addition or improvement upon termination of this Lease, as contemplated in Section 7.2 hereof, then Tenant shall make an express written request for such a determination by Landlord at the time Tenant requests Landlord's approval of the applicable alteration, addition or improvement; if Tenant makes such a written request and Landlord does not, in response thereto, advise Tenant that Landlord intends -14- 18 to require (or at least to reserve the right to require) removal of the applicable alteration, addition or improvement upon expiration of this Lease, then Landlord shall not be entitled to request such removal, notwithstanding any contrary provisions in Section 7.2 hereof. 7.2. Title To Alterations. All alterations, additions and improvements installed in, on or about the Premises shall be part of the Building and the property of Landlord, unless Landlord elects to require Tenant to remove the same upon the termination of this Lease; provided, however, that (a) the foregoing shall not apply to Tenant's movable furniture and trade fixtures not affixed to the Property, and (b) Tenant shall not under any circumstances be required to remove any of the improvements constructed by Landlord pursuant to Section 2.4 and Exhibit C. 7.3. Tenant Fixtures. Notwithstanding the provisions of Sections 7.1 and 7.2, Tenant may install, remove and reinstall trade fixtures without Landlord's prior written consent, except that any fixtures which are affixed to the Premises or which affect the exterior or structural portions of the Building shall require Landlord's written approval. The foregoing shall apply to Tenant's signs, logos and insignia, all of which Tenant shall have the right to place and remove and replace subject only to (a) Landlord's prior written consent as to location, size and composition and (b) compliance with all applicable legal requirements and all applicable covenants, conditions and restrictions. Tenant shall immediately repair any damage caused by installation and removal of fixtures under this Section 7.3. 7.4. No Liens. Tenant shall at all times keep the Premises free from all liens and claims of any contractors, subcontractors, materialmen, suppliers or any other parties employed either directly or indirectly by Tenant in construction work on or about the Premises. Tenant may contest any claim of lien, but only if, prior to such contest, Tenant either (i) posts security in the amount of the claim, plus estimated costs and interest, or (ii) records a bond of a responsible corporate surety in such amount as may be required to release the lien from the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any and all liability, loss, damage, cost and other expenses, including, without limitation, reasonable attorneys' fees, arising out of claims of any lien for work performed or materials or supplies furnished at the request of Tenant or persons claiming under Tenant. 8. MAINTENANCE AND REPAIRS 8.1. Landlord's Work. (a) Landlord shall repair and maintain or cause to be repaired and maintained the Common Areas of the Property and the roof, exterior walls and other structural portions of the Building. The cost of all work performed by Landlord under this Section 8.1(a) shall be an Operating Expense hereunder, except to the extent such work (i) is required due to the negligence or willful misconduct of Landlord or its agents or employees, of any other tenant of the Property other than Tenant or of the agents, employees or invitees of any such other tenant, (ii) is a service to a specific tenant or tenants, other than Tenant, for which Landlord has received or has the right to receive full reimbursement, (iii) is a capital expense not includible as an Operating Expense under Section 5.2 hereof, (iv) is otherwise expressly excluded from the definition of Operating Expenses under Section 5.2 hereof, or (v) is required due to the negligence or willful misconduct of Tenant or its agents, employees or invitees (in which event Tenant shall bear the full cost of such work pursuant to the indemnification provided in Section 10.6 hereof, subject to the release set forth in Section 10.4 hereof). Tenant knowingly and voluntarily waives the right to make repairs at Landlord's expense, or to offset the cost thereof against rent, under any law, statute, regulation or ordinance now or hereafter in effect. (b) Notwithstanding any contrary provisions of Section 8.1(a) hereof or of any other provision of this Lease, to the extent a substantially complete replacement (as opposed to ordinary or routine maintenance or repair) is required from time to time with respect to the roof or major building systems (HVAC, plumbing, electrical and mechanical systems) of the Building, or with respect to the parking or driveway areas or other portions of the Common Areas of the Property, Landlord shall perform such replacement when and as reasonably required. To the extent such replacement is required as a result of defective design, construction, installation or -15- 19 materials, or as a result of the negligence or willful misconduct of Landlord or its agents or employees, or as a result of the negligence or willful misconduct of any other tenant of the Property other than Tenant or of any such other tenant's agents, employees or invitees, such replacement shall be at Landlord's sole cost and expense, subject to any rights of reimbursement Landlord may have against contractors, suppliers, other tenants or other third parties. To the extent such replacement is required as a result of the negligence or willful misconduct of Tenant or its agents, employees or invitees, Tenant shall bear the full cost of such work pursuant to the indemnification provided in Section 10.6 hereof, subject to the release set forth in Section 10.4 hereof. To the extent such replacement is required as a result of casualty or condemnation, the provisions of Article 13 hereof shall be controlling. To the extent such replacement is required due to ordinary wear and tear or obsolescence, the cost of such replacement shall be amortized by Landlord over the useful life of the replacement improvement or system and either (i) in the case of replacement of the roof or a major building system of the Building, Tenant shall reimburse to Landlord, as additional rent and not as an Operating Expense, on a monthly basis or at other regular intervals as reasonably requested by Landlord, the entire amortized cost of such replacement allocable to the period of time from the date of replacement until the earlier of (x) the expiration of the term of this Lease or (y) the next date as of which minimum rental under this Lease is adjusted or reset to a new rental based on fair market rental value (excluding, however, any CPI-based or stepped adjustments pursuant to Section 3.1(a) or (b) or pursuant to a prior fair market rental determination), or (ii) in the case of replacement of parking or driveway areas or other portions of the Common Areas, the amortized cost of such replacement shall be recoverable by Landlord as an Operating Expense pursuant to Section 5.2(v)(cc) hereof. 8.2. Tenant's Obligation For Maintenance. (a) Good Order, Condition And Repair. Subject to the provisions of Section 2.4 hereof, by accepting possession of the Premises (excluding any portion thereof in which interior improvements have not been completed as a result of the phased construction of such interior improvements) on the Commencement Date, Tenant shall be deemed to acknowledge that the Premises (or the applicable initial portion thereof) are then in good and sanitary order, condition and repair. Except as provided in Section 8.1 hereof, Tenant at its sole cost and expense shall keep and maintain in good and sanitary order, condition and repair the Premises and every part thereof, wherever located, including but not limited to the signs, interior, ceiling, electrical system, plumbing system, telephone and communications systems, HVAC equipment and related mechanical systems serving the Premises (for which equipment and systems Tenant shall enter into a service contract with a person or entity designated or approved by Landlord), all doors, door checks, windows, plate glass, door fronts, utility facilities, fixtures, lighting, wall surfaces, floor surfaces and ceiling surfaces and all other interior repairs, foreseen and unforeseen, as required. (b) Landlord's Remedy. If Tenant, after notice from Landlord, fails to make or perform promptly any repairs or maintenance which are the obligation of Tenant hereunder, Landlord shall have the right, but shall not be required, to enter the Premises and make the repairs or perform the maintenance necessary to restore the Premises to good and sanitary order, condition and repair. Immediately on demand from Landlord, the cost of such repairs shall be due and payable by Tenant to Landlord. (c) Condition Upon Surrender. At the expiration or sooner termination of this Lease, Tenant shall surrender the Premises, including any additions, alterations and improvements thereto, broom clean, in good and sanitary order, condition and repair, ordinary wear and tear excepted, first, however, removing all goods and effects of Tenant and all fixtures and items required to be removed or specified to be removed at Landlord's election pursuant to this Lease, and repairing any damage caused by such removal. Tenant expressly waives any and all interest in any personal property and trade fixtures not removed from the Premises by Tenant at the expiration or termination of this Lease, agrees that any such personal property and trade fixtures may, at Landlord's election, be deemed to have been abandoned by Tenant, and authorizes Landlord (at its election and without prejudice to any other remedies under this Lease or under applicable law to remove and either retain, store or dispose of such property at Tenant's cost and expense, and Tenant waives all claims against Landlord for any damages resulting from any such removal, storage, retention or disposal. -16- 20 9. USE OF PREMISES 9.1. Permitted Use. Tenant may use the Premises solely for office and administrative purposes, production of payroll checks, light assembly of products, storage, non-retail marketing and sales demonstrations and training classes, and for no other purpose without the prior written consent of Landlord. 9.2. [Omitted.] 9.3. No Nuisance. Tenant shall not use the Premises for or carry on or permit upon the Premises or any part thereof any offensive, noisy or dangerous trade, business, manufacture, occupation, odor or fumes, or any nuisance or anything against public policy, nor interfere with the rights or business of any other tenants or of Landlord in or about the Property, nor commit or allow to be committed any waste in, on or about the Premises, nor make any other unreasonable use of the Premises. Tenant shall not do or permit anything to be done in or about the Premises, nor bring nor keep anything therein, which will in any way cause the Premises to be uninsurable with respect to the insurance required by this Lease or with respect to standard fire and extended coverage insurance with vandalism, malicious mischief and riot endorsements. 9.4. Compliance With Laws. Tenant shall not use the Premises or permit the Premises to be used in whole or in part for any purpose or use that is in violation of any applicable laws, ordinances, regulations or rules of any governmental agency or public authority. Tenant shall keep the Premises equipped with all safety appliances required by law, ordinance or insurance on the Premises, or any order or regulation of any public authority because of Tenant's particular use of the Premises. Tenant shall procure all licenses and permits required for Tenant's use of the Premises. Tenant shall use the Premises in strict accordance with all applicable ordinances, rules, laws and regulations and shall comply with all requirements of all governmental authorities now in force or which may hereafter be in force pertaining to the use of the Premises by Tenant, including, without limitation, regulations applicable to noise, water, soil and air pollution, and making such nonstructural alterations and additions thereto as may be required from time to time by such laws, ordinances, rules, regulations and requirements of governmental authorities or insurers of the Premises (collectively, "Requirements") because of Tenant's construction of improvements in or other particular use of the Premises. Any structural alterations or additions required from time to time by applicable Requirements because of Tenant's construction of improvements in or other particular use of the Premises shall, at Landlord's election, either (i) be made by Tenant, at Tenant's sole cost and expense, in accordance with the procedures and standards set forth in Section 7.1 for alterations by Tenant, or (ii) be made by Landlord at Tenant's sole cost and expense, in which event Tenant shall pay to Landlord as additional rent, within ten (10) days after demand by Landlord, an amount equal to all costs incurred by Landlord in connection with such alterations or additions. The judgment of any court, or the admission by Tenant in any proceeding against Tenant, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement shall be conclusive of such violation as between Landlord and Tenant. 9.5. Liquidation Sales. Tenant shall not conduct or permit to be conducted any auction, bankruptcy sale, liquidation sale, or going out of business sale, in, upon or about the Premises or the Property, whether said auction or sale be voluntary, involuntary or pursuant to any assignment for the benefit of creditors, or pursuant to any bankruptcy or other insolvency proceeding. 9.6. Environmental Matters. Without limiting the generality of Tenant's obligations set forth in Section 9.4 of this Lease: (a) Tenant shall not cause or permit any hazardous or toxic substance or hazardous waste (as defined in any federal, state or local law, ordinance or regulation applicable to such substances or wastes) to be brought upon, kept, stored or used on or about the Property without the prior written consent of Landlord; provided, however, that nothing in this paragraph (a) shall prohibit Tenant from using ordinary office and cleaning products and other materials reasonably necessary for the conduct of Tenant's business for the permitted uses described in Section 9.1 hereof, regardless of whether such materials constitute hazardous or toxic substances or hazardous wastes, so long as Tenant provides Landlord with prior or concurrent written notice -17- 21 of such use and complies with the requirements of paragraphs (b) and (c) hereof with respect to such use: (b) Tenant shall comply with all applicable laws, rules, regulations, orders, permits, licenses and operating plans of any governmental authority with respect to the receipt, use, handling, generation, transportation, storage, treatment, release and/or disposal of hazardous or toxic substances or wastes in the course of or in connection with the conduct of Tenant's business on the Property, and shall provide Landlord with copies of (x) any and all permits, licenses, registrations and other similar documents that authorize Tenant to conduct any such activities in connection with Tenant's use of the Property and (y) any and all notices and written communications actually given by Tenant to or received by Tenant from, or required by law to be given by Tenant to, regulatory authorities in connection with such activities in the course of Tenant's use of the Property; (c) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, losses, damages, liabilities, costs, legal fees and expenses of any sort arising out of or relating to (i) any failure by Tenant to comply with any provisions of subparagraph (a) or (b) above, or (ii) any receipt, use, handling, generation, transportation, storage, treatment, release and/or disposal of any hazardous or toxic substances or wastes on or about the Property in connection with Tenant's use or occupancy of the Property or as a result of any intentional or negligent acts or omissions of Tenant or of any agent or employee of Tenant; (d) Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, losses, damages, liabilities, costs, legal fees and expenses of any sort arising out of or relating to (i) the presence on the Property of any hazardous or toxic substances or wastes present on the Property as of the Commencement Date (other than as a result of any intentional or negligent acts or omissions of Tenant or of any agent or employee of Tenant), and/or (ii) any unauthorized release into the environment of hazardous or toxic substances or wastes to the extent such release results from the negligence of or willful misconduct or omission by Landlord or its agents or employees; and (e) The provisions of this Section 9.6 shall survive the termination of this Lease. 10. INSURANCE AND INDEMNITY 10.1. Insurance. (a) Tenant shall procure and maintain in full force and effect at all times during the term of this Lease, at Tenant's cost and expense, commercial general liability insurance to protect against any liability to the public, or to any invitee of Tenant arising out of or related to the use of or resulting from any accident occurring in, upon or about the Premises, with limits of liability of not less than (i) One Million Dollars ($1,000,000.00) for injury to or death of one person, (ii) Three Million Dollars ($3,000,000.00) for personal injury or death, per occurrence, and (iii) Five Hundred Thousand Dollars ($500,000.00) for property damage, or a combined single limit of bodily injury and property damage insurance of not less than Five Million Dollars ($5,000,000.00). Such insurance shall name Landlord and its general partners as additional insureds thereunder. The amount of such insurance shall not be construed to limit any liability or obligation of Tenant under this Lease. (b) Landlord shall procure and maintain in full force and effect at all times during the term of this Lease, at Landlord's cost and expense (but reimbursable as an Operating Expense under Section 5.2 hereof), fire and "all risk" extended coverage property damage insurance for the Building and for the improvements in the Common Areas of the Property on a full replacement cost basis, with rental loss insurance. Such insurance may include earthquake coverage to the extent Landlord in its discretion elects to carry such coverage, and shall have such commercially, reasonable deductibles and other terms as Landlord in its discretion determines to be appropriate. Landlord shall have no obligation to carry property damage insurance for any alterations, additions or improvements installed by Tenant on or about the Premises. Tenant shall -18- 22 have no obligation to reimburse or compensate Landlord for the "deductible" portion of any insured losses, except to the extent either (i) such losses result from the negligence or willful misconduct of Tenant or its agents, employees or invitees (as contemplated in Section 8.1(a)(v) and/or Section 10.6 hereof, but subject to the release set forth in Section 10.4 hereof), or (ii) Tenant elects to pay repair or restoration costs under Section 13.1 hereof, in order to avoid a termination of this Lease under certain circumstances as specified in such Section 13.1. (c) Tenant shall procure and maintain in full force and effect at all times during the term of this Lease, at Tenant's cost and expense, fire and "all risk" extended coverage property damage insurance for all alterations, additions and improvements installed by Tenant from time to time on or about the Premises (excluding, however, Tenant's trade fixtures, equipment and personal property, as to which Tenant has no insurance obligation hereunder), on a full replacement cost basis. Such insurance may have such commercially reasonable deductibles and other terms as Tenant in its discretion determines to be appropriate. 10.2. Quality Of Policies And Certificates. All policies of insurance required hereunder shall be issued by responsible insurers and shall be written as primary policies not contributing with and not in excess of any coverage that Landlord may carry. Tenant shall deliver to Landlord copies of policies or certificates of insurance showing that said policies are in effect. The coverage provided by such policies shall include the clause or endorsement referred to in Section 10.4. If Tenant fails to acquire, maintain or renew any insurance required to be maintained by it under this Article 10 or to pay the premium therefor, then Landlord, at its option and in addition to its other remedies, but without obligation so to do, may procure such insurance, and any sums expended by it to procure any such insurance shall be repaid upon demand, with interest as provided in Section 3.2 hereof. Tenant shall obtain written undertakings from each insurer under policies required to be maintained by it to notify all insureds thereunder at least thirty (30) days prior to cancellation, amendment or revision of coverage. 10.3. Workers' Compensation. Tenant shall maintain in full force and effect during the term of this Lease workers' compensation insurance covering all of Tenant's employees working on the Premises. 10.4. Waiver Of Subrogation. Notwithstanding anything to the contrary contained in this Lease, to the extent permitted by law and without affecting the coverage provided by insurance required to be maintained hereunder, Landlord and Tenant each waive any right to recover against the other (i) damage to property, (ii) damage to the Property or any part thereof, or (iii) claims arising by reason of any of the foregoing, but only to the extent that any of the foregoing damages and claims under subparts (i)-(iii) hereof are covered, and only to the extent of such coverage, by insurance actually carried or required to be carried hereunder by either Landlord or Tenant. This provision is intended to waive fully, and for the benefit of each party, any rights and claims which might give rise to a right of subrogation in any insurance carrier. Each party shall procure a clause or endorsement on any policy required under this Article 10 denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Coverage provided by insurance maintained by Tenant under this Article 10 shall not be limited, reduced or diminished by virtue of the subrogation waiver herein contained. 10.5. Increase In Premiums. Tenant shall do all acts and pay all expenses necessary to insure that the Premises are not used for purposes prohibited by any applicable fire insurance, and that Tenant's use of the Premises complies with all requirements necessary to obtain any such insurance. If Tenant uses or permits the Premises to be used in a manner which increases the existing rate of any insurance on the Premises carried by Landlord, Tenant shall pay the amount of the increase in premium caused thereby, and Landlord's costs of obtaining other replacement insurance policies, including any increase in premium, within ten (10) days after demand therefor by Landlord. 10.6. Indemnification. (a) Tenant shall indemnify, defend and hold Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person, or loss of or damage to the property of any -19- 23 person, and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Landlord or which Landlord may pay or incur by reason of the use, occupancy and enjoyment of the Property by Tenant or any invitees, sublessees, licensees, assignees, employees, agents or contractors of Tenant or holding under Tenant from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents, employees or contractors. Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such persons for, damages to goods, wares and merchandise in or upon the Property, or for injuries to Tenant, its agents or third persons in or upon the Property, from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents, employees or contractors. Tenant shall give prompt notice to Landlord of any casualty or accident in, on or about the Property. (b) Landlord shall indemnify, defend and hold Tenant, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person, or loss of or damage to the property of any person, and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Tenant or which Tenant may pay or incur, to the extent such liabilities or other matters arise by reason of any negligence or willful misconduct or omission by Landlord, its agents, employees or contractors. 10.7. Blanket Policy. Any policy required to be maintained hereunder may be maintained under a so-called "blanket policy" insuring other parties and other locations so long as the amount of insurance required to be provided hereunder is not thereby diminished. 11. SUBLEASE AND ASSIGNMENT 11.1. Assignment And Sublease Of Premises. Tenant shall not have the right or power to assign its interest in this Lease, or make any sublease of the Premises or any portion thereof, nor shall any interest of Tenant under this Lease be assignable involuntarily or by operation of law, without on each occasion obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any purported sublease or assignment of Tenant's interest in this Lease requiring but not having received Landlord's consent thereto shall be void. Any dissolution, consolidation, merger or other reorganization of Tenant, or any series of one or more of such related events, involving in the aggregate a change of fifty percent (50%) or more in the beneficial ownership of Tenant, or any sale of all or substantially all of the assets of Tenant, shall be deemed to be an assignment hereunder and shall be void without the prior written consent of Landlord as required above. Notwithstanding the foregoing, Landlord's consent shall not in any event be required for (i) an initial public offering of the common stock of Tenant, or for any stock transfer or conversion in connection with any such initial public offering; (ii) any merger, consolidation or other reorganization, or any sale of substantially all of the assets of Tenant, provided that (x) the net worth of the surviving entity or transferee is equal to or greater than that of Tenant immediately prior to the applicable transaction, (y) Tenant gives Landlord prior or concurrent written notice of the applicable transaction, and (z) the surviving entity or transferee expressly assumes in writing, for the benefit of Landlord, Tenant's remaining obligations under this Lease; and/or (iii) any sale or transfer of the stock of Tenant, other than pursuant to a dissolution, consolidation, merger, reorganization or sale of substantially all assets as specifically described above. 11.2. Rights Of Landlord. Consent by Landlord to one or more assignments of this Lease, or to one or more sublettings of the Premises or any portion thereof, or collection of rent by Landlord from any assignee or sublessee, shall not operate to exhaust Landlord's rights under this Article 11, nor constitute consent to any subsequent assignment or subletting. No assignment of Tenant's interest in this Lease and no sublease shall relieve Tenant of its obligations hereunder, notwithstanding any waiver or extension of time granted by Landlord to any assignee or sublessee, or the failure of Landlord to assert its rights against any assignee or sublessee. and regardless of whether Landlord's consent thereto is given or required to be given hereunder. In the event of a default by any assignee, sublessee or other successor of Tenant in the performance of any of the terms or obligations of Tenant under this Lease, Landlord may proceed directly -20- 24 against Tenant without the necessity of exhausting remedies against any such assignee, sublessee or other successor. In addition, Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted under this Lease, and Landlord, as Tenant's assignee and as attorney-in-fact for Tenant, or any receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; except that, until the occurrence of an act of default by Tenant, Tenant shall have the right to collect such rent. 12. RIGHT OF ENTRY AND QUIET ENJOYMENT 12.1. Right Of Entry. Landlord and its authorized representatives shall have the right to enter the Premises at any time during the term of this Lease during normal business hours and upon not less than twenty-four (24) hours prior notice, except in the case of emergency (in which event no notice shall be required and entry may be made at any time), for the purpose of inspecting and determining the condition of the Premises or for any other proper purpose including, without limitation, to make repairs, replacements or improvements which Landlord may deem necessary, to show the Premises to prospective purchasers, to show the Premises to prospective tenants (but only during the final year of the term of this Lease), and to post notices of nonresponsibility. To facilitate exercise of Landlord's right of entry, Tenant shall ensure that Landlord or its agent at all times has at least one (1) key to unlock all doors in or about the Building, and Tenant shall not change any locks in or about the Building without prior notice to Landlord and delivery of a key for the new locks to Landlord or its agent. Landlord shall not be liable for inconvenience, annoyance, disturbance, loss of business, quiet enjoyment or other damage or loss to Tenant by reason of making any repairs or performing any work upon the Building or the Property or by reason of erecting or maintaining any scaffolding or protective barricades in connection with any such work, and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever; provided, however, Landlord shall use reasonable efforts to minimize the inconvenience to Tenant's normal business operations caused thereby. 12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the rent and performing its obligations hereunder and subject to all the terms and conditions of this Lease, shall peacefully and quietly have, hold and enjoy the Premises throughout the term of this Lease, or until this Lease is terminated as provided by this Lease. 13. CASUALTY AND TAKING 13.1. Termination Or Reconstruction. If during the term of this Lease the Building, or any substantial part thereof, is damaged materially by fire or other casualty or by action of public or other authority in consequence thereof, or if during the term of this Lease the Building or the parking area serving the Building, or any material part of either of them, (i) is taken by eminent domain or by reason of any public improvement or condemnation proceeding, or in any manner by exercise of the right of eminent domain (including any transfer in avoidance of an exercise of the power of eminent domain), or (ii) receives irreparable damage by reason of anything lawfully done under color of public or other authority, then in any such event this Lease shall terminate as to the entire Premises at either Landlord's or Tenant's election, by written notice given to the other party within sixty (60) days after the damage or taking has occurred, subject to the following limitations (and, to the extent applicable, the limitations set forth in Section 13.2): (a) in the case of damage or destruction by fire or other peril prior to the final year of the term of this Lease, Landlord's termination right shall be exercisable only if either (x) the reasonably estimated cost to repair or restore the Building exceeds eighty percent (80%) of the replacement cost of the Building and the remaining term of this Lease (including any extended term, if Tenant elects an early exercise of any extension option under Section 2.7 hereof in order to avoid a termination under this Section 13.1) is less than three (3) years, or (y) the reasonably estimated cost to repair or restore the Building exceeds the insurance proceeds available for such repair or restoration by an amount greater than five percent (5%) of the replacement cost of the Building (unless Tenant agrees in writing, within fifteen (15) days after -21- 25 written request by Landlord, to pay all repair and restoration costs in excess of the sum of the available insurance proceeds plus five percent (5%) of the replacement cost of the Building, in which event Landlord shall have no termination right under clause (y) of this paragraph (a)); (b) in the case of damage or destruction by fire or other peril prior to the final year of the term of this Lease, Tenant's termination right shall be exercisable only if the time reasonably estimated to be required for the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein (which time estimate shall be given by Landlord to Tenant in writing within forty-five (45) days after the date of the damage or destruction) exceeds two hundred and seventy (270) days from the date of the damage or destruction; (c) in the case of damage or destruction by fire or other peril during the final year of the term of this Lease (including any extended term, if Tenant has already duly elected such term or elects an early exercise of any extension option under Section 2.7 hereof in order to avoid a termination under this Section 13.1), Landlord's termination right shall be exercisable to avoid only if either (x) the reasonably estimated cost to repair or restore the Building exceeds twenty percent (20%) of the replacement cost of the Building, or (y) the reasonably estimated cost to repair or restore the Building exceeds the insurance proceeds available for such repair or restoration by an amount greater than five percent (5%) of the replacement cost of the Building (unless Tenant agrees in writing, within fifteen (15) days after written request by Landlord, to pay all repair and restoration costs in excess of the sum of the available insurance proceeds plus five percent (5%) of the replacement cost of the Building, in which event Landlord shall have no termination right under clause (y) of this paragraph (c)); and (d) in the case of damage or destruction by fire or other peril during the final year of the term of this Lease (including any extended term, if Tenant has already duly elected such term or elects an early exercise of any extension option under Section 2.7 hereof in order to avoid a termination under this Section 13.1), Tenant's termination right shall be exercisable only if the damage affects more than twenty percent (20%) of the floor area of the Building and the time reasonably estimated to be required for the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein (which time estimate shall be given by Landlord to Tenant in writing within thirty (30) days after the date of the damage or destruction) exceeds sixty (60) days from the date of commencement of repairs. If neither party elects to terminate this Lease pursuant to the foregoing termination rights (if any) and/or Section 13.2 (if applicable), then Landlord shall promptly and diligently repair any such damage and restore the Premises (to the extent of Landlord's work therein under Section 2.4 and Exhibit C) and the Building as nearly as reasonably possible to the condition existing before the damage or taking. 13.2. Tenant's Rights. If any portion of the Premises is so taken by condemnation, Tenant may elect to terminate this Lease if the portion of the Premises taken is of such extent and nature as substantially to handicap, impede or permanently impair Tenant's use of the balance of the Premises. Tenant must exercise its right to terminate by giving notice to Landlord within thirty (30) days after the nature and extent of the taking have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than thirty (30) days nor later than ninety (90) days after Tenant has notified Landlord of its election to terminate, except that this Lease shall terminate on the date of taking if the date of taking falls on any date before the date of termination designated by Tenant. 13.3. Lease To Remain In Effect. If neither Landlord nor Tenant terminates this Lease as hereinabove provided, this Lease shall continue in full force and effect, except that minimum monthly rental and Tenant's Operating Cost Share shall abate to the extent Tenant's use of the Premises is impaired for any period that any portion of the Premises is unusable or inaccessible because of a casualty or taking hereinabove described. Each party waives the provisions of Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial condemnation of the Premises or Property. -22- 26 13.4. Reservation Of Compensation. Landlord reserves, and Tenant waives and assigns to Landlord, all rights to any award or compensation for damage to the Premises. Building, Property and the leasehold estate created hereby, accruing by reason of any taking in any public improvement, condemnation or eminent domain proceeding or in any other manner by exercise of the right of eminent domain or of anything lawfully done by public authority, except that Tenant shall be entitled to any and all compensation or damages paid for or on account of Tenant's moving expenses, trade fixtures, equipment and any leasehold improvements in the Premises, the cost of which was borne directly by Tenant, but only to the extent of the then remaining unamortized value of such improvements computed on a straight-line basis over the initial term of this Lease. Tenant covenants to deliver such further assignments of the foregoing as Landlord may from time to time request. 13.5. Restoration Of Fixtures. If Landlord repairs or causes repair of the Premises after such damage or taking, Tenant at its sole expense shall repair and replace promptly all additions, alterations and improvements and all other items installed or paid for by Tenant under this Lease (excluding, however, any of Tenant's trade fixtures, equipment and personal property, the repair or replacement of which shall be in Tenant's sole discretion, and excluding any improvements originally constructed by Landlord under Section 2.4 and Exhibit C) that were damaged or taken, so as to restore the same to a condition substantially equal to that which existed immediately prior to the damage or taking. Provided that Tenant has maintained in effect the insurance required under Section 10.1(c) hereof, Tenant's repair and restoration obligation under the preceding sentence in the event of any casualty shall be limited to the insurance proceeds available to Tenant with respect to such casualty, plus the amount of any applicable deductible under Tenant's applicable insurance policy. Tenant shall have the right to make modifications to the Premises, fixtures and improvements, subject to the prior written approval of Landlord and subject to all other applicable provisions of this Lease. In its review of Tenant's plans and specifications, Landlord may take into consideration the effect of the proposed modifications on the exterior appearance, the structural integrity and the mechanical and other operating systems of the Building. 14. DEFAULT 14.1. Events Of Default. The occurrence of any of the following shall constitute an event of default on the part of Tenant: (a) Abandonment. Abandonment of the Premises. "Abandonment" is hereby defined to include, but is not limited to, the complete absence by Tenant from the Premises for fifteen (15) consecutive days or more while there exists an event of default on the part of Tenant under any other provision of this Section 14.1 which has not been cured on or before the expiration of such fifteen (15) day period. Tenant waives any right Tenant may have to notice under Section 1951.3 of the California Civil Code, the terms of this subsection (a) being deemed such notice to Tenant as required by said Section 1951.3; (b) Nonpayment. Failure to pay, when due, any amount payable to Landlord hereunder, such failure continuing for a period of five (5) days after written notice of such failure; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 et seq., as amended from time to time; (c) Other Obligations. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subsection (b) hereof, such failure continuing for fifteen (15) days after written notice of such failure, or, if such default is curable in nature but it is not possible to cure such default within fifteen (15) days, failure to commence cure within said fifteen (15) day period and thereafter to proceed diligently to complete cure; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 et seq., as amended from time to time: (d) General Assignment. A general assignment by Tenant for the benefit of creditors: -23- 27 (e) Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of thirty (30) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease. Specifically, but without limiting the generality of the foregoing, such adequate assurances must include assurances that the Premises continue to be operated only for the use permitted hereunder. The provisions hereof are to assure that the basic understandings between Landlord and Tenant with respect to Tenant's use of the Premises and the benefits to Landlord therefrom are preserved, consistent with the purpose and intent of applicable bankruptcy laws: (f) Receivership. The employment of a receiver appointed by court order to take possession of substantially all of Tenant's assets or the Premises, if such receivership remains undissolved for a period of thirty (30) days; (g) Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of thirty (30) days after the levy thereof; or (h) Insolvency. The admission by Tenant in writing of its inability to pay its debts as they become due, the filing by Tenant of a petition seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant of an answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding or, if within thirty (30) days after the commencement of any proceeding against Tenant seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed. 14.2. Remedies Upon Tenant's Default. (a) Upon the occurrence of any event of default described in Section 14.1 hereof, Landlord, in addition to and without prejudice to any other rights or remedies it may have, shall have the immediate right to re-enter the Premises or any part thereof and repossess the same, expelling and removing therefrom all persons and property (which property may be stored in a public warehouse or elsewhere at the cost and risk of and for the account of Tenant), using such force as may be necessary to do so (as to which Tenant hereby waives any claim for loss or damage that may thereby occur). In addition to or in lieu of such re-entry, and without prejudice to any other rights or remedies it may have, Landlord shall have the right either (i) to terminate this Lease and recover from Tenant all damages incurred by Landlord as a result of Tenant's default, as hereinafter provided, or (ii) to continue this Lease in effect and recover rent and other charges and amounts as they become due. (b) Even if Tenant has breached this Lease or abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under subsection (a) hereof and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a lessor under California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations), or any successor Code section. Acts of maintenance, preservation or efforts to relet the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interests under this Lease shall not constitute a termination of Tenant's right to possession. (c) If Landlord terminates this Lease pursuant to this Section 14.2, Landlord shall have all of the rights and remedies of a landlord provided by Section 1951.2 of the Civil Code of the State of California, or any Successor Code section, which remedies include -24- 28 Landlord's right to recover from Tenant (i) the worth at the time of award of the unpaid rent and additional rent which had been earned at the time of termination, (ii) the worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided, (iii) the worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the cost of recovering possession of the Premises, expenses of reletting, reasonable attorneys' fees, and other reasonable costs. The "worth at the time of award" of the amounts referred to in clauses (i) and (ii) above shall be computed by allowing interest at ten percent (10%) per annum from the date such amounts accrued to Landlord. The "worth at the time of award" of the amounts referred to in clause (iii) above shall be computed by discounting such amount at one percentage point above the discount rate of the Federal Reserve Bank of San Francisco at the time of award. 14.3. Remedies Cumulative. All rights, privileges and elections or remedies of Landlord contained in this Article 14 are cumulative and not alternative to the extent permitted by law and except as otherwise provided herein. 15. SUBORDINATION, ATTORNMENT AND SALE 15.1. Subordination To Mortgage. This Lease, and any sublease entered into by Tenant under the provisions of this Lease, shall be subject and subordinate to any ground lease, mortgage, deed of trust, sale/leaseback transaction or any other hypothecation for security now or hereafter placed upon the Building, the Property, or both, and the rights of any assignee of Landlord or of any ground lessor, mortgagee, trustee, beneficiary or leaseback lessor under any of the foregoing, and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof, provided, however, that such subordination in the case of any future ground lease, mortgage, deed of trust, sale/leaseback transaction or any other hypothecation for security placed upon the Building, the Property, or both shall be conditioned on Tenant's receipt from the ground lessor, mortgagee, trustee, beneficiary or leaseback lessor of a nondisturbance agreement in a form reasonably acceptable to Tenant (and subject only to reasonable limitations), confirming that so long as Tenant is not in default hereunder, Tenant's rights hereunder shall not be disturbed by such person or entity following any foreclosure or other acquisition of the Property. Moreover, Tenant's obligations under this Lease shall be conditioned on Tenant's receipt, within thirty (30) days after mutual execution of this Lease, from SDK Incorporated and from any other ground lessor, mortgagee, trustee, beneficiary or leaseback lessor currently owning or holding a security interest in the Property, of a nondisturbance agreement in a form reasonably acceptable to Tenant (and subject only to reasonable limitations), confirming that so long as Tenant is not in default hereunder, Tenant's rights hereunder shall not be disturbed by such person or entity following any foreclosure or other acquisition of the Property. If any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee elects to have this Lease be an encumbrance upon the Property prior to the lien of its mortgage, deed of trust, ground lease or leaseback lease or other security arrangement and gives notice thereof to Tenant, this Lease shall be deemed prior thereto, whether this Lease is dated prior or subsequent to the date thereof or the date of recording thereof. Tenant, and any sublessee, shall execute such documents as may reasonably be requested by any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee to evidence the subordination herein set forth or to make this Lease prior to the lien of any mortgage, deed of trust, ground lease, leaseback lease or other security arrangement, as the case may be. Upon any default by Landlord in the performance of its obligations under any mortgage, deed of trust, ground lease, leaseback lease or assignment, Tenant (and any sublessee) shall, notwithstanding any subordination hereunder, attorn to the mortgagee, trustee, beneficiary, ground lessor, leaseback lessor or assignee thereunder upon demand and become the tenant of the successor in interest to Landlord, at the option of such successor in interest, and shall execute and deliver any instrument or instruments confirming the attornment herein provided for. -25- 29 15.2. Sale Of Landlord's Interest. Upon sale, transfer or assignment of Landlord's entire interest in the Building and Property, Landlord shall be relieved of its obligations hereunder with respect to liabilities accruing from and after the date of such sale, transfer or assignment; provided, however, that such relief from liabilities (i) shall be effective only if and to the extent that the transferee expressly assumes in writing, for the benefit of Tenant, Landlord's obligations under this Lease. (ii) shall not apply to Landlord's environmental indemnification under Section 9.6(d) hereof unless the transferee has, immediately after the transfer, a net worth equal to or greater than that of Landlord immediately prior to the transfer, and (iii) shall not in any event apply to Landlord's obligations with respect to the initial construction of the Building and Common Areas under Section 2.4 and Exhibit C. Moreover, in recognition of Tenant's substantial reliance upon Landlord's creditworthiness and development experience with respect to the initial construction of the Building and Common Areas, Landlord shall not sell, transfer, convey or otherwise dispose of its ownership interest in the portion of the Property designated as Phase VI on the Site Plan, or any portion thereof, prior to the Commencement Date under Section 2.1 hereof, except (x) with Tenant's prior written consent or (y) to an entity of which Britannia Hopyard, LLC, or an entity controlling, controlled by or under common control with Britannia Hopyard, LLC, is a general partner or has management responsibilities and equity participation comparable to those of a general partner. 15.3. Estoppel Certificates. Tenant shall at any time and from time to time, within ten (10) days after written request by Landlord, execute, acknowledge and deliver to Landlord a certificate in writing stating: (i) that this Lease is unmodified and in full force and effect, or if there have been any modifications, that this Lease is in full force and effect as modified and stating the date and the nature of each modification; (ii) the date to which rental and all other sums payable hereunder have been paid; (iii) that Landlord is not in default in the performance of any of its obligations under this Lease, that Tenant has given no notice of default to Landlord and that no event has occurred which, but for the expiration of the applicable time period, would constitute an event of default hereunder, or if Tenant alleges that any such default, notice or event has occurred, specifying the same in reasonable detail; and (iv) such other matters as may reasonably be requested by Landlord or any institutional lender, mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or prospective purchaser of the Property. Any such certificate under this Section 15.3 may be relied upon by any lender, mortgagee, trustee, beneficiary, assignee or successor in interest to Landlord, by any prospective purchaser, by any purchaser on foreclosure or sale, by any grantee under a deed in lieu of foreclosure of any mortgage or deed of trust on the Property or Premises, or by any other third party. Failure to execute and return within the required time any estoppel certificate requested hereunder shall be deemed to be an admission of the truth of the matters set forth in the form of certificate submitted to Tenant for execution. 15.4. Subordination to CC&R's. This Lease, and any permitted sublease entered into by Tenant under the provisions of this Lease, shall be subject and subordinate (a) to any declarations of covenants, conditions and restrictions affecting the Property from time to time, which may include easements, access rights and similar nonexclusive use rights and privileges in favor of appropriate third parties, provided that the terms of such future declarations are approved by Tenant in writing; (b) to the Declaration of Covenants, Conditions and Restrictions for Hacienda Business Park (No. 2) recorded on January 24, 1985 as Instrument No. 85-14396, Alameda County Records, as amended from time to time (the "Master Declaration"), the provisions of which Master Declaration are an integral part of this Lease; and (c) to the provisions of the Corporation Grant Deed and Rider recorded on June 28, 1996 as Instrument No. 96-158374, which provisions are binding upon Tenant as if set forth herein in full. Tenant agrees to execute, upon request by Landlord, any documents reasonably required from time to time to evidence such subordination. 16. SECURITY 16.1. Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of One Hundred Forty-Three Thousand Dollars ($143,000.00), which sum (the "Security Deposit") shall be held by Landlord as security for the faithful performance of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, -26- 30 including, without limitation, the provisions relating to the payment of rental and other sums due hereunder. Landlord shall have the right, but shall not be required, to use, apply or retain all or any part of the Security Deposit for the payment of rental or any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any Portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep any deposit under this Section separate from Landlord's general funds, and Tenant shall not be entitled to interest thereon. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit, or any balance thereof, shall be returned to Tenant or, at Landlord's option, to the last assignee of Tenant's interest hereunder, at the expiration of the term of this Lease and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer all deposits then held by Landlord under this Section to Landlord's successor in interest, whereupon Tenant agrees to release Landlord from all liability for the return of such deposit or the accounting thereof. 17. MISCELLANEOUS 17.1. Notices. All notices, consents, waivers and other communications which this Lease requires or permits either party to give to the other shall be in writing and shall be deemed given when delivered personally (including delivery by private courier or express delivery service) or four (4) days after deposit in the United States mail, registered or certified mail, postage prepaid, addressed to the parties at their respective addresses as follows: To Tenant: (until Commencement Date) ProBusiness, Inc. 5934 Gibraltar Drive Pleasanton, CA 94588 Attn: Mitch Everton, Executive Vice President (after Commencement Date) ProBusiness, Inc. [street address of Premises, when known] Pleasanton, CA 94588 Attn: Mitch Everton, Executive Vice President with copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attn: Bradford C. O'Brien To Landlord: Britannia Hacienda V Limited Partnership 1939 Harrison Street, Suite 412 Park Plaza Building Oakland, CA 94612 Attn: T. J. Bristow with copy to: Folger & Levin Embarcadero Center West 275 Battery Street, 23rd Floor San Francisco, CA 94111 Attn: Donald E. Kelley, Jr. or to such other address as may be contained in a notice at least fifteen (15) days prior to the address change from either party to the other given pursuant to this Section. Rental payments and other sums required by this Lease to be paid by Tenant shall be delivered to Landlord at -27- 31 Landlord's address provided in this Section, or to such other address as Landlord may from time to time specify in writing to Tenant, and shall be deemed to be paid only upon actual receipt. 17.2. Successors And Assigns. The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that, subject to the provisions of Section 15.2 hereof, the original Landlord named herein and each successive Landlord under this Lease shall be liable only for obligations accruing during the period of its ownership of the Property, said liability terminating upon termination of such ownership and passing to the successor lessor. 17.3. No Waiver. The failure of Landlord to seek redress for violation, or to insist upon the strict performance, of any covenant or condition of this Lease shall not be deemed a waiver of such violation, or prevent a subsequent act which would originally have constituted a violation from having all the force and effect of an original violation. 17.4. Severability. If any provision of this Lease or the application thereof is held to be invalid or unenforceable, the remainder of this Lease or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each of the provisions of this Lease shall be valid and enforceable, unless enforcement of this Lease as so invalidated would be unreasonable or grossly inequitable under all the circumstances or would materially frustrate the purposes of this Lease. 17.5. Litigation Between Parties. In the event of any litigation or other dispute resolution proceedings between the parties hereto arising out of or in connection with this Lease, the prevailing party shall be reimbursed for all reasonable costs, including, but not limited to, reasonable accountants' fees and attorneys' fees, incurred in connection with such proceedings (including, but not limited to, any appellate proceedings relating thereto) or in connection with the enforcement of any judgment or award rendered in such proceedings. "Prevailing party" within the meaning of this Section shall include, without limitation, a party who dismisses an action for recovery hereunder in exchange for payment of the sums allegedly due, performance of covenants allegedly breached or consideration substantially equal to the relief sought in the action. 17.6. Surrender. A voluntary or other surrender of this Lease by Tenant, or a mutual termination thereof between Landlord and Tenant, shall not result in a merger but shall, at the option of Landlord, operate either as an assignment to Landlord of any and all existing subleases and subtenancies, or a termination of all or any existing subleases and subtenancies. This provision shall be contained in any and all assignments or subleases made pursuant to this Lease. 17.7. Interpretation. The provisions of this Lease shall be construed as a whole, according to their common meaning, and not strictly for or against Landlord or Tenant. The captions preceding the text of each Section and subsection hereof are included only for convenience of reference and shall be disregarded in the construction or interpretation of this Lease. 17.8. Entire Agreement. This written Lease, together with the exhibits hereto, contains all the representations and the entire understanding between the parties hereto with respect to the subject matter hereof. Any prior correspondence, memoranda or agreements are replaced in total by this Lease and the exhibits hereto. This Lease may be modified only by an agreement in writing signed by each of the parties. 17.9. Governing Law. This Lease and all exhibits hereto shall be construed and interpreted in accordance with and be governed by all the provisions of the laws of the State of California. 17.10. No Partnership. The relationship between Landlord and Tenant is solely that of a lessor and lessee. Nothing contained in this Lease shall be construed as creating any type or manner of partnership, joint venture or joint enterprise with or between Landlord and Tenant. 17.11. Financial Information. From time to time Tenant shall promptly provide directly to prospective lenders and purchasers of the Property designated by Landlord such financial -28- 32 information pertaining to the financial status of Tenant as Landlord may reasonably request, provided, Tenant shall be permitted to provide such financial information in a manner which Tenant deems reasonably necessary to protect the confidentiality of such information, including (if Tenant so requests) conditioning disclosure of such information upon execution of a reasonable confidentiality agreement by Landlord and by any other proposed or permitted recipient of such information; and provided further, that if Tenant is then a publicly traded company filing periodic reports under the Securities Exchange Act of 1934, as amended, and the regulations thereunder, Tenant shall be required only to furnish copies of Tenant's most recent Form 10K, 10Q and 8K (if any) reports and shall not be required to disclose any nonpublic financial information pursuant to this Section 17.11. In addition, from time to time, Tenant shall provide Landlord with such financial information pertaining to the financial status of Tenant as Landlord may reasonably request, subject to the final proviso of the immediately preceding sentence. Landlord agrees that all financial information supplied to Landlord by Tenant shall be treated as confidential material, and shall not be disseminated to any party or entity (including any entity affiliated with Landlord) without Tenant's prior written consent. For purposes of this Section, without limiting the generality of the obligations provided herein it shall be deemed reasonable for Landlord to request (and sufficient for Tenant to provide) copies of (i) Tenant's most recent audited annual financial statements, or, if audited statements have not been prepared, unaudited financial statements for Tenant's most recent fiscal year, and (ii) Tenant's unaudited financial statements for Tenant's most recent fiscal quarter, all of which unaudited statements shall be accompanied by a certificate of Tenant's chief financial officer as to the accuracy of such unaudited statements. Landlord and Tenant recognize the need of Tenant to maintain the confidentiality of information regarding its financial status and the need of Landlord to be informed of, and to provide to prospective lenders and purchasers of the Premises financial information pertaining to, Tenant's financial status. Landlord and Tenant agree to cooperate with each other in achieving these needs within the context of the obligations set forth in this Section. 17.12. [Omitted.] 17.13. Time. Time is of the essence of this Lease, and of every term and condition hereof. 17.14. Rules And Regulations. Tenant shall observe, comply with and obey, and shall cause its employees, agents and, to the best of Tenant's ability, invitees to observe, comply with and obey such rules and regulations as Landlord may promulgate from time to time for the safety, care, cleanliness, order and use of the Premises, the Building and the Property, provided that any such rules and regulations promulgated after the date of this Lease shall not materially and adversely affect Tenant's rights under this Lease. 17.15. Brokers. Landlord agrees to pay a brokerage commission to Tenant's broker, Colliers Parrish International, Inc. in connection with the consummation of this Lease in accordance with a separate agreement between Landlord and such broker. Tenant represents and warrants that no other broker participated in the consummation of this Lease and agrees to indemnify, defend and hold Landlord harmless against any liability, cost or expense, including, without limitation, reasonable attorneys' fees, arising out of any claims for brokerage commissions or other similar compensation in connection with any conversations, prior negotiations or other dealings by Tenant with any other broker. 17.16. Memorandum Of Lease. At any time during the term of this Lease, either party, at its sole expense, shall be entitled to record a memorandum of this Lease and, if either party so elects, both parties agree to cooperate in the preparation, execution, acknowledgement and recordation of such document in reasonable form. 17.17. Corporate Authority. The person signing this Lease on behalf of Tenant warrants that he or she is fully authorized to do so and, by so doing, to bind Tenant. As evidence of such authority, Tenant shall deliver to Landlord, upon or prior to execution of this Lease, a certified copy of a resolution of Tenant's board of directors authorizing the execution of this Lease and naming the officer that is authorized to execute this Lease on behalf of Tenant. -29- 33 17.18. Execution and Delivery. Submission of this Lease for examination or signature by Tenant does not constitute an agreement or reservation of or option for lease of the Premises. This instrument shall not be effective or binding upon either party, as a lease or otherwise, until executed and delivered by both Landlord and Tenant. This Lease may be executed in one or more counterparts and by separate parties on separate counterparts, but each such counterpart shall constitute an original and all such counterparts together shall constitute one and the same instrument. 17.19. Stock Warrants. In consideration of their mutual execution of this Lease, Landlord and Tenant shall proceed diligently and in good faith to negotiate and enter into a Warrant Purchase Agreement in mutually satisfactory form within thirty (30) days after the date hereof, covering the issuance of warrants for the purchase of an aggregate of twenty-two thousand five hundred (22,500) shares of Series E Preferred Stock of Tenant at an exercise price of $7.94 per share (which Series E Preferred Stock is then, under its present terms, convertible into 45,000 shares of Common Stock of Tenant at no additional cost). 17.20. Survival. Without limiting survival provisions which would otherwise be implied or construed under applicable law or which are otherwise explicitly set forth herein, the provisions of Sections 2.6, 5.4, 7.2, 7.3, 7.4, 9.6, 10.6, 13.4 and 17.5 hereof shall survive the termination of this Lease with respect to matters occurring prior to the expiration of this Lease. 17.21. Consents. Whenever the approval or consent of a party is required to be obtained under any provision of this Lease as a condition or prerequisite to the taking of any action or effectiveness of any action by the other party, then such approval or consent shall not be unreasonably withheld, delayed or conditioned, regardless of whether or not such reasonableness requirement is expressly stated in the applicable provision of this Lease. 17.22 Landlord Defaults. If Landlord fails to perform any obligation, agreement or covenant under this Lease which relates specifically to the Premises and does not materially affect other tenants of the Property (such as, by way of example and not limitation, Landlord's obligation to maintain the roof, exterior walls and other structural portions of the Building), and if such failure continues for fifteen (15) days after written notice of such failure is given by Tenant to Landlord or, if such default is curable in nature but it is not possible to cure such default within fifteen (15) days, Landlord fails to commence cure within such fifteen (15) day period or thereafter fails to proceed diligently to complete cure, then Tenant shall have the right to perform such obligation or cure such default of Landlord, and Landlord shall reimburse Tenant for the reasonable cost thereof, together with interest at the rate specified in the first sentence of Section 3.2 hereof from the date of payment by Tenant to the date of reimbursement by Landlord, within fifteen (15) days after written notice from Tenant of the completion and cost of such cure, accompanied by copies of invoices or other supporting documentation. Under no circumstances, however, shall Tenant have any right to offset the cost of any such cure against rent or other charges falling due from time to time under this Lease. [rest of page intentionally left blank) -30- 34 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first set forth above. "Landlord" "Tenant" BRITANNIA HACIENDA V LIMITED PROBUSINESS, INC., PARTNERSHIP, a Delaware limited a California corporation partnership By: BRITANNIA HOPYARD, LLC, By: /s/ Thomas H. Sinton a California limited liability --------------------------- company, General Partner Its: President -------------------------- By: /s/ T. J. Bristow -------------------------- T. J. Bristow Manager & President -31- 35 EXHIBITS EXHIBIT A Real Property Description EXHIBIT B Site Plan EXHIBIT C Construction C-1: First Floor Plan C-2: Second Floor Plan C-3: Finish Specifications EXHIBIT D Construction Timeline EXHIBIT E Acknowledgement of Lease Commencement 36 EXHIBIT A REAL PROPERTY DESCRIPTION PARCEL ONE: Lot 14A of Amended Parcel Map No. 4571, filed November 23, 1987, in Book 172 of Maps, Pages 81 and 82, Alameda County Records. PARCEL TWO: Non-exclusive easements, appurtenant to Parcel One above, for the purpose of vehicular (including trucks of all sizes) and pedestrian ingress and egress over, along and across all that portion of Lot 14B as shown on said Parcel Map No. 4517 lying within the lines of that certain "Community Driveway Easement" depicted in said Parcel Map No. 4517, as the grant of such easement was confirmed unto The Prudential Insurance Company of America, a New Jersey corporation, pursuant to that certain "Grant of Easement and Maintenance Agreement" dated July 30, 1985, recorded July 30, 1985, as Series No. 85-150156, Official Records of Alameda County. EXHIBIT A 37 [SITE PLAN MAP] EXHIBIT B TO BUILD-TO-SUIT LEASE 38 [AP+1 Design, Inc. Logo] PROBUSINESS Tenant Improvement Notes September 26, 1996 Page One FLOORS 1. Provide direct glue carpet throughout unless otherwise noted. Provide material cost of S18 per square yard for general office carpet. 2. Provide upgraded carpet in first floor lobby insets, lobby conference rooms, stair, second floor atrium area, boardroom and presentation rooms. Provide material cost of $34 per square yard for upgraded carpet. Provide carpet pad at the stair. 3. Provide sheet linoleum in the servery and dining area of the cafeteria. Provide quarry tile in the kitchen/prep area. Provide material cost of $5 for the linoleum. 4. Provide 2" x 2" ceramic tile on the floors of all general office and gym toilet rooms and shower rooms. 5. Provide stone flooring in the first floor lobby, lobby toilet rooms and the elevator cab. Provide material cost of $10 per square foot. 6. Provide VCT at coffee bars, file rooms, storage rooms and the Production area except at offices within Production. 7. Provide 6" stone base at all areas of stone flooring. 8. Provide 4" wood base at all upgraded carpet. 9. Provide 4" top set base at all general office carpet. 10. Provide 6" cove base at linoleum. WALLS 11. Provide two coats of flat latex paint over smooth finish walls throughout unless otherwise noted. 12. Provide eggshell enamel paint finish in Coffee Bars and other to be determined areas. Architecture Planning Interior Design 3945 Freedom Circle, Suite 108 Santa Clara, CA 95054 408.496.1892 FAX 408.496.1896 EXHIBIT C-3 39 ProBusiness September 26, 1996 Page Two 13. Provide 4' wainscot of 4" x 4" ceramic tile in toilet rooms on wet walls. Provide eggshell enamel paint above ceramic tile. 14. Provide furring and gyp board on all exterior concrete walls. 15. At owner's option, provide full height one hour walls at the lobby for future use as multitenant building. (Current exiting configuration does not require tile rating of the lobby, however, construction of tile walls to one hour now should save time and effort later should the building become multi-tenant). 16. All walls that are insulated at offices and conference rooms are to attach to the structure above for optimum acoustical protection. 17. All columns are to be furred. CEILINGS 18. Delete 19. Provide 9'- 0" dropped ceilings with building standard ceiling boards in all open office areas, enclosed offices, conference rooms, and coffee areas. except as defined in item 20. 20. Provide 2' x 2' Fineline 9/16" grid at upgraded ceilings in board room, presentation rooms and upgraded areas. Provide upgraded ceiling tile allowance of $3 per square foot for these areas. 21. Provide gyp board ceilings with smooth finish in the lobby and second floor atrium space and toilet rooms. 22. Provide allowance for soffits and/or ceiling elevation changes in the lobby, second floor atrium space, board room and presentation rooms. 23. Provide an allowance for four skylights in the second floor lobby. Size to be determined. DOORS, WINDOWS AND FRAMES 24. Provide 3' x 9' solid core maple veneer doors with clear aluminum frames. 25. Provide clear anodized aluminum frames for all sidelights and glass throughout the building 26. Provide Schlage "D" series Rhodes lever handles, brushed chrome finish. 27. Provide wire glass at all rated walls as shown on the plans. 40 ProBusiness September 26, 1996 Page Three FIRE SPRINKLERS 28. Provide semi-recessed heads with white painted escutcheons in all finished ceilings. Provide heads painted to match structure in open ceiling areas. INSULATION 29. Delete 30. Provide R-19, foil faced batt insulation to be installed throughout the roof structure. 31. Provide R-11 foil faced batt insulation to be installed at all exterior walls of conditioned spaces. 32. Provide 1/2" rigid sound board and fiberglass sound batts in all office walls, conference rooms and toilet room walls. Provide 4' of fiberglass batts over the ceiling on each side, of each insulated wall. 33. Provide R-11 foil faced batt insulation between conditioned spaces and unconditioned warehouse areas. ELECTRICAL 34. Provide three duplex electrical receptacles in all private offices and conference rooms. Provide general convenience outlets throughout the space. Provide allowance for additional dedicated or special electrical requirements (as yet unspecified) in areas such as copy rooms, presentation rooms, boardroom, etc. 35. Provide one pull wire for telephone and data in all private offices and conference rooms. 36. Provide one junction box for every three open office furniture workstations, 15 amps. 37. Light fixtures in all open office areas, enclosed offices, conference rooms, coffee areas, etc. to be suspended 2' x 4' fluorescent fixtures with parabolic lenses. Light fixtures in upgraded ceilings in board room, presentation rooms and upgraded areas to be suspended 2' x 2' fluorescent fixtures with parabolic lenses. Provide allowance for sconces at first floor lobby, second floor atrium, boardroom and servery/dining area. 38. Provide downlights in key areas such as the first and second floor lobby, boardroom and presentation rooms. 39. Provide emergency and exit lighting and smoke detectors in the unused areas that serve as exits for the adjacent office areas. 40. Provide allowance for pendant light fixtures over the reception desk, in the dining area and in the gallery space outside of the workout room. 41 ProBusiness September 26, 1996 Page Four HEATING & AIR CONDITIONING 41. Provide roof top variable air volume system. 42. Provide additional air conditioning in the IS computer room and the Production room. MISCELLANEOUS 43. Provide plastic laminate top and splash in the toilet rooms and locker room. 44. Provide plastic laminate upper and lower cabinets with sinks at all Coffee Bars. 45. Provide plastic laminate toilet room partitions, floor mounted, overhead braced. 46. Provide stainless steel toilet room accessories. 47. Provide fiberglass shower stalls in the shower room. 48. Provide 1" horizontal blinds on all exterior and interior windows. 49. Delete 50. Provide allowance of $15,000 for the reception desk and $30,000 for all audio visual cabinetry in the Boardroom and both Sales Presentation Rooms. 51. ProBusiness has contacted the caterer Bon Appetite to provide services in the Kitchen/Servery. While the areas have not been planned yet, Bon Appetite was instrumental in establishing the sizes of the areas. ProBusiness will provide landlord with a proposed layout for the Kitchen/Servery. Landlord to provide all plumbing, electrical, HVAC in accordance to the above layout. 42 [MAP] 43 [MAP] EXHIBIT C-2 44 [MAP] [SPACE PLAN NO. 1] 45 [MAP] EXHIBIT C-1 46 PRO BUSINESS, BRITANNIA BUSINESS CENTER, HACIENDA 5, PLEASANTON PREPARED ON 25 SEPTEMBER 96 SITE & SHELL
SEP OCT 96 NOV 96 DEC 96 JAN 97 23 30 1 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 GRADE SITE **** **** **** ***** SITE UTILITIES **** ***** FOUNDATIONS **** **** **** ***** UNDERSLAB UTILITIES **** **** ***** GROUND FLOOR SLAB **** **** **** ***** PANELS **** **** **** **** **** ***** ERECT PANELS ** STEEL DETAILING **** **** **** **** **** **** **** ***** FAB STEEL **** **** **** **** **** **** **** ***** FEB 97 MAR 97 APR 97 MAY 97 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 ERECT STEEL ** **** **** **** **** **** **** **** ***** STEEL JOISTS/DECKING **** **** **** **** **** **** **** ***** EXTERIOR FRAMING **** **** **** **** **** ***** ROOFING MEMBRANE **** **** ***** EXT PAINTING **** **** **** ALUMINUM & GLAZING **** **** **** **** **** ***** JUNE 97 JULY 97 AUG 97 SEP 97 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 GRADE SITE AND PAD SITE UTILITIES FOUNDATIONS UNDERSLAB UTILITIES GROUND FLOOR SLAB PANELS ERECT PANELS STEEL DETAILING FAB STEEL ERECT STEEL STEEL JOISTS/DECKING EXTERIOR FRAMING ROOFING MEMBRANE EXT PAINTING ALUMINUM & GLAZING
SEP OCT 96 NOV 96 DEC 96 JAN 97 FEB 97 23 30 1 7 14 21 28 4 11 18 25 2 9 18 23 30 6 13 20 27 3 10 17 24 DESIGN SCHEDULE FINAL LOBBY DESIGN 25 SEPT 96 T.I. SPACE PLAN ALL PLUMBING LOCATED 30 SEPT 96 ANY OTHER UNDERGROUND 30 SEPT 96 SUBMIT SHELL FOR PERMIT 14 OCT 96 ARCH DWGS COMPLETE RESUBMIT 04 NOV 96 FINAL T.I. SPACE PLAN 18 OCT 96 SUBMIT FOR T.I. PERMIT 15 JAN 97
TENANT IMPROVEMENTS VOICE/DATA TRENCHING **** **** **** ***** ROUGH M.E.P. **** **** **** **** ***** FRAME HIGH WALLS **** **** **** ***** DRYWALL @ HIGH WALLS **** ***** T-BAR GRID **** **** ***** FRAME BELOW GRID **** **** ***** M.E.P. **** ***** INSULATE WALLS ***** DRYWALL, TAPE & TOP **** ***** INTERIOR PAINTING ***** FINISH RESTROOMS **** **** ***** FLOOR COVERINGS ***** CABINETRY ***** FINISH MEP ***** PUNCH LIST * MOVE IN * SITE WORK SITE CONCRETE **** **** **** ***** LANDSCAPING **** **** **** **** ***** PAVING **** **** ***** MAR 97 APR 97 MAY 97 JUNE 97 JULY 97 AUG 97 SEP 97 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15
EXHIBIT D to Build-to-Suit Lease 47 EXHIBIT E ACKNOWLEDGEMENT OF LEASE COMMENCEMENT This Acknowledgement is executed as of ______________, 1997, by BRITANNIA HACIENDA V LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and PROBUSINESS, INC., a California corporation ("Tenant"), pursuant to Section 2.5 of the Lease dated September 27, 1996 between Landlord and Tenant (the "Lease") covering premises located at______________________, Pleasanton, CA 94588 (the "Premises"). Landlord and Tenant hereby acknowledge and agree as follows: 1. The Commencement Date under the Lease is______________, 1997. 2. The termination date under the Lease shall be __________, 2008, subject to any applicable provisions of the Lease for extension or early termination thereof. 3. The agreed square footage of the Building, as built, is ______ square feet; the agreed square footage of the portion of the Premises initially occupied by Tenant as of the Commencement Date is ___________ square feet. 4. Tenant accepts the Premises and acknowledges the satisfactory completion of all improvements therein (if any) required to be made by Landlord, subject only to any applicable "punch list" or similar procedures specifically provided under the Lease. 5. The excess cost of improvements (if any) for which Tenant is responsible under Exhibit C to the Lease is $______________ , resulting in an additional rent amount of $_____________ per month pursuant to Section 3.1(d) of the Lease. EXECUTED as of the date first set forth above. "Landlord" "Tenant" BRITANNIA HACIENDA V LIMITED PROBUSINESS, INC., PARTNERSHIP, a Delaware limited a California corporation partnership By: BRITANNIA HOPYARD, LLC, a By:______________________ California limited liability Its:_____________________ company, General Partner By:______________________ T. J. Bristow Manager & President EX-10.6 26 OFFICE LEASE DATED MARCH 22, 1996 1 Exhibit 10.6 OFFICE LEASE THIS LEASE, made and entered into in the City of Bellevue, State of Washington, as of the 22nd day of March 1996, by and between THE TRUSTEES UNDER THE WILL AND OF THE ESTATE OF JAMES CAMPBELL, DECEASED acting in their fiduciary and not in their individual capacities (hereinafter referred to as "LESSOR"), and BENEFITS - - PLUS ADMINISTRATORS, INC., a Washington corporation (hereinafter referred to as "LESSEE"): WITNESSETH: In consideration of the mutual covenants herein contained, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, for the term hereinafter specified, the following described premises: PREMISES The certain space of approximately 6,587 square feet of net rentable area, hereinafter referred to as the "DEMISED PREMISES" and as marked as Exhibit "A" attached hereto, which Demised Premises are located on the fifth (5th) floor of the building (the "BUILDING") commonly known as the "400 Building", located at 400 108th Avenue N.E., in Bellevue, King County, Washington, on the real property described in the legal description attached hereto and marked Exhibit "B". TERM 1. The term of this Lease (the "LEASE TERM") shall be eighty-four (84) calendar months commencing on the "Target Commencement Date" (defined below) or such later date as the Demised Premises shall be tendered to Lessee as set forth in Exhibit C attached (the "WORKLETTER"), or upon such earlier date as Lessee takes possession and commences use of the Demised Premises for the permitted use in Paragraph 4 below. Notwithstanding the preceding sentence, if the Commencement Date is a day other than the first day of the calendar month, the Lease Term shall not commence until the first day of the first calendar month following the Commencement Date, however all of the other terms and conditions of this Lease (including those regarding payment of rent) shall be applicable on the Commencement Date. Lessor will confirm the Commencement Date (and the date the term of this Lease will expire) in writing to Lessee promptly after the commencement of the term of this Lease. The target commencement date is June 1, 1996 (the "TARGET COMMENCEMENT DATE"). PARTIAL CONSIDERATION 2. As partial consideration for the execution of this Lease, the Lessee shall pay to Lessor, the sum of Seven Thousand Two Hundred Seventy Three and 15/100 Dollars ($7,273.15). Such sum shall be applied to the rent due for the first month of the Lease term. In no event shall Lessor be required to keep these sums separate from its general accounts, nor shall Lessor be required to pay or accrue interest for use of the partial consideration. RENT 3. Lessee covenants and agrees to pay to Lessor, or its contract manager, THE SENECA REAL ESTATE GROUP, INC., at its office, or such other place or party as may be designated in writing by Lessor, as rent for the Demised Premises, the following sums: (A) Base Rent: During the first forty-eight (48) full calendar months during the Lease Term (and any partial months at the commencement of the Lease Term), Eighty Seven Thousand Two Hundred Seventy Seven and 80/100 Dollars ($87,277.80) per annum, payable in equal monthly installments in the amount of Seven Thousand Two Hundred Seventy Three and 15/100 Dollars ($7,273.15), and thereafter One Hundred Thousand Four Hundred Fifty One and 76/100 Dollars ($100,451.76) per annum, payable in equal monthly installments in the amount of Eight Thousand Three Hundred Seventy and 98/100 Dollars ($8,370.98). Base Rent shall be due and payable in advance on the first day of each calendar month during the term hereof. Rent for partial months shall be prorated in proportion to the number of days of the month included in the Lease Term. (B) Additional Rent: (1) During each calendar year after calendar year 1996 (the "BASE YEAR"), Lessee agrees to pay as "Additional Rent" for the Demised Premises, "Lessee's Share" (defined below) of all increases in Property Taxes and Operating Expenses incurred by Lessor in the operation of the Building, over the amount of the Property Taxes and Operating Expenses incurred by Lessor in the operation of the Building during the Base Year. For purposes of this Lease, "LESSEE'S SHARE" shall mean the ratio between the rentable area of the Demised Premises and the rentable area of the Building. Lessee's Share, calculated based on the initial square foot area of the Demised Premises, is nine and 92/100 percent (9.92%). The estimated amount of the Property Taxes and Operating Expenses for the Base Year is $7.65 per rentable square foot of the Building. (2) Prior to or promptly after the commencement of each calendar year following the Base Year, Lessor shall give Lessee a written estimate of the anticipated increases in Property Taxes and Operating Expenses over the Base Year and Lessee's Share of such increases. Lessee shall pay such estimated amount to Lessor in equal monthly installments, in advance, without deduction or offset, on or before the first day of each calendar month, with the monthly installment of Base Rent payable under Paragraph 3(A) above. After the end of each calendar year, Lessor shall furnish to -1- EXECUTED BY /X/ LANDLORD /X/ TENANT ORIGINAL / / HNL / / FSLC / / MGR /X/ TENANT 2 Lessee a statement showing in reasonable detail the actual increases over the Base Year in the Property Taxes and Operating Expenses incurred by Lessor during the applicable calendar year and Lessee's Share thereof. If the statement shows Lessee's Share of the actual increases exceeds the amount of Lessee's estimated payments, within thirty (30) days after receiving the statement, Lessee shall pay the amount of the deficiency to Lessor. If the statement shows Lessee has overpaid, the amount of the excess shall be credited against installments of Base Rent and Additional Rent next coming due under this Lease; provided, however upon the expiration or earlier termination of the Lease Term, if Lessee is not then in default under this Lease, Lessor shall refund the excess to Lessee. (3) If at any time during any calendar year of the Lease Term (other than the Base Year) the Property Taxes applicable to the Building change and/or any information used by Lessor to calculate the estimated Operating Expenses changes, Lessee's estimated share of such Property Taxes and/or Operating Expenses, as applicable, may be adjusted accordingly effective as of the month in which such changes become effective, by written notice from Lessor to Lessee of the amount or estimated amount of the change, the month in which effective, and Lessee's Share thereof. Lessee shall pay such increase to Lessor as a part of Lessee's monthly payments of estimated Property Taxes or Operating Expenses as provided in subparagraph (2) above, commencing with the month following the month in which Lessee is notified of the adjustment. (4) For purposes of this Lease, the term "Operating Expenses" means all costs of and expenses paid or incurred by Lessor for maintaining, operating, repairing, replacing and administering the Building, including all common areas and facilities, and shall include the following costs by way of illustration but not limitation: water and sewer charges; insurance premiums; license, permit, and inspection fees; heat; light; power; steam; janitorial and security services; labor; salaries; air conditioning; landscaping; maintenance and repair of driveways and surface areas; supplies; materials; equipment; tools; the cost of any capital improvements or modifications made to the Building by Lessor that are intended to reduce Operating Expenses, are required under any governmental law or regulation not applicable to the Building or not in effect at the time the Building was constructed, or are made for the general benefit and convenience of all tenants of the Building, which costs shall be amortized over such reasonable period as Lessor shall determine with a return on capital at the current market rate per annum on the unamortized balance or at such higher rate as may have been paid by Lessor on funds borrowed for the purpose of constructing such capital improvements; all property management costs, including office rent for any property management office and professional property management fees; legal and accounting expenses; and all other expenses or charges which, in accordance with generally accepted management practices would be considered an expense of maintaining, operating, repairing, replacing or administering the Building. Notwithstanding the foregoing, Operating Expenses shall not include ground lease rental payments or debt service on mortgages or deeds of trust encumbering the Building; leasing commissions and attorneys' and other fees and costs incurred in leasing space in the Building or in connection with disputes with tenants of the Building; depreciation; the cost of tenant improvements; or the cost of any special services rendered to individual tenants of the Building (including Lessee) for which a special charge is made or which are not generally made available to all tenants of the Building. (5) For purposes of this Lease, the term "Property Taxes" means all real estate taxes or personal property taxes and other taxes, surcharges and assessments, unforeseen as well as foreseen, which are levied with respect to the Building and any improvements, fixtures and equipment and other property of Lessor, real or personal, located in the Building and used in connection with the operation of the Building, and the land upon which it is situated, and any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, other than taxes covered in Paragraph 4. The term "Property taxes" shall also include any rental, excise, sales, transaction, privilege, or other tax or levy, however denominated, imposed upon or measured by the rental reserved hereunder or on Lessor's business of leasing the Demised Premises, excepting only net income, inheritance, gift and franchise taxes. (C) Late Charges: Rental shall be paid without deduction or offset. In the event Lessee should fail to pay any installment of rent or any other sum due Lessor hereunder within ten (10) days after such amount is due, Lessee agrees to pay to Lessor as Additional Rent a late charge equal to five percent (5%) of each such installment. 4. Lessee will use and occupy the Demised Premises for office use and for no other purpose. Lessee will not use or permit in the Demised Premises anything that will increase the rate of fire insurance therein or prevent Lessor's taking advantage of any ruling of the Washington Insurance Examining Bureau or its successors which would allow Lessor to obtain reduced rates for long-term insurance policies, or maintain anything that may be dangerous to life or limb, or in any manner deface, injure or commit waste in, on or about said building or any portion thereof, or overload the floors, or permit any objectionable noise or odor to escape or to be emitted from the Demised Premises, or permit anything to be done upon the Demised Premises in any way tending to create a nuisance or to disturb any other tenants of the building, or to injure the reputation of the building or to use or permit the use of Demised Premises for lodging or sleeping purposes, or for any immoral -2- 3 or illegal purposes. Lessee will comply, at Lessee's own cost and expense, with all orders, notices, regulations or requirements of any municipality, state or other governmental authority respecting the use of the Demised Premises. Lessee shall be liable for and shall pay prior to delinquency, all taxes, levies and assessments against any personal property or trade fixtures placed by Lessee in or about the Demised Premises. ASSIGNMENT & SUBLETTING 5. (A) Lessee shall not voluntarily or involuntarily assign, sublet, mortgage or otherwise encumber or convey all or any portion of its interest in this Lease or in the Demised Premises without obtaining the prior written consent of Lessor, and any such attempted assignment, subletting, mortgage or other encumbrance or conveyance without such consent shall be null and void and of no effect. Lessor will not unreasonably withhold its consent to any proposed assignment or subletting by Lessee, and in determining whether to consent to a proposed assignment or subletting, Lessor may consider any commercially reasonable basis for approving or disapproving the proposed subletting or assignment, including without limitation any of the following: (i) the experience or business reputation of the proposed assignee or sublessee, (ii) whether the clientele, personnel or foot traffic which will be generated by the business of the proposed assignee or sublessee is consistent in Lessor's opinion with the businesses of other tenants of the Building, (iii) notwithstanding that Lessee or others may remain liable under this Lease, whether the proposed assignee or sublessee has a net worth and financial strength and credit record satisfactory to Lessor, and (iv) whether the use of the Demised Premises by the proposed assignee or sublessee will violate or create any potential violation of any laws or a breach or violation of any other lease or agreement by which Lessor is bound. (B) No permitted assignment, subletting, mortgage or other encumbrance of Lessee's interest in this Lease shall relieve Lessee of its obligations to pay the rent and to perform all of the other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any other person shall not be deemed to be a waiver by Lessor of any provision of this Lease or be a consent to any subletting, assignment, mortgage or other encumbrance or conveyance. Consent to one sublease, assignment, mortgage or other encumbrance or conveyance shall not be deemed to constitute consent to any subsequent attempted subletting, assignment, mortgage or other encumbrance or conveyance. (C) If Lessee desires at any time to assign this Lease or to sublet the Demised Premises or any portion thereof, it shall first notify Lessor of its desire to do so and shall submit in writing to Lessor no less than thirty (30) days prior to the date such assignment or subletting is to be effective (i) the name of the proposed subtenant or assignee; (ii) the nature of the proposed subtenant's or assignee's business to be carried on in the Demised Premises; (iii) the terms and provisions of the proposed sublease or assignment and a copy of the proposed sublease or assignment form; and (iv) such financial and other information as Lessor may request concerning the proposed subtenant or assignee. (D) Upon receipt of the notice required in Paragraph 5(C) above, Lessor, at its option, shall have the right to terminate this Lease as to the portion of the Demised Premises which Lessee proposes to sublease or assign, unless Lessee withdraws its request for the proposed assignment or subletting within ten (10) days after receiving written notice of Lessor's election to terminate this Lease. Lessor shall have twenty (20) days from the date it receives Lessee's notice under Paragraph 5(C) to exercise such option. If Lessor exercises its option to terminate this Lease as to the portion of the Demised Premises to be sublet or assigned, Lessor shall be free to lease such portion of the Demised Premises to any person or entity (including the sublessee or assignee proposed by Lessee) on such terms and conditions as Lessor deems acceptable. If Lessor does not exercise such option within such time, Lessee may thereafter assign this Lease or sublet the portion of the Demised Premises subject thereof, provided Lessor pursuant to Paragraph 5(A) above consents thereto, but at the rental rate and other terms and conditions set forth in Lessee's notice to Lessor and not later than ninety (90) days after delivery of the aforesaid Lessee's notice to Lessor unless a further notice is given. No action or inaction by Lessor in connection with its right under this Paragraph 5(D) shall constitute or be deemed to constitute an approval of a proposed assignment or sublease for purposes of Paragraph 5(A). If Lessor elects not to recapture the portion of the Demised Premises to be sublet or assigned pursuant to this Paragraph 5(D) and Lessor consents to the subletting or assignment, Lessee shall pay to Lessor one-half (1/2) of any and all consideration received by Lessee for the sublease or assignment, including without limitation any rent payments to Lessee in excess of the monthly minimum rent payable by Lessee pursuant to this Lease; however, such additional consideration shall be reduced by any reasonable costs and expenses (including brokerage fees and tenant improvement costs) incurred by Lessee in connection with the subject sublease or assignment. (E) The voluntary or other surrender of this Lease by Lessee or a mutual cancellation hereof shall not work a merger, and shall at the option of Lessor, terminate all or any existing subleases or subtenancies or shall operate as an assignment to Lessor of such subleases or subtenancies. The transfer, assignment or hypothecation of any stock or other ownership interest in Lessee, in the aggregate in excess of twenty-five percent (25%), shall be deemed an assignment within the meaning and provisions of this Paragraph 5; provided, transfers of stock or other ownership -3- 4 interests in Lessee in excess of twenty-five percent (25%), shall not be deemed an assignment within the meaning and provisions of this Paragraph 5 so long as Ben W. Reppond, Louis R. Baransky, and Alison M. Elder collectively own at least fifty percent (50%) of the beneficial ownership interests in Lessee. Lessee agrees to reimburse Lessor for Lessor's reasonable costs and attorney's fees incurred in conjunction with the processing and documentation of any such requested assignment, subletting, transfer, change of ownership or hypothecation of this Lease or Lessee's interest in and to the Demised Premises. ALTERATION 6. Lessee will make no alterations in, or additions to, the Demised Premises without obtaining the prior written consent of Lessor. Lessor may impose such conditions on its consent as Lessor deems appropriate. All additions, improvements and fixtures (except the movable furniture and trade fixtures of Lessee) made or added either by Lessee or Lessor shall be and remain the property of Lessor; provided however, that Lessor may require, at Lessee's expense, that Lessee remove, upon termination of this Lease, any additions made or fixtures added by Lessee. REPAIRS, SURRENDER OF PREMISES 7. Lessee shall at all times take good care of the Demised Premises. Lessee agrees to promptly repair at Lessee's expense: (A) all injury to the Demised Premises, or to the Building of which they are a part, caused by moving the property of Lessee in or out of the Building or the Demised Premises; (B) all breakage or damage to the Demised Premises or the building caused by Lessee or the agents, servants or employees of Lessee; (C) all injury or damage to the Demised Premises from fire or other casualty caused by negligence of Lessee, his agents, servants or employees except as provided in paragraph 10. Lessee shall return the Demised Premises to Lessor at the expiration or earlier termination of this Lease in good condition, subject to ordinary wear and tear. INDEMNIFICATION 8. (A) Lessor shall indemnify, hold Lessee harmless from and defend Lessee against any and all claims, losses, costs, damages, expenses and liabilities, including without limitation reasonable attorneys' fees, for any injury or damages to any person or property whatsoever, when such injury or damage has been caused in whole or in part by any negligent or willful act or omission of Lessor, or any officer, agent or employee of Lessor, or resulting from Lessor's failure to comply with any terms or conditions of this Lease. This indemnity shall not require payment as a condition precedent to recovery. This indemnity with respect to acts or omissions during the term of this Lease shall survive termination or expiration of this Lease. As between Lessor and Lessee, the foregoing indemnity is specifically and expressly intended to constitute a waiver of Lessor's immunity under Washington's Industrial Insurance Act, RCW Title 51, to the extent necessary to provide Lessee with a full and complete indemnity from claims made by Lessor, and its employees, to the extent of their negligence. (B) Lessee shall indemnify, hold Lessor harmless from and defend Lessor against any and all claims, losses, costs, damages, expenses and liabilities, including without limitation reasonable attorneys' fees, for any injury or damages to any person or property whatsoever, when such injury or damage has been caused in whole or in part by any negligent or willful act or omission of Lessee, or any officer, agent or employee of Lessee, or resulting from Lessee's failure to comply with any of the terms or conditions of this Lease. This indemnity shall not require payment as a condition precedent to recovery. This indemnity with respect to acts or omissions during the term of this Lease shall survive termination or expiration of this Lease. As between Lessor and Lessee, the foregoing indemnity is specifically and expressly intended to constitute a waiver of Lessee's immunity under Washington's Industrial Insurance Act, RCW Title 51, to the extent necessary to provide Lessor with a full and complete indemnity from claims made by Lessee and its employees, to the extent of their negligence. (C) Lessee shall and does hereby assume all risk of loss or damage to furnishings, furniture, fixtures, supplies, merchandise and other property, stored, placed or affixed in the Demised Premises and does hereby agree, except to the extent of the negligence or willful misconduct of Lessor or its employees, agents or contractors, Lessor shall not be responsible for loss or damage to any such property. INSURANCE 9. Lessee hereby agrees to maintain in full force and effect at all times during the term of this Lease, at its own expense, for the protection of Lessee and Lessor, as their interests may appear, policies of insurance issued by a responsible carrier or carriers acceptable to Lessor which afford the following coverages: (A) Comprehensive General Liability Insurance including Blanket Contractual Liability Broad Form Property Damage, Personal Injury, Completed Operations, Products Liability and Fire -4- 5 Damage, such insurance to afford protection in the minimum combined limit of not less that $1,000,000.00. (B) Fire insurance with extended coverage endorsement upon Lessee's equipment, furniture, fixtures, merchandise and any other personal property located in the Demised Premises in the amount of the full insurable value thereof. (C) Workers' Compensation as required by statute and Employee's liability of not less than $1,000,000.00. The Lessee shall deliver to Lessor prior to occupancy and thereafter at least thirty (30) days prior to expiration of such policy, Certificates of Insurance evidencing the above coverage which shall expressly provide that at least thirty (30) days prior written notice shall be given Lessor in the event of material alteration or cancellation of the coverage. Lessor makes no representation that the limits of liability specified to be carried by Lessee under the terms hereof are adequate to protect Lessee; if Lessee deems this insurance to be inadequate, Lessee shall, at its own expense, provide such additional insurance as necessary. WAIVER OF SUBROGATION 10. The parties shall obtain from their respective insurance carriers waivers of subrogation against the other party, agents, employees and as to Lessee, invitees. Neither party shall be liable to the other for any loss or damage caused by fire or any of the risks enumerated in a standard fire insurance policy with an extended coverage endorsement if such insurance was obtainable at the time of such loss or damage. LIABILITY FOR INJURY OR DAMAGE 11. Lessor shall not be liable to Lessee for any damage to personal property resulting from the carelessness, negligence or improper conduct on the part of a co-tenant or anyone other than Lessor, or for any damage to person or property resulting from any condition of the Demised Premises or other cause, including, but not limited to, damage by water, not resulting from the negligence of Lessor. Lessee shall give Lessor prompt notice of any defects in the Demised Premises to be remedied by Lessor. DAMAGE TO PREMISES 12. In the event the Demised Premises shall be wholly destroyed, this Lease may be terminated by either party as of the date of destruction. If the Demised Premises are partially damaged then Lessor may, at Lessor's option, exercised in writing within sixty (60) days of written notice of damage from Lessee, elect to terminate this Lease or to repair the damages. If Lessor elects to repair the damages, Lessor shall at its own expense, without unnecessary delay, repair the damages. If Lessor elects to repair, Lessee shall pay the cost of repairing any tenant improvements in the Demised Premises other than the Building itself and Building standard improvements. Lessee shall be entitled to an abatement of rent in fair proportion to the amount and nature of the damage sustained, until the Demised Premises are made fit for occupancy and use. Provided however, that Lessee shall not be entitled to an abatement of rent if such damage was caused by the negligence or willful misconduct of Lessee or Lessee's employees or invitees. EMINENT DOMAIN 13. If all or any part of the Demised Premises shall be taken as a result of the exercise of the power of eminent domain, this Lease shall terminate as to the part so taken as of the date of taking. In the event of a partial taking, either Lessor or Lessee shall have the right to terminate this Lease as to the balance of the Demised Premises by written notice to the other within thirty (30) days after such date, provided however, that a condition to the exercise by Lessee of such right to terminate shall be that the portion of the Demised Premises taken shall be of such extent and nature as substantially to handicap, impede or impair Lessee's use of the balance of the Demised Premises. In the event of a total taking or a partial taking resulting in termination of this Lease, Lessor shall be entitled to any and all compensation, damages or awards which may be paid in connection therewith. Lessee shall be entitled to any damages attributable to moving expenses or damages to Lessee's non-removable fixtures, provided that such award does not diminish the award to Lessor and further provided that no portion of the award is for any excess value or leasehold value of this Lease. In the event of a partial taking of the Demised Premises which does not result in termination of this Lease, the monthly rental thereafter shall be equitably reduced. ADMITTANCE BY PASS-KEY 14. Lessor shall not be liable for the consequences of admitting by pass-key or refusing to admit to the Demised Premises Lessee or any of Lessee's agents, employees or other persons claiming the right of admittance. EXHIBITION AND INSPECTION OF PREMISES 15. Lessor and Lessor's agents shall have the right at reasonable hours to (a) exhibit the Demised Premises to prospective purchasers and during the final six months of the term hereof to prospective lessees; (b) to examine the Demised Premises to determine whether Lessee complying with its obligations hereunder and in reference to any emergency or general maintenance; (c) supply janitorial service and any other service supplied by Lessor to Lessee hereunder; and (d) to make repairs or alterations to any portion of the Building. Lessee hereby waives any claim for damages or any injury or inconvenience to or interference with Lessee's business, occupancy or quiet enjoyment -5- 6 of the Demised Premises. Lessor agrees Lessee may install an internal security system and locks on offices or other areas located in the Demised Premises so long as Lessor is provided with such pass-keys or codes as may be necessary for Lessor to have full access to the Demised Premises. Lessee at its option, may designate certain portions of the Demised Premises from time to time as being "off limits" and may secure such portions of the Demised Premises, and neither Lessor nor its employees, agents or contractors shall have any access to such areas of the Premises except in an emergency. If Lessee elects to designate areas of the Demised Premises as off limits, Lessor shall have no obligation to provide janitorial services to such areas. VACATION OR ABANDONMENT 16. Upon vacation or abandonment of the Demised Premises by the Lessee without the prior written consent of Lessor, Lessor may forthwith enter upon the Demised Premises or any portion thereof and relet and otherwise exercise control over the Demised Premises and Lessee's fixtures and equipment situated therein. For the purpose of such reletting, Lessor is authorized at the cost of Lessee to make any repairs, changes, alterations or additions in or to said Demised Premises which may be necessary in the opinion of Lessor for the purpose of such reletting. Such entry and control shall not release Lessee from the obligations herein and Lessee shall remain liable and continue to be bound and shall continue to pay rent, unless Lessor, at Lessor's election, shall terminate this Lease, and in that event Lessor shall be entitled to damages as provided in paragraph 24. Any personal property left on the Demised Premises shall be deemed to be abandoned at the option of Lessor and Lessee waives any claims to or arising from said property. SIGNS 17. No sign, picture, advertisement or notice shall be displayed, inscribed, painted or affixed to any of the glass or woodwork of the Demised Premises, or on the exterior walls of the Building, except such as shall be approved in writing by Lessor. ELECTRICAL AND MECHANICAL DEVICES AND INSTALLATIONS 18. Lessee shall not without Lessor's prior written consent, operate or install any electrical equipment or operate or install any machinery or mechanical device said Demised Premises other than that normal to office use. No electric wiring or other electrical apparatus shall be installed, maintained or operated on the Demised Premises, except with the prior written approval of and in a matter satisfactory to Lessor, and in no event shall Lessee overload the electrical circuits from which Lessee obtains current. WINDOWS 19. Lessee shall not allow anything to be placed on the outside window ledges of the Demised Premises. No awnings shall be attached to the outside of any windows of the Demised Premises. Only such window draperies furnished by Lessor, which shall be uniform to Building standards, shall be exposed to exterior views. FLOOR COVERINGS 20. Lessee, or any other person, shall not lay linoleum or any other similar floor covering or attach or affix any covering to the walls or ceiling of the Demised Premises or any part thereof without the prior consent of Lessor. Any such addition shall be deemed an alteration within the meaning of paragraph 6, and shall be subject to the conditions set forth therein. SERVICES 21. (A) Lessor agrees to furnish or cause to be furnished to the Demised Premises, the utilities and services described below, subject to the conditions and in accordance with the standards set forth below: (1) Lessor shall provide automatic elevator facilities from 7 a.m. to 6 p.m., Monday through Friday, except for holidays observed by Building management ("NORMAL BUILDING HOURS"). At least one elevator will be available for use at all times other than Normal Building Hours (so Lessee shall have access to the Demised Premises seven (7) days per week, twenty-four (24) hours per day, including holidays), subject to such Building security systems and procedures as may be in effect from time to time. Passes permitting access to the Building at hours other than Normal Business Hours will be made available to Lessee for all existing and new employees of Lessee at no additional charge; provided, Lessor may impose a reasonable charge (currently $10.00) to replace lost, stolen or damaged passes. (2) During Normal Building Hours, and on Saturdays (other than holiday weekends) from 8:00 a.m. to 1:00 p.m., Lessor shall ventilate the Demised Premises and furnish heat and air conditioning when in the judgment of the Lessor it is required for the comfortable occupancy of the Demised Premises, subject to any governmental requirements or standards relating to, among other things, energy conservation. Upon request, Lessor shall make available at Lessee's expense after hours heat or air conditioning. The minimum use of after hours heat or air conditioning and the cost thereof shall be determined by Lessor and confirmed in writing to Lessee the same may change from time to time. In addition to any and all other rights and remedies which Lessor may have for a violation or breach of this Lease, Lessor may discontinue said after hours heating and air conditioning service without any abatement of rent to Lessee whatsoever. (3) Lessor shall furnish to the Demised Premises at all times, subject to interruptions beyond Lessor's control, electric current as required by the building standard office -6- 7 light and receptacles. At all times Lessee's use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installations, or be in violation of any governmental energy use ordinance. (4) Lessor shall furnish water for drinking, cleaning and lavatory purposes only. (5) Lessor shall provide janitorial services to the Demised Premises, comparable to that provided in other comparable office buildings in the immediate vicinity of the Building, provided the same are used exclusively as offices, and are kept reasonably in order by Lessee. If the Demised Premises are not used exclusively as offices, and Lessor directs, they shall be kept clean and in order by Lessee, at Lessee's expense and to the satisfaction of Lessor, and by persons approved by Lessor and no one other than persons approved by Lessor shall be permitted to enter the Demised Premises for such purposes. Lessee shall pay to Lessor the cost of removal of any of Lessee's refuse and rubbish in excess of that usually attendant upon the use of the Demised Premises as offices. (6) Lessor shall replace, as necessary, the fluorescent tubes in the standard lighting fixtures installed by Lessor. (B) In accordance with Paragraph 3 of this Lease, as Additional Rent, Lessee shall pay its share of all charges for heat, water, light, gas, electricity, sewer, garbage, fire protection and any other utilities and/or services used or consumed on or supplied to the Building and not separately metered and charged to the Demised Premises or any other premises in the Building. Lessee shall be solely responsible for and shall promptly pay when due all charges for telephone or any other utilities or services separately metered or charged to the Demised Premises. Lessor may impose a reasonable charge for any utilities and services, including without limitation, air conditioning, electric current and water, required to be provided by Lessor by reason of any substantial recurrent use of the Demised Premises at any time other than Normal Building Hours, or any use beyond what Lessor agrees to furnish as described above, or special electrical, cooling and ventilating needs created in certain areas by hybrid telephone equipment, computers and other similar equipment or uses. At Lessor's option, separate meters for such utilities and services may be installed for the Demised Premises, and Lessee upon demand therefor, shall immediately pay Lessor for the installation, maintenance or repair of such meters. (C) Lessee agrees to cooperate fully at all times with Lessor and to abide by all regulations and requirements which Lessor may prescribe for the use of the above utilities and services. Any failure to pay any excess costs as described above shall constitute a breach of the obligation to pay rent under this Lease and shall entitle the Lessor to the rights herein granted for such breach. (D) Lessor shall not be liable for, and Lessee shall not be entitled to, any abatement or reduction of rent by reason of Lessor's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lock-outs or other labor disturbance or labor dispute of any character, governmental regulation, moratorium or other governmental action, inability by exercise of reasonable diligence to obtain electricity, water or fuel, or by any other cause beyond Lessor's reasonable control, nor shall any such failure, stoppage or interruption of any such service be construed either as an eviction of Lessee, or relieve Lessee from the obligation to perform any covenant or agreement. In the event of any failure, stoppage or interruption thereof, however, Lessor shall use reasonable diligence to resume service promptly. (E) Notwithstanding anything hereinabove to the contrary, Lessor reserves the right from time to time to make reasonable and nondiscriminatory modifications to the above standards for utilities and services. (F) All telephone and telecommunications services desired by Lessee shall be ordered and utilized by Lessee at its sole cost and expense. Lessee shall separately contract with a telephone or telecommunications provider (a "Provider") to provide telephone and telecommunications services to the Demised Premises. If Lessee desires to utilize the services of a Provider whose equipment is not presently servicing the Building, such Provider must obtain the written consent of Lessor before it will be permitted to install its lines or other equipment within the Building. Lessor's consent to the installation of lines or equipment within the Building by any Provider shall be evidenced by a written agreement between Lessor and the Provider, which contains terms and conditions acceptable to Lessor in its sole discretion. Lessor's refusal for any reason whatsoever to consent to any prospective Provider shall not be deemed a default or breach by Lessor of its obligations under this Lease. Lessor makes no warranty or representation to Lessee to the suitability, capability or financial strength of any Provider whose equipment is presently serving the Building, and Lessor's consent to a Provider whose equipment is not presently serving the Building shall not be deemed to constitute such a representation or warranty. To the extent the service by a Provider is interrupted, curtailed or discontinued for any reason whatsoever, Lessor shall have no obligation or liability in -7- 8 connection therewith unless the interruption is caused by the negligence or intentional misconduct of Lessor, and it shall be the sole obligation of Lessee at its expense to obtain substitute service. The provisions of this paragraph are solely for the benefit of Lessee and Lessor, are not for the benefit of any third party, specifically including without limitation, no telephone or telecommunications provider shall be deemed a third party beneficiary hereof. ATTORNEYS' FEES 22. In the event of any legal action or proceeding brought by either party against the other arising out of this Lease the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred in such action and such amount shall be included in any judgment rendered in such proceeding. DEFAULT 23. The occurrence of any one or more of the following events shall constitute a breach of this Lease and default by Lessee: (A) if Lessee fails to make prompt payment of rent or any amounts due Lessor in connection with Lessee's occupancy of the Demised Premises; or (B) if Lessee fails to keep or perform any of the covenants or conditions of this Lease or rules or regulations in connection therewith, other than the making of any payment when due; or (C) if a receiver shall be appointed for Lessee's property or any part thereof, or if a petition is filed by Lessee for an arrangement with his creditors under the United States Bankruptcy Act, or if Lessee shall be declared bankrupt or insolvent according to law, or if any assignment of Lessee's property shall be made for the benefit of creditors. With respect to a default occurring under (A) above, Lessee shall have five (5) days following receipt of written notice from Lessor within which to cure any such default. With respect to a default arising under subparagraph (B) above, Lessee shall have twenty (20) days following receipt of written notice from Lessor within which to cure any such defaults; provided, if the nature of the default is such that the cure cannot reasonably be cured within such twenty (20) day period, the cure period shall be extended for so long as may be reasonably necessary to cure the default (but for no more than an additional sixty (60) days) if (i) Lessee commences the cure within the initial twenty (20) day period and thereafter diligently prosecutes the cure to completion in good faith; and (ii) Lessee furnishes Lessor with such assurances and indemnities as Lessor may reasonably require to insure completion thereof and fully and completely protect Lessor from any loss or liability resulting from any such default or any delay by Lessee in curing the default. The notice periods provided for above shall include, but not be in addition to, any notice periods otherwise required by RCW 59.12, as now or hereafter amended, or any legislation in substitution thereof. REMEDIES 24. In the event of a default or breach not cured within the applicable cure period, if any, Lessor may at any time, without waiving or limiting any other right or remedy reenter and take possession of the Demised Premises, terminate this Lease and/or pursue any remedy allowed by law. In the event of any entry or taking possession of the Demised Premises by Lessor, Lessor shall have the right but not the obligation to remove therefrom all or any part of the personal property of Lessee located therein and may place the same in storage in a public warehouse at the cost and risk of Lessee. If Lessor elects to reenter the Demised Premises and terminate this Lease, Lessor may recover from Lessee as damages the following: (i) the worth at the time of award of any unpaid rental which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rental which would have been earned after termination until the time of award exceeds the amount of such rental loss Lessee proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rental for the balance of the term after the time of award exceeds the amount of such rental loss that Lessee proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Lessor for all the detriment approximately caused by Lessee's failure to perform its obligations under this Lease, including but not limited to any costs or expenses incurred by Lessor in (a) retaking possession of the Demised Premises, including attorneys' fees and costs, (b) maintaining or preserving the Demised Premises after Lessee's default, (c) preparing the Demised Premises for reletting to a new tenant, including repairs or alterations to the Demised Premises for such reletting, (d) leasing commissions and (e) any other costs necessary or appropriate to relet the Demised Premises; plus (v) at Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of Washington. As used in item (i) and (ii) above, "worth at the time of award" is computed by allowing interest at the interest rates specified in Paragraph 41 below. As used in item (iii) above, the "worth at the time of award" is computed by using the discount rate of six percent (6%). If Lessor retakes possession, Lessor shall have the right to let any other available space in the Building before reletting or attempting to relet the Demised Premises and such action shall not relieve Lessee of any of its obligations hereunder. All remedies provided herein are cumulative and are in addition to those provided by law. -8- 9 CUMULATION OF REMEDIES - NO WAIVER 25. No right to remedy herein expressly conferred upon or reserved to Lessor is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. The failure of Lessor or Lessee to insist in any one or more instances upon the strict performance by the other party of any of the covenants of this Lease or to exercise any option herein contained shall not be construed as a waiver or a relinquishment for the future of any such covenant or option. The receipt by Lessor of rent with the knowledge of a breach of any covenant or agreement hereof shall not be deemed a waiver of such breach, and no waiver by either party of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by the other party or its duly authorized agent. LIGHT AND AIR 26. This Lease does not grant any right of access to light, air, or view, over the property, and Lessor shall not be liable for any diminution of such light, air, or view by any adjacent structure. REPAIR 27. In the event Lessor, during the term of this Lease, deems it necessary to repair, alter, remove, reconstruct or improve any part of the Demised Premises or the Building, then such repairs, alterations, removals, reconstructions or improvements may be made by and at the expense of Lessor without any interference or claim for damages by Lessee, but there shall be such an abatement or adjustment of rent as shall be just and in proportion to the interference with Lessee's occupation of the Demised Premises, unless such repairs or alterations. are made at Lessee's request, or necessitated by reason of Lessee's negligence or the negligence of Lessee's employees, agents or invitees. HOLDING OVER 28. Unless otherwise agreed in writing by Lessor and Lessee, any holding over by Lessee after the expiration of the Lease Term consented to in advance in writing by Lessor, shall be construed as a tenancy for month-to-month on the terms and conditions set forth herein at such rental rate as may be agreed upon by Lessor and Lessee. Any such holdover tenancy consented to by Lessor may be terminated by either party upon thirty (30) days written notice to the other party, unless otherwise agreed in writing. Lessor agrees it will not unreasonably withhold its consent to a proposed holdover by Lessee, however Lessee agrees it shall not be unreasonable for Lessor to withhold its consent to a holdover if Lessor has leased all or any portion of the Demised Premises to another person or entity or if Lessor believes it is necessary to have possession of the Demised Premises in order to relet it. Any holding over by Lessee after the expiration of the Lease Term without Lessor's consent shall be deemed a tenancy at will, terminable at any time by Lessor, at a rental rate equal to one and one-half (1 1/2) times the Base Rent and Additional Rent payable by Lessee during the last month rent is payable by Lessee pursuant to this Lease. Acceptance by Lessor of rent after such expiration or earlier termination shall not constitute a consent to a holdover hereunder or result in a renewal or extension of the Lease term. The foregoing provisions of this Paragraph are in addition to and do not affect Lessor's right of re-entry or any other rights of Lessor hereunder or as otherwise provided by law. LIENS 29. Lessee shall keep the Demised Premises and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred by Lessee. Lessor shall have the right to post or keep posted on the Demised Premises any notices that may be provided by law or which Lessor may deem to be proper for the protection of the Lessor, the Demised Premises and the Building from such liens. Nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Lessor, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration or repair to the Demised Premises or any part thereof, nor as giving Lessee any right, power or authority to contact for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any lien against the fee of the Demised Premises. If any such lien shall at any time be filed against the Demised Premises, Lessee shall cause the same to be discharged of record within twenty (20) days after the date of filing the same. Any amount paid by Lessor for any of the expenses or fees incurred or arising from such lien, including all reasonable legal or other expenses of Lessor, shall be repaid by Lessee to Lessor on demand with interest at the interest rate specified in Paragraph 41 below. FURNITURE AND BULKY ITEMS 30. Safes, furniture or bulky items shall be moved in or out of the Demised Premises only at such hours and in such manner as shall least inconvenience other tenants, as Lessor shall decide. No safe or other articles of over 1000 pounds shall be moved into the Demised Premises without the consent of the Lessor. Lessor shall have the right to fix the position of any article of such weight in the Demised Premises. REGULATIONS 31. Lessor may make and enforce regulations appropriate for maintenance and management of the Building including but not limited to regulations for order, cleanliness and security, but said regulations shall not be inconsistent with the terms, covenants and conditions of this Lease. Lessor shall not be responsible to Lessee for the nonperformance by any other tenant or occupant of any said rules or regulations. PREPARATION FOR OCCUPANCY 32. Lessor shall cause the Demised Premises to be improved with the tenant improvements in accordance with the Workletter. All improvements made in connection with the preparation of the 9 10 Demised Premises for occupancy shall be and remain the property of Lessor. Lessee shall pay all costs of furnishing, installing or connecting fixtures and any equipment required by Lessee. POSSESSION 33. If Lessor for any reason cannot deliver possession of the Demised Premises to Lessee on or before the Target Commencement Date, then except as provided below, Lessor shall not be subject to any liability therefor; nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder; provided Lessee shall not be obligated to pay rent until possession of the Demised Premises is tendered to Lessee. Notwithstanding the foregoing, if Lessor has not delivered possession of the Demised Premises within one hundred twenty (120) days from the Target Commencement Date, then at Lessee's option, to be exercised within thirty (30) days after the expiration of said 120-day period, this Lease shall terminate and upon Lessor's return of any monies previously deposited by Lessee the parties shall have no further rights or liabilities towards each other. Notwithstanding the foregoing sentence, if Lessor is unable to deliver possession of the Demised Premises to Lessee within the 120-day period due to delays caused by Lessee or material shortages, labor strikes, or other reasons beyond Lessor's control, the 120-day period shall be extended by the number of days of delay experienced by Lessor. If Lessor is unable to deliver possession of the Demised Premises to Lessee prior to the Target Commencement Date, and such failure is the result of causes within the reasonable control of Lessor, if and to the extent Lessee (or Group Data Administrators, Inc.) is required to pay holdover rent at its current premises, at 915 118th S.E. in Bellevue, Washington, in excess of the rent currently payable by Lessee pursuant to its lease thereof, Lessor shall reimburse Lessee (or Group Data Administrators, Inc.) for the amount of such excess rent on a monthly basis upon the presentation to Lessor of an invoice specifying the amount thereof; provided, Lessee shall use reasonable efforts to negotiate with its Lessor a holdover rent not in excess of that which Lessee is presently paying pursuant to its lease. DEMOLITION 34. In the event at any time Lessor decides to demolish the Building, or substantially change the character of the Building, then Lessor may cancel this Lease upon six (6) month's prior written notice to Lessee. Upon date of actual termination, all payments due for unamortized tenant improvements following said termination date shall be forgiven in their entirety by Lessor and Lessee shall have no obligation pursuant to Paragraph 6 of this Lease to remove tenant improvements. If Lessor so elects to terminate this Lease, on or before the effective date of the termination, Lessor shall pay to Lessee an amount equal to the unamortized balance of the Lessee Improvement costs, if any, paid by Lessee pursuant to Exhibit C attached. Such costs shall be amortized over the initial term of this Lease on a straight-line basis without interest. SUBORDINATION 35. Lessee agrees that upon request of Lessor it will subordinate its rights hereunder to the lien of any Mortgage, Ground Lease or Deed of Trust now or hereafter enforced against the Land or the Building of which the Demised Premises are part and to all events made or hereafter to be made upon the security thereof. Lessee agrees to execute such documents that may be necessary to effectuate the provisions of this article. ESTOPPEL CERTIFICATE 36. At any time upon ten (10) days prior written request by Lessor, Lessee shall promptly execute, acknowledge and deliver to Lessor, a certificate certifying (a) that this Lease is unmodified and in full force and effect or, if there had been modifications, that this Lease is in full force and effect as modified, and state the date and nature of each modification; (b) the date, if any, to which rental and other sums payable hereunder have been paid; (c) that no notice has been received by Lessee of any default which has not been cured, except as to default specified in said certificate; and (d) such other matters as may be reasonably requested by Lessor. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary of a Deed of Trust placed on or against the building or on or against Lessor's interest or estate or any part thereof. RESERVED 37. Reserved. ARTICLE HEADINGS 38. The article headings throughout this instrument are for convenience in reference only, and the words contained therein shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of the provisions of this Lease. NOTICE 39. Any notice which may be given by either party to the other, whether required under the terms of this Lease or by law, shall be conclusively deemed to be sufficiently given when deposited in the United States mail, postage prepaid, registered or certified, addressed if to the Lessor at: The Estate of James Campbell, c/o The Seneca Real Estate Group, Inc., 10900 N.E. 4th Street, Suite 800, Bellevue, WA 98004, and if to Lessee: at the Premises, or at such other address which the parties may from time to time designate. PARTIES AFFECTED 40. The rights, liabilities and remedies provided for herein shall extend to the heirs, legal representatives, successors and as far as the terms of this Lease permit, assigns of the parties hereto. The words "Lessor" and "Lessee" and their accompanying verbs or pronouns, whenever used in this Lease shall apply equally to all persons, firms or corporations which may be or become parties hereto. -10- 11 TIME 41. TIME IS OF THE ESSENCE OF THIS AGREEMENT. Any amount due from Lessee to Lessor under this Lease which is not paid within five (5) days of the date due, shall bear interest from the date such payment due until paid (computed on the basis of a 365-day year) at the lesser of (a) the maximum and lawful rate per annum, or (b) the prime business lending rate publicly quoted from time to time by Seattle-First National Bank, Seattle main branch, plus three percentage points (3%) per annum. If Seattle-First National Bank ceases to quote a prime rate or similar rate, Lessor shall select the prime rate or similar rate quoted by another national bank having an office in Seattle, Washington. ENTIRE AGREEMENT 42. This Lease and the exhibits hereto constitute the entire agreement between the parties hereto and no modification of this Lease shall be binding unless evidenced by an agreement in writing signed by the Lessor and Lessee. AFFILIATED COMPANIES 43. Notwithstanding Paragraph 5 above, any corporation, partnership, limited liability company or other entity in which Ben W. Reppond has an ownership interest may occupy portions of the Demised Premises pursuant to subleases, provided Lessor receives written notice of the sublease within thirty (30) days after the date the sublease is to become effective, and further provided the business of the proposed sublessee is related to the primary business of Lessee (i.e., the sale, brokerage and servicing of medical, dental, life and disability insurance for groups and individuals). Any such sublease must contain terms and conditions reasonably acceptable to Lessor, including provisions requiring the sublessee to maintain insurance and indemnification obligations comparable to those required pursuant to Paragraphs 8 and 9 of this Lease. PARKING 44. Throughout the term of this Lease, Lessee shall be entitled to one (1) parking permit for unreserved monthly parking in the Skyline Tower parking garage, per each one thousand (1,000) rentable square feet of space from time to time constituting the Demised Premises. Such parking permits shall be made available to Lessee at the then current charge for unreserved monthly parking in the Skyline Tower garage, as such rates may change from time to time, however during the initial twelve (12) months of the Lease Term, parking will be made available to Lessee at one-half (1/2) of the other prevailing rate charged for unreserved monthly parking in the Skyline Tower garage. Lessee acknowledges the current charge for unreserved monthly parking in the Skyline Tower garage is $80.00 per month, including applicable Washington State sales taxes. Lessee's parking privileges in the Skyline Tower parking garage shall be subject to whatever parking methods are then being used in the Skyline Tower parking garage (e.g, self parking, valet parking, stack parking, etc.) and subject to any rules and regulations applicable to parking in the Skyline Tower garage. Lessor will provide Lessee with validation stickers so that its clients and visitors may park in the Skyline Tower at no charge for up to thirty (30) minutes so long as Lessor generally makes such validation stickers available to substantially all of the tenants of the Building. PERSONAL GUARANTEE 45. Ben W. Reppond and Louis R. Baransky will personally guarantee a portion of Lessee's obligations under this lease pursuant to a Guaranty of Lease in the form attached to this Lease as Exhibit D. PARTIAL TERMINATION 46. So long as Lessee is not in default under this Lease, Lessee shall have the right to terminate this Lease for up to one-half (1/2) of the rentable area of the Demised Premises effective as of the end of the thirty sixth (36th) full calendar month of the Lease Term, or as of the end of the sixtieth (60th) full calendar month of the Lease Term, if Washington state or federal health care legislation has been enacted which causes a demonstrable reduction in Lessee's annual revenues by more than twenty five percent (25%) from the most recent calendar year prior to the enactment of such legislation. To so terminate this Lease pursuant to this Paragraph 46, Lessee must give Lessor written notice between June 1 and August 31 of the year prior to the date the cancellation is to be effective. The configuration of the Demised Premises following such a termination shall be subject to the mutual agreement of Lessor and Lessee. In addition, Lessee must pay to Lessor at least thirty (30) days prior to the date the termination is to be effective, an "Early Termination Fee" calculated pursuant to the following sentence. The Early Termination Fee shall be equal to the sum of (i) the unamortized balance of a pro rata portion (calculated based on the ratio between the rentable area of the portion of the Demised Premises as to which this Lease is terminated and the original rentable area of the Demised Premises) of all costs and expenses incurred by Lessor in connection with this Lease, specifically including all costs associated with the design, permitting and construction of the tenant improvements to the Demised Premises, the cost of relocating any existing tenants on the fifth (5th) floor of the Building to accommodate this Lease, and all brokerage commissions incurred by Lessor in connection with this Lease ("Lessor's Costs"), amortized using an interest rate of nine percent (9%) per annum, and (ii) the cost of constructing a demising wall between the portion of the Demised Premises as to which the termination applies and the remainder of the Demised Premises. If Lessee so elects to terminate this Lease, Lessor and Lessee shall be relieved of their respective obligations and duties under this Lease for the applicable portion of the Demised Premises, effective as of the termination date, except for indemnities and other obligations which are intended to survive the expiration or earlier termination of this Lease, or any obligations either may have to the other which arise prior to the effective date of termination. -11- 12 EXPANSION OPTION 47. Lessee shall have a right of first offer to lease any remaining space on the fifth (5th) floor of the Building which becomes available for lease (the "RFO Space"). Lessee's right to lease RFO Space shall be subject and subordinate to any expansion or other such rights as other tenants of the Building may have in and to the RFO Space as of the date of this Lease. Prior to leasing any RFO Space to any third party (other than a tenant with existing rights in and to the RFO Space), Lessor will first advise Lessee in writing of the RFO Space available and the date the RFO Space will be available for the commencement of tenant improvement work. Lessee shall have three (3) business days after receiving such notice from Lessor to notify Lessor in writing that Lessee desires to expand the Demised Premises to include all of the offered RFO Space. If Lessee does not timely notify Lessor of Lessee's desire to lease the subject RFO Space, Lessor shall be free to lease such space to any person or entity on whatever terms or conditions Lessor desires. If Lessee timely notifies Lessor of Lessee's desire to lease the subject RFO Space, this Lease shall be amended to provide for the expansion of the Demised Premises to include the subject RFO Space. Upon the expansion of the Demised Premises pursuant to this Paragraph 47, the Demised Premises will be expanded to include the RFO Space and Lessee will take occupancy and commence paying rent thereon on the earlier of the following dates (the "Expansion Date"): (i) the date Lessee commences the beneficial use and occupancy of the applicable RFO Space for purposes other than the construction of tenant improvements, or (ii) three (3) business days after the improvements to the applicable RFO Space are substantially complete. All of the terms and conditions of this Lease shall be applicable to RFO Space added to the Demised Premises pursuant to this Paragraph 47, including rental rate and term. For improvements to RFO Space, Lessor will make a tenant improvement allowance available to Lessee in an amount equal to $.20 (i.e., $16.88 + 84) per full calendar month remaining in the Lease Term following the applicable Expansion Date. Improvements to RFO Space added to the Demised Premises will be made in accordance with the procedures set forth in the Workletter, to the extent applicable. EXTENSION OPTION 48. So long as Lessee is not then in default under this Lease, on the terms and conditions stated in this Paragraph 48, Lessee shall have the option to extend the term of this Lease one (1) additional eighty-four (84) month period (the "Additional Term"). To exercise its option to extend this Lease for the Additional Term, Lessee must deliver to Lessor a written notice (an "Option Notice") exercising its renewal option at least twelve (12) months (but not more than eighteen (18) months) prior to the date the then Lease Term will expire, together with a then current financial statement of Lessee. If such financial statement(s) show a material adverse change in Lessee's financial condition since the date of this Lease, at Lessor's option, Lessee's exercise of its extension option shall be null and void. The extension option granted to Lessee pursuant to this Paragraph 48 is personal to Lessee and may not be exercised by or for the benefit of any assignee or sublessee of Lessee (other than a sublessee permitted pursuant to Paragraph 43 above). All of the terms and conditions of this Lease shall apply during the Additional Term except (i) the base annual rent shall be the "fair market rent" (defined below) for the Demised Premises as agreed to by Lessor and Lessee or determined by arbitration as set forth below; (ii) unless otherwise agreed by Lessor in writing, there shall be no further renewal options after the commencement of the Additional Term; and (iii) Lessor shall have no tenant improvement obligations with respect to the Demised Premises. When the rental rate for the Additional Term is determined, whether by agreement of the parties or pursuant to arbitration as provided below, Lessor and Lessee shall enter into a lease extension agreement setting forth the new base rent for the Demised Premises and such other terms as may be applicable. If at the time Lessee delivers the Option Notice to Lessor, or at any time between such date and the commencement date of the Additional Term, Lessee defaults under this Lease and fails to cure its default within the applicable cure period, if any, Lessor may declare the Option Notice null and void by written notice to Lessee. The term "fair market rent" means the rate per rentable square foot that a willing, non-equity tenant would pay in an arms-length transaction for comparable space in the Building and in comparable buildings in the central business district of Bellevue, Washington, for leases having a seven (7) year term, taking into account the then condition of the improvements in the Demised Premises. Lessor and Lessee agree the base annual rent for the Additional Term shall be determined as follows: (A) Lessor shall advise Lessee in writing ("Lessor's Notice") of Lessor's determination of fair market rent not later than thirty (30) days after receiving the Option Notice. Within thirty (30) days after receiving Lessor's Notice, Lessee shall notify Lessor in writing ("Lessee's Notice") whether or not Lessee accepts Lessor's determination of the fair market rent. If Lessee disagrees with Lessor's determination of fair market rent, Lessee's Notice shall set forth Lessee's determination of fair market rent. If Lessee fails to give Lessee's Notice to Lessor within such thirty (30) day period, then the Option Notice shall be deemed null and void, unless otherwise agreed in writing by Lessor and Lessee. If Lessee does not accept Lessor's determination of fair market rent, and Lessee has given Lessee's Notice, the parties (or their designated representatives) shall promptly meet and attempt to agree on the fair market rent. If the parties have not agreed on the fair market rent within ninety (90) days after Lessor receives the Option Notice, and Lessee's renewal option is still in effect in accordance with the terms of this paragraph, then unless otherwise agreed in writing by the parties, the parties shall submit the matter to arbitration in accordance with the terms of the following paragraphs. The last day of such ninety (90) day period (as the same may be extended by -12- 13 the written agreement of the parties) is referred to in this Lease as the "Arbitration Commencement Date". (B) The arbitration will be conducted by three MAI real estate appraisers who have been active over the five (5) year period ending on the Arbitration Commencement Date in the appraisal of downtown properties in Bellevue, Washington. One appraiser will be selected by Lessee, one appraiser will be selected by the Lessor, and the third appraiser will be selected by the two appraisers so chosen. If the two appraisers chosen by the parties cannot agree on a third appraiser within ten (10) days after the date the second appraiser has been appointed, the third appraiser will be appointed by the Seattle office of the American Arbitration Association upon the application of either party. Each party shall select its appraiser within ten (10) days after the Arbitration Commencement Date. If either party fails to select its appraiser within such ten (10) day period, and the other party timely selects its appraiser, then the appraiser selected by the other party shall be the sole arbitrator for determining fair market rent. (C) Within thirty (30) days after the selection of the third appraiser (or if only one appraiser is to render the decision as provided in subparagraph (ii) above, within thirty (30) days after the last day of the above-referenced ten (10) day period), the appraiser(s) shall determine fair market. If more than one appraiser has been appointed, the decision of a majority of the appraisers shall control. If a majority of the appraisers do not agree within the stipulated time period, then each appraiser shall in writing render his or her separate determination as to fair market rent within five (5) days after the expiration of the thirty (30) day period. In such case, the three determinations shall be averaged to determine the fair market rent; however, if the lowest fair market rent or the highest fair market rent is ten percent (10%) lower or higher, as applicable, than the middle fair market rent, then the low fair market rent and/or the high fair market rent, as applicable, shall be disregarded and the remaining fair market rent(s) will be averaged in order to establish the fair market rent. (D) Both parties may submit any information to the arbitrators for their consideration, with copies to the other party. The arbitrators shall have the right to consult experts and competent authorities for factual information or evidence pertaining to the determination of fair market rent. The arbitrators shall render their decision and award in writing with counterpart copies to each party. The arbitrators shall have no power to modify the provisions of this Lease. The determination of the arbitrators will be final and binding upon Lessor and Lessee. The cost of the arbitration will be paid by Lessor if the fair market rent determined by arbitration is ninety percent (90%) or less than the fair market rent specified in Lessor's Notice; by Lessee if the fair market rent determined by arbitration is one hundred ten percent (110%) or more than the fair market rent specified in Lessee's Notice; and otherwise shall be shared equally by Lessor and Lessee. IN WITNESS WHEREOF, the parties hereto have executed this lease as of the date first herein written.
LESSEE: LESSOR: BENEFITS - PLUS THE TRUSTEES UNDER THE WILL AND OF THE ADMINISTRATORS, INC, ESTATE OF JAMES CAMPBELL, DECEASED, acting in their fiduciary and not in their individual capacities By: /s/ Louis R. Baransky By: /s/ Roy S. Robins --------------------- ------------------------------- Louis R. Baransky, Chairman Roy S. Robins, Director of Mainland Properties By: /s/ Ben W. Reppond By: /s/ Douglas C. Morris --------------------- ------------------------------- Ben W. Reppond, Secretary Douglas C. Morris, Senior Asset Manager Its --------------------------------
-13- 14 EXHIBIT A SUITE #500 PREMISES [LEASING PLAN 400 BUILDING 5TH FLOOR] 15 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 22nd day of March 1996, before me, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared Louis R. Baransky and Ben W. Reppond, to me known to be the Chairman and Secretary, respectively of BENEFITS - PLUS ADMINISTRATORS, INC., the corporation named in and which executed the foregoing instrument; and they acknowledged to me that they signed the same as the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned. I certify that I know or have satisfactory evidence that the persons appearing before me and making this acknowledgment are the persons whose true signatures appear on this document. WITNESS my hand and official seal the day and year in this certificate above written. /s/ Carol Baldwin _______________________ Signature Carol Baldwin _______________________ Print Name NOTARY PUBLIC in and for the State of Washington, residing at Bellevue. My commission expires 10-2-97. STATE OF CALIFORNIA ) ) ss. COUNTY OF ) On this day of , 1996, before me, a Notary Public in and for the State of California, duly commissioned and sworn, personally appeared Roy S. Robins and Douglas C. Morris, known to me to be the Director of Mainland Properties and Senior Asset Manager, respectively, of THE TRUSTEES UNDER THE WILL AND OF THE ESTATE OF JAMES CAMPBELL, DECEASED, the parties named in and which executed the foregoing instrument; and they executed the foregoing document, and acknowledged to me that they signed the same as their free and voluntary act and deed of said trustees for the uses and purposes therein mentioned. I certify that I know or have satisfactory evidence of the persons appearing before me and making this acknowledgment are the persons whose true signatures appear on this document. WITNESS my hand and official seal the day and year in this certificate above written. _________________________________ Signature _________________________________ Print Name NOTARY PUBLIC in and for the State of California, residing at_____________. My commission expires_______________. 14 16 EXHIBIT B 400 BUILDING 400 - 108th Avenue Northeast Bellevue, Washington LEGAL DESCRIPTION PARCEL NO. 1: That portion of the south 1/2 of the southwest 1/4 of the northwest 1/4 of the northeast 1/4 of Section 32, Township 25 North, Range 5 East, W.M., in King County, Washington which lies south of the north 99 feet of said south 1/2; EXCEPT the south 16-1/2 feet thereof, and EXCEPT the west 30 feet thereof conveyed to King County for road by deed recorded under Auditors File No. 913744, also EXCEPTING that portion thereof lying within the south 100.00 feet of the north 199.00 feet of the west 230.00 feet of the south 1/2 of the southwest 1/4 of the northwest 1/4 of the northeast 1/4 of said section; and PARCEL NO. 2: The west 230 feet of the south 100 feet of the north 199 feet of the south 1/2 of the southwest of the northwest 1/4 of the northeast 1/4 of Section 32, Township 25 North, Range 5 East, W.M. in King County, EXCEPT the west 30 feet thereof conveyed to King County for road by deed recorded under Auditor's File No. 913744. 17 EXHIBIT C TENANT IMPROVEMENT WORKLETTER This Workletter is attached to and a part of that certain Lease (the "Lease") between THE TRUSTEES UNDER THE WILL AND OF THE ESTATE OF JAMES CAMPBELL, DECEASED ("Lessor"), and BENEFITS - PLUS ADMINISTRATORS, INC. ("Lessee"). The purpose of this Workletter is to set forth how the Tenant Improvements (defined below) to the Demised Premises are to be constructed and designed, who will be responsible for constructing the Tenant Improvements, who will pay for the Tenant Improvements and the time schedule for completion of the Tenant Improvements. Lessor and Lessee hereby agree as follows: 1. Defined Terms. Unless otherwise defined in this Workletter, capitalized terms used in this Workletter shall have the same meanings given such terms in the Lease. The following capitalized terms shall have the meanings set forth below: "Allowance" means the amount of $111,178. "Architect" means Marvin Stein & Associates, Inc. "Business Day" means any day other than a Saturday, Sunday or other day on which United States national banks in Seattle, Washington are authorized or required by law to be closed for business. "Contractor" means TCI General Contractors Inc. or such other contractor as may be agreed upon by the parties. "Cost of the Work" means all costs of completing the Work, including the Contractor's fees, design fees, Lessor's coordination fees, demolition costs, the cost of installing computer cabling and communications equipment, permit fees and any applicable taxes. "Plans and Specifications" means the space plan, detailed plans and specifications (including without limitation all mechanical, electrical and plumbing drawings) and working drawings pursuant to which the Tenant Improvements will be completed. The Plans and Specifications shall be compatible with the design, construction and equipment of the Building, and shall show all partition locations, plumbing locations, air conditioning system and duct work, special air conditioning requirements, reflected ceiling plans, office equipment locations, and special security systems, if any. "Ready for Occupancy" or "Substantial Completion" means complete to the extent Lessee may reasonably use and occupy the Demised Premises for the purpose for which the same were intended, as evidenced by the issuance of a Standard AIA Certificate of Substantial Completion executed by the Architect and issuance of a certificate of occupancy (or other governmental approval permitting the occupancy of the Demised Premises by Lessee) by the City of Bellevue, subject to minor details of construction, decoration and mechanical adjustments that remain to be completed by Lessor, which do not materially interfere with Lessee's use of the Demised Premises. "Tenant Improvements" means those certain improvements to the Demised Premises to be described in the Plans and Specifications, as the same may be modified pursuant to Paragraph 7 of this Workletter, including all items of Work, including labor and materials, that are utilized directly or indirectly in altering, repairing, improving, adding to, modifying or otherwise changing the Demised Premises to accommodate Lessee's occupancy. "Lessee's Representative" means the individual designated by Lessee as its tenant improvement representative pursuant to Paragraph 10 of this Workletter. "Work" means construction of the Tenant Improvements in accordance with the Plans and Specifications, as the same may be modified pursuant to Paragraph 7 of this Workletter. 2. Preparation of Plans and Specifications. a.Lessee shall cause the Plans and Specifications to be prepared by Architect and submitted to Lessor or on before the Plan Submittal Date set forth in Paragraph 6 below. Lessee shall provide Lessor with at least two (2) complete sets of the Plans and Specifications. Lessor shall have ten (10) Business Days after receiving the Plans and Specifications to approve the Plans and Specifications or provide Lessee with its comments. Lessee shall then have five (5) Business Days after receiving Lessor's comments to revise and resubmit the Plans and Specifications to Lessor. Lessor shall have five (5) Business Days after receiving the revised Plans and Specifications to either approve or disapprove the revised Plans and Specifications. The process outlined in the preceding two sentences shall be repeated until Lessor and Lessee have mutually agreed on the Plans and Specifications. The final approved Plans and Specifications must be in compliance with applicable building codes and with insurance regulations for fire resistant Class A buildings. Lessee agrees and 1 18 understands that Lessor's review and approval of the Plans and Specifications pursuant to this Workletter is solely to protect the interest of Lessor, and Lessor shall not be the guarantor of nor responsible for the correctness of the Plans and Specifications, or responsible for the compliance of the Plans and Specifications with applicable laws. b. Lessee shall cause the Plans and Specifications to be prepared in a form satisfactory for submittal to the appropriate governmental authorities for permits and licenses required for construction of the Tenant Improvements. 3. Construction of Tenant Improvements. a. Lessor shall cause the Tenant Improvements to be constructed in accordance with the Plans and Specifications approved by both parties in accordance with Paragraph 2 above by the Contractor. b. If the Cost of the Work exceeds the amount of the Allowance, Lessor will so notify Lessee and Lessee shall pay the amount of the difference on the later of (i) the Commencement Date of the Lease, or (ii) ten (10) days after written notice from Lessor of the amount due from Lessee. 4. Acceptance of Demised Premises. Lessor will notify Lessee when the Tenant Improvements are Ready for Occupancy. Within three (3) Business Days after receiving such notice, and prior to move-in of any furniture, fixtures or equipment, and again not more than twenty (20) days after Lessee occupies the Demised Premises, Lessee shall inspect the Demised Premises for any deficiencies in the Work. A "punchlist" of all the deficiencies in the Work shall be prepared and agreed upon by both Lessor and Lessee. Lessor will correct defective items stated in the punchlist which are the responsibility of Lessor or the Contractor. If Lessee does not so provide Lessor with a punchlist prior to occupying the Demised Premises or within twenty (20) days thereafter, Lessee shall be deemed to have accepted the Demised Premises and the Tenant Improvements in their then present condition, except for latent defects not reasonably discoverable upon an inspection of the Demised Premises. The existence of minor punchlist items shall not postpone the Commencement Date of the Lease or result in a delay or abatement of Lessee's obligation to pay rent or give rise to a damage claim against Lessor. Lessor agrees to complete all punchlist items which are Lessor's or the Contractor's responsibility within forty five (45) days after receiving the final punchlist (or longer if reasonably necessary). 5.Completion and Rental Commencement Date a. Notwithstanding the Target Commencement Date of the Lease, Lessee's obligation for the payment of rent under the Lease shall not commence until the Demised Premises are Ready for Occupancy; provided, if Lessor is delayed in substantially completing the Work as a result of delays caused by Lessee, then Lessee's obligation to pay rent under the Lease shall commence on the date the Tenant Improvements would have been Ready for Occupancy except for the delays caused by Lessee as reasonably determined by Lessor and the Contractor. b. For purposes of this Workletter, the phrase "delays caused by Lessee" means any delay that Lessor may encounter in performance of the Work as a result of (i) delays resulting from changes in or additions to the approved Plans and Specifications or the Tenant Improvements which are requested by Lessee; (ii) delays by Lessee in the submission of information (including the Plans and Specifications) required of Lessee pursuant to this Workletter, or the giving of authorizations or approvals within any time limits set forth in this Workletter; (iii) delays due to the postponement of any of the Work at the request of Lessee; or (iv) delays otherwise attributable to the acts or omissions of Lessee or its employees, agents or contractors. 6. Schedule. Lessee and Lessor hereby agree to make reasonable efforts to meet all of the deadlines included in the schedule detailed below: Date Plan Submittal Date March 12, 1996 Acceptance of Space/Preparation of Initial Punchlist May 29, 1996 Target Occupancy Date June 1, 1996 7. Changes In Work. Lessee shall have the right to request, in writing, changes to the Plans and Specifications and to the Work, subject to Lessor's prior approval. Lessor shall notify Lessee in writing of any additional costs and any construction delays attributable to such change and whether or not Lessor approves or disapproves of the requested change. Lessor may condition its approval of any change on receipt of written confirmation from Lessee within three (3) Business Days after receiving Lessor's notice, that Lessee will pay the additional cost of making the change and any costs Lessor will incur as a result of any delays. If Lessee fails to deliver Lessor written notice that it still desires the requested change within such three (3) Business Day period, Lessee shall be deemed to have withdrawn its request for the change. Each change order shall include a recap of the total costs of the Work and shall reference all changes made up to the date of such change order. Lessee 2 19 . shall be responsible for paying any additional costs in the Work resulting from any changes in the Work requested by Lessee. 8.Quality of Construction. All Work shall be done by Contractor on behalf of Lessor in a good and workmanlike manner. Architect shall obtain all necessary permits, licenses and approvals including building permits, from such governmental authorities for such construction. Lessee's Representative shall have access to the construction in progress and shall be notified of all construction progress meetings with Lessor, Contractor and/or the Architect. 9.Early Entry. With Lessor's prior written approval, Lessee and Lessee's contractors shall have the privilege of entering into the Demised Premises prior to their being Ready for Occupancy for purposes of cable, telephone and furniture installation; provided that such entry or work does not interfere with the construction of the Tenant Improvements by Contractor. No payment of minimum rent or additional rent shall be required of Lessee for the aforesaid entry or entries by Lessee or its contractors prior to the Substantial Completion of the Tenant Improvements. Lessee hereby indemnifies, and shall hold harmless Lessor, its officers, directors, agents, employees and contractors from and against all claims, damages, losses, expenses for bodily injury or property damage, including attorneys' fees, arising out of or resulting from Lessee's early entry into the Demised Premises prior to their being Ready for Occupancy pursuant to this Paragraph 9, including any expenses incurred by Lessor for delays in the completion of the Work caused by such early entry, and for any damages to the Work caused by Lessee or Lessee's contractors prior to the Demised Premises being Ready for Occupancy. 10.Tenant Improvement Representative. Prior to the commencement of the Work, Lessee shall designate in writing one individual who shall be Lessee's Representative during the Work. Lessor and Contractor shall be entitled to rely on the decisions of Lessee's Representative regarding the Work (and the decisions of Lessee's Representative shall be binding upon Lessee) until Lessor and Contractor have received written notice from Lessee that such person's authority has been revoked. 11.Additional Provisions, This Workletter and the exhibits attached hereto set forth the entire agreement of Lessor and Lessee with respect to the completion of the Work. Neither this Workletter nor any of the provisions contained in this Workletter may be changed or waived, except by a written instrument signed by both parties. Any costs or expenses which Lessee is required to pay under this Workletter (such as additional construction costs due to changes in the Work) shall be due and payable in full upon Substantial Completion of the Work, and the presentation to Lessee of a written statement setting forth the amounts due from Lessee. 3 20 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT STATE OF CALIFORNIA : County of San Francisco : On this 2nd day of April, 1996, before me, Lynn Salanga, Notary Public, personally appeared Douglas C. Morris and Roy S. Robins, personally known to me to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the persons acted, executed the instrument. LYNN SALANGA WITNESS my hand and official seal. COMM. No. 1051145 Notary Republic-California /s/Lynn Salanga SAN FRANCISCO COUNTY ----------------------------- My Comm. Expires FEB 6, 1999 LYNN SALANGA Notary Public in and for the State of [Seal] California, residing in San Francisco DESCRIPTION OF THE ATTACHED DOCUMENT Title and Type: Office Lease by and between the Trustees under the Will and of the Estate of James Campbell, deceased, and Benefits - Plus Administrators, Inc. for space at the 400 Building located in Bellevue, Washington. Dated: March 22, 1996 Signer(s) Other Than Named Above: Louis R. Baransky, Chairman, and Ben W. Reppond, Secretary, of Benefits - Plus Administrators, Inc. 21 GUARANTY OF LEASE This Guaranty is made as of March 22,1996, by BEN W. REPPOND and LOUIS R. BARANSKY (if one person or entity "Guarantor", and if more than one person or entity "Guarantors"), for the benefit of THE TRUSTEES UNDER THE WILL AND OF THE ESTATE OF JAMES CAMPBELL, DECEASED, acting in their fiduciary and not in their individual capacities ("Lessor"). RECITALS: A. Lessor has agreed to enter into a Lease dated as of March 22, 1996 (the "Lease") with Benefits Plus Administrators, Inc., a Washington corporation ("Lessee"), for certain space (the "Demised Premises") located in a building (the "Building") currently known as the 400 Building, situated at 400 108th Avenue N.E., Bellevue, King County, Washington. B. Guarantor(s) has a financial interest in Lessee, and will receive a material benefit from the Lease. Guarantor(s) acknowledges Lessor would not enter into the Lease without this Guaranty. AGREEMENT: In consideration of and to induce Lessor to enter into the Lease, Guarantor(s) agrees as follows: 1. Subject to Paragraph 11 below, Guarantor(s) hereby guarantees to Lessor the full and prompt payment of all sums, including, but not limited to the rent, taxes, insurance, utility charges and any and all other sums and charges payable by Lessee under the Lease as the same may be amended from time to time, and the full performance and observance of all the covenants, terms conditions and agreements therein provided to be performed and observed by Lessee. Guarantor(s) hereby covenants and agrees to and with Lessor if Lessee or its sublessees, successors or assigns at any time defaults in the payment of any such sum or in the performance of any of the terms, covenants, provisions or conditions contained in the Lease and such default is not cured within the applicable cure period, Guarantor(s) will immediately pay such sum or will forthwith perform and fulfill such terms, covenants and conditions and agreements, and will immediately pay to Lessor, its successors and assigns all damages that may arise as a consequence of any default by Lessee under the Lease, including without limitation, all reasonable attorneys' fees incurred by Lessor. 2. This is an absolute and unconditional guaranty of payment and performance. The obligations of Guarantor(s) hereunder are independent of the obligations of Lessee, and a separate action or actions may be brought and prosecuted against each Guarantor, regardless of whether an action is brought against Lessee or any other Guarantor and regardless of whether Lessee or any other Guarantor is joined in such action or actions, and each Guarantor waives the benefit of any statute of limitations affecting his, her or its liability hereunder or the enforcement thereof. The liability of Guarantor(s) hereunder is primary and shall not be affected or diminished by any transfer (by sublease, assignment or otherwise) of Lessee's interest in the Lease. 3. Guarantor(s) authorizes Lessor, without notice or demand and without affecting any Guarantor's liability hereunder, from time to time to (a) renew, extend, accelerate or otherwise change the time for payments under or otherwise change the terms of, the Lease or any part thereof; (b) take and hold security for the payment of this Guaranty or the indebtedness guaranteed and exchange, enforce, waive and release any such security; (c) apply any security for the Lease or direct the order or manner of sale thereof as Lessor in its sole discretion may determine; (d) release or substitute any one or more Guarantor(s); (e) modify or alter the liability of Lessee under the Lease; or (f) settle or compromise any claim of Lessor against Lessee. Lessor may assign the Lease and this Guaranty in whole or in part, without notice and without in any manner affecting Guarantor's obligations hereunder. 4. Guarantor(s) waives any right to require Lessor to (a) proceed against Lessee; (b) proceed against or exhaust any security held from Lessee; or (c) pursue any other remedy in Lessor's power whatsoever. Guarantor(s) waives any defense arising by reason of any disability or other defense of Lessee or by reason of the cessation from any cause whatsoever of the liability of Lessee. Until all obligations of Lessee to Lessor under the Lease shall have been fully paid and performed, Guarantor(s) shall have no right of subrogation, and waive any right to enforce any remedy which Lessor now has or may hereafter have against Lessee, and waive any benefit of, and any right to participate in any security now or hereafter held by Lessor. Guarantor(s) waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, notices of acceptance of this Guaranty and of the existence, creation or incurring of new or additional indebtedness and all other notices of every kind and nature to which Guarantor(s) might otherwise be entitled as a matter of law. 5. Any indebtedness of Lessee now or hereafter held by each or both of the Guarantor(s) is hereby subordinated to the indebtedness of Lessee to Lessor and such indebtedness of Lessee to Guarantors, if Lessor so requests after a default by Lessee under the Lease, shall be collected, enforced and received by Guarantor(s) -1- 22 as a trustee for Lessor and be paid over to Lessor on account of the indebtedness of Lessee to it, but without reduction or affecting in any manner the liability of Guarantor(s) under the other provisions of this Guaranty. Until such time as the Lease has been paid and performed in full, Guarantor(s) agrees not to exercise any rights any of them may now or hereafter acquire against Lessee (whether by subrogation, reimbursement, or otherwise) arising out of payments to Lessor hereunder. Guarantor(s) hereby waives and relinquishes in favor of Lessor and Lessee any claim or right to payment either or both of the Guarantor(s) may now have or hereafter have or acquire against Lessee, by subrogation or otherwise. 6. Guarantor(s) agrees it is not necessary for Lessor to inquire into the powers of Lessee or any officers, directors, partners or agents acting or purporting to act on its behalf and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. Guarantor(s) warrants that no consent of any persons or entities or any governmental authority is necessary for Guarantor(s) to execute, deliver and perform this Guaranty. 7. Guarantor(s) shall pay all costs of enforcement of this Guaranty, including Lessor's reasonable attorneys' fees and all costs and expenses of suit and in preparation therefor and on appeal therefrom. Any sums due hereunder which are not paid when due shall bear interest at the maximum rate permitted by law. 8. This Guaranty shall continue in full force and effect and shall be unaffected by any bankruptcy, reorganization or insolvency of Lessee or any successor or assign of Lessee or any disaffirmance or rejection of the Lease by a trustee of Lessee or any trustee of any successor or assign of Lessee. This Guaranty may not be changed, modified, discharged or terminated orally or in any other manner other than by an agreement in writing signed by Guarantor(s) and Lessor. For purposes of this Guaranty, the term "Lessee" shall include any successor, sublessee or assignee of Lessee; the term "Lessor" shall include any successor or assignee of Lessor; and the term "Lease" shall include any amendment, extension or renewal of the Lease, whether made with or without the consent of Guarantor(s). This Guaranty shall be the joint and several obligation of each of the undersigned if there be more than one, and shall bind the individual and community property of each of them. 9. This Guaranty shall be governed by and construed and enforced under the laws of the State of Washington, United States of America. Guarantor(s) irrevocably submits to the jurisdiction of any state or federal court sitting in King County, Washington, in any action or proceeding brought to enforce or otherwise arising out of or relating to this Guaranty. Guarantor(s) waives any objection to venue in such court and waive any claim that such form is an inconvenient form. 10. Within twenty (20) days after Lessor's written request, each Guarantor shall provide Lessor with a copy of his, her or its current financial statement, prepared in accordance with generally accepted accounting principles, consistently applied, or such other accounting practices as may be reasonably acceptable to Lessor, and certified as true and correct by the applicable Guarantor. 11. The maximum liability of Guarantor(s) hereunder shall be the unamortized balance (calculated as provided below) of the sum of (i) the tenant improvement costs incurred by Lessor in connection with the Lease, including all costs associated with the design and permitting of the tenant improvements to the Demised Premises, and (ii) all brokerage commissions incurred by Lessor in connection with the Lease (collectively "Lessor's Costs"). For purposes of calculating the unamortized balance of Lessor's Costs, so long as Lessee is not in default under the Lease, each month during the term of the Lease, Lessor's Costs shall be reduced by the monthly payment amount necessary to fully amortize Lessor's Costs over the initial term of the Lease, in substantially equal payments, at an interest rate of nine percent (9%) per annum. IN WITNESS WHEREOF, each Guarantor has executed this Guaranty as of the day and year first written above. GUARANTOR(S): /s/ Ben W. Reppond ------------------------- Ben W. Reppond Address: 13217 - 9th Ave NW ------------------- Seattle, WA 98177 ----------------- Social Security No.: ###-##-#### ----------- /s/ Louis R. Baransky ------------------------- Louis R. Baransky Address: 11607-72ND PL. NC ----------------- Kirkland, WA 98034 ------------------ Social Security No.: 538404949 --------- -2- 23 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 22nd day of March, 1996, before me, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared BEN W. REPPOND, known to me to be the individual named in and who executed the foregoing document, and acknowledged to me that he signed the same as his free and voluntary act and deed for the uses and purposes therein mentioned. I certify that I know or have satisfactory evidence of the person appearing before me and making this acknowledgment is the person whose true signature appears on this document. WITNESS my hand and official seal the day and year in this certificate above written. /s/ Carol Baldwin ------------------------------ Signature Carol Baldwin ------------------------------ Print Name NOTARY PUBLIC in and for the State of Washington, residing at Bellevue. My commission expires 10-2-97. STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 22nd day of March, 1996, before me, a Notary Public in and for the State of Washington, duly commissioned and sworn, personally appeared LOUIS R. BARANSKY, known to me to be the individual named in and who executed the foregoing document, and acknowledged to me that he signed the same as his free and voluntary act and deed for the uses and purposes therein mentioned. I certify that I know or have satisfactory evidence of the person appearing before me and making this acknowledgment is the person whose true signature appears on this document. WITNESS my hand and official seal the day and year in this certificate above written. /s/ Carol Baldwin ------------------------------ Signature Carol Baldwin ------------------------------ Print Name NOTARY PUBLIC in and for the State of Washington, residing at Bellevue. My commission expires 10-2-97. EX-10.7 27 1996 STOCK OPTION PLAN 1 EXHIBIT 10.7 PROBUSINESS SERVICES, INC. 1996 STOCK OPTION PLAN (formerly the Executive Stock Option Plan) 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means ProBusiness Services, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity, and any Director of the Company whether compensated for such services or not. 2 (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- 3 (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (q) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. (s) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "Option Exchange Program" means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price. (u) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (v) "Optionee" means the holder of an outstanding Option granted under the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1996 Stock Option Plan. (y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) "Section 16(b)" means Section 16(b) of the Exchange Act. (aa) "Service Provider" means an Employee, Director or Consultant. (bb) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (cc) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 750,000 -3- 4 Shares, plus any unused Shares under the Company's Amended 1989 Stock Option Plan (the "1989 Plan") on the date such plan is terminated, and any Shares issued or subject to issuance pursuant to options under the 1989 Plan that are forfeited to the Company under the terms of such options. In addition, the maximum aggregate number of Shares that may be optioned and sold under the Plan shall be increased on each anniversary date of the adoption of the Plan by a number of Shares equal to the lesser of (i) 250,000 Shares, (ii) two percent (2%) of the outstanding Shares on such date or (iii) a lesser number determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options may be granted hereunder; -4- 5 (iii) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 14(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. -5- 6 (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 125,000 Shares. (ii) Over the remaining term of the Plan, a Service Provider may be granted Options to purchase up to an additional 250,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 12), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. -6- 7 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: -7- 8 (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a -8- 9 dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -9- 10 (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Non-Transferability of Options. Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation -10- 11 refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. -11- 12 (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -12- 13 PROBUSINESS 1996 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _______________________________ Date of Grant _______________________________ Vesting Commencement Date _______________________________ Exercise Price per Share $______________________________ Total Number of Shares Granted _______________________________ Total Exercise Price $______________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _______________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to this Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates, so that this Option shall be exercisable as to all of the shares forty-eight (48) months after the Vesting Commencement Date. -1- 14 Alternatively, this option may be exercised in whole or in part at any time as to Shares that have not yet vested under the above Vesting Schedule provided, however, the Optionee shall execute as a condition to such exercise a Restricted Stock Purchase Agreement in a form provided by the Company. Termination Period: This Option may be exercised for 30 days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to [Title] of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. -2- 15 No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or (e) with the Administrator's consent, delivery of Optionee's promissory note (the "Note") in the form attached hereto as Exhibit C, in the amount of the aggregate Exercise Price of the Exercised Shares together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B. The Note shall bear interest at the "applicable federal rate" prescribed under the Code and its regulations at time of purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. -3- 16 (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from -4- 17 such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: PROBUSINESS, INC. ___________________________________ _____________________________________ Signature By ____________________________________ _____________________________________ Print Name Title -5- 18 ____________________________________ Residence Address ____________________________________ -6- 19 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _______________________________________ Spouse of Optionee -7- 20 EXHIBIT A 1996 STOCK OPTION PLAN EXERCISE NOTICE ProBusiness, Inc. 5934 Gibraltor Pleasanton, CA 94566 Attention: [Title] 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of ProBusiness, Inc. (the "Company") under and pursuant to the 1996 Stock Option Plan (the "Plan") and the Stock Option Agreement dated ____________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $______, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in [Section 13] of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing 21 signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER: PROBUSINESS, INC. __________________________________ _____________________________________ Signature By __________________________________ _____________________________________ Print Name Its Address: Address: _________________________________ ProBusiness, Inc. _________________________________ 5934 Gibraltor Pleasanton, CA 94566 _____________________________________ Date Received -2- 22 EXHIBIT B SECURITY AGREEMENT This Security Agreement is made as of __________, 19___ between ProBusiness, Inc., a California corporation ("Pledgee"), and _________________________ ("Pledgor"). Recitals Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated ________ (the "Option"), between Pledgor and Pledgee under Pledgee's 1996 Stock Option Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promissory note (the "Note"), Pledgor has purchased _________ shares of Pledgee's Common Stock (the "Shares") at a price of $________ per share, for a total purchase price of $__________. The Note and the obligations thereunder are as set forth in Exhibit C to the Option. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. -1- 23 c. Margin Regulations. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or b. Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which -2- 24 shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. -3- 25 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" _________________________________ Signature _________________________________ Print Name Address: _________________________________ _________________________________ "PLEDGEE" ProBusiness, Inc., a California corporation ________________________________ Signature ________________________________ Print Name ________________________________ Title "PLEDGEHOLDER" ________________________________ Secretary of ProBusiness, Inc. -4- 26 EXHIBIT C NOTE $_______________ [City, State] ______________, 19___ FOR VALUE RECEIVED, _______________ promises to pay to ProBusiness, Inc., a California corporation (the "Company"), or order, the principal sum of _______________________ ($_____________), together with interest on the unpaid principal hereof from the date hereof at the rate of _______________ percent (____%) per annum, compounded semiannually. Principal and interest shall be due and payable on __________, 19___. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of ________________. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ____________________________________ ____________________________________ -1- EX-10.8 28 1996 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.8 PROBUSINESS SERVICES, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1996 Employee Stock Purchase Plan of ProBusiness Services, Inc., a Delaware corporation. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean ProBusiness Services, Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. 2 (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and shall end on the last Trading Day on or before April 30, 1999. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first -2- 3 Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before April 30, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. -3- 4 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, -4- 5 which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 2,500 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19) on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall -5- 6 be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shallnot resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be Five Hundred Thousand (500,000) shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i) 150,000 Shares, (ii) one and one-half percent (1.5%) of the outstanding Shares on such date or (iii) a lesser number determined by the Board. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. -6- 7 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. -7- 8 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Periods shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any -8- 9 successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period -9- 10 shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- 11 EXHIBIT A PROBUSINESS SERVICES, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ________________________ hereby elects to participate in the ProBusiness Services, Inc. 1996 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and sub scribes to purchase shares of the Company's Common Stock in accordance with this Sub scription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to _____%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):________________________ . 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me 12 over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) ______________________________________________ (First) (Middle) (Last) _______________________________ Address: Relationship ___________________________________ ___________________________________ -2- 13 Employee's Social Security Number: ___________________________________ Employee's Address: ___________________________________ ___________________________________ ___________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ _________________________________________ Signature of Employee _________________________________________ Spouse's Signature (If beneficiary other than spouse) -3- 14 EXHIBIT B PROBUSINESS SERVICES, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the ProBusiness Services, Inc. 1996 Employee Stock Purchase Plan that began on _________________, 19____ hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned under stands that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ________________________________ ________________________________ ________________________________ Signature: ________________________________ Date:__________________________ EX-10.9 29 EMPLOYMENT AND NON-COMPETITION AGREEMENT 1 Exhibit 10.9 EMPLOYMENT AND NON-COMPETITION AGREEMENT THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT ("Agreement"), dated as of the _____ day of May, 1996 is entered into by and between ProBusiness, Inc., a California corporation ("ProBusiness"), and Dwight L. Jackson ("Employee"). Recitals A. Employee has been employed as the President of Dimension Solutions, a California corporation (the "Company") and is a shareholder of the Company; B. ProBusiness and the Company have entered into an Agreement and Plan of Reorganization, dated as of May __, 1996 (the "Acquisition Agreement"), which requires, among other things, that Employee enter into this Agreement in connection with the acquisition of the assets of the Company by ProBusiness (capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Acquisition Agreement); and C. Employee is to be granted certain options to purchase shares of the Common Stock of ProBusiness. NOW, THEREFORE, IT IS HEREBY AGREED by and between the parties hereto as follows: 1. Employment. (a) Duties. Effective upon the closing of the acquisition of the assets of the Company pursuant to the Acquisition Agreement (the "Closing Date") and for the Employment Term (as defined in subsection 1(b) below), Employee is hereby employed and accepts employment as Vice President, Human Resources Systems of ProBusiness, to perform such services as are commensurate with such a position and as may be required or directed by the Chief Executive Officer of ProBusiness. During the Employment Term, Employee shall carry out his duties and responsibilities hereunder in a diligent and competent manner and shall devote his full business time, attention and energy thereto. (b) Employment Term. Employee and ProBusiness acknowledge that Employee's employment hereunder shall be at will. The term of Employee's employment hereunder (the "Employment Term") shall commence on the Closing Date and shall continue until the termination of Employee's employment with ProBusiness as provided herein. ProBusiness may terminate Employee's employment at any time, for any reason whatsoever with Cause (as defined in Section 4(c), or without Cause, in either case without prior notice to Employee. In the event of termination without Cause prior to the third anniversary date of this Agreement, 2 Employee shall be entitled to receive as severance payment (the "Severance") from ProBusiness, an amount equal to the difference between (i) the aggregate salary Employee would have earned pursuant to Section 2(a) hereof if the Employment Term ended on the third anniversary from the date of this agreement (the "Third Anniversary") assuming Employee's salary immediately prior to such termination without Cause continued to be the salary received by Employee until the Third Anniversary (but in no event shall the amount used for this calculation be less than $125,000 per year), and (ii) the aggregate salary Employee earned during the Employment Term. Such Severance shall be paid in equal installments in accordance with ProBusiness's normal payroll practice over the period ending no later than the Third Anniversary. Notwithstanding the foregoing, ProBusiness at its option, may pay the Severance in a one-lump-sum payment to Employee in an amount equal to the Severance owed adjusted to the present value on the date of payment to Employee at an interest rate equal to the then-current prime rate set by Coast Business Credit (or, if the loan agreement between ProBusiness and Coast Business Credit dated April 30, 1996 has terminated, the prime rate shall be determined on the basis of the prime rate listed from time to time in the Wall Street Journal, which represents the base rate on Corporate loans posted by a substantial majority of the Nation's thirty (30) largest banks) plus one point, which shall be payable within thirty days of such date of termination without Cause. Unless otherwise specified herein, ProBusiness will make deductions, withholdings, and other payments from all sums payable pursuant to this Agreement which Employee requests or are required by law for taxes or other charges. (c) Place of Employment. During the Employment Term, Employee shall render his services at the site designated by ProBusiness within a sixty-mile radius of San Francisco, California. Employee shall do such traveling as shall be reasonably necessary in connection with his duties and responsibilities hereunder. (d) No Other Consulting. During the Employment Term, Employee will not, without the written consent of an officer of ProBusiness, accept any consulting assignment for (or accept any board of directors position or partnership position in) any payroll, payroll tax or human resources software or service provider. 2. Compensation. (a) Salary. Upon the commencement of the Employment Term, Employee shall receive a salary of not less than $115,000 per year and beginning on July 1, 1996 and continuing through the remainder of the Employment Term, Employee will receive a salary of not less than $125,000 per year, which shall be paid in accordance with ProBusiness's normal payroll practice and shall be subject to review and adjustment based upon ProBusiness's normal performance review practices. Unless otherwise specified herein, ProBusiness will make such deductions, withholdings and other payments from all sums payable pursuant to this Agreement which Employee requests or which are required by law for taxes and other charges. -2- 3 (b) Benefit Plans. Employee will be entitled to participate in or receive benefits under ProBusiness's employee benefit plans and policies as in effect from time to time in which Employee is eligible to participate, subject to the applicable terms and conditions of the particular benefit plan. These benefit plans may include health care, life insurance, accidental death and disability, short- and long-term disability, savings and/or bonus plans provided by, through or on behalf of ProBusiness. ProBusiness may change, amend, modify or terminate any benefit or bonus plan from time to time. (c) Grant of Options. Subject to consummation of the actions contemplated by the Acquisition Agreement, and pursuant to action to be taken by the Board of Directors of ProBusiness at its next regularly scheduled Board meeting at which stock options are granted (the "Board meeting"), Employee shall be granted an incentive stock option (within the meaning of Section 422 of the Internal Revenue Code of 1986) to purchase 10,000 shares of ProBusiness's Common Stock at an exercise price equal to the fair market value of the Common Stock as determined by ProBusiness's Board of Directors as of the date of the Board Meeting. 3. Intellectual Property. (a) Concurrently with the execution of this Agreement, ProBusiness and Employee will execute the Employee Proprietary Information Agreement in the form attached hereto as Attachment 1 which is a standard agreement under ProBusiness's policies and procedures (the "Intellectual Property Agreement"). (b) Employee agrees that (a) he will disclose immediately to ProBusiness all inventions, discoveries, improvements, trade secrets, formulae, techniques, processes, know-how and computer programs, whether or not patentable and whether or not reduced to practice, that were conceived by Employee during employment by the Company, either alone or jointly with others, which relate to or result from the actual or anticipated business, work, research or investigations of the Company or which resulted to any extent from the use of the Company's premises or tangible or intangible property (herein collectively referred to as "Inventions"), and (b) that all such Inventions are owned exclusively by ProBusiness pursuant to the Acquisition Agreement. At ProBusiness's sole cost and to the extent necessary to perfect ProBusiness's interest therein, Employee hereby assigns to ProBusiness all Employee's right, title and interest in and to all such Inventions, and Employee agrees that ProBusiness shall be the sole owner of all domestic and foreign patent, copyright or other rights pertaining thereto. Employee also agrees, during the term of his employment and thereafter, to execute all documents which ProBusiness reasonably determines to be necessary or convenient for use in applying for, perfecting or enforcing patents, copyrights or other intellectual property rights in the Inventions. Upon termination of Employee's employment with ProBusiness, Employee shall, if requested by ProBusiness, reaffirm in writing that Employee has complied with all of the above obligations. -3- 4 4. Covenant Not to Compete. (a) Scope and Reasonableness. Employee acknowledges that this Agreement (including without limitation the covenants and agreements set forth in this Section 4) is being entered into as an important part of the consideration for the acquisition by ProBusiness of substantially all of the assets of the Company as provided in the Acquisition Agreement. Employee also acknowledges that ProBusiness has a reasonable present and future expectation of business within the Restricted Territory (as defined below). (b) Non-Compete. Employee agrees that until the expiration of the earlier to occur of: (i) four (4) years from the Closing Date, or (ii) the date of termination without Cause of Employee's employment with ProBusiness, he will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in a "Restricted Business" in a "Restricted Territory" (as such terms are hereinafter defined). It is agreed that ownership of no more than 1% of the outstanding voting stock of a publicly traded corporation shall not constitute a violation of this provision. (c) Definitions. As used in this Agreement, the terms (i) "Cause" shall mean: (A) Employee's continued failure to perform his duties and responsibilities, in any material respect, as required or directed by the Chief Executive Officer of ProBusiness after notice thereof from ProBusiness to Employee; (B) Employee personally engaging in knowing and intentional illegal conduct that is materially detrimental to ProBusiness;; (C) Employee being convicted of a felony, or committing a material act of dishonesty or fraud or misappropriating property; (D) Employee willfully breaching in any material respect the terms of this Agreement or the Intellectual Property Agreement; or (E) Employee's commencement of employment with another employer while he is an employee of ProBusiness. (ii) "Restricted Business" shall mean a business that produces, creates, manufacturers, develops, or provides payroll, payroll tax or human resources software or services. -4- 5 (iii) "Restricted Territory" shall mean each and every country, province, state, city or other political subdivision of the world in which ProBusiness or the Company or any subsidiary or affiliate of ProBusiness or the Company is currently engaged in business or otherwise sells its products. (d) Non-Solicit. Employee agrees that until the later to occur of (i) the termination of Employee's agreement not to compete pursuant to Section 4(b) above and (ii) one year following the Employment Term, Employee shall not: (i) solicit, encourage, or take any other action which is intended to induce any other employee of ProBusiness to terminate his employment with ProBusiness; or (ii) knowingly and intentionally interfere in any manner with the contractual or employment relationship between ProBusiness and any employee, supplier or customer of ProBusiness. (e) Severability. The parties intend that the covenants contained in the preceding paragraphs shall be construed as a series of separate covenants, one for each county, city, state and other political subdivision of the Restricted Territory. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in the preceding paragraphs. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants (or any part thereof) deemed included in said paragraphs, then such unenforceable covenant (or such part) shall be deemed eliminated from this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced by such court. It is the intent of the parties that the covenants set forth herein be enforced to the maximum degree permitted by applicable law. (f) Reformation. In the event that the provisions of this Section 4 should ever be deemed to exceed the scope, time or geographic limitations of applicable law regarding covenants not to compete, then such provisions shall be reformed to the maximum scope, time or geographic limitations, as the case may be, permitted by applicable laws. 5. Representations of Employee. Employee represents that: (a) he (i) is familiar with the covenants not to compete and not to solicit set forth in this Agreement, (ii) is fully aware of his obligations hereunder, including, without limitation, the length of time, scope and geographic coverage of these covenants, (iii) finds the length of time, scope and geographic coverage of these covenants to be reasonable, and (iv) is receiving specific, bargained-for consideration for his covenants not to compete and not to solicit; (b) execution of this Agreement and the Intellectual Property Agreement and performance of Employee's obligations hereunder and thereunder, will not conflict with, or result -5- 6 in a violation or breach of, any other agreement to which Employee is a party or any judgment, order or decree to which Employee is subject. 6. Assignment. This Agreement may not be assigned by Employee without the written consent of ProBusiness. This Agreement may not be assigned by ProBusiness without the written consent of Employee, except to an assignee who acquires all or substantially all of the business of ProBusiness, whether by merger, consolidation, sale of assets or otherwise. ProBusiness will require any such assignee to assume and agree to perform this Agreement in the same manner and to the same extent that ProBusiness would be required to perform it if no such succession had taken place. 7. Entire Agreement. This Agreement sets forth the entire Agreement and understanding between Employee and ProBusiness and between Employee and the Company with respect to the subject matter hereof, and supersedes any other negotiations, agreements, understandings, representations or past or future practices, whether written or oral. 8. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing to both parties and shall be deemed given on the date of delivery, if delivered, or five days after mailing, if mailed first-class mail, postage prepaid, to the following addresses: (a) If to ProBusiness: ProBusiness, Inc. 5934 Gibraltar, Suite 201 Pleasanton, CA 94566 Attention: President with a copy to: Elizabeth M. Kurr Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 (b) If to Employee, at the address set forth on the signature page hereof, or to such other address as any party hereto may designate by notice given as herein provided. -6- 7 with a copy to: Bruce Ring Morgan Miller & Blair 1676 North California Blvd., Suite 200 Walnut Creek, California 94596-4137 9. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to principles regarding conflict of laws. 10. Amendments. This Agreement shall not be changed or modified in whole or in part except by an instrument in writing signed by each party hereto, nor shall any covenant or provision of this Agreement be waived except by an instrument in writing signed by the party against whom enforcement of such waiver is sought. 11. Effective Date. This Agreement shall become effective upon the Closing Date. 12. Attorneys' Fees. In the event of any legal action or proceeding to enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 14. Effect of Headings. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 15. Definitions. All capitalized terms used herein shall have the meaning defined in the Acquisition Agreement, unless otherwise defined herein. 16. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to either party upon any breach or default of the other party hereto shall impair any such right, power or remedy of such non-defaulting party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver, single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. -7- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. PROBUSINESS, INC. By:_______________________________________ Thomas H. Sinton, President, Chief Executive Officer and Chairman EMPLOYEE By:_______________________________________ Dwight L. Jackson Address: 74 Partridge Court Danville, CA 94526 -8- EX-10.10 30 EQUIPMENT LEASE DATED JULY 31, 1996 1 EXHIBIT 10.10 LINC CAPITAL MANAGEMENT, A DIVISION OF Linc Capital Management, SCIENTIFIC LEASING INC. EQUIPMENT SCHEDULE a division of Scientific Leasing Inc. 303 East Wacker Drive Chicago, Illinois 60601 Equipment Location: 5934 Gibraltar Drive (312) 946-1000 Pleasanton, California 94588 -and- 18400 Von Karman Ave., Master Lease Agreement No. 6403 Suite 340 Schedule No. 001 Irvine, California 92715 Acceptance Date:________________ Equipment Description: The "Equipment" shall consist of office furniture, office equipment, computers and peripherals. As more fully described on Schedule "A" attached hereto and made a part hereof. Total Equipment Cost: $670,082.83 TERM AND RENTAL: Minimum Lease Term: 42 months Lease Commencement Date: August 1, 1996 Rental Payments to be made: X monthly (In Advance) Expected Acceptance Date: July 31, 1996 *Rental Payments: $19,181.12 per rental payment for the first forty-two rental payments Followed by: Initial Payment of $57,064.00 covering the last lease payment on the entire lease line. * Plus, if applicable, freight, taxes, insurance and maintenance expense paid by Lessor which shall be paid by Lessee in accordance with the terms of the Lease and this Schedule. OPTION AT END OF MINIMUM LEASE TERM (see reverse side hereof for additional terms and conditions applicable to options): 2 * Plus, if applicable, freight, taxes, insurance, and maintenance expense paid by Lessor which shall be paid by Lessee in accordance with the terms of the Lease and this Schedule. OPTION AT END OF MINIMUM LEASE TERM (see reverse side hereof for additional terms and conditions applicable to options): Purchase Option: At the expiration of the Initial Lease Term of Schedule No. 001, Lessee may elect to purchase all, but not less than all, of the Equipment under all Schedules to the Lease at their respective expiration dates for a purchase price equal to fifteen percent (15%) of the Amount Advanced (as defined in section 22 of Addendum No. 1 to Master Lease No. 6403) thereunder as of the end of the Minimum Lease Term applicable to each Equipment Schedule plus any applicable sales or other transfer taxes payable as a result of such sale plus any amounts that remain unpaid to Lessor under the Lease. Renewal Option: At the expiration of Initial Lease Term of Schedule No. 001, Lessee may elect to renew or extend the Lease with respect to all, but not less than all, of the Equipment under all Schedules to the Lease at their respective expiration dates for twelve (12) months at 1.5% of the Amount Advanced (as defined in section 22 of Addendum No. 1 to Master Lease No. 6403) per month in Advance. LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. (Lessor) hereby agrees to lease to the Lessee named below, and Lessee hereby agrees to lease and rent from Lessor the Equipment listed above, for the term and at the rental payments specified herein, all subject to the terms and conditions set forth herein and on the reverse side hereof and in the referenced Master Lease Agreement except as the same may be varied by the terms of this Schedule. SEE ADDITIONAL TERMS AND CONDITIONS TO EQUIPMENT SCHEDULE ON THE REVERSE SIDE HEREOF. Addendum ("X" if applicable) /X/ ACCEPTED AT CHICAGO, ILLINOIS LINC CAPITAL MANAGEMENT, A DIVISION OF PROBUSINESS, INC. SCIENTIFIC LEASING INC. Lessee Lessor By: /s/ Steven Klei By: /s/ Mark K. Zimmerman ------------------------------- ------------------------------------- Title: Vice President, CFO Title: Vice President ------------------------------- ------------------------------------- Date: 7/31/96 Date: 10/25/96 ------------------------------- ------------------------------------- This lease (and Equipment Schedule and Master Lease the terms of which it incorporates has been assigned, is subject to the security interests of, and is held in trust for the benefit of Fleet Bank N.A., as Agent, pursuant to the terms and conditions or a security agreement dated September 28, 1994 and related documents (as the same may be amended) 3 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 1 of 13 Equipment Location: 5934 Gibraltar Drive Pleasanton, California 94588 Various equipment from Capella Worldwide Networking, Inc. consisting of:
2 ETHERSWITCH 1400 25 10 BASE T $11,550.00 Serial #CPW140200462, #CPW140200716 ---------- SUBTOTAL $11,550.00 FREIGHT 57.00 SALES TAX 952.88 ---------- VENDOR TOTAL $12,559.88 ==========
Various equipment from Circuit City Stores, Inc. consisting of:
1 HOT CTX16BAXWH REFRIGERATOR $ 429.98 1 PAN NN7515A MICROWAVE OVEN 149.93 1 SHA 25VTG60 25" & UP TV/VCR 449.97 --------- SUBTOTAL $1,029.88 FREIGHT 59.94 SALES TAX 84.96 --------- VENDOR TOTAL $1,174.78 =========
Various equipment from Citrix Systems, Inc. consisting of:
1 WINFRAME 1.5 TO 1.6 UPGRADE $495.00 ------- SUBTOTAL $495.00 SALES TAX 9.00 ------- VENDOR TOTAL $504.00 =======
Various equipment from Conley Computer Stacking Systems consisting of:
3 UPRIGHT 30"D X 84"H $735.00 1 SOLID SHELF - DOUBLE NUT 140.00 2 SINGLE NUT ADJUSTABLE SHELF 250.00 2 SINGLE NUT STD. SLIDE SHELF 310.00 1 EQUIPMENT RESTRAINT KIT 35.00 1 CROSS BRACE 27" WIDE BAY 30.00 1 X BRACE KIT 27" WIDE BAY 25.00 4 OAK VENEER 1 5/16" W X 96" L 88.00
Lessee: 4 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 2 of 13 Various equipment from Conley Computer Stacking Systems (continued):
1 DOOR WITH HARDWARE $ 193.00 2 ENCLOSURE WITH HARDWARE 396.00 1 TOP STARTER W/FAN & HARDWARE 241.00 --------- SUBTOTAL $2,443.00 LESS DISCOUNT (122.15) FREIGHT 246.05 --------- VENDOR TOTAL $2,566.90 =========
Various equipment from Creative Office Systems, Inc. consisting of:
1 12WX62H-FABRIC-COVER-HARD-P $ 110.72 1 62H-PANEL-CONNECTOR-DRAW-R 5.12 1 62H-T-CONNECTOR/WALL-START 11.52 1 62H-PANEL-END-CAP-HINGEABL 8.96 4 SNOWPINE-WHITE FROST (DIR)/MT/MT/ 49.16 1 12W-WIRE-MANAGEMENT-ASSY-NO 18.00 1 END-CAP-TRIM-COVER-SPCFY-C 0.00 62 48WX62H-ACOUSTICAL-PANEL 13,392.00 53 24WX62H-ACOUSTICAL-PANEL/CLIENT-FABRIC/HT/ 8,700.48 42 48W-EDP-FLIPPER-ASSY-FAB-L/STIN- 4,287.36 REFLECT-FLINT/HT/ 21 48WX16H-TACKBOARD 1,008.00 55 62H-PANEL-CONNECTOR-DRAW-R 281.60 24 62H-HARD-SURF-2-WAY-90-CON 706.56 7 62H-HARD-SURFACD-3-WAY-CON 322.56 6 62H-4-WAY-CORNER-CONNECTOR 364.80 27 62H-PANEL-END-CAP-HINGEABL 241.92 42 48W-EDP-SHELF-ASSEMBLY 2,486.40 21 48W-TASK-LIGHT-WITH-LAMP 1,270.08 21 6-12 PEDESTAL 3,642.24 21 PENCIL-DRAWER-DARK-TONE/WIL-GREYPAMPAS/HT/ 241.92 21 48WX24D-CORNER-WORKSURFACE 3,232.32 21 WORKSURFACE GROMMET 0.00 21 24WX24D-WORKSURFACE-HANGIN 1,464.96 21 48WX24D-WORKSURFACE-HANGIN 2,016.00 13 REFLECTANCE-FLINT R1914 0.00 1 325 YD WHITE FROST FABRIC/MT/MT/ 3,995.00 23 48W-WIRE-MGMNT-ASSY-WITH-P 2,180.63 5 24W-WIRE-MGMNT-ASSY-WITH-P 279.60 39 48W-WIRE-MANAGEMNT-ASSY-NO 902.46 48 24W-WIRE-MANAGEMNT-ASSY-NO 925.44 24 2-WAY-90-TRIM-COVER-KIT-DK 200.64
Lessee: 5 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 3 of 13 Various equipment from Creative Office Systems, Inc. (continued):
7 3-WAY-TRIM-COVER-KIT-DARK- 63.77 6 4-WAY-TRIM-COVER-KIT-DARK- 65.58 27 END-CAP-TRIM-COVER-SPCFY-C 225.72 11 ELECTRIC-CONNECTOR-ADAPTR- 162.58 42 ONE-RECEPTACLE-CIR:A-DRK-T 159.18 42 ONE-RECEPTACLE-CIR:B-DRK-T 159.18 42 ONE-RECEPTACLE-CIR:C-DRK-T 170.10 4 BASE-FEED-LEFT-ANGLE-DARK-/HT/HT/ 239.12 1 INSTALLATION/FABRICATION 4,000.00 800 T-MOLD-1-1/8-INNERTONE 0.00 21 LETTER FILE 2H S/S 8,106.00 12 24WX34H-FABRIC-OVER-HARD-P 1,232.64 6 48WX34H-FABRIC-OVER-HARD-P 821.76 1 24WX34H-FABRIC-OVER-HARD-P 102.72 22 24WX62H-ACOUSTICAL-PANEL 3,611.52 59 48WX62H-ACOUSTICAL PANEL/STIN-FLINT/HT/ 12,744.00 17 48WX16H-TACKBOARD/CUST-FABRIC/HT/ 816.00 34 48W-EDP-FLIPPER-ASSY-FAB-L 3,470.72 12 34H-PANEL-CONNECTOR-DRAW-R 57.60 11 34H-VARIABLE-PANEL-HEIGHT- 123.20 37 62H-PANEL-CONNECTOR-DRAW-R 189.44 20 62H-HARD-SURF-2-WAY-90-CON 588.80 1 34H-HARD-SURF-2-WAY-90-CON 22.08 1 34H-PANEL-END-CAP-HINGEABL 7.36 5 62H-HARD-SURFACD-3-WAY-CON 230.40 6 62H-4-WAY-CORNER-CONNECTOR 364.80 20 62H-PANEL-END-CAP-HINGEABL 179.20 17 6-12 PEDESTAL 2,948.48 17 12-12 PEDESTAL 4,275.84 34 48W-EDP-SHELF-ASSEMBLY 2,012.80 17 48W-TASK-LIGHT-WITH-LAMP 1,028.16 17 PENCIL-DRAWER-DARK-TONE/WIL-GREYPAMP/HTI/ 195.84 17 48WX24D-CORNER-WORKSURFACE 2,616.64 17 WORKSURFACE GROMMET 0.00 17 24WX24D-WORKSURFACE-HANGIN 1,185.92 17 48WX24D-WORKSURFACE-HANGIN 1,632.00 12 REFLECTANCE-FLINT R1914 0.00 307 SNOWPINE-WHITE FROST (DIR) 3,773.03 1 INSTALLATION/FABRICATION/MT/MT 3,270.00 3 BASE-FEED-LEFT-ANGLE-DARK- 179.37 2 62H-POWER-POLE 270.04 2 PHNX DES-POWER POLE COVER 270.02 18 48W-WIRE-MGMNT-ASSY-WITH-P 1,707.12 23 24W-WIRE-MANAGEMNT-ASSY-NO 443.67
Lessee: 6 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 4 of 13 Various equipment from Creative Office Systems, Inc. (continued):
45 48W-WIRE-MANAGEMNT-ASSY-NO $ 1,121.40 22 2-WAY-90-TRIM-COVER-KIT-DK 183.92 7 3-WAY-TRIM-COVER-KIT-DARK- 63.00 6 4-WAY-TRIM-COVER-KIT-DARK- 65.58 25 END-CAP-TRIM-COVER-SPCFY-C 209.00 9 ELECTRIC-CONNECTOR-ADAPTR- 133.11 34 ONE-RECEPTACLE-CIR:A-DRK-T 128.86 34 ONE-RECEPTACLE-CIR:B-DRK-T 128.86 34 ONE-RECEPTABLE-CIR:C-DRK-T 137.70 12 24W-WIRE-MGMNT-ASSY-WITH-P 671.04 46 T-MOLD-1-1/8-INNERTONE 0.00 10 24WX34H-FABRIC-OVER-HARD-P 1,027.20 5 48WX34H-FABRIC-OVER-HARD-P 684.80 26 24WX62H-ACOUSTICAL-PANEL 4,268.16 67 48WX62H-ACOUSTICAL-PANEL/STIN-FLINT/HT/ 14,472.00 18 48WX16H-TACKBOARD/CUST-FABRIC/HT/ 864.00 36 48W-EDP-FLIPPER-ASSY-FAB-L 3,674.88 10 34H-PANEL-CONNECTOR-DRAW-R 48.00 10 34H-VARIABLE-PANEL-HEIGHT- 112.00 44 62H-PANEL-CONNECTOR-DRAW-R 225.28 22 62H-HARD-SURF-2-WAY-90-CON 647.68 10 62H-HARD-SURFACD-3-WAY-CCN 460.80 3 62H-4-WAY-CORNER-CONNECTOR 182.40 22 62H-PANEL-END-CAP-HINGEABL 197.12 18 12-12 PEDESTAL 4,757.76 18 6-12 PEDESTAL 3,121.92 36 48W-EDP-SHELF-ASSEMBLY 2,131.20 18 48W-TASK-LIGHT-WITH-LAMP 1,088.64 18 PENCIL-DRAWER-DARK-TONE/WIL-GREYPAMP/HT/ 207.36 18 48WX24D-CORNER-WORKSURFACE 2,770.56 18 WORKSURFACE GROMMET 0.00 18 24WX24D-WORKSURFACE-HANGIN 1,255.68 18 48WX24D-WORKSURFACE-HANGIN 1,728.00 22 REFLECTANCE-FLINT R1914 0.00 30 SNOWPINE-WHITE FROST (DIR) 4,055.70 1 INSTALLATION/FABRICATION/MT/MT/ 3,180.00 3 BASE-FEED-LEFT-ANGLE-DARK- 177.66 25 48W-WIRE-MGMNT-ASSY-WITH-P 2,347.75 26 24W-WIRE-MANAGEMNT-ASSY-NO 496.60 49 48W-WIRE-MANAGEMNT-ASSY-NO 1,199.52 22 2-WAY-90-TRIM-COVER-KIT-DK 182.16 8 3-WAY-TRIM-COVER-KIT-DARK- 71.28 5 4-WAY-TRIM-COVER-KIT-DARK- 54.10 22 END-CAP-TRIM-COVER-SPCFY-C 182.16
Lessee: 7 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 5 of 13 Various equipment from Creative Office Systems, Inc. (continued):
13 ELECTRIC-CONNECTOR-ADAPTR $ 190.32 36 ONE-RECEPTACLE-CIR:A-DRK-T 135.36 36 ONE-RECEPTACLE-CIR:B-DRK-T 135.36 36 ONE-RECEPTACLE-CIR:C-DRK-T 144.72 2 48" PASSTHRU 59.84 2 24" PASSTHRU 46.48 10 24W-WIRE-MGMNT-ASSY-WITH-P 559.20 684 T-MOLD-1-1/8-INNERTONE 0.00 -------------- SUBTOTAL $ 176,054.97 SALES TAX 14,524.53 -------------- VENDOR TOTAL $ 190,579.50 ==============
Various equipment from Isolink Systems (Datalink) consisting of:
3 UL/CSA/BALL-BEARING FA N PS, $ 114.00 Serial #951102593, #951102590, #951102589 20 MICROSOFT PS2 MOUSE 700.00 3 ENDEAVER 256BP, NO SOUND CARD 615.00 Serial #k79713568, #k79713668, #k79713701 2 DIAMOND STEALTH-64 lMB DRAM PCI 190.00 Serial #013504, #013505 1 INTEL ETHEREXP 10/100 PCI, Serial #AOC900838B 120.00 1 COOLING FAN FOR PENTIUM CPU 7.00 12 ISOLINK PENTIUM SYSTEM INC. 26,724.00 Serial #M1334-4047347, #M1334-4045686, #M1334-4047624, #M1334-4045688, #M1334-4045684, #M1334-4045750, #M1334-4045626, #M1334-4045689, #M1334-4047357, #M1334-4043138, #M1334-4043143, #M1334-4043559 12 MINI TOWER CASE 230W UL PS 0.00 12 ENDEAVER 256BP, NO SOUND CARD 0.00 12 INTEL PENTIUM 133MHZ CPU 0.00 12 COOLING FAN FOR PENTIUM CPU 0.00 12 32MB RAM 0.00 12 SIM 4X32-70 16MB RAM 0.00 12 TEAC 1.44MB FDD PS2 COLOR 0.00 12 QUANTUM 850MB IDE HD 0.00 12 DIAMOND STEALTH-64 IMB DRAM PCI 0.00 12 TOSHIBA 6X INT. IDE CD-ROM 0.00 12 INTEL ETHEREXP 10/100 PCI 0.00 12 MAG 15" .28 N-I L-R 0.00 12 KEYTRONICS 104 KEYBOARD 0.00
Lessee: 8 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 6 of 13 Various equipment from Isolink Systems (Datalink) (continued):
12 MICROSOFT SERIAL MOUSE 2.0A-GRAY $ 0.00 12 MS DOS 6.22 3.5" 0.00 12 MS WINDOWS 95 ON CD ROM 0.00 1 ISOLINK PENTIUM SYSTEM INC. 2,572.00 1 MEDIUM TOWER CASE 23OW UL PS 0.00 1 ENDEAVER 256BP, NO SOUND CARD 0.00 1 INTEL PENTIUM 133MHZ CPU 0.00 1 COOLING FAN FOR PENTIUM CPU 0.00 1 32MB RAM 0.00 2 SIM 4X32-70 16MB RAM 0.00 1 TEAC 1.44MB FDD PS2 COLOR 0.00 1 QUANTUM 850MB IDE HD 0.00 1 DIAMOND STEALTH-64 IMB DRAM PCI 0.00 1 TOSHIBA 6X INT. IDE CD-ROM 0.00 1 INTEL ETHEREXP 10/100 PCI 0.00 1 MAG 17" .26 N-I L-R 0.00 1 KEYTRONICS 104 KEYBOARD 0.00 1 MICROSOFT SERIAL MOUSE 2.OA-GRAY 0.00 1 MS DOS 6.22 3.5" 0.00 1 MS WINDOWS 95 ON CD ROM 0.00 1 ISOLINK PENTIUM SYSTEM INC. 3,200.00 1 PENTIUM PRO CASE W/INTEL AURORA MB 0.00 1 INTEL PENTIUM PRO 200MHZ CPU 0.00 2 SIM 4X32-70 16MB RAM 0.00 1 TEAC 1.44MB FDD PS2 COLOR 0.00 1 QUANTUM 850MB IDE HD 0.00 1 DIAMOND STEALTH-64 IMB DRAM. PCI 0.00 1 TOSHIBA 6X INT. IDE CD-ROM 0.00 1 INTEL ETHEREXP 10/100 PCI 0.00 1 MAG 15" .28 N-I L-R 0.00 1 KEYTRONICS 104 KEYBOARD 0.00 1 MS WINDOWS 95 ON CD ROM 0.00 1 MICROSOFT SERIAL MOUSE 2.OA-GRAY 0.00 1 MS DOS 6.22 3.5" 0.00 1 PENTIUM PRO FAN 0.00 2 WESTERN DIGITAL 2.5GB IDE HD 778.00 Serial #WT334 005 8907, #WT334 005 8446 1 TRUESCAN BAR CODE READER 195.00 7 TRUESCAN BAR CODE READER 1,365.00 30 ISOLINK PENTIUM SYSTEM INC. 74,550.00 Serial #J961717861, #J961717862, :#J961717863, #J961717864, #J961707865, #J961717886, #J961717887, #J961717888, #J961717889, #J961717890, #J961717876, #J961717877,
Lessee: 9 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 7 of 13 Various equipment from Isolink Systems (Datalink) (continued):
#J961717878, #J961717879, ;#J961717880, #J961717881, #J961717882, #J961717883, #J961717884, #J961717885, #J961717891, #J961717892, #J961717893, #J961717894, #J961717895, #J961717901, #J961717902, #J961717903, #J961717904, #J961717905 30 MINI TOWER CASE 230W UL PS $ 0.00 30 ENDEAVER 256BP, NO SOUND CARD 0.00 30 INTEL PENTIUM 133MHZ CPU 0.00 30 COOLING FAN FOR PENTIUM CPU 0.00 30 32MB RAM 0.00 60 SIM 4X32-70 16MB RAM 0.00 30 TEAC 1.44MB FDD PS2 COLOR 0.00 30 QUANTUM 850MB IDE HD 0.00 30 DIAMOND STEALTH-64 1MB DRAM PCI 0.00 30 TOSHIBA 6X INT. IDE CD-ROM 0.00 30 INTEL ETHEREXP 10/100 PCI 0.00 30 MAG 17" .26 N-I L-R 0.00 30 KEYTRONICS 104 KEYBOARD 0.00 30 MS DOS 6.22 3.5" 0.00 30 MS WINDOWS 95 ON CD ROM 0.00 30 MICROSOFT SERIAL MOUSE 2.0A-GRAY 0.00 4 TOSHIBA TECRA 700CT NOTEBOOK 24,000.00 Serial #03645416, #04651299, #03645921, #04652478 4 TOSHIBA 4X CD KIT FOR T400 & TECRA 1,380.00 Serial #046138782, #036120141, #056146854 #046138782 2 72 PIN SIMM 8*32-70 478.00 1 MITSUMI 6X CD ROM DRIVE, Serial "DJC184122 69.00 4 72 PIN SIMM 8*32-70 956.00 ----------- SUBTOTAL $138,013.00 FREIGHT 43.00 SALES TAX 11,386.09 ----------- VENDOR TOTAL $149,442.09 ' ===========
Various equipment from Laser-Life Technologies, Inc. consisting of:
4 HEWLETT PACKARD LASER JET 5SiMX POSTSCRIPT $16,656.00 LEVEL 11 PRINTER, Serial #USBF072387, #USBF073132, #USDF022013, #USDF021441 2 HEWLETT PACKARD LASERJET 5M LASER PRINTER, 3,580.00
Lessee: 10 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 8 of 13 Various equipment from Laser-Life Technologies, Inc. (continued):
600 DPI, 6MB RAM, Serial :#USHC017367, #USHC087912 5 HEWLETT PACKARD LASERJET 5MP 3MB RAM, $ 5,455.00 6PPM, 600 DPI, Serial #USFB088803, #USFB085407, #USHB018226, #USHB018264, #USFB004371 8MEG MEMORY UPGRADE FOR ALL NEW PRINTERS 229.00 and PLOTTERS 1 POSTCRIPT SIMM FOR HP LASERJET 4 PLUS 399-00 ---------- SUBTOTAL $26,319.00 SALES TAX 2,171.32 ---------- VENDOR TOTAL $28,490.32 ==========
Various equipment from Liebert Corporation consisting of:
1 UPS 18KVA FL BAT BVP LIEB $17,297.33 1 OPTION KIT RS232 0.00 1 KIT Y-ADAPTER 0.00 1 OPTION KIT EXTERNAL MODEM 0.00 1 KIT SNMP ETHERNET V2.5.3A 0.00 1 STARTUP*UPSTN* STD 15-18K 0.00 1 POWER BATT CAB 7,774.67 ---------- SUBTOTAL $25,072.00 SALES TAX 2,068.43 ---------- VENDOR TOTAL $27,140.43 ==========
Various equipment from Minnesota Western consisting of:
1 SUPER BRIGHT VIDEO PROJECTOR, $ 8,495.00 Serial #2AA0620650 1 HARD CASE FOR EPSON VIDEO PROJECTOR 0.00 W/WHEELS/HANDLE 2 4000 LUMEN OVERHEAD PROJECTOR 1,318.00 Serial #1901735, #1906792 4 PHOTOLAMP 0.00 2 4000 LUMEN OVERHEAD PROJECTOR 1,318.00 Serial #1901722, #1902727 2 PADDED SHOULDER BAG 0.00 3 16-MILLION COLOR ACTIVE MATRIX SVGA 11,985.00 LCD W/BUILT-IN SPEAKER, Serial #5AU00601,
Lessee: 11 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 9 of 13 Various equipment from Minnesota Western (continued):
#5AU00602, #5AU00603 1 16-MILLION COLOR ACTIVE MATRIX SVGA $ 3,995.00 LCD W/BUILT-IN SPEAKER, Serial #5AU00605 ---------- SUBTOTAL $27,111.00 FREIGHT 81.52 SALES TAX 2,236.67 ---------- VENDOR TOTAL $29,429.19 ==========
Various equipment from Media Integration Inc. consisting of:
1 INT-ALTSERVER-1 INTEL ALTSERVER 5/166 $ 9,284.00 16MB MEM 1 14" VGA MONITOR 1,049.00 1 ACER PS/2 KEYBOARD 0.00 1 MICROSOFT MOUSE W/ PS/S CON. 0.00 1 INTEL ETHEREXPRESS PRO 10/100 0.00 1 TOSHIBA 6X IDE CD-ROM 0.00 1 DAC960-PCI 3 CHANNEL BOARD 1,949.00 1 MYLEX 16MB 72 PIN SIMM MODULE 0.00 2 SCSI 3 CONNECTOR 6' CABLE 0.00 2 INTERNAL EXPANSION CABLE FOR M 64.00 2 DEC HA-700W WIDE SCSI DEVICE S 1,278.00 2 DEC RETMA MOUNTING BRAKETS 7" 192.00 4 DEC P-150 150W POWER SUPPLY 3. 1,276.00 11 DEC 4.3GB 7200RPM ST15150W 3.5 16,995.00 1 15/30 GB DLT TAPE DRIVE EXTERN 3,195.00 6 HP 32MB 32BIT, 70NS SIMM MEMOR 2,700.00 1 HD ADAPTOR WITH PLATE 0.00 1 EXTERNAL 50P HI DENSITY 50P CE 0.00 1 SEAGATE 630MD IDE HARD DRIVE 0.00 8 MYLEX 32MB SIMM MODULE 72PIN 0.00 1 ARCSERVE 6.0 FOR NETWARE UNLIM 1,395.00 6 32 MEMORY MOD. 70NS TIN LEAD 2,700.00 2 32MB MEMORY MOD. 70NS TIN LEAD 900.00 ---------- SUBTOTAL $42,977.00 FREIGHT 10.00 SALES TAX 3,545.61 ---------- VENDOR TOTAL $46,532.61 ==========
Lessee: 12 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 10 of 13 Various equipment from Merisel Americas, Inc. consisting of:
1 MICROSOFT MS WIN NT SVR V3.51 $ 604.00 NOVELL NETWARE 4.1 250 USER 7,891.58 2 AMERICAN P SMART-UPS 1400VA 6 OUTS 1,076.00 4 U.S. ROBOTIC COURIER V.EVERYTHING V.34 EXT 1,017.20 4 XIRCOM PCMCIA ETHERNET + MODEM 28.8 1,424.48 25 MICROSOFT MSOL OFFICE PRO WIN 95 LEV A 9,996.00 0 SYMANTEC PCANYWHERE V7.5 HOST/REMOTE 1,263.70 2 U.S. ROBOTIC COURIER V.EVERYTHING V.34 EXT 508.60 10 BELKIN PREMIUM IBM PAR PNTR CBL 10 FT- 40.00 5 SYMANTEC PCANYWHERE V7.5 HOST/REMOTE 631.85 ----------- SUBTOTAL $ 24,453.41 FREIGHT 179.11 ----------- VENDOR TOTAL $ 24,632.52 ===========
Various equipment from Soft Iron Systems consisting of:
2 28115 LATTISSWITCHING ETH, Serial #3988909, $25,390.00 #3804957 2 514 100MBPS FIBER OPTIC T 1,472.00 1 MICROSOFT BACK OFFICE SER 1,608.00 250 MICROSOFT EXCHNG CLIENT L 13,000.00 250 MICROSOFT SYSTEMS MNGMT C 8,750.00 20 MICROSOFT WNDWS NT CLIENT 500.00 20 MICROSOFT SQL CLIENT LICE 2,440.00 ---------- SUBTOTAL $53,160.00 FREIGHT 70.00 SALES TAX 4,385.71 ---------- VENDOR TOTAL $57,615.71 ==========
Various equipment from Stewarts Office Furniture consisting of:
4 LATERAL FILES P39 MED. TAUPE $2,236.00 1 KEYBOARD TRAY 160.00 20 KEYBOARD TRAYS 3,200.00 1 COMPUTER U DESK OAK 1,639.00 4 DOUBLE LATERAL FILES 2,780.00 1 6' BOOKCASE 179.00 1 OAK 36' OCTAGON TABLE 359.00 3 CASTER CHAIR ACCORD GRAPHITE 270.00 1 OAK LAMINATE 579.00
Lessee: 13 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 11 of 13 Various equipment from Stewarts Office Furniture (continued):
12 CHAIRS OAK ACCORD GRAPHITE $ 1,908.00 3 CHAIRS OAK ACCORD GRAPHITE 270.00 1 PRODUCTION ROOM 1,490.00 8 CHAIRS IN COM ACCORD GRAPHITE 2,632.00 2 DRI ERASE BOARDS (MLC48) 258.00 4 CHAIR MATS 77.00 3 DESKS 1,575.00 78 ACCORD GRAPHITE FABRIC 1,560.00 40 ACCORD GRAPHITE FABRIC 800.00 7 BURGUNDY STOOLS 906.50 58 FABRIC FOR CHAIRS 1,150.00 1 TABLE W/663-36 BASE 129.00 4 GREY CHAIRS 140.00 2 DRI ERASE BOARDS 258.00 25 OAK/ACCORD GRAPHITE CHAIRS 2,250.00 22 CHAIRS W/3159 ARM ACCORD FAB. 7,238.00 3 OAK DESKS 2,574.00 3 OAK DOUBLE LATERAL FILES 2,085.00 22 CHAIRMATS 423.50 21 CHAIRMATS 404.25 3 OAK DESK 2,574.00 3 OAK DOUBLE LATERAL FILES 2,085.00 21 CHAIRS W/3159 ARM ACCORD FAB. 6,909.00 24 OAK CHAIRS ACCORD GRAPHITE 2,160.00 6 STOOLS W/ADJ. ARMS OXFORD 779.70 24 CHAIRS COM ACCORD GRAPHITE 7,896.00 25 CHAIRS OAK ACCORD GRAPHITE 2,250.00 1 4 DRAWER LATERAL FILE, PUTTY 539.00 2 BOOKCASES 439.90 21 CHAIRMATS 404.25 3 BLACK/WALNUT 477.00 2 4' X 8' DRI-ERASE BOARDS 258.00 1 4' OCTAGON OAK TABLE 419.00 4 OAK/TIERRA BLUE 356.00 10 JR. EXEC. CONF. CHAIRS 1,590.00 MED. OAK/ACCORD GRAPHITE ---------- SUBTOTAL $68,667.10 FREIGHT 790.00 SALES TAX 5,727.33 ---------- VENDOR TOTAL $75,184.43 ==========
Lessee: 14 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 12 of 13 Various equipment from Taylor Made consisting of:
1 6607500 FAX - CANON 7500, Serial #UBZ52436 $3,495.00 1 17750 WARRANTY 90 DY LIMITED 0.00 1 601450 CANON DELIVERY/INSTALL PKG 0.00 1 7900060 SUPPLIES ON SITE 0.00 1 6607500 FAX - CANON 7500, Serial #UBZ52566 3,495.00 1 17750 WARRANTY 90 DY LIMITED 0.00 1 601450 CANNON DELIVERY/INSTALL PKG 0.00 1 7900060 NO SUPPLIES SOLD 0.00 --------- SUBTOTAL $6,990.00 SALES TAX 576.68 --------- VENDOR TOTAL $7,566.68 =========
Various equipment from VoicePro consisting of:
3 GRD/LOOP START 9 $10,116.00 2 DIGITAL STATION CARD 0.00 8 VISION TELEPHONE 1,880.00 ---------- SUBTOTAL $11,996.00 SALES TAX 989.67 ---------- VENDOR TOTAL $12,985.67 ==========
Various equipment from WAN Technologies, Inc. consisting of:
2 ADTRAN TSU TI DSU/CSU-V35 $2,116.50 2 CISCO MALE DTE V.35 CABLE 170.00 1 REMOTE INSTALL ADTRAN TSU 250.00 --------- SUBTOTAL $2,536.50 FREIGHT 45.62 --------- VENDOR TOTAL $2,582.12 =========
Lessee: 15 SCHEDULE A TO MASTER LEASE NO. 6403 EQUIPMENT SCHEDULE 001 PROBUSINESS, INC. Page 13 of 13 Equipment Location: 18400 VON KARMEN AVENUE, SUITE 340 IRVINE, CALIFORNIA 92175 Various equipment from Laser-Life Technologies, Inc. consisting of:
1 HEWLETT PACKARD LASERJET 5MP 3MB RAM, $1,000.00 6 PPM, 600 DPI 1 10 FOOT PARALLEL CABLE 25 PIN TO 36 PIN CENTRONIC 0.00 --------- SUBTOTAL $1,000.00 FREIGHT 18.50 SALES TAX 77.50 --------- VENDOR TOTAL $1,096.00 =========
TOTAL ORIGINAL EQUIPMENT COST: $670,082.83 ========================================== Lessee: 16 ADDENDUM NO.1 TO MASTER LEASE AGREEMENT NO.6403 DATED AS OF JULY 31, 1996 BETWEEN LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC., AS LESSOR AND PROBUSINESS, INC., AS LESSEE This Addendum is attached to and forms part of that certain Master Lease Agreement No. 6403 dated as of July 31, 1996, between LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING, ("Lessor" or "LINC") and PROBUSINESS, INC., ("Lessee"), (the "Lease") agreeing as follows: A. Terms defined in the Lease shall have the same meanings herein unless otherwise expressly set forth herein or otherwise required by context hereof. B. The following shall be added to the terms of the Lease and are hereby incorporated therein by reference. 22. LEASING OF EQUIPMENT a. Lease Line. Subject to the terms and conditions herein set forth and in the applicable Equipment Schedule, and provided no event of default under the Lease shall have occurred and be then continuing, Lessor agrees to purchase and lease to Lessee, from time to time, the "Equipment" (as defined below). The aggregate "Cost" (as defined below) of Equipment purchased by Lessor pursuant to this Section 22.a shall in no event exceed $2,000,000.00 (the "Lease Line Amount"). All "Takedowns" (as defined below) shall be completed on or before June 30, 1997 (the "Last Takedown Date"). b. Equipment. (1) Lessor will purchase certain new office furniture, office equipment, computers and peripherals (the "Equipment") from Lessee or from vendors designated by Lessee. Software cannot exceed fifteen percent (15%) of the total fundings under the lease line. Financing of any upgrades shall be limited to upgrades for assets financed by LINC or available for sale and leaseback by LINC. The purchase price for the Equipment will be equal to the lesser of either (i) 100% of the manufacturers' net invoice price (excluding applicable sales or use taxes, freight, installation, and similar charges) or (ii) the then fair market value for each item or commercial unit of the Equipment ("Cost") or (iii) Net Book Value (determined in accordance with generally accepted principles). (2) The "Amount Advanced" for Equipment shall be equal to one hundred percent (100%) of the Equipment Cost. The minimum Cost for an individual item of or commercial unit of the Equipment shall not be less than $1,000. (3) All Equipment shall be tangible personal property eligible for MACRS depreciation under the Internal Revenue Code of 1986, as amended. The depreciation benefits arising from the Equipment will be for the account of Lessor. 17 (4) Each item of or commercial unit of the Equipment, its vendor and all purchase orders, invoices and related documents will be subject to review and approval by Lessor prior to funding any Takedown. c. Minimum Lease Term and Monthly Lease Rate. The Minimum Lease Term for each Equipment Schedule shall be 42 months. The applicable Monthly Lease Rate factor shall be 2.8532% of Cost per month, [reflecting an annual implicit rate of 11.00%,] subject to Rate Adjustments described below. d. Rate Adjustment. The Lease Rate and the Monthly Lease Rate Factor will be indexed to the average yield for U.S. Treasury Notes maturing closest to the date forty-two (42) months from the commencement date of each Equipment Schedule (the "Index Instrument") currently 6.35% for the 7 3/4% Treasury Notes maturing November 1999 as reported in the Wall Street Journal dated May 13, 1996 as reported in the Wall Street Journal dated May 13, 1996. The Monthly Lease Rate Factor shall be adjusted to provide for any increase or decrease (limited) in the average yield of the Index Instrument on the commencement date of each Equipment Schedule so as to maintain an annual implicit rate equal to the Lease Rate. The average yield of the Index Instrument shall have a floor of 6.35%. Upon commencement of each Equipment Schedule, the Monthly Lease Rate Factor shall be fixed for the Initial Lease Term of such Equipment Schedule. e. Takedowns. "Takedowns" means the date of the final payment of the Cost of the Equipment for the applicable Equipment Schedules by LINC. All Takedowns shall commence on the first day of the calendar quarter following Lessee's acceptance of all Equipment on each Equipment Schedule. The Initial Takedown shall occur on or before August 1, 1996, provided Lessee has executed and delivered the Master Lease Agreement and all related documentation required by Lessor. Any Equipment purchased after the Initial Takedown shall be funded on subsequent Takedowns through additional Equipment Schedules of at least $100,000.00 each up to the amount of the Cost of such Equipment. Each Equipment Schedule will include all purchases of Equipment made for Equipment on a progress payment basis in the previous calendar quarter not previously included in an Equipment Schedule. All Equipment Schedules shall takedown prior to June 30, 1997. f. Last Month's Rent. An amount equal to $57,064.00, representing the last month's rental on the entire Lease Line Amount, calculated by multiplying the Monthly Lease Rate Factor by the Equipment Cost equal to the aggregate Lease Line Amount, will be invoiced and due at the time of the commencement of Equipment Schedule 001 and this rent will be applied to the last Monthly Lease Payment due under each Equipment Schedule on a pro rata basis. If the entire Lease Line Amount is not fully funded by June 30, 1997, then the unused amount of the last payment paid under this paragraph shall be retained by Lessor. g. Payment Terms. Monthly in advance. h. End of Term Options. Provided that the Lease has not been terminated and that no Event of Default or event which, with notice or lapse of time or both, would become an Event of Default shall have occurred and be continuing, Lessee shall elect one of the following options in clauses (i) or (ii) below: (i) Lessee's Option to Renew: At the expiration of the Initial Lease Term of Schedule No. 001, Lessee may elect to renew the Lease with respect to all, and not less than all, of the Equipment under all Schedules to the Lease at their respective expiration dates for -2- 18 twelve (12) months at 1. 5 % of the Amount Advanced (as defined in section 22) per month, payable in advance plus any applicable taxes. (ii) Lessee's Option to Purchase: At the expiration of the Initial Lease Term of Schedule No.001, Lessee may elect to purchase all, but not less than all, of the Equipment under all Schedules to the Lease at their respective expiration dates for a purchase price equal to fifteen percent (15%) of the Amount Advanced (as defined in section 22) thereof as of the end of the Minimum Lease Term applicable to each Equipment Schedule plus any applicable sales or other transfer taxes payable as a result of such sale plus any amounts that remain unpaid to Lessor under the Lease. If neither of the foregoing options in clauses (i) or (ii) of this section is duly exercised by Lessee, this Lease shall be automatically extended at the highest rental rate in effect immediately prior to the expiration date of the Minimum Lease Term applicable to Schedule No. 001 with respect to all Equipment covered by any applicable Schedule from the expiration date of the Minimum Lease Term of each Schedule on a month-to-month basis. Lessee may terminate any such extended term on ninety (90) days' prior written notice to Lessor and so long as with such notice Lessee has elected one of the options described in clauses (i) or (ii) above. The purchase of the Equipment by Lessee pursuant to any options herein granted shall be "AS IS, WHERE IS," without recourse to or any warranty by Lessor, other than a warranty that the Equipment is free and clear of liens and encumbrances resulting by or through acts of Lessor. i. Commitment Fee. Lessor acknowledges receipt of a $10,000.00 Commitment Fee from Lessee. j. Earnest Money Deposit. Lessor acknowledges receipt of a $10,000.00 Earnest Money Deposit. The Earnest Money Deposit will be applied to on-site documentation preparation costs (if requested by Lessee), and then to the first lease rental payment. If ProBusiness elects not to proceed with transactions contemplated herein, then the deposit amount will be retained by LINC. k. Conditions Precedent to Leasing. In addition to any other document or item requested by Lessor, Lessee shall deliver the items set forth below in form and substance acceptable to Lessor. With respect to the Initial Takedown the following items: (1) Execution and delivery by Lessee to Lessor the following documents prior to the Initial Takedown: (a) Master Lease Agreement; (b) Addendum No. 1 to Master Lease Agreement; (c) Equipment Schedule(s), as required by Lessor; (d) Secretary's certificate as to board of directors' resolutions and incumbency; (e) UCC-I financing statements and protective fixture filings signed by Lessee (to be filed prior to the earlier of funding or, for Equipment delivered after the date of the Lease, delivery of Equipment to Lessee) along with any UCC Amendments relating thereto for any prior, present or subsequent Equipment Schedule; (f) Progress Payment Authorization (if applicable); (g) Bill(s) of sale for Equipment sold by Lessee to Lessor (if applicable); (h) Purchase Agreement Assignment of agreements between Lessee and its Equipment vendors for new Equipment (if applicable); and -3- 19 (i) The Warrant described in Section 24 below. (2) Delivery to Lessor of executed copies of the following Documents prior to the Initial Takedown: (a) Legal opinion of Lessee's Counsel, in form and substance acceptable to Lessor; (b) Certificate of insurance; (c) Release or subordination of all security interests in favor of any other party granted by Lessee or the owners of Equipment to be sold to Lessor which cover either the Equipment to be sold or include "after acquired" Equipment clauses in favor of such other party ("Equipment Liens"), (if applicable); and (d) Release, disclaimer or subordination agreements (if required by Lessor) by each owner of any premises in which Equipment will be located of any landlord's lien or other right which a real property owner might claim in the Equipment to be leased hereunder. (3) With respect to Subsequent Takedowns, the following items will be required to be delivered and executed, if applicable, prior to each Subsequent Takedown: (a) Equipment Schedule(s), as needed by Lessor; (b) Secretary's certificate as to board of directors' resolutions and incumbency (if requested by Lessor); (c) UCC-I financing statements and protective fixture filings signed by Lessee (to be filed prior to the earlier of funding or delivery of Equipment to Lessee) along with any UCC Amendments relating thereto for any prior, present, or subsequent Equipment Schedule; (d) Progress Payment Authorization, (if applicable); (e) Bill(s) of sale for Equipment sold by Lessee to Lessor (if applicable); (f) Purchase Agreement Assignment of agreements between Lessee and its Equipment vendors for new Equipment (if applicable); (g) Updated legal opinion (if requested by Lessor); (h) Certificate of insurance (if requested by Lessor); (i) Release of "Equipment Liens" (if applicable); (j) Landlord subordination agreements or Equipment Waiver agreements acceptable to Lessor; (if applicable); (k) Original invoices issued to Lessor (or copies of invoices to Lessee and canceled checks of Lessee); (l) Amendments to Articles of Incorporation and By-Laws (if applicable); 1. Broker Fee. Lessor agrees to pay Interlease Group, Limited a Broker Fee equal to 1.5 % of the amount funded on each Takedown under the Lease Line, payable within 30 days of funding. Lessee represents and warrants that it has not made nor shall make additional payments to Interlease Group, Limited, for any services in connection with this Master Lease, and that it shall not receive any payments from Interlease Group, Limited in connection with this Master Lease. 23. PROGRESS PAYMENTS If requested, progress payments will be made for any amount over S1,000 per invoice to vendors in accordance with Lessor's standard procedures. Interim rent on progress payments on Equipment shall -4- 20 be payable from the date progress payments are made to the Commencement Date of the corresponding Equipment Schedule. Lessee shall deliver to Lessor Lessee's authorization, not less than 30 days prior to the due date thereof and in a form acceptable to Lessor, to make a progress payment and, provided on such due date no Events of Default have occurred and be continuing hereunder or under the Lease, Lessor shall make the progress payment to the manufacturer(s) or supplier(s) as set forth in such authorization. With respect to such progress payments so made by Lessor, Lessee agrees as follows: (i) to pay the Lessor or Lessor's Assignee a daily rental amount equal to the product of the aggregate amount of progress payments actually made by Lessor multiplied by the Lease Rate Factor as set forth in each applicable Equipment Schedule divided by thirty (30) from the date such progress payments are in fact made. Such payment shall be made by Lessee to Lessor immediately upon Lessee's receipt of a written request therefor (but not more than one such payment shall be made within any given period of thirty (30) days) accompanied by evidence reasonably satisfactory to Lessee indicating the amount and date of payment by Lessor of the progress payments in respect of which such payment is so requested; (ii) in the event Lessee shall not deliver Lessee's Equipment Acceptance Form with respect to the Equipment to Lessor on or before three (3) months from the date of the first progress payment made hereunder (unless such period is extended by mutual written agreement of Lessor and Lessee), to pay to Lessor or Lessor's Assignee, upon demand, an amount equal to the sum of all progress payments theretofore made by Lessor pursuant to this provision, together with unpaid daily rental amounts thereon; (iii) Lessee acknowledges and understands that Lessor may elect to borrow all or a portion of the progress payments required of Lessor under this provision and that as security therefor, Lessor may assign the applicable Equipment Schedule, including but not limited to Lessor's rights hereunder, to the lender of such amounts so borrowed. Lessee agrees, without notice to Lessee, Lessor may make such assignment in connection with any such borrowing and for the protection and benefit of Lessor and any such assignee, the rights of Lessor or its assignee in and to such payments shall be absolute and unconditional under all circumstances, notwithstanding: (i) any set-off, abatement, reduction, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the manufacturer(s) or seller(s) of the Equipment, or any other person for any reason whatsoever; or (ii) any defect in condition, operation, fitness or use, damage or destruction of the Equipment, or failure of the manufacturer(s) or supplier(s) to deliver the Equipment for any reason whatsoever; or (iii) or any insolvency, bankruptcy, reorganization or similar proceedings instituted by or against the Lessor or Lessee. 24. WARRANTS In connection with the Master Lease Agreement No. 6403, Lessee shall issue and deliver to Lessor a warrant to purchase 10,000 shares of Series E Preferred Stock at the same exercise price as the most recent equity placement, which is $7.94 per share. The warrants shall be issued and delivered to Lessor upon execution of the Master Lease Agreement. The warrant expiration date shall be five (5) years from the date of the final acceptance of the Equipment under the lease. The terms of the warrant shall include piggyback registration rights on a pro rata basis with the shares of other shareholders subject to cutback on the Initial Public Offering, -5- 21 acceptable anti-dilution rights, and shall provide for a "cashless" exercise provision in the event of exercise by LINC. 25. REPORTS a. Reports. (1) within 30 days of the end of a quarter. Lessee shall furnish to Lessor the following quarterly financial and operating performance data: Statement of Cash Flow, Operating data (which shall include updates on items (1) and (2) in section 26 herein), Income Statement and Balance Sheet, (2) Within 60 days of year end, Lessee shall furnish to Lessor the following audited financial statements: Statement of Cash Flow, Operating data (which shall include updates on items (1) and (2) in section 26 herein), Income Statement and Balance Sheet; (3) Lessee shall furnish to Lessor copies of minutes of the meetings of the Board of Directors of Lessee and actions approved by consent in lieu of a meeting in connection with the transactions contemplated by the Lease; and (4) If an Event of a Default occurs, Lessee shall have the right to review all minutes of all Board of Directors Meetings. 26. OTHER SPECIAL TERMS AND CONDITIONS a. Material Adverse Change. Lessee shall furnish to Lessor prompt written notice of any Material Adverse Change. A "Material Adverse Change" occurs if: (1) The cash balance or available borrowing capacity under a revolving line of credit is less than $1 million; (2) The net customer base loss exceeds ten percent (10%) for any given calendar quarter measured against the previous quarter; (3) The revenues for a quarter are ninety percent (90%) or less than revenues for the corresponding quarter one year prior; or (4) Upon the incapacitation or death of Thomas H. Sinton. IN WITNESS WHEREOF, this Addendum has been executed by a duly authorized officer of Lessee as of the ______ day of ___________ 19_____. PROBUSINESS, INC. (Lessee) By: /s/ Steven Klei -------------------------------------- Name: /s/ Steven Klei ------------------------------------- Title: /s/ Vice President -------------------------------------- LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. (Lessor) By: /s/ Mark K. Zimmerman -------------------------------------- Name: /s/ Mark K. Zimmerman -------------------------------------- VICE PRESIDENT Title: -------------------------------------- Date: Illegible -------------------------------------- -6- 22 LINC CAPITAL MANAGEMENT, A DIVISION OF LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. SCIENTIFIC LEASING INC. MASTER LEASE AGREEMENT 303 EAST WACKER Drive Chicago, Illinois 60601 (312) 946-1000 LESSEE: ProBusiness Inc. MASTER LEASE AGREEMENT NO. 6403 ADDRESS: 5934 Gibraltar Drive DATE: July 31, 1996 Pleasanton, California 94588 LINC CAPITAL Management, A DIVISION OF SCIENTIFIC LEASING INC. ("Lessor") hereby leases to Lessee and Lessee leases from Lessor, in accordance with the terms and conditions hereinafter set forth, the equipment and property together with all replacement parts, additions, accessories, alterations and repairs incorporated therein or now or hereafter affixed thereto (herein collectively referred to as the "Equipment") described in each Equipment Schedule which may be executed by Lessor and Lessee from time to time (individually a "Schedule' and collectively, the "Schedules"), each of which is made a part hereof. For all purposes of this Master Lease Agreement ("Lease"), each Schedule relating to one or more items of Equipment shall be deemed a separate lease incorporating all of the terms and provisions of this Lease. In the event of a conflict between the terms of this Lease the terms and conditions of a Schedule, the terms and conditions of the Schedule shall govern and control that Schedule. 1. TERM AND RENTAL. The term of this Lease (the "Minimum Lease Term") for any item of Equipment shall be set forth in the Schedule relating to such item of Equipment and shall commence (the "Commencement Date") on the acceptance Date ("Acceptance Date"), which shall be the applicable of: (1) the later of (a) the date of delivery of the Equipment to Lessee and (b) the date of acceptance of such Equipment by Lessee; (2) in the case of Equipment which is the subject of a sale and leaseback between Lessor and Lessee, the date upon which Lessor purchases such Equipment from Lessee: or (3) in the case of Equipment requiring installation, the date of installation of the Equipment. If the Acceptance Date Is other than the first day of a calendar quarter. then the Commencement Date of the Minimum Lease Term set forth in any Schedule shall be the first day of the calendar quarter following the month which includes the Acceptance Date and Lessee shall pay to Lessor, in addition to all other sums due hereunder, an amount equal to one-thirtieth of the amount of the average monthly rental payment due or to become due hereunder multiplied by the number of days from and including the Acceptance Date to the Commencement Date of the Minimum Lease Term set forth in the Schedule. Lessee agrees to pay the total rental 23 quarter following the month which includes the Acceptance Date and Lessee shall pay to Lessor, in addition to all other sums due hereunder, an amount equal to one-thirtieth of the amount of the average monthly rental payment due or to become due hereunder multiplied by the number of days from and including the Acceptance Date to the Commencement Date of the Minimum Lease Term set forth in the Schedule. Lessee agrees to pay the total rental for the entire term hereof, which shall be the total amount of all rental payments set forth in the Schedule, plus such additional amounts as may become due hereunder or pursuant to any written modification hereof or additional written agreement hereto. Except as otherwise specified in the Schedule. rental payments hereunder shall be monthly and shall be payable in advance on the first day of each month during the term of this Lease beginning with the Commencement Date of the Minimum Lease Term and shall be sent to the address of the Lessor specified in this Lease or the Schedule or as otherwise directed by the Lessor in writing. Rental payments or any other payments due hereunder not made on or before the due date shall be overdue and shall be subject to a service charge in an amount equal to two percent (2%) per month of the overdue payments or the maximum rate permitted by law whichever is less (the "Service Charge Rate"). If Lessor shall at any time accept a rental payment after it shall become due, such acceptance shall not constitute or be construed as a waiver of any or all of Lessor's rights hereunder, including without limitation those rights of Lessor set forth in Sections 12 and 13 hereof. 2. TITLE TO EQUIPMENT; LIENS. (a) All of the Equipment shall remain personal property (whether or not the Equipment may at any time become attached or affixed to real property). All replacement parts or repairs incorporated in or affixed to the Equipment (herein collectively called "Appurtenances" and included in the definition of "Equipment"), whether before or after the Commencement Date, shall become subject to this Lease upon being so incorporated or affixed. (b) During the term of each Schedule and upon Lessee's full performance of all its obligations under or relating to such Schedule and the Lease as they relate to such Schedule, Lessor shall retain title to such Equipment, provided, that, Lessee and Lessor acknowledge that transactions documented hereunder and under each Schedule shall constitute a "Lease intended as security", or "security interest", as the case may be under the Uniform Commercial Code. Lessee agrees to promptly execute and deliver or cause to be executed and delivered to Lessor and Lessor is hereby authorized to record or file, any statement and/or instrument requested by Lessor for the purpose of showing Lessor's interest in the Equipment, including without limitation, financing statements, security agreements, and (using its best efforts) waivers with respect to rights in the Equipment from any owners or mortgagees of any real estate where the Equipment may be located. Without limiting any provision of this Lease and not withstanding any provision hereof to the contrary, (i) to secure Lessee's obligations to Lessor hereunder, under any Schedule and under any other document relating to this Lease (both now existing and hereafter arising), Lessee hereby grants to Lessor a first priority security interest in the Equipment described in each Schedule together with all products, proceeds, replacements, substitutions thereof and Appurtenances thereto and (ii) such security interest will be a valid. perfected and enforceable first priority security interest in such Equipment. In the event that Lessee fails or refuses to execute and/or file Uniform Commercial Code financing statements or other instruments or recordings which Lessor or its assignee reasonably deems necessary to perfect or maintain perfection of Lessor's or its assignee's interests hereunder. Lessee hereby appoints Lessor as Lessee's limited attorney-in-fact to execute and record all documents necessary to perfect or maintain the perfection of Lessor's interests hereunder. Lessee shall pay Lessor for any costs and fees relating to any filings hereunder including, but not limited to, costs, fees, searches, document preparation, documentary stamps, privilege taxes and reasonable attorneys' fees. (c) Lessee shall at its expense: (i) indemnify, protect and defend Lessor's title to the Equipment from and against all persons claiming against or through Lessee, (ii) at all times keep the Equipment free from any and all liens, encumbrances, attachments, levies, executions, burdens, charges or legal process of any and every type whatsoever except the lien of Lessor hereunder: (iii) give Lessor immediate written notice of any breach of this Lease described in clause (ii); and (iv) indemnify, protect and save Lessor harmless 24 from any loss, cost or expense (including reasonable attorneys' fees) caused by the Lessee's breach of any of the provisions of this Lease, whether incurred by Lessor in pursuing its rights against Lessee or defending against any claims or defenses asserted by or through Lessee. (d) It is hereby agreed between Lessee and Lessor that, for Federal, state and local income tax purposes (i) the Lease is, and will be consistently treated as, a financing rather than a true lease, (ii) Lessee will be the owner of the Equipment delivered under this Lease; (iii) Lessee will not claim any rental deduction for amounts paid to Lessor under the Lease; (iv) Lessor will not claim any cost recovery or depreciation deductions with respect to the Equipment delivered under this Lease; (v) neither Lessor nor Lessee will at any time take any action, directly or indirectly, or file any returns or other documents inconsistent with the foregoing; and (vi) Lessor and Lessee will file such returns, take such actions and execute such documents as may be reasonable and necessary to facilitate accomplishment of the intent expressed herein. If any item of Equipment includes computer software, Lessee shall execute and deliver and shall cause Seller (as hereinafter defined) to deliver all such documents as are necessary to effectuate assignment of all applicable software licenses to Lessor. Lessee shall at its expense: (i) indemnify, protect and defend Lessor's title to the Equipment from and against all persons claiming against or through Lessee; (ii) at all times keep the Equipment free from any and all liens, encumbrances, attachments, levies, executions, burdens, charges or legal process of any and every type whatsoever; (iii) give Lessor immediate written notice of any breach of this Lease described in clause (ii); and (iv) indemnify, protect and save Lessor harmless from any loss, cost or expense (including reasonable attorneys' fees incurred by Lessor in pursuing its rights against Lessee or defending any claims or defenses asserted by or through Lessee) caused by the Lessee's breach of any of the provisions of this Lease. 3. ACCEPTANCE AND RETURN OF EQUIPMENT. Lessor shall, at any time prior to unconditional acceptance of all Equipment by Lessee, have the right to cancel this Lease with respect to any Equipment (and if any such Equipment or any portion thereof has not previously been delivered, Lessor may refuse to pay for such Equipment or any portion thereof or refuse to cause the same to be delivered) if: (a) the Acceptance Date with respect to any such item of Equipment to be leased pursuant to any Schedule has not occurred within sixty (60) days of the estimated Acceptance Date set forth in such Schedule or (b) there shall be a Material Adverse Change (as defined in section 26 of Addendum No. 1 to Master Lease Agreement No. 6403), since the date of the most recent financial statements of Lessee or of any guarantor Of Lessee's performance hereunder submitted to Lessor. Upon any cancellation by Lessor pursuant to this Section or the provisions of any Schedule, Lessee shall forthwith reimburse to Lessor all sums paid by Lessor with respect to such Equipment plus all costs and expenses of Lessor incurred in connection with such Equipment and any interest or rentals due hereunder in connection with such Equipment and shall pay to Lessor all other sums then due hereunder, whereupon if Lessee is not then in default and has fully performed all of its obligations hereunder, Lessor will, upon request of Lessee, transfer to Lessee without warranty or recourse any rights that Lessor may then have with respect to such Equipment. Lessee agrees to promptly execute and deliver to Lessor (in no event later than 15 days after the Acceptance Date) a confirmation by Lessee of unconditional acceptance of the Equipment in the form supplied by Lessor (the "Equipment Acceptance"). Lessee agrees, before execution of the aforesaid Equipment Acceptance, to inform Lessor in writing of any defects in the Equipment, or in the installation thereof, which have come to the attention of Lessee or its agents and which might give rise to a claim by Lessee against the Seller or any other person. If Lessee fails to give notice to Lessor of any such defects or fails to deliver to Lessor the Equipment Acceptance as provided herein, it shall be deemed an acknowledgment by Lessee (for purposes of this Lease only) that no such defects in the Equipment or its installation exist and it shall be conclusively presumed, solely as between Lessor and its assignees and Lessee, that such Equipment has been unconditionally accepted by Lessee for lease hereunder. Except as otherwise provided in any Schedule, Lessee shall provide Lessor ninety (90) days prior written notice of its intention to return the Equipment upon expiration of the Minimum Lease Term. Upon expiration or the cancellation or termination of the Lease with 25 respect to any Equipment, Lessee shall, at its own expense, assemble, crate, insure and deliver all of the Equipment and all of the service records and all software and software documentation subject to this Lease and any Schedules hereto to Lessor in the same good condition and repair as when received, reasonable wear and tear resulting only from proper use thereof excepted, to such reasonable destination within the continental United States as Lessor shall designate. Lessee shall, use its best efforts immediately prior to such return of each item of Equipment to provide to Lessor a letter from the manufacturer of the Equipment or another service organization reasonably acceptable to Lessor certifying that said item is in good working order, reasonable wear and tear resulting only from proper use thereof excepted, that such item is eligible for a maintenance agreement by such manufacturer and all software is included thereon. If any computer software requires relicensing when removed from Lessee's premises, Lessee shall bear all costs of such relicensing. If Lessee fails for any reason to provide the notice set forth above or to re-deliver the Equipment back to Lessor in accordance with the terms set forth above. Lessee shall pay to Lessor, at Lessor's election, an amount equal to the highest monthly payment set forth in the Schedule for a period of not less than three (3) months and at the end of such period of time ("Holdover Period"), Lessee shall return the Equipment to Lessor as provided herein. If Lessee fails or refuses to return the Equipment as provided herein at the end of any Holdover Period, Lessee shall pay to Lessor, at Lessor's option, an amount equal to the highest monthly payment set forth in the Schedule for each month or portion thereof, until Lessee so returns the Equipment to Lessor. 4. DISCLAIMER OF WARRANTIES. LESSEE HAS EXCLUSIVELY SELECTED AND CHOSEN THE TYPE, DESIGN, CONFIGURATION, SPECIFICATION AND QUALITY OF THE EQUIPMENT HEREIN LEASED AND THE VENDOR, DEALER, SELLER, MANUFACTURER OR SUPPLIER THEREOF (HEREIN COLLECTIVELY CALLED "SELLER"), AS SET FORTH IN THE SCHEDULES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION, THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS, ADAPTABILITY, ANY IMPLIED WARRANTY OF QUIET ENJOYMENT OR NON-INTERFERENCE OR SUITABILITY FOR ANY PARTICULAR PURPOSE, AND, LESSEE LEASES, HIRES AND RENTS THE EQUIPMENT "WHERE IS, AS IS" Lessee understands and agrees that neither Seller, nor any agent of Seller, is an agent of Lessor or is in any manner authorized to waive or alter any term or condition of this Lease. Lessor shall not be liable for any loss or damage suffered by Lessee or by any other person or entity, direct or indirect or consequential, including, but not limited to, business interruption and injury to persons or property, resulting from non-delivery or late delivery, installation, failure or faulty operation, condition, suitability or use of the Equipment leased by Lessee hereunder, or for any failure of any representations, warranties or covenants made by the Seller. Any claims of Lessee shall not be made against Lessor but shall be made, if at all, solely and exclusively against Seller, or any persons other than the Lessor. Lessor hereby authorizes Lessee to enforce during the term of this Lease, in its name, but at Lessee's 2 MASTER LEASE - SECURITY 3/95 26 AMENDED 8/17/95 sole effort and expense, all warranties, agreements or representations, if any, which may have been made by Seller to Lessor or to Lessee, and Lessor hereby assigns to Lessee solely for the limited purpose of making and prosecuting any such claim, all rights which Lessor may have against Seller for breach of warranty or other representation respecting the Equipment. 5. CARE, TRANSFER AND USE OF EQUIPMENT. Lessee, at its own expense, shall maintain the Equipment in good operating condition, repair and appearance in accordance with Seller's specifications and in compliance with all applicable laws and regulations and shall protect the Equipment from deterioration except for reasonable wear and tear resulting only from proper use thereof. When generally offered, Lessee shall, at its expense, keep a maintenance contract in full force and effect, throughout the term of this Lease and any Schedule hereto. The disrepair or inoperability of the Equipment regardless of the cause thereof shall not relieve Lessee of the obligation to pay rental hereunder. Lessee shall not make any modification, alteration or addition to the Equipment (other than normal operating accessories or controls). Lessee will not, and will not permit anyone other than the authorized field engineering representatives of Seller or other maintenance organization reasonably acceptable to Lessor to effect any inspection, adjustment, preventative or remedial maintenance or repair to the Equipment. LESSEE MAY NOT (A) RELOCATE OR OPERATE THE EQUIPMENT AT LOCATIONS OTHER THAN THE PREMISES OF LESSEE SPECIFIED IN THE APPLICABLE SCHEDULE (THE "PREMISES"), EXCEPT WITH LESSOR'S PRIOR WRITTEN CONSENT, WHICH SHALL NOT BE UNREASONABLY WITHHELD IF SUCH OTHER LOCATION IS WITHIN THE CONTINENTAL UNITED STATES, OR (B) SELL, CONVEY, TRANSFER, ENCUMBER, PART WITH POSSESSION OF, OR ASSIGN ANY ITEM OF EQUIPMENT OR ANY OF ITS RIGHTS HEREUNDER, AND ANY SUCH PURPORTED TRANSACTION SHALL BE NULL AND VOID AND OF NO FORCE OR EFFECT. In the event of a relocation of the Equipment or any item thereof to which Lessor consents, all costs (including any additional property taxes or other taxes and any additional expense of insurance coverage) resulting from any such relocation, shall be promptly paid by Lessee upon presentation to Lessee of evidence supporting such cost. Lessor shall have the right during normal business hours upon reasonable notice to Lessee, subject to applicable laws and regulations, to enter Lessee's Premises in order to inspect, observe, affix labels or other markings, or to exhibit the Equipment to prospective purchasers or future lessees thereof, or to otherwise protect Lessor's interest therein; provided, that any such inspections or visits are reasonably conducted. 6. NET LEASE. THIS LEASE AND ANY SCHEDULE HERETO IS A NET LEASE, AND ALL PAYMENTS HEREUNDER ARE NET TO LESSOR. All taxes, assessments, licenses, and other charges (including, without limitation personal property taxes and sales, use and leasing taxes and penalties and interest on such taxes) imposed, levied or assessed on the ownership, possession, rental or use of the Equipment during the term of this Lease and any Schedule hereto (except for Lessor's federal or state net income taxes) shall be paid by Lessee when due and before the same shall become delinquent, whether such taxes are assessed or would ordinarily be assessed against Lessor or Lessee. To the extent possible under applicable law, for personal property or advalorem tax return purposes only, Lessee shall include the Equipment on such returns as may be required, which returns shall be timely filed by it. In any event, Lessee shall file all tax returns required for itself or Lessor and Lessor hereby appoints Lessee as its attorney-in-fact for such purpose. In case of failure by Lessee to so pay said taxes, assessments, licenses or other charges, Lessor may pay all or any 27 part of such items, in which event the amount so paid by Lessor including any interest or penalties thereon and reasonable attorneys' fees incurred by Lessor in pursuing its rights against Lessee or defending against any claims or defenses asserted by or through Lessee shall be paid by Lessee to Lessor as additional rental hereunder no later than the next rental payment date following receipt of invoice therefor. Lessee shall promptly pay all costs, expenses and obligations of every kind and nature incurred in connection with the use or operation of the Equipment which may arise or become due during the term of this Lease and any Schedule hereto, whether or not specifically mentioned herein. In case of failure by Lessee to comply with any provision of this Lease and any Schedule hereto, Lessor shall have the right, but not the obligation, to effect such compliance on behalf of Lessee. In such event, all costs and expenses incurred by Lessor in effecting such compliance shall be paid by Lessee to Lessor as additional rental hereunder no later than the next rental payment date following receipt of invoice therefor. 7. INDEMNITY. Lessee shall and does hereby agree to indemnify, defend and hold Lessor and its assigns harmless from and against any and all liability, loss, costs, injury, damage, penalties, suits, judgements, demands, claims, expenses and disbursements (including without limitation, reasonable attorneys' fees incurred by Lessor in pursuing its rights against Lessee or defending against any claims or defenses asserted by or through Lessee) of any kind whatsoever arising out of, on account of, or in connection with this Lease and the Equipment leased hereunder, including, without limitation, its manufacture, selection, purchase, delivery, rejection, installation, ownership, possession, leasing, renting, operation, control, use, maintenance and the return thereof. This indemnity shall survive the Minimum Lease Term or earlier cancellation or termination of this Lease and any Schedule hereto. 8. INSURANCE. Commencing on the date that risk of loss or damage passes to Lessor from the Seller and continuing until Lessee has re-delivered possession of the Equipment to Lessor, Lessee shall, at its own expense, keep the Equipment (including all additions thereto) insured against all risks of loss or damage from every and any cause whatsoever in such amounts (but in no event less than the greater of the replacement value thereof or the amount set forth in the applicable Casualty Schedule, whichever is higher) with such deductibles and exclusions as approved by Lessor and in such form as is satisfactory to Lessor. All such insurance policies shall protect Lessor and Lessor's assignee(s) as loss payees as their interests may appear. Lessee shall also, at its own expense, carry public liability insurance, with Lessor and Lessor's assignee(s) as an additional insured, in such amounts with such companies and in such form as is satisfactory to Lessor, with respect to injury to person or property resulting from or based in any way upon or in any way connected with or relating to the installation, use or alleged use, or operation of any or all of the Equipment, or its location or condition. Not less than ten days prior to the Acceptance Date, Lessee shall deliver to Lessor satisfactory evidence of such insurance and shall further deliver evidence of renewal of each such policy not less than thirty (30) days prior to expiration thereof. Each such policy shall contain an endorsement providing that the insurer will give Lessor not less than thirty (30) days prior written notice of the effective date of any alteration, change, cancellation, or modification of such policy or the failure by Lessee to timely pay all required premiums, costs or charges with respect thereto. Upon Lessor's request, Lessee shall cause its insurance agent(s) to execute and deliver to Lessor Loss Payable Clause Endorsement and Additional Insured Endorsement (bodily injury and property damage liability insurance) forms provided to Lessee by Lessor. In case of the failure to procure or maintain such insurance, Lessor shall have the right, but not the obligation, to obtain such insurance and any premium paid by Lessor shall be due and payable Master Lease - Security 3/95 3 28 Amended 8/17/95 by Lessee to Lessor as additional rent hereunder no later than the next rental payment date following receipt of invoice therefor. The maintenance of any policy or policies of insurance pursuant to this Section shall not limit any obligation or liability of Lessee pursuant to Sections 7 or 9 or any other provision of this Lease and any Schedule hereto. 9. RISK OF LOSS. Until such time as the Equipment is returned and delivered to and accepted by Lessor, pursuant to the terms of this Lease and any Schedule hereto, Lessee hereby assumes and shall bear the entire risk of loss, damage, theft and destruction of the Equipment, or any portion thereof, from any cause whatsoever ("Equipment Loss"). Without limitation of the foregoing, no Equipment Loss shall relieve Lessee in any way from its obligations hereunder. Lessee shall promptly notify Lessor in writing of any Equipment Loss. In the event of any such Equipment Loss, Lessee shall: (a) in the event Lessor determines such Equipment to be repairable, promptly place, at Lessee's expense, the Equipment in good repair, condition and working order in accordance with Seller's specifications and to the satisfaction of Lessor; or (b) in the event of an actual or constructive total loss of any item of Equipment, at Lessor's option: (i) promptly replace, at Lessee's expense, the Equipment with like equipment of the same or a later model with the same additions as the Equipment, and in good repair, condition and working order in accordance with the Seller's specifications and to the satisfaction of Lessor; or (ii) immediately pay to Lessor the amount obtained by multiplying the Actual Equipment Cost as specified in the applicable Schedule by the percentage contained in the applicable Casualty Schedule for the date of such Equipment Loss plus, any unpaid rentals or any amounts due hereunder or, if no Casualty Schedule has been made a part of any applicable Schedule, an amount equal to the present value of the total amount of unpaid rentals and all other amounts due and to become due under any applicable Schedule during the term thereof as of the date of any payment, discounted at a rate equal to discount rate of the Federal Reserve Bank of Chicago as of the Commencement Date of the Lease with respect to each applicable Schedule, plus an additional amount equal to the fair market value of the Equipment immediately prior to the loss, theft, damage, or destruction, but in no event shall the amount of such fair market value be less than twenty percent (20%) of the actual cost of the Equipment. In the event Lessee is required to repair or replace any such item of Equipment pursuant to Subsections (a) or (b)(i) of the preceding sentence, the insurance proceeds received by Lessor, if any, pursuant to Section 8, after the use of such funds to pay any unpaid amounts then due hereunder, shall be paid to Lessee or, if applicable, to a third party repairing or replacing the Equipment upon Lessee's furnishing proof satisfactory to Lessor that such repair or replacement has been completed in a satisfactory manner. In the event Lessor elects option (b)(ii), Lessee shall be entitled to a credit against the payment required by said Subsection in an amount equal to such insurance proceeds actually received by Lessor pursuant to Section 8 on account of such Equipment, (and Lessee shall be entitled to any such insurance proceeds in excess of the amount required to be paid to Lessor pursuant to Subsection (b)(ii)) and, upon payment by Lessee to Lessor of all of the sums required pursuant to Subsection (b)(ii), the applicable Schedule shall terminate with respect to such item of Equipment and Lessee shall be entitled to whatever interest Lessor may have in such item "as is, where is" and with all faults" in its then condition and location without warranties of any type whatsoever, express or implied. 10. COVENANTS OF LESSEE. LESSEE AGREES THAT ITS OBLIGATIONS UNDER THIS LEASE AND ANY SCHEDULE HERETO, INCLUDING WITHOUT LIMITATION, THE OBLIGATION TO PAY RENTAL, ARE IRREVOCABLE AND ABSOLUTE, SHALL NOT ABATE FOR ANY REASON WHATSOEVER (INCLUDING ANY CLAIMS AGAINST LESSOR), AND SHALL CONTINUE IN FULL FORCE AND EFFECT REGARDLESS OF ANY INABILITY OF LESSEE TO USE THE EQUIPMENT OR ANY PART THEREOF FOR ANY REASON WHATSOEVER INCLUDING, WITHOUT LIMITATION, WAR, ACT OF GOD, STORMS, GOVERNMENTAL REGULATIONS, STRIKE OR OTHER LABOR TROUBLES, LOSS, DAMAGE, DESTRUCTION, 29 DISREPAIR, OBSOLESCENCE, FAILURE OF OR DELAY IN DELIVERY OF THE EQUIPMENT, OR FAILURE OF THE EQUIPMENT TO PROPERLY OPERATE FOR ANY CAUSE. In the event of any alleged claim (including a claim which would otherwise be in the nature of a set-off) against Lessor, Lessee shall fully perform and pay its obligations hereunder (including all rents, without set-off or defense of any kind) and its only exclusive recourse against Lessor shall be by a separate action. Lessee agrees to furnish promptly to Lessor the quarterly financial statements of Lessee (and of any guarantors of Lessee's performance under this Lease and any Schedule hereto), prepared in accordance with generally accepted accounting principles and certified by independent certified public accountants, and such interim financial statements of Lessee as Lessor may require during the entire term of this Lease and any Schedule hereto. Lessee, if requested, shall provide at Lessee's expense an opinion of its counsel acceptable to Lessor affirming the covenants, representations and warranties of Lessee under this Lease and any Schedule hereto. 11. REPRESENTATIONS AND WARRANTIES. In order to induce Lessor to enter into this Lease and any Schedule hereto and to lease the Equipment to Lessee hereunder, Lessee represents and warrants that: (a) FINANCIAL STATEMENTS. (i) applications, financial statements, and reports which have been submitted by Lessee and any Obligors (as hereinafter defined) to Lessor, and all information hereafter furnished by Lessee and Obligors to Lessor represent in all material respects as of the date submitted; (ii) as of the date hereof, the date of any Schedule and any Acceptance Date, there has been no Material Adverse Change (as defined in section 26 of Addendum No. 1 to Master Lease Agreement No. 6403) and, (iii) none of the foregoing omit or omitted to state any material fact. (b) ORGANIZATION. Lessee is an organizational entity described on the signature page hereof and is duly incorporated, validly existing and is duly qualified to do business and is in good standing in each State in which the Equipment will be located. (c) AUTHORITY. Lessee has full power, authority and right to execute, deliver and perform this Lease and any Schedule hereto, and the execution, delivery and performance hereof has been authorized by all necessary action of Lessee. (d) ENFORCEABILITY. This Lease and any Schedule or other document executed in connection therewith has been duly executed and delivered by Lessee and any Obligor and constitutes a legal, valid and binding obligation of Lessee and any Obligor enforceable in accordance with its terms. (e) CONSENTS. Except as disclosed, the execution, delivery and performance of this Lease and any Schedule hereto does not require any approval or consent of any stockholders, partners or proprietors or of any trustee or holders of any indebtedness or obligations of Lessee, and will not contravene any law, regulation, judgment or decree applicable to Lessee, or the certificate of incorporation, partnership agreement, by-laws or other governing documents of Lessee, or contravene the provisions of, or constitute a material default under, or result in the creation of any lien upon any property of Lessee under any mortgage, instrument or other agreement to which Lessee is a party or by which Lessee or its assets may be bound or affected. Except as disclosed, no authorization, approval, license, filing or registration with any court or governmental agency or instrumentality is necessary in connection with the execution, delivery, performance, validity and enforceability of this Lease and any Schedule hereto. (f) TITLE AND SECURITY INTEREST. On each Commencement Date, Lessor shall have a valid, perfected, first priority security interest in the items of Equipment which is subject to this Lease and any Schedule hereto on such date, free and clear of all liens, except the lien of Seller which will be released upon receipt of payment and the lien evidenced by this Lease. Lessee warrants that no party has a security interest in Master Lease - Security 3/95 4 30 Amended 8/17/95 the Equipment which will not be released on or before payment by Lessor to Seller of the Equipment and that the Equipment and shall at all times remain personal property regardless of how it may be affixed to any real property. (g) LITIGATION. There is no action, suit, investigation or proceeding by or before any court, arbitrator, agency or governmental authority pending or threatened against or affecting Lessee: (i) which involves the Equipment or the transactions contemplated by this Lease and any Schedule hereto; or which, if adversely determined, would reasonably be likely to have a material adverse effect on the financial condition, business or operation of Lessee. 12. EVENTS OF DEFAULT. An event of default ("Event of Default") shall occur hereunder if Lessee or any Obligor ("Obligor" shall include any guarantor or surety of any obligations of Lessee to Lessor under this Lease and any Schedule hereto): (i) fails to pay any installment of rent or other payment required hereunder when due and such failure continues after a 5 day grace period; or (ii) attempts to or does remove from the Premises (except a relocation with Lessor's consent as provided in Section 5), sell, transfer, encumber, part with possession of, or sublet any item of the Equipment; or (iii) shall suffer or have suffered, a Material Adverse Change (as defined in section 26 of Addendum No. 1 to Master Lease Agreement No. 6403) since the date of the last financial statements submitted to Lessor, and as a result thereof Lessor deems itself to be insecure, or any of the statements or other documents or information submitted at any time heretofore or hereafter by Lessee or Obligor to Lessor has misstated or shall misstate or has failed or shall fail to state a material fact; or (iv) breaches or shall have breached any representation or warranty made or given by Lessee or Obligor in this Lease or in any other document furnished to Lessor in connection herewith, or any such representation or warranty shall be untrue or, by reason of failure to state a material fact or otherwise, shall be misleading; or (v) fails to perform or observe any other covenant, condition or agreement to be performed or observed by it hereunder, and such failure or breach shall continue unremedied for a period of ten days after the earlier of (a) the date on which Lessee obtains, or should have obtained knowledge of such failure or breach, or (b) the date on which notice thereof shall be given by Lessor to Lessee; or (vi) shall become insolvent or bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a trustee or receiver, or a trustee or receiver shall be appointed for a substantial part of its property without its consent, or bankruptcy or reorganization or insolvency proceeding shall be instituted by or against Lessee or Obligor; or (vii) conveys, sells, transfers or assigns substantially all of Lessee's or Obligor's assets or ceases doing business as a going concern, or, if a corporation, ceases to be in good standing or files a statement of intent to dissolve, or abandons any or all of the Equipment, or (viii) shall be in breach of or default under any lease or other agreement at any time executed with Lessor or any other lessor or with any lender to Lessee or Obligor. 13. REMEDIES. Upon the occurrence of an Event of Default (the "Default Date") set forth in Section 12 and at any time thereafter, Lessor may, in its sole and absolute discretion, do any one or more of the following: (a) upon notice to Lessee cancel all or any portion of this Lease and some or all Schedules executed pursuant thereto; (b) enter Lessee's Premises and without removal of the Equipment, render the Equipment unusable or, require Lessee to assemble the Equipment and make it available to Lessor at a place designated by Lessor, and/or dispose of the Equipment by sale or otherwise (all of which determinations may be made by Lessor in its sole and absolute discretion) without any duty to account for such action or inaction or for any proceeds or profits with respect thereto; (c) declare immediately due and payable all sums due and to become due hereunder for the full term of the Lease (including any renewal or purchase obligations which Lessee has contracted to pay); (d) with or without canceling this Lease, recover from Lessee damages, in an amount equal to the sum of: (i) all unpaid rent and other amounts that became due and payable on, or prior to, the Default Date, 31 (ii) the present value of all future rentals and other amounts described in the Lease and not included in (i) above discounted to the Default Date at a rate equal to the discount rate of the Federal Reserve Bank of Chicago as of the Comencement Date of the Lease with respect to each Schedule (which discount rate, Lessee agrees is a commercially reasonable rate which takes into account the facts and circumstances at the time such Schedule commenced), (iii) all commercially reasonable costs and expenses incurred by Lessor in enforcing Lessor's rights under this Lease, or defending against any claims or defenses asserted by or through Lessee, including but not limited to, costs of repossession, recovery, storage, repair, sale, release and reasonable attorneys' fees, (iv) the estimated residual value of the Equipment as of the expiration of the Lease, (v) any indemnity amount payable to Lessor; and (vi) interest on all of the foregoing from the Default Date until the date payment is received by Lessor at 3 1/2% in excess of the Prime Rate (or its equivalent) per annum in effect on the date of such payment at the First National Bank of Chicago) or the highest rate permitted by law, whichever is less; (e) exercise any other right or remedy which may be available to it under the Uniform Commercial Code or any other applicable law. Lessor reserves the right, in its sole and absolute discretion, to release or sell any or all of the Equipment at a public auction or in a private sale, at such time, on such terms and with such notice as Lessor shall in its sole and absolute discretion deem reasonable. In such event, without any duty on Lessor's part to effect any such re-lease or sale of the Equipment, Lessor will credit the present value of any proceeds from such sale or re-lease actually received and retainable by it (net of any and all costs or expenses) discounted from the date of Lessor's receipt thereof to the Default Date at 3 1/2% in excess of the Prime Rate (or its equivalent) per annum in effect on the date of such payment at the First National Bank of Chicago, or the highest rate permitted by law, whichever is less to the amounts due to Lessor from Lessee under the provisions of (c), (d) and/or (e) above. A cancellation of this Lease shall occur only upon notice by Lessor and only as to such items of Equipment as Lessor specifically elects to cancel and this Lease shall continue in full force and effect as to the remaining items of Equipment, if any. If this Lease and/or any Schedule is deemed at any time to be one intended as security, Lessee agrees that the Equipment shall secure, in addition to the indebtedness set forth herein, any other indebtedness at any time owing by Lessee to Lessor. No remedy referred to in this Section is intended to be exclusive, but shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity. No express or implied waiver by Lessor of any default shall constitute a waiver of any other default by Lessee or a waiver of any of Lessor's rights. 14. ASSIGNMENT BY LESSOR. LESSOR MAY (WITH OR WITHOUT NOTICE TO LESSEE) SELL, TRANSFER, ASSIGN OR GRANT A SECURITY INTEREST IN ALL OR ANY PART OF ITS INTEREST IN THIS LEASE, ANY SCHEDULE, ANY ITEMS OF EQUIPMENT OR ANY AMOUNT PAYABLE HEREUNDER. In such an event, Lessee shall, upon receipt of notice, acknowledge any such sale, transfer, assignment or grant of a security interest and shall pay its obligations hereunder or amounts equal thereto to the respective transferee, assignee or secured party in the manner specified in any instructions received from Lessor. Notwithstanding any such sale, transfer, assignment or grant of a security interest by Lessor and so long as no event of default shall have occurred hereunder, neither Lessor nor any transferee, assignee or secured party shall interfere with Lessee's right of use or quiet enjoyment of the Equipment. In the event of such sale, transfer, assignment or grant of a Master Lease - Security 3/95 5 32 Amended 8/17/95 security interest in all or any part of this Lease and any Schedule hereto, or in the Equipment or in sums payable hereunder, as aforesaid, Lessee agrees to execute such documents as may be reasonably necessary to evidence, secure and complete such sale, transfer, assignment or grant of a security interest and to perfect the transferee's, assignee's or secured party's interest therein and Lessee further agrees that the rights of any transferee, assignee or secured party shall not be subject to any defense, set-off or counterclaim that Lessee may have against Lessor or any other party, including the Seller, which defenses, set-offs and counterclaims shall be asserted only against such party, and that any such transferee, assignee or secured party shall have all of Lessor's rights hereunder, but shall assume none of Lessor's obligations hereunder. Lessee acknowledges that any assignment or transfer by Lessor shall not materially change Lessee's duties or obligations under this Lease nor materially increase the burdens and risks imposed on Lessee. Lessee agrees that Lessor may assign or transfer this Lease or Lessor's interest in the Equipment even if said assignment or transfer could be deemed to materially affect the interests of Lessee. Nothing in the preceding sentence shall affect or impair the provisions of Section 4, Section 10 or any other provision of this Lease. 15. AMENDMENTS. This Lease and any Schedule hereto contain the entire agreement between the parties with respect to the Equipment, this Lease and any Schedule hereto and there is no agreement or understanding, oral or written, which is not set forth herein. This Lease and any Schedule hereto may not be altered, modified, terminated or discharged except by a writing signed by the party against whom such alteration, modification, termination or discharge is sought. 16. LAW. This Lease and any Schedule hereto shall be binding only when accepted by Lessor at its corporate headquarters in Illinois and shall in all respects be governed and construed, and the rights and the liabilities of the parties hereto determined, except for local filing requirements, in accordance with the laws of the State of Illinois. LESSEE WAIVES TRIAL BY JURY AND SUBMITS TO THE JURISDICTION OF THE FEDERAL DISTRICT COURTS OF COMPETENT JURISDICTION OR ANY STATE COURT WITHIN THE STATE OF ILLINOIS AND WAIVES ANY RIGHT TO ASSERT THAT ANY ACTION INSTITUTED BY LESSOR IN ANY SUCH COURT IS IN THE IMPROPER VENUE OR SHOULD BE TRANSFERRED TO A MORE CONVENIENT FORUM. 17. INVALIDITY. In the event that any provision of this Lease and any Schedule hereto shall be unenforceable in whole or in part, such provision shall be limited to the extent necessary to render the same valid, or shall be excised from this Lease or any Schedule hereto, as circumstances may require, and this Lease and the applicable Schedule shall be construed as if said provision had been incorporated herein as so limited, or as if said provision had not been included herein. as the case may be without invalidating any of the remaining provisions hereof. 18. MISCELLANEOUS. All notices and demands relating hereto shall be in writing and mailed by certified mail, return receipt requested, to Lessor or Lessee at their respective addresses above or shown in the Schedule, or at any other address designated by notice served in accordance herewith. Notice shall become effective when deposited in the United States mail, with proper postage prepaid, addressed to the party intended to be served at the address designated herein. All obligations of Lessee shall survive the termination or expiration of this Lease and any Schedule hereto. Should Lessor permit use by Lessee of any Equipment beyond the Minimum Lease Term, or, if applicable, any exercised extension or renewal term, the lease obligations of Lessee shall continue and such permissive use shall not be construed as a renewal of the term thereof, or as a waiver of any right or continuation of any obligation of Lessor hereunder, and Lessor may take possession of any such Equipment at any time upon demand. If more than one Lessee is named in this Lease, the liability of each shall be joint and several. Lessee shall, upon request of Lessor from time to time, perform all acts and execute and deliver to Lessor all documents which Lessor deems reasonably necessary to implement this Lease and any Schedule hereto, including, without limitation, certificates addressed to such persons as Lessor may direct stating that this Lease and the Schedule hereto is in full force and effect, that there are no amendments or modifications thereto, that Lessor is not in default hereof or breach hereunder, setting forth the date to which rentals due hereunder have been paid, and stating such other matters as Lessor may request. This Lease and any Schedule hereto shall be binding upon the parties and their successors, legal representatives and assigns. Lessee's successors and assigns shall include, without limitation, a receiver, debtor-in-possession, or trustee of or for Lessee. If any person, firm, corporation or other entity shall guarantee this Lease and the performance by Lessee of its obligations hereunder, all of the terms and provisions hereof shall be duly applicable to such Obligor. 19. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee hereby waives any and all rights and remedies conferred upon a Lessee by Article 2A of the Uniform Commercial Code as adopted in any jurisdiction, including but not limited to Lessee's rights to; (i) cancel this Lease; (ii) repudiate this Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover damages from Lessor for any breaches of warranty or for any other reason; (vi) claim a security interest in the Equipment in Lessee's possession or control for any reason (vii) deduct all or any part of any claimed damages resulting from Lessor's default, if any, under this Lease; (viii) accept partial delivery of the Equipment (ix) "cover" by making any purchase or lease of or contract to purchase or lease Equipment in substitution for those due from Lessor; (x) recover any general, special, incidental, or consequential damages for any reason whatsoever; and (xi) specific performance, replevin, detinue, sequestration, claim, and delivery of the like for any Equipment identified to this Lease. To the extent permitted by applicable law, Lessee also hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages as set forth in Paragraph 13 or which may otherwise limit or modify any of Lessor's rights or remedies under Paragraph 13. Any action by Lessee against Lessor for any default by Lessor under this Lease. Including breach of warranty or indemnity, shall be commenced within one (1) year after any such cause of action accrues. 33 34 AMENDED 8/17/95 20. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall BE deemed an original. Each Schedule shall be executed in three (3) serially numbered counterparts each of which shall be deemed an original but only counterpart number 1 shall constitute "chattel paper" or "collateral" within the meaning of the Uniform Commercial Code in any jurisdiction. 21. ADDENDUM. ("X" if applicable) [X] See Addendum (s) attached hereto and made a part hereof. THE PERSON EXECUTING THIS LEASE FOR AND ON BEHALF OF LESSEE WARRANTS AND REPRESENTS, WHICH WARRANTY AND REPRESENTATION SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THIS LEASE, THAT THIS LEASE AND THE EXECUTION HEREOF HAS BEEN DULY AND VALIDLY AUTHORIZED BY LESSEE, CONSTITUTES A VALID AND BINDING OBLIGATION OF LESSEE AND THAT HE HAS AUTHORITY TO MAKE SUCH EXECUTION FOR AND ON BEHALF OF LESSEE. IN WITNESS WHEREOF, this Lease has been executed by Lessee this 31st day of July 1996. ACCEPTED AT CHICAGO, ILLINOIS PROBUSINESS, INC. LINC CAPITAL MANAGEMENT, A DIVISION OF SCIENTIFIC LEASING INC. Lessee Lessor By: Steven Klei By: /s/ Mark K. Zimmerman ----------------------- ---------------------- Title: Steven Klei Title: Vice President -------------------- ------------------- Date: July 31, 1996 Date: 10/23/96 -------------------- -------------------- 35 LINC CAPITAL MANAGEMENT, A DIVISION OF LINC Capital Management, a division of SCIENTIFIC LEASING INC. Scientific Leasing Inc. EQUIPMENT ACCEPTANCE CERTIFICATE 303 East Wacker Drive Chicago, Illinois 60601 (312) 946-1000 Master Lease Agreement No. 6403-001 Equipment Description: The "Equipment" will consist of new office furniture, office equipment, computers and peripherals as more fully described on Schedule "A" attached hereto and made a part hereof. To Whom it May Concern: The undersigned, being duly authorized, hereby (i) certifies that all of the above-referenced equipment (the "Equipment") has been delivered and inspected, is of an acceptable size, design, capacity and manufacture, is in good working order, repair and condition, and has been installed to the satisfaction of Lessee; and (ii) unconditionally accepts the Equipment as is where is for all purposes of the Lease. It is understood and agreed that LINC Capital Management, a division of Scientific Leasing Inc. in no way or manner assumes any responsibility, either now or hereafter, for the use, performance, functioning, maintenance or service of the Equipment, or for its suitability or adaptability for any particular purpose. Upon your request your identification decals will be attached indicating your ownership of the above equipment. PROBUSINESS, INC. Lessee By: /s/ Steven Klei ------------------------------ Title: Vice President/CFO --------------------------- Acceptance Date as defined in Section 1 of the Lease as of: July 31, 1996 ----------------------------- EX-10.11 31 FORM OF INDEMNIFICATION AGREEMENT 1 Exhibit 10.11 PROBUSINESS SERVICES, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of this ___ day of ____, 1996, by and between ProBusiness Services, Inc., a Delaware corporation (the "Company"), and _________________________ ("Indemnitee"). WHEREAS the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, in consideration for Indemnitee's services as an officer or director of the Company, the Company and Indemnitee hereby agree as follows: 1. Indemnification. (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or any alternative dispute resolution mechanism, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company 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 (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's 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 Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any 2 criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee 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 Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State 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, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Subsections (a) and (b) of this Section 1, or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. Agreement to Serve. In consideration of the protection afforded by this Agreement, if Indemnitee is a director of the Company he agrees to serve at least for the six months after the effective date of this Agreement as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Company not serving under an employment contract, he agrees to serve in such capacity at least for the balance of the current fiscal year of the Company and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company (or under separate agreement, if such agreement exists) so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. Expenses; Indemnification Procedure. -2- 3 (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within thirty (30) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed, five business days if sent by airmail to a country outside of North America; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than thirty (30) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within thirty (30) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 14 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including it Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such -3- 4 applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. Additional Indemnification Rights; Nonexclusivity. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's -4- 5 official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's perfor mance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 8. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full -5- 6 extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (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, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. -6- 7 (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company 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 if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee 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 state courts of the State of Delaware. 16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware -7- 8 residents entered into and to be performed entirely within Delaware without regard to the conflict of law principles thereof. 17. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. -8- 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PROBUSINESS SERVICES, INC. By:________________________________ Its:_______________________________ Address: 5934 Gibralter Pleasanton, CA 94566 -9- 10 AGREED TO AND ACCEPTED: INDEMNITEE: _______________________________________ (Print Name) _______________________________________ (signature) Address: _____________________________ _____________________________ -10- EX-10.12 32 LOAN AGREEMENT DATED OCTOBER 20, 1995 1 EXHIBIT 10.12 LOAN AGREEMENT This LOAN AGREEMENT, dated as of October 20, 1995 (the "Agreement"), is made by and among ProBusiness, Inc., a California corporation ("Borrower") with its principal office at 5934 Gibraltar Drive, Pleasanton, California 94588, and the persons listed in Exhibit A attached hereto (collectively referred to herein as "Lenders"). W I T N E S S E T H WHEREAS, Borrower desires to borrow funds, and Lenders desire to lend funds, for use as working capital on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties contained in this Agreement, the parties hereto agree as follows: 1. Debt Financing. 1.1 Promissory Notes. Each Lender severally agrees to make available to Borrower on the closing date the principal amount set forth opposite such Lender's name in Exhibit A attached hereto to be evidenced by a promissory note (collectively, the "Notes") the form of which is attached hereto as Exhibit B, for up to a total aggregate principal amount to be made available to Borrower by all Lenders of up to $2,500,000. 1.2 Interest; Payment of Interest. Interest on the outstanding principal amount of each Note issued hereby shall accrue at an interest rate of eight percent (8%) per annum or if less, the maximum rate permitted by applicable law. Borrower shall make quarterly payments to each Lender for the amount of accrued interest on the principal amount owed to such Lender under the Notes beginning on December 31, 1995. 1.3 Loan Term; Repayment Date. Subject to the terms and conditions herein, the provisions of this Agreement shall be in effect until three years from the date of this Agreement. Each Note executed under the provisions of this Agreement shall be due and payable at the earliest to occur (the "Repayment Date" with respect to such Note): (a) three years from the date of this Agreement; or (b) at the option of Lender or the Borrower, within thirty days after the closing of a public offering of the Company that triggers the conversion of the Company's outstanding Preferred Stock into the Company's Common Stock under the Company's Articles of Incorporation, as amended. 2 On the Repayment Date, the then-outstanding principal balance and all accrued interest thereon shall be payable. 1.4 Payments. All payments to Lenders shall be payable at Lenders' address, set forth in Exhibit A attached hereto, or at such other place or places as Lenders may designate from time to time in writing to Borrower. 1.5 Prepayment. At anytime after one year from the date of this Agreement, Borrower may, at its option, prepay, in whole or in part, the then outstanding principal balance and accrued interest, if any, under this Agreement and related Notes without penalty. Such payment shall be credited to Borrower's account and interest will cease to accrue on such prepaid principal. Unless otherwise agreed, any prepayment shall be applied first to accrued interest due to the date of prepayment, and the remainder shall be applied to the then outstanding principal balance of the respective Notes. 2. Warrants to Purchase Series E Preferred Stock. Subject to the terms and conditions hereinafter set forth and in consideration of a purchase price of $1.00, Borrower shall issue a warrant ("Warrant") to each Lender, entitling each Lender, upon surrender of the Warrant at the principal office of Borrower (or at such other place as Borrower shall notify Lender hereof in writing), to purchase from Borrower the value of fully paid and nonassessable shares of Series E Preferred Stock of the Company as is equal to twenty-five percent (25%) of the principal amount of each Note held by such Lender under this Agreement at an exercise price of $7.94 per share of Series E Preferred Stock, all as set forth in the form of Warrant attached hereto as Exhibit C. Each Warrant shall be subject to antidilution price protection, net exercise provisions and registration rights and shall be substantially in the form set forth in Exhibit C, attached hereto and made a part hereof. 3. Closing Date; Delivery. 3.1 Closing Date. The closing of the execution of this Agreement and the issuance of the Notes and Warrants hereunder shall be held at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050 at 5:00 p.m., local time, on October 20, 1995 (the "Closing") or at such other time and place upon which Borrower and the Lenders shall agree (the date of the Closing is hereinafter referred to as the "Closing Date"). 3.2 Delivery. At the Closing, the Company will deliver to each Lender an executed counterpart of this Agreement together with a Note and Warrant, issued in such Lender's name, evidencing the principal amount borrowed from such Lender by Borrower and the number of shares of Series E Preferred Stock to be issued to Lender upon exercise of the Warrant as set forth beside such Lender's name on Exhibit A, against delivery of an executed counterpart of this Agreement, together with payment of the principal amount plus $1.00, the purchase price of the Warrant, by check payable to Borrower or wire transfer per Borrower's instructions. -2- 3 3.3 Subsequent Closings. If less than $2,500,000 is made available to the Company by Lenders on the Closing Date, then, subject to the terms and conditions of this Agreement, the Company may issue additional promissory Notes at subsequent closings evidencing up to the balance of the $2,500,000 not made available to the Company by Lenders to such persons as the Company may determine with the same terms and conditions as the Notes issued pursuant to this Agreement. Any such issuance shall be on the same terms and conditions as those contained in the Agreement and such persons shall become parties to the Agreement and that certain Registration Rights Agreement dated as of December 1, 1989 as amended (the "Registration Rights Agreement") and shall have the rights and obligations of the Purchasers as defined thereunder, subject to the Sixteenth Amendment to the Registration Rights Agreement (the "Sixteenth Amendment") attached hereto as Exhibit D. A copy of the Registration Rights Agreement is attached hereto as Exhibit E. 4. Representations and Warranties of Borrower. Borrower hereby represents and warrants to Lenders as of the Closing Date as follows: (a) Organization and Standing; Articles of Incorporation and Bylaws. Borrower is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. Borrower has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. Borrower is not presently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified would not have a material adverse effect on Borrower's business as now conducted. Borrower has furnished to Lenders or their special counsel upon request copies of its Articles of Incorporation, as amended, and Bylaws, as amended. Said copies are true, correct and complete and contain all amendments through the Closing Date. (b) Corporate Power. Borrower will have at the Closing Date all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Notes and Warrants hereunder, to issue the Series E Preferred Stock and Common Stock issuable upon conversion of the Warrants and Series E Preferred Stock, respectively (collectively, referred to as "Underlying Securities") and to carry out and perform its obligations under the terms of this Agreement. (c) Subsidiaries. Borrower has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. (d) Capitalization. The authorized capital stock of Borrower consists of 20,000,000 shares of Common Stock, par value $.01 per share, 19,262 of which are issued and outstanding as of the Closing Date, and 6,000,000 shares of Preferred Stock with par value, $.01 per share (the "Preferred"), 1,500,000 of which have been designated Series A Preferred Stock (the "Series A Preferred"), of which 920,000 are issued and outstanding as of the Closing Date, 1,500,000 -3- 4 of which have been designated Series B Preferred Stock (the "Series B Preferred"), of which 919,400 are issued and outstanding as of the Closing Date, 1,500,000 of which have been designated Series C Preferred Stock (the "Series C Preferred"), of which 260,785 are issued and outstanding as of the Closing Date, 500,000 which have been designated Series D Preferred Stock (the "Series D Preferred"), of which 300,000 are issued and outstanding as of the closing date, and 500,000 of which have been designated Series E Preferred stock (the "Series E Preferred"), 213,116 of which are issued and outstanding immediately before the Closing Date. No other series of Preferred Stock has been designated. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Borrower has reserved 78,715 shares of Series E Preferred for issuance upon the exercise of the Warrants hereunder, 151,430 shares of Common Stock for issuance upon conversion of the Series E Preferred to be issued upon the exercise of such Warrants hereunder, 9,446 shares of Series E Preferred Stock for issuance upon the exercise of a warrant issued to Silicon Valley Bank ("SVB"), 18,892 shares of Common Stock for issuance upon the conversion of the Series E Preferred to be issued upon the exercise of SVB's warrant, 426,232 shares of Common Stock for issuance upon the conversion of the outstanding Series E Preferred, 600,000 shares of Common Stock for issuance upon the conversion of the Series D Preferred, 521,570 shares of Common Stock for issuance upon conversion of the Series C Preferred, 1,838,800 shares of Common Stock for issuance upon conversion of the Series B Preferred, 1,840,000 shares of Common Stock for issuance upon conversion of the Series A Preferred, and, as of June 30, 1995, excluding options that have been exercised as of October 20, 1995, 1,013,062 shares of Common Stock for issuance upon exercise of options granted and 391,892 shares of Common Stock for issuance upon exercise of options not yet granted under Borrower's 1989 Stock Option Plan. The Series E Preferred Stock to be issued upon the exercise of the Warrants hereunder shall have the rights, preferences, privileges and restrictions set forth in Borrower's Articles of Incorporation, as amended, (the "Articles"). Other than options granted or to be granted pursuant to Borrower's 1989 Stock Option Plan and a warrant issued to SVB, there are no options, warrants or other rights, including convertible debentures or notes, granted or issued by or binding upon Borrower to purchase any of Borrower's authorized and unissued Common Stock or Preferred Stock, except the Board of Directors has approved an increase in the number of shares to be issued under the Company's 1989 Stock Option Plan by 147,793 shares. (e) Authorization. All corporate action on the part of Borrower, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement, the Notes and the Warrants by Borrower and the performance of all of Borrower's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement and the Notes, when executed and delivered by the Borrower, shall constitute a valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Warrant and Underlying Securities, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will have the rights, preferences and privileges described in the Articles. The Underlying Securities have been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Articles, will be validly issued, fully paid and nonassessable; -4- 5 and, the Underlying Securities will be free of any liens or encumbrances, assuming Lenders take the Underlying Securities with no notice thereof, and other than any liens or encumbrances created by or imposed upon the holders through no action of Borrower; provided, however, that the Underlying Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein. The Notes, Warrants and the Underlying Securities are not subject to any preemptive rights or rights of first refusal. (f) Financial Statements. Borrower has delivered to each Lender Borrower's audited financial statements for the twelve-month periods ending June 30, 1994 and June 30, 1995 (the "Financial Statements"), which are complete and correct in all material respects and to the best of the Borrower's knowledge were prepared in accordance with generally accepted accounting principles applied on a consistent basis. The Financial Statements accurately set out and describe the financial condition and operating results of Borrower as of the respective dates and for the respective periods indicated. (g) Employees. To the best of Borrower's knowledge, no employee of Borrower is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with Borrower or any other party because of the nature of the business conducted or to be conducted by Borrower. Each employee of Borrower with access to confidential or proprietary information has executed an Employee Confidential Information Agreement in a form substantially similar to the agreement attached hereto as Exhibit F. (h) Governmental Consent, etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of Borrower is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Notes, Warrants and the Underlying Securities, or the consummation of any other transaction contemplated hereby, except the qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Notes, Warrants and the Underlying Securities under applicable Blue Sky laws, which filings and qualifications, if required, will be accomplished in a timely manner. (i) Brokers or Finders; Other Offers. Borrower has not incurred, and will not incur, directly or indirectly, as a result of any action taken by Borrower, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. (j) No Material Liabilities. Borrower has no material liabilities or obligations, other than: (a) liabilities and obligations disclosed in the Financial Statements (including, without limitation, the Company's borrowings pursuant to the Loan Agreement between the Company and Silicon Valley Bank dated January 13, 1995 for up to a maximum principal amount of $1,500,000) (b) liabilities incurred in the ordinary course of business; (c) obligations under contracts and commitments incurred in the ordinary course of business and not required under -5- 6 generally accepted accounting principles to be reflected in the Financial Statements; (d) leases for operating headquarters and branches of Borrower; and (e) any other obligations which are not in any case material to the financial condition or operating results of Borrower. (k) Registration Rights. Except as provided in the Registration Rights Agreement, as amended, and the Registration Rights Agreement dated January 13, 1995 between the Company and SVB, Borrower is not obligated to register under the Securities Act of 1933, as amended (the "Securities Act") any of its presently outstanding securities or any of its securities that may subsequently be issued. (l) Use of Proceeds. Borrower's use of the proceeds of the principal amounts made available to Borrower by Lenders pursuant to this Agreement are, and will continue to be, legal and proper corporate uses, and such uses are and will continue to be consistent with all applicable laws and statutes, as in effect from time to time. 5. Representations and Warranties of Lenders Each Lender hereby represents and warrants to Borrower with respect to its purchase of the Notes, Warrants and Underlying Securities as follows: 5.1 Investment Representations and Covenants of Lenders. (a) This Agreement is made by Borrower with Lender in reliance upon such Lender's representations and covenants made in this Section 4, which by its execution of this Agreement Lender hereby confirms. Lender represents that the Notes, Warrants and Underlying Securities issuable upon conversion of the Warrants to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. Lender further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants. (b) Lender understands and acknowledges that the offering and issuance of the Notes, Warrants and Underlying Securities issuable upon conversion of the Warrants pursuant to this Agreement will not be registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that Borrower's reliance on such exemption is predicated on Lenders' representations set forth herein. (c) Lender covenants that in no event will it make any disposition of any of the Underlying Securities issuable upon conversion of the Warrants, except in accordance with the Registration Rights Agreement. Lender further covenants that it will not make any sale, transfer or -6- 7 other disposition of the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants in violation of the Securities Act, the Securities and Exchange Act of 1934 (the "Securities Exchange Act"), or the rules of the Securities and Exchange Commission (the "Commission") promulgated thereunder. (d) Lender represents that it is experienced in evaluating companies similar to Borrower, is able to fend for itself in transactions such as the one contemplated by this Agreement, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in Borrower, has the ability to bear the economic risks of the investment and is an "accredited investor" as defined by Regulation D promulgated under the Securities Act of 1933, as amended. (e) Lender acknowledges and understands that the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants, must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Registration Rights Agreement, Borrower is under no obligation to register either the Notes, Warrants or Underlying Securities. (f) Lender acknowledges that it has reviewed a copy of Rule 144 promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. Lender understands that before the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants may be sold under Rule 144, the following conditions must be fulfilled: (i) certain public information about Borrower must be available, (ii) the sale must occur at least two years after Lender purchased and paid for the Notes, Warrants, and Underlying Securities issuable upon conversion of the Warrants (iii) the sale must be made in a broker's transaction and (iv) the number of shares of securities sold must not exceed certain volume limitations. Lender understands that the current information referred to above is not now available and Borrower has no present plans to make such information available. (g) Lender acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act, compliance with the Commission's Regulation A or another exemption from registration will be required for any disposition of its securities. Lender understands that although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (h) Lender represents that one or more of the following criteria are applicable to such Lender: (1) Lender is a director or executive officer of Borrower, or -7- 8 (2) Lender is a natural person who has a net worth or joint net worth with the Lender's spouse exceeding $1,000,000 at the time of purchase; or (3) Lender is a natural person who had an individual income in excess of $200,000 in each of the two most recent years (or joint income with Lender's spouse in excess of $300,000 in each of the two most recent years) and who reasonably expects an income in excess of such amount in the current year; or (4) Lender is either (i) a bank as defined in Section 3(a)(2) of the Securities Act or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act, whether acting in its individual capacity or fiduciary capacity as trustee; (ii) an insurance company as defined in Section 2(13) of the Securities Act; (iii) an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of such Act; (iv) a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; (v) a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees if such plan has total assets in excess of $5,000,000; (vi) any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; or (vii) an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or is a self-directed plan, with investment decisions made solely by persons that are accredited investors; or (5) Lender is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; or (6) Lender is a not-for-profit organization or other entity exempt from income tax under Section 501(c)(3) of the Internal Revenue Code, a corporation, Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the securities offered with total assets in excess of $5,000,000; or (7) Lender is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a "sophisticated person" as described in Rule 506(b)(2) of Regulation D; or (8) Lender is an entity in which each of the equity owners of such entity meets one of the qualifications set forth in (1) through (7) above. 5.2 No Public Market. Lender understands that no public market now exists for any of the securities issued by Borrower and that it is unlikely that a public market will ever exist for Borrower's securities. -8- 9 5.3 Receipt of Information. Lender has received and reviewed this Agreement and all exhibits hereto and the Investment Representation Statement. Lender and its counsel have had access to and an opportunity to review all documents and other materials requested of Borrower; Lender and its counsel have been given an opportunity to ask any and all questions of, and receive answers from, Borrower concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants; and, in evaluating the suitability of an investment in the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 5.4 Authorization. This Agreement when executed and delivered by Lender will constitute a valid and legally binding obligation of Lender, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 5.5 Brokers or Finders. Borrower has not, and will not, incur, directly or indirectly, as a result of any action taken by any Lender, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 5.6 Tax Advisors. Lender has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. Lender is relying solely on such advisors and not on any statements or representations of Borrower or any of its agents and understands that it (and not Borrower) shall be responsible for Lender's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 5.7 Investor Counsel. Lender acknowledges that it has had the opportunity to review this Agreement, the exhibits and the schedules attached hereto and the transactions contemplated by this Agreement with its own legal and investment counsel. Lender is relying solely on such counsel and not on any statements or representations of Borrower or any of its agents for legal or investment advice with respect to this investment or the transactions contemplated by this Agreement. 6. Events of Default; Remedies. 6.1 Events of Default. The occurrence of any one or more of the following events after the date of this Agreement shall constitute an "Event of Default": (a) Borrower fails to make timely payment of any principal, interest, fees or other charges when due hereunder; -9- 10 (b) Any material warranty, representation or other statement made to Lenders by Borrower hereunder proves to have been false or misleading in any material respect when made or furnished; (c) Borrower fails or neglects to perform, keep or observe any other material term, provision, condition, covenant, warranty or representation contained in this Agreement, which is required to be performed, kept or observed by Borrower; (d) Borrower shall commence any proceeding or other action relating to it in bankruptcy or seek reorganization, arrangement, readjustment of its debts, dissolution, liquidation, winding-up, composition or any other relief under the Bankruptcy Act, as amended, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; (e) Borrower shall admit the material allegations of any petition or pleading in connection with any such proceeding; (f) Borrower shall apply for, or consent to or acquiesce in, the appointment of a receiver, conservator, trustee or similar officer for it or for all or a substantial part of its property; (g) Borrower shall make a general assignment for the benefit of creditors; or (h) Borrower shall admit in writing its inability to pay its debts as they mature. 6.2 Acceleration of the Obligations. Upon the occurrence of an Event of Default as above provided, all or any portion of the obligations due or to become due from Borrower to each Lender shall, at the option of each Lender, and without notice or demand by such Lender, become at once due and payable. Borrower will forthwith pay to each Lender, in addition to any and all sums and charges due, the entire outstanding principal balance and interest accrued thereon. 7. Conditions to Closing of Lenders. Lender's obligations to purchase the Notes, Warrants and Underlying Securities issuable upon conversion of the Warrants at the Closing are, at the option of Lenders, subject to the fulfillment of the following conditions: 7.1 Representations and Warranties Correct. The representations and warranties made by Borrower in Section 4 hereof shall be true and correct in all material respects as of the Closing Date. -10- 11 7.2 Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by Borrower on or prior to the Closing Date shall have been performed or complied with in all material respects. 7.3 Compliance Certificate. Borrower shall have delivered to Lenders a certificate of Borrower in the form of Exhibit G hereto, executed by the President of Borrower, dated the Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Sections 7.1 and 7.2 of this Agreement. 7.4 Opinion of Borrower's Counsel. Lenders shall have received from Wilson, Sonsini, Goodrich & Rosati, P.C., counsel to Borrower, an opinion addressed to Lenders, dated the Closing Date, in substantially the form attached as Exhibit H. 7.5 Blue Sky. Borrower shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants. 7.6 Legal Matters. All material matters of a legal nature that pertain to this Agreement and the transactions contemplated hereby, shall have been reasonably approved by special counsel to Lenders. 7.7 Board of Directors. The Board of Directors of Borrower shall consist of the following persons: Thomas Sinton, Jane Sinton, Michael Hughes, Tom Roddy and Victor Long. 7.8 Registration Rights Agreement. Borrower and each Lender shall have entered into the Sixteenth Amendment to Registration Rights Agreement in substantially the form attached hereto as Exhibit D. 7.9 Promissory Notes. Borrower shall have executed and delivered a Note to each Lender evidencing the principal amount borrowed by Borrower from Lender, in the form substantially as set forth in Exhibit B hereto. 7.10 Warrants. Borrower shall have executed and delivered to each Lender a Warrant subject to the terms and provisions set forth in Section 2 hereof and in the form substantially as set forth in Exhibit C attached hereto. 8. Conditions to Closing of Borrower. Borrower's obligation to sell and issue the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants pursuant to this Agreement is, at the option of Borrower, subject to the fulfillment as of the Closing Date of the following conditions: -11- 12 8.1 Representations and Warranties. The representations and warranties made by Lenders in Section 5 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 8.2 Blue Sky. Borrower shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants. 8.3 Legal Matters. All material matters of a legal nature that pertain to this Agreement and the transactions contemplated hereby, shall have been reasonably approved by counsel to Borrower. At the time of the Closing, the purchase of the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants shall be legally permitted by all laws and regulations to which each Lender and Borrower are subject. 8.4 Board Approval. All approvals of Borrower's Board of Directors necessary for performance of the transactions contemplated by this Agreement shall have been obtained. 8.5 Registration Rights Agreements. Borrower and each Lender shall have entered into the Sixteenth Amendment to Registration Rights Agreement in substantially the form attached hereto as Exhibit D. 9. Affirmative Covenants of Borrower and Lenders. Borrower hereby covenants and agrees as follows: 9.1 Financial Information. Borrower will furnish to each Lender for so long as such Lender holds any Notes: (a) As soon as practicable after the end of each fiscal year, and in any event within 120 days thereafter, consolidated balance sheets of Borrower and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of changes in financial position of Borrower and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of reputable standing selected by Borrower. (b) With reasonable promptness, such other information and data with respect to Borrower and its subsidiaries, if any, as any such holder may from time to time reasonably request; provided, however, that Borrower shall not be obligated pursuant to this Section 9.1(b) to disclose or provide any information that it reasonably considers to be a trade secret or to contain confidential proprietary information. -12- 13 (c) So long as such Lender holds any Notes with a principal amount outstanding of $250,000 or more, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of Borrower and in any event within 60 days thereafter, unaudited consolidated statements of income and consolidated statements of changes in financial condition of Borrower and its subsidiaries, if any, for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception of footnotes, all in reasonable detail and signed, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of Borrower. 9.2 Rights of Inspection. For so long as a Lender is eligible to receive reports under Section 9.1(c), such Lender shall also have the right, at Lender's expense, to visit and inspect any of the properties of Borrower and to discuss its affairs, finances and accounts with its officers, all at such reasonable times and as often as may be reasonably requested, provided that Borrower shall not be required at any time to disclose any manufacturing or trade secret or secret process or other data of a proprietary nature the disclosure of which Borrower reasonably believes may adversely affect its business, provided, further, that Borrower shall not be required at any time to disclose any customer data to any Lender or any transferee of a Lender, as provided in Section 9.3, engaged in a business similar to the business in which Borrower is engaged at such time, and provided, further, that Borrower shall not be required at any time to disclose any information or data that is classified by any governmental agency. 9.3 Assignment of Rights to Financial Information. The rights granted pursuant to Sections 9.1 and 9.2 may not be assigned or otherwise conveyed by a Lender or by any subsequent transferee of any such rights without the prior written consent of Borrower; provided, however, that a Lender may assign such rights to any transferee, other than a competitor of Borrower, and after giving notice to Borrower, who acquires any Notes with a principal amount outstanding of $250,000 or more. 9.4 Termination of Covenants. The covenants set forth in Sections 9.1, 9.2 and 9.3 shall terminate and be of no further force or effect at such time as Borrower is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act. 10. Subordination. To the extent there is any conflict between the provisions of this Section 10 and the other provisions of this Agreement, the provisions of this Section 10 shall control. (a) Each Lender hereby subordinates to Silicon Valley Bank ("Bank") any security interest or lien that Lender may have or in the future obtain in any property of Borrower. Notwithstanding any respective dates of attachment or perfection of the security interest of Lender and the security interest of Bank, the security interest of Bank in the property of Borrower shall at all times be prior to the security interest of Lender. (b) All indebtedness hereunder (the "Subordinated Debt") is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all -13- 14 costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding (the "Senior Debt"). (c) Lender will not demand or receive from Borrower (and Borrower will not pay to Lender) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Lender exercise any remedy with respect to any of Bank's collateral, nor will Lender commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Lender shall be entitled to receive each regularly scheduled payment of interest that constitutes Subordinated Debt, provided that an event of default, as defined in the financing agreements between Borrower and Bank, has not occurred and is not continuing and would not exist immediately after such payment. (d) Lender shall promptly deliver to Bank in the form received (except for endorsement or assignment by Lender where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Lender with respect to the Subordinated Debt other than in accordance with this Section 10. (e) In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, the provisions of this Section 10 shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Lender. (f) For so long as any of the Senior Debt remains unpaid, Lender irrevocably appoints Bank as Lender's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Lender or in the name of Bank, for the use and benefit of Bank, without notice to Lender, to perform at Bank's option the following acts in any bankruptcy, insolvency or similar proceeding involving Borrower: (i) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Lender if Lender does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims; and (ii) To accept or reject any plan of reorganization or arrangement on behalf of Lender and to otherwise vote Lender's claims in respect of any Subordinated Debt in any manner that Bank deems appropriate for the enforcement of its rights hereunder. (g) This Section 10 shall remain effective for so long as Borrower owes any amounts to Bank. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Section 10 and the relative rights and priorities set forth herein shall be reinstated as to all such -14- 15 disgorged payments as though such payments had not been made and Lender shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, without notice to Lender, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise affect Bank's rights hereunder. Lender waives the benefits, if any, of California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. (h) The provisions of this Section 10 shall bind any successors or assignees of Lender and shall benefit any successors or assigns of Bank, and, if Borrower refinances a portion of the Senior Debt with a new lender, such new lender shall be deemed a successor of Bank for the purposes of this Section 10. This Section 10 is solely for the benefit of Lender and Bank and not for the benefit of Borrower or any other party. (i) The provisions of this Section 10 may be amended only by written instrument signed by Lender and Bank. (j) In the event of any legal action to enforce the rights of a party under this Section 10, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 11. Miscellaneous. 11.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California. The parties expressly stipulate that any litigation under this Agreement shall be brought in the state courts of the County of Santa Clara, California and in the United States District Court for the Northern District of California. The parties agree to submit to the jurisdiction and venue of those courts. 11.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by a Lender and the closing of the transactions contemplated hereby. 11.3 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto, provided, however, that the Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants shall not be assignable without the consent of Borrower. -15- 16 11.4 Entire Agreement; Amendment. This Agreement, the exhibits attached hereto and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated, on behalf of all holders, upon the written consent of Borrower and the holders of a majority of the Notes. 11.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to a Lender, to such Lender's address set forth in Exhibit A, or at such other address as the Lender shall have furnished to Borrower in writing, or (b) if to any other holder of any Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants, at such address as such holder shall have furnished Borrower in writing, or, until any such holder so furnishes an address to Borrower, then to and at the address of the last holder of such Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants who has so furnished an address to Borrower, or (c) if to Borrower, one copy should be sent to its address set forth at the beginning of this Agreement and addressed to the attention of the President of Borrower, or at such other address as Borrower shall have furnished to the Lenders. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 11.6 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any Notes, Warrants or Underlying Securities issuable upon conversion of the Warrants, upon any breach or default of Borrower under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 11.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH -16- 17 THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 11.8 Expenses. Borrower and Lenders shall bear their own expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby. 11.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be enforceable against the party actually executing such counterpart, and all of which together shall constitute one instrument. 11.10 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. -17- 18 IN WITNESS WHEREOF, the parties have duly executed this Loan Agreement on the day and year first above written. BORROWER: PROBUSINESS, INC. a California corporation By:_________________________________________ Thomas H. Sinton, President and Chief Executive Officer -18- 19 PROBUSINESS INC. LOAN AGREEMENT LENDER'S SIGNATURE PAGE ----------------------------------- (Printed Name of Lender) ----------------------------------- (Signature) ----------------------------------- (Title, if Applicable) -19- 20 PROBUSINESS, INC. FIRST AMENDMENT TO LOAN AGREEMENT This FIRST AMENDMENT to that certain Loan Agreement dated as of October 20, 1995 (the "Agreement") is made as of December 12, 1995 (the "First Amendment"), by an among ProBusiness, Inc, a California corporation ("Borrower") with its principal office at 5934 Gibraltar Drive, Pleasanton, California 94588, each of the persons listed in Exhibit A to the Agreement (collectively referred to herein as the "Original Lenders") and each of the persons listed in Exhibit A attached hereto (collectively referred to herein as "Additional Lenders"). The Original Lenders and the Additional Lenders shall collectively be referred to herein as "Lenders". RECITALS WHEREAS, the Original Lenders possess certain rights under the Agreement; WHEREAS, Section 11.4 of the Agreement provides that the Agreement may be amended, waived, discharged or terminated, on behalf of all holders, upon the written consent of the Borrower and holders of a majority of the Notes (as defined in the Agreement) purchased under the Agreement; WHEREAS, the Agreement provided for the authorization of up to an aggregate principal amount of $2,500,000 of Notes with an interest rate of eight percent (8%) per annum and Warrants (as defined in the Agreement) to purchase up to 78,715 shares of the Borrower's Series E Preferred Stock in one or more closings; WHEREAS, the Borrower issued $1,100,000 of the Notes and Warrants to purchase 34,630 shares of the Borrower's Series E Preferred Stock on October 20, 1995 to the Original Lenders and the Borrower and the Original Lenders wish to amend the Agreement to provide for the issuance of an additional $2,900,000 principal amount of the Notes and Warrants to purchase up to an additional 91,309 shares of Series E Preferred Stock to the Additional Purchasers on the same terms and conditions as set forth in the Agreement for an aggregate total principal amount of the Notes issued of $4,000,000 and Warrants to purchase up to an aggregate total of 125,939 of the Borrower's Series E Preferred Stock; WHEREAS, the Borrower, the Original Lenders and the Additional Lenders wish to amend the expiration date of the Warrants issued to the Original Lenders and the Warrants to be issued to the Additional Lenders hereunder to be substantially as set forth in Exhibits C-1 and C-2 attached hereto; WHEREAS, the Borrower, the Original Lenders and the Additional Lenders wish to amend the Notes issued to the Original Lenders and the Notes to be issued to the Additional Lenders hereunder in Exhibits B-1 and B-2 to be substantially as set forth to provide for early repayment of 21 the Note at the option of the Borrower the earlier of one year from the date of the Loan Agreement or an initial public offering of the Borrower; WHEREAS, the Board of Directors (the "Board") and shareholders of the Borrower have amended the Borrower's Bylaws to change the size of the Board and the Board has appointed John M. Duff, Jr. to fill a vacancy on the Board resulting from such Bylaw amendment; WHEREAS, the Borrower has authorized this First Amendment providing for the sale and issuance of an additional $2,900,000 principal amount of the Notes and Warrants to purchase up to an additional 91,309 shares of the Series E Preferred Stock at an additional closing or closings; WHEREAS, Additional Lenders desire to purchase the Additional Notes (as defined below) and Additional Warrants (as defined below) on the terms and conditions set forth herein; and WHEREAS, the Borrower desires to issue and sell the Additional Notes and Additional Warrants to the Additional Lenders on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 12. Debt Financing. a. Promissory Notes. Each Additional Lender severally agrees to make available to Borrower on the closing date the principal amount set forth opposite such Additional Lender's name in Exhibit A attached hereto to be evidenced by a promissory note (collectively, the "Additional Notes") the form of which is attached hereto as Exhibit B-1, for up to a total principal amount to be made available to Borrower by all Additional Lenders of up to $2,900,000 and for up to a total aggregate principal amount to be made available to Borrower by all Lenders of up to $4,000,000. The Additional Notes shall be issued on the same terms and conditions as the Notes issued pursuant to the Agreement, the form of which is substantially as set forth in Exhibit B-1 attached hereto. b. Payments. All payments to Additional Lenders shall be payable at Additional Lenders' address, set forth in Exhibit A attached hereto, or at such other place or places as Additional Lenders may designate from time to time in writing to Borrower. 13. Warrants to Purchase Series E Preferred Stock. Subject to the terms and conditions hereinafter set forth (including without limitation Section 7.11 below) and in consideration of a purchase price of $1.00, Borrower shall issue a warrant ("Additional Warrant") to each Additional Lender, entitling each Additional Lender, upon surrender of the Additional Warrant at the principal office of Borrower (or at such other place as Borrower shall notify Additional Lender hereof in writing), to purchase from Borrower the value of fully paid and nonassessable shares of Series E Preferred Stock of Borrower as is equal to twenty-five percent (25%) of the principal amount of each Additional Note held by such Additional Lender under this First Amendment at an exercise price of $7.94 per share of Series E Preferred Stock, all as set forth in the form of Additional Warrant -3- 22 attached hereto as Exhibit C-1. Each Additional Warrant shall be subject to antidilution price protection, net exercise provisions and registration rights and shall be substantially in the form set forth in Exhibit C-1, attached hereto and made a part hereof. 14. Closing Date; Delivery. a. Closing Date. The closing of the execution of this First Amendment and the issuance of the Additional Notes and Additional Warrants hereunder shall be held at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050 at 5:00 p.m., local time, on December 12, 1995 (the "Second Closing") or at such other time and place upon which Borrower and Additional Lenders shall agree (the date of the Second Closing is hereinafter referred to as the "Second Closing Date"). b. Delivery. At the Second Closing, Borrower will deliver to each Additional Lender an executed counterpart of this First Amendment together with an Additional Note and Additional Warrant issued in such Additional Lender's name, evidencing the principal amount borrowed from such Additional Lender by Borrower and the number of shares of Series E Preferred Stock to be issued to Additional Lender upon exercise of the Additional Warrant as set forth beside such Additional Lender's name on Exhibit A attached hereto, against delivery of an executed counterpart of this First Amendment, together with payment of the principal amount plus $1.00, the purchase price of the Additional Warrant, by check payable to Borrower or wire transfer per Borrower's instructions. c. Subsequent Closings. If less than $4,000,000 is made available to Borrower by Lenders on the Closing Date (as defined in the Agreement) and Second Closing Date, then, subject to the terms and conditions of the Agreement Borrower may issue additional Notes at subsequent closings evidencing up to the principal balance amount of the $4,000,000 not made available to Borrower by Lenders and Warrant to such persons as Borrower may determine with the same terms and conditions as the Notes and Warrant issued pursuant to the Agreement. Any such issuance shall be on the same terms and conditions as those contained in the Agreement and such persons shall become parties to the Agreement and that certain Registration Rights Agreement dated as of December 1, 1989 as amended (the "Registration Rights Agreement") and shall have the rights and obligations of the Lenders as defined thereunder, subject to the Seventeenth Amendment to the Registration Rights Agreement (the "Seventeenth Amendment") attached hereto as Exhibit D. A copy of the Registration Rights Agreement is attached hereto as Exhibit E. d. Rights and Obligations of Borrower, the Original Lenders and the Additional Lenders. Concurrently with the execution of this First Amendment, the Additional Lenders shall execute counterpart signature pages to the Seventeenth Amendment. The Additional Lenders shall be entitled to the rights, and be subject to the obligations, applicable to the Original Lenders contained in the Agreement and the Registration Rights Agreement as if the Additional Lenders had purchased the Additional Notes and Additional Warrants pursuant to the Agreement. Without limiting the generality of the foregoing, the Additional Lenders shall be considered "Lenders" as defined in the Agreement, the Additional Notes and Additional Warrants shall be considered "Notes" and "Warrants", respectively as defined in the Agreement and the Series E Preferred Stock to be -4- 23 issued upon the exercise of the Additional Warrants and the Common Stock to be issued upon the Conversion of such Series E Preferred Stock (the "Additional Underlying Securities") shall be considered "Underlying Securities" as defined in the Agreement. Further, the definitions of the "Agreement" and "Bylaws" in the Agreement shall include the First Amendment and the Exhibits attached thereto, and all amendments to the Bylaws as of the date hereof, respectively. 15. Disclosure; Capitalization. a. Disclosure. Each Additional Lender hereby acknowledges receipt of the Borrower's audited financial statements for the twelve-month period ended June 30, 1995 (the "Financial Statements"). The Company affirms to the Additional Lenders that: i. The representations and warranties of the Company set forth in Section 4 of the Agreement were true and accurate when made; and ii. Those representations and warranties are incorporated herein by this reference and made a part hereof, and remain true and accurate in all material respects as of the date hereof and as of the Second Closing Date, except as otherwise set forth below. b. Capitalization. The authorized capital stock of Borrower consists of 20,000,000 shares of Common Stock, par value $.01 per share 244,679 of which are issued and outstanding as of the Closing Date and 6,000,000 share of Preferred Stock with par value, $.01 per share (the "Preferred"), 1,500,000 of which have been designated Series A Preferred Stock (the "Series A Preferred"), of which 920,000 are issued and outstanding as of the Closing Date, 1,500,000 of which have been designated Series B Preferred Stock (the "Series B Preferred"), of which 919,400 are issued and outstanding as of the Closing Date, 1,500,000 of which have been designated Series C Preferred Stock (the "Series C Preferred"), of which 260,785 are issued and outstanding as of the Closing Date, 500,000 which have been designated Series D Preferred Stock (the "Series D Preferred"), of which 300,000 are issued and outstanding as of the closing date, and 500,000 of which have been designated Series E Preferred Stock (the "Series E Preferred"), 213,116 of which are issued and outstanding immediately before the Closing Date. No other series of Preferred Stock has been designated. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Borrower has reserved 125,939 shares of Series E Preferred for issuance upon the exercise of Warrants pursuant to the Agreement, 251,878 shares of Common Stock for issuance upon conversion of the Series E Preferred to be issued upon the exercise of such Warrants, 9,446 shares of Series E Preferred Stock for issuance upon the exercise of a warrant issued to Silicon Valley Bank ("SVB"), 18,892 shares of Common Stock for issuance upon the conversion of the Series E Preferred to be issued upon the exercise of SVB's warrant, 426,232 shares of Common Stock for issuance upon the conversion of the outstanding Series E Preferred, 600,000 shares of Common Stock for issuance upon the conversion of the Series D Preferred, 521,570 shares of Common Stock for issuance upon conversion of the Series C Preferred, 1,838,800 shares of Common Stock for issuance upon conversion of the Series B Preferred, 1,840,000 shares of Common Stock for issuance upon conversion of the Series A Preferred, and 862,146 shares of Common Stock for issuance upon exercise of options granted and 465,184 shares of Common Stock for issuance upon exercise of options not yet granted under Borrower's 1989 Stock Option Plan, as -5- 24 amended. The Series E Preferred Stock to be issued upon the exercise of the Warrants hereunder shall have the rights, privileges and restrictions set forth in Borrowers Articles of Incorporation, as amended, (the "Articles"). Other than options granted or to be granted pursuant to Borrower's 1989 Stock Option Plan, as amended, Warrants to purchase 34,630 shares of the Borrower's Series E Preferred Stock issued to the Original Lenders and a warrant issued to SVB, there are no options, warrants or other rights, including convertible debentures or notes, granted or issued by or binding upon Borrower to purchase any of Borrower's authorized and unissued Common Stock or Preferred Stock. c. Brokers or Finders; Other Offers. Borrower has not incurred, and will not incur, directly or indirectly, as a result of any action taken by Borrower, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement, except with respect to certain Additional Lenders, the Borrower will issue a Warrant to Duff, Ackerman, Goodrich & Associates, L.P. to purchase 1,599 shares of Borrower's Series E Preferred Stock on the same terms and conditions as set forth in the Agreement and as provided for in Section 7.11 below and such Additional Lenders will pay an amount equal to two percent of the principal amount set forth opposite their name to such firm. d. No Material Liabilities. Borrower has no material liabilities or obligations, other than: (a) liabilities and obligations disclosed in the Financial Statements (including, without limitation, Borrower's borrowings pursuant to the Loan Agreement between Borrower and Silicon Valley Bank dated January 13, 1995 for up to a maximum principal amount of $1,500,000); (b) liabilities incurred in the ordinary course of business; (c) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements; (d) leases for operating headquarters and branches of Borrower; (e) liabilities and obligations pursuant to the Agreement for up to a maximum principal amount of $1,100,000 of Notes issued to the Original Purchasers; and (f) any other obligations which are not in any case material to the financial condition or operating results of Borrower. 16. Representations and Warranties of Additional Lenders. Each Additional Lender acknowledges that such Additional Lender has reviewed the representations and warranties set forth in Sections 5 and 8.1 of the Agreement and agrees with Borrower that such representations and warranties, which are incorporated herein by this reference and made a part hereof, are true and correct as of the date hereof as they relate to the purchase of any of the Additional Notes, Additional Warrants or Additional Underlying Securities by such Additional Lender hereunder except as follows:. a. Brokers or Finders; Other Offers. Additional Lender has not incurred, and will not incur, directly or indirectly, as a result of any action taken by Additional Lender, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement, except with respect to certain Additional Lenders, the Borrower will issue a Warrant to Duff, Ackerman, Goodrich & Associates, L.P. to purchase 1,599 shares of Borrower's Series E Preferred Stock on the same terms and conditions as set forth in the Agreement and as -6- 25 provided for in Section 7.11 below and such Additional Lenders will pay an amount equal to two percent of the principal amount set forth opposite their name to such firm. 17. Events of Default; Remedies. The terms and provisions set forth in Section 6 of the Agreement are incorporated herein by this reference and made a part hereof. 18. Conditions to Closing of Lenders. Additional Lenders' obligations to purchase the Additional Notes, Additional Warrants and Additional Underlying Securities issuable upon conversion of the Additional Warrants at the Second Closing and the Original Lenders' obligations to amend the Agreement are, at the option of Additional Lenders and Original Lenders, subject to the fulfillment of the following conditions: a. Representations and Warranties Correct. The representations and warranties made by Borrower in Section 4 hereof shall be true and correct in all material respects as of the Closing Date. b. Covenants. All covenants, agreements and conditions contained in this First Amendment to be performed by Borrower on or prior to the Second Closing Date shall have been performed or complied with in all material respects. c. Compliance Certificate. Borrower shall have delivered to Additional Lenders a certificate of Borrower in the form of Exhibit G hereto, executed by the President of Borrower, dated the Second Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Sections 7.1 and 7.2 of this First Amendment. d. Opinion of Borrower's Counsel. Additional Lenders shall have received from Wilson Sonsini Goodrich & Rosati, P.C., counsel to Borrower, an opinion addressed to Lenders, dated the Second Closing Date, in substantially the form attached as Exhibit H. e. Blue Sky. Borrower shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Additional Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional Warrants. f. Legal Matters. All material matters of a legal nature that pertain to this First Amendment and the transactions contemplated hereby, shall have been reasonably approved by special counsel to Additional Lenders. g. Board of Directors. The Board of Directors of Borrower shall consist of the following persons: Thomas Sinton, Jane Sinton, Michael Hughes, Thomas Roddy, Victor Long and John M. Duff, Jr. h. Registration Rights Agreement. Borrower, and each Additional Lender and Duff, Ackerman, Goodrich & Associates shall have entered into the Seventeenth Amendment to Registration Rights Agreement in substantially the form attached hereto as Exhibit D. -7- 26 i. Promissory Notes. Borrower shall have executed and delivered an Additional Note to each Additional Lender evidencing the principal amount borrowed by Borrower from Additional Lender, in the form substantially as set forth in Exhibit B-1 hereto. Borrower shall have executed and delivered to each Original Lender an Amendment to Note in the Form substantially as set forth in Exhibit B-2. j. Warrants. Subject to Section 7.11 below, Borrower shall have executed and delivered to each Additional Lender an Additional Warrant subject to the terms and provisions set forth in Section 2 hereof and in the form substantially as set forth in Exhibit C-1 attached hereto and Borrower shall have executed and delivered to each Original Lender an Amendment to Warrant in the form substantially as set forth in Exhibit C-2 attached hereto. k. Warrants to Duff, Ackerman, Goodrich & Associates, L.P.. Borrower shall execute and deliver a Warrant subject to the terms and provisions set forth in Section 2 hereof and in the form substantially as set forth in Exhibit C-1 attached hereto, to Duff, Ackerman, Goodrich & Associates, L.P. to purchase 1,599 shares of Borrower's Series E Preferred Stock. Such Warrant shall be delivered to Duff, Ackerman, Goodrich & Associates, L.P. at its headquarters located at Two Embarcadero Center, Suite 2930, San Francisco, California 94111, Attention: John M. Duff, Jr. As a result of the issuance of such Warrant, the number of shares of Series E Preferred Stock issuable upon the exercise of Additional Warrants issued to certain Additional Lenders shall be reduced by ten percent as indicated on Exhibit A attached hereto. l. Amendment to Bylaws. The Board of Directors and shareholders of Borrower shall have amended the Bylaws of Borrower to provide for a change in the size of the Board in the form substantially as set forth in Exhibit I attached hereto. 19. Conditions to Closing of Borrower. Borrower's obligation to sell and issue the Additional Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional Warrants pursuant to this First Amendment and to amend the Agreement is, at the option of Borrower, subject to the fulfillment as of the Second Closing Date of the following conditions: a. Representations and Warranties. The representations and warranties made by Additional Lenders in Section 5 hereof shall be true and correct when made, and shall be true and correct on the Second Closing Date. b. Blue Sky. Borrower shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Additional Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional Warrants. c. Legal Matters. All material matters of a legal nature that pertain to this First Amendment and the transactions contemplated hereby, shall have been reasonably approved by counsel to Borrower. At the time of the Second Closing, the purchase of the Additional Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional -8- 27 Warrants shall be legally permitted by all laws and regulations to which each Lender and Borrower are subject. d. Board and Shareholder Approval. All approvals of Borrower's Board of Directors and shareholders necessary for performance of the transactions contemplated by this First Amendment shall have been obtained. e. Registration Rights Agreements. Borrower, each Additional Lender and Duff, Ackerman, Goodrich & Associates, L.P. shall have entered into the Seventeenth Amendment to Registration Rights Agreement in substantially the form attached hereto as Exhibit D. 20. Affirmative Covenants of Borrower and Lenders. The covenants of Borrower and Lenders set forth in Section 9 of the Agreement are incorporated herein by this reference and made a part hereof, to the effect that each Additional Lender has all the rights and obligations of a Lender under such provisions with respect to the Additional Notes, Additional Warrants or Additional Underlying Securities acquired hereby, except for Section 9.1(c) which is amended in full as follows: "(c) So long as such Lender holds any Notes, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of Borrower and in any event within 60 days thereafter, unaudited consolidated statements of income and consolidated statements of changes in financial condition of Borrower and its subsidiaries, if any, for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception of footnotes, all in reasonable detail and signed, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of Borrower." 21. Subordination. To the extent there is any conflict between the provisions of this Section 10 and the other provisions of this First Amendment, the provisions of this Section 10 shall control. i. Each Lender hereby subordinates to Silicon Valley Bank ("Bank") any security interest or lien that Lender may have or in the future obtain in any property of Borrower. Notwithstanding any respective dates of attachment or perfection of the security interest of Lender and the security interest of Bank, the security interest of Bank in the property of Borrower shall at all times be prior to the security interest of Lender. ii. All indebtedness hereunder (the "Subordinated Debt") is subordinated in right of payment to all obligations of Borrower to Bank now existing or hereafter arising, together with all costs of collecting such obligations (including attorneys' fees), including, without limitation, all interest accruing after the commencement by or against Borrower of any bankruptcy, reorganization or similar proceeding (the "Senior Debt"). iii. Lender will not demand or receive from Borrower (and Borrower will not pay to Lender) all or any part of the Subordinated Debt, by way of payment, prepayment, setoff, lawsuit or otherwise, nor will Lender exercise any remedy with respect to any of Bank's collateral, nor will -9- 28 Lender commence, or cause to commence, prosecute or participate in any administrative, legal or equitable action against Borrower, for so long as any portion of the Senior Debt remains outstanding. The foregoing notwithstanding, Lender shall be entitled to receive each regularly scheduled payment of interest that constitutes Subordinated Debt, provided that an event of default, as defined in the financing agreements between Borrower and Bank, has not occurred and is not continuing and would not exist immediately after such payment. iv. Lender shall promptly deliver to Bank in the form received (except for endorsement or assignment by Lender where required by Bank) for application to the Senior Debt any payment, distribution, security or proceeds received by Lender with respect to the Subordinated Debt other than in accordance with this Section 10. v. In the event of Borrower's insolvency, reorganization or any case or proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, the provisions of this Section 10 shall remain in full force and effect, and Bank's claims against Borrower and the estate of Borrower shall be paid in full before any payment is made to Lender. vi. For so long as any of the Senior Debt remains unpaid, Lender irrevocably appoints Bank as Lender's attorney-in-fact, and grants to Bank a power of attorney with full power of substitution, in the name of Lender or in the name of Bank, for the use and benefit of Bank, without notice to Lender, to perform at Bank's option the following acts in any bankruptcy, insolvency or similar proceeding involving Borrower: (1) To file the appropriate claim or claims in respect of the Subordinated Debt on behalf of Lender if Lender does not do so prior to 30 days before the expiration of the time to file claims in such proceeding and if Bank elects, in its sole discretion, to file such claim or claims; and (2) To accept or reject any plan of reorganization or arrangement on behalf of Lender and to otherwise vote Lender's claims in respect of any Subordinated Debt in any manner that Bank deems appropriate for the enforcement of its rights hereunder. vii. This Section 10 shall remain effective for so long as Borrower owes any amounts to Bank. If, at any time after payment in full of the Senior Debt any payments of the Senior Debt must be disgorged by Bank for any reason (including, without limitation, the bankruptcy of Borrower), this Section 10 and the relative rights and priorities set forth herein shall be reinstated as to all such disgorged payments as though such payments had not been made and Lender shall immediately pay over to Bank all payments received with respect to the Subordinated Debt to the extent that such payments would have been prohibited hereunder. At any time and from time to time, without notice to Lender, Bank may take such actions with respect to the Senior Debt as Bank, in its sole discretion, may deem appropriate, including, without limitation, terminating advances to Borrower, increasing the principal amount, extending the time of payment, increasing applicable interest rates, renewing, compromising or otherwise amending the terms of any documents affecting the Senior Debt and any collateral securing the Senior Debt, and enforcing or failing to enforce any rights against Borrower or any other person. No such action or inaction shall impair or otherwise -10- 29 affect Bank's rights hereunder. Lender waives the benefits, if any, of California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433. viii. The provisions of this Section 10 shall bind any successors or assignees of Lender and shall benefit any successors or assigns of Bank, and, if Borrower refinances a portion of the Senior Debt with a new lender, such new lender shall be deemed a successor of Bank for the purposes of this Section 10. This Section 10 is solely for the benefit of Lender and Bank and not for the benefit of Borrower or any other party. ix. The provisions of this Section 10 may be amended only by written instrument signed by Lender and Bank. x. In the event of any legal action to enforce the rights of a party under this Section 10, the party prevailing in such action shall be entitled, in addition to such other relief as may be granted, all reasonable costs and expenses, including reasonable attorneys' fees, incurred in such action. 22. Miscellaneous. a. Incorporation by References. The provisions set forth in Section 11 of the Agreement are incorporated herein by this reference and made a part hereof. b. Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to an Additional Lender, to such Additional Lender's address set forth in Exhibit A, or at such other address and the Additional Lender shall have furnished to Borrower in writing, (b) if to any other holder of any Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional Warrants, at such address as holder shall have furnished Borrower in writing, or, until any such holder so furnishes an address to Borrower, then to and at the addresses of the last holder of such Additional Notes, Additional Warrants or Additional Underlying Securities issuable upon conversion of the Additional Warrants who has so furnished an address to Borrower, or (c) if to Borrower, one copy should be sent to its address set forth at the beginning of this First Amendment and addressed to the attention of the President of Borrower, or at such other address as Borrower shall have furnished to the Additional Lenders or (d) if to an Original Lender, as provided in Section 11.5 to the Agreement. Each such notice or other communication shall for all purposes of this First Amendment be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. c. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE -11- 30 ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. -12- 31 IN WITNESS WHEREOF, the parties have duly executed this First Amendment to the Loan Agreement on the day and year first above written. BORROWER: PROBUSINESS, INC. a California corporation By:_________________________________________ Thomas H. Sinton, President and Chief Executive Officer -13- 32 PROBUSINESS, INC. FIRST AMENDMENT TO THE LOAN AGREEMENT ORIGINAL LENDER'S SIGNATURE PAGE ----------------------------------- (Printed Name of Lender) ----------------------------------- (Signature) ----------------------------------- (Title, if Applicable) 33 PROBUSINESS, INC. FIRST AMENDMENT TO THE LOAN AGREEMENT ADDITIONAL LENDER'S SIGNATURE PAGE ----------------------------------- (Printed Name of Lender) ----------------------------------- (Signature) ----------------------------------- (Title, if Applicable) EX-10.13 33 LOAN AND SECURITY AGREEMENT DATED APRIL 30, 1996 1 EXHIBIT 10.13 COAST LOAN AND SECURITY AGREEMENT BORROWER: PROBUSINESS, INC., A CALIFORNIA CORPORATION ADDRESS: 5934 GIBRALTER DR., SUITE 201 PLEASANTON, CA 94588 DATE: APRIL 30, 1996 THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association ("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles, California 90025, and the borrower named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts determined by Coast in its reasonable discretion, up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Coast's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Coast minimum monthly interest during the term of this Agreement with respect to the Receivable Loans and the Inventory Loans in the amount set forth on the Schedule (the "Minimum Annual Interest"). 1.3 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Coast and are not refundable. 1.4 CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the sole and absolute discretion of Coast, at or prior to the Closing Date, of each, every and all of the following conditions: (a) STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and unpaid ninety (90) days past its due date except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided; (b) MINIMUM AVAILABILITY. Borrower shall have minimum availability immediately after the initial funding of the Loans of Four Hundred Thousand Dollars ($400,000); (c) LANDLORD WAIVER. Borrower shall have used its best efforts to obtain executed landlord waivers in form an substance satisfactory to Coast, in Coast's sole and absolute discretion, and in form for recording in the appropriate recording office, with respect to all locations where Borrower maintains any inventory or equipment in excess of One Hundred Thousand Dollars ($100,000); (d) EXECUTED LOAN DOCUMENTS. Coast shall have received this Agreement duly executed by Borrower; (e) OPINION OF BORROWER'S COUNSEL. Coast shall have received opinions of Borrower's counsel, in form and substance satisfactory to Coast in its sole and absolute discretion; 1 2 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- (f) ASSIGNMENT FROM SILCON VALLEY BANK. Coast shall have received an assignment of the documents and debt between Borrower and Silcon Valley Bank and an assignment of the security interests in the assets of Borrower held by Silcon Valley Bank in form and substance satisfactory to Coast in its sole and absolute discretion. (g) WARRANTS. Coast shall have received executed Warrants, in form and substance satisfactory to Coast in its sole and absolute discretion; (h) PRIORITY OF COAST'S LIENS. Coast shall have received the results of "of record" searches satisfactory to Coast in its sole and absolute discretion, reflecting its Uniform Commercial Code filings against Borrower indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens; (i) INSURANCE. Coast shall have received copies of the insurance binders or certificates evidencing Borrower's compliance with Section 5.2 hereof, including lender's loss payee endorsements; (j) CORPORATE EXISTENCE. Coast shall have received copies of Borrower's Articles of Incorporation and all amendments thereto, and a Certificate of Good Standing, certified by the Secretary of State of California, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for Borrower from the Secretary of State of each state wherein the failure to be so qualified could have a Material Adverse Effect; (k) CORPORATE DOCUMENTS. Coast shall have received copies of Borrower's Bylaws and all amendments thereto, and Coast shall have received copies of the resolutions of the board of directors of Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of Borrower to execute the same on behalf of Borrower, in each case certified by the Secretary or other acceptable officer of Borrower as of the Closing Date; (l) DUE DILIGENCE. Coast shall have completed its due diligence with respect to Borrower; and (m) OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other agreements, instruments and documents, including, but not limited to, the Subordination Agreements, landlord waivers, fixture filings, termination statements and security agreements (including covering copyrights, patents and trademarks), as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's sole and absolute discretion, and in form for filing in the appropriate filing office. 1.5 CONDITIONS SUBSEQUENT. The obligation of Coast to continue to make the Loans is subject to the satisfaction, in the sole and absolute discretion of Coast, at or prior to the dates indicated below, of each, every and all of the following conditions; and the failure to satisfy each, every and all of the following shall constitute an Event of Default under this Agreement: (a) SUBORDINATION AGREEMENTS. Coast shall receive, within sixty (60) days of the date hereof, executed subordination agreements from Subordinated Debt Holders set forth on Schedule 1.5(a) hereto holding at least eighty percent (80%) of the Borrower's outstanding subordinated debt, each such subordination agreement shall be in form and substance satisfactory to Coast in its sole and absolute discretion. 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Coast a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts (except Borrower funds which are segregated from its general funds and held on behalf of third parties for remittance to taxing authorities), and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Coast to enter into this Agreement and to make Loans, Borrower represents and warrants to Coast as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the 2 3 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - --------------------------------------------------------------------------- jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (iii) do not violate in any material respect Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Coast 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Coast at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule, except in connection with the Acquisition. 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises, except to the extent a landlord waiver is obtained from lessor pursuant to the terms hereof. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise). Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, such waivers and subordinations as Coast shall specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately notify Coast in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with generally accepted accounting principles (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect in all material respects the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Borrower is now and will continue to be solvent. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) establishes reserves or takes any 3 4 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ----------------------------------------------------------------------------- other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any Material Adverse Effect. Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of One Hundred Thousand Dollars ($100,000) or more, or involving Two Hundred Thousand Dollars ($200,000) or more in the aggregate. 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to Coast as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower's business. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct in all material respects and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all material respects what they purport to be. All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. To the best of Borrower's knowledge, all signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to Coast transaction reports and loan requests, schedules of Receivables, and schedules of collections, all on Coast's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of Borrower's Receivables, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 11:00 AM will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrower shall furnish Coast with copies of all orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall request. In addition, Borrower shall deliver to Coast the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Coast with copies of all credit memos as and when requested by Coast. 4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrower shall deliver all such payments and 4 5 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- proceeds to Coast within one Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a blocked account agreement in such form as Coast may specify. Coast or its designee may, upon the occurrence of any Default or Event of Default, notify Account Debtors that Coast has been granted a security interest in the Receivables. 4.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered to Coast within one Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 4.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or claims relating to Receivables exceeding One Hundred Thousand Dollars ($100,000) in the aggregate. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Coast on the regular reports provided to Coast; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast may, at any time after the occurrence and continuance of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Coast considers advisable in its reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan account with only the net amounts received by Coast in payment of any Receivables. 4.7 VERIFICATION. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. This verification shall generally be done by letter in the form attached hereto as Exhibit 4.7, such form hereby being authorized by Borrower. 4.8 NO LIABILITY. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Coast from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 5.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrower shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a lenders loss payee endorsement in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, any such proceeds respecting Equipment shall be paid directly to Borrower to be utilized by Borrower solely for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast copies of all reports made to insurance companies. 5.3 REPORTS. Borrower, at its expense, shall provide Coast with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times during regular business hours, and on one 5 6 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - --------------------------------------------------------------------------- Business Day's notice, Coast, or its agents, shall have the right to inspect, audit and copy Borrower's books and records and the Collateral (the "Audits"). Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The Audits shall be at Borrower's expense and the charge for the Audits shall be Five Hundred Fifty Dollars ($550) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same not to exceed Six Hundred Fifty Dollars ($650) per person per day during the first two (2) years of the term hereof), plus reasonable out of pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same rights with respect to access to books and records and related rights as Coast has under this Loan Agreement. 5.5 NEGATIVE COVENANTS. Except as set forth on Schedule 5.5 hereto with respect to the Acquisitions, Borrower shall not, without Coast's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity, except in a transaction in which (A) the shareholders of the Borrower hold at least 50% of the common stock and all other capital stock of the surviving corporation immediately after such merger or consolidation, and (B) the Borrower is the surviving corporation; (ii) acquire any assets, except (A) in the ordinary course of business, or (B) in a transaction or a series of transactions not involving the payment of an aggregate amount in excess of Two Hundred Thousand Dollars ($200,000); (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets, except (A) advances to customers or suppliers in the ordinary course of business, (B) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (C) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower; (viii) incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity, other than guarantees limited to Two Hundred Fifty Thousand Dollars ($250,000) or less with respect to (A) advances to customers or suppliers in the ordinary course of business, (B) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (C) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock, except that Borrower may repurchase stock owned by employees, directors and consultants of Borrower pursuant to terms of employment, consulting or other stock restriction agreements at such time as any such employee, director or consultant terminates his or her affiliation with the Borrower, for an aggregate purchase price not to exceed $250,000 in any fiscal year; (xii) make any change in Borrower's capital structure which would have a Material Adverse Effect; or (xiii) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to Borrower which 6 7 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- reasonably be likely to result in a Material Adverse Effect. Borrower shall, without expense to Coast, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 INDEMNITY. Borrower hereby agrees to indemnify Coast and hold Coast harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, reasonable costs and expenses (including reasonable attorneys' fees), of every nature, character and description, which Coast may sustain or incur based upon or arising out of any of the Obligations, any actual or alleged failure to collect and pay over any withholding or other tax relating to Borrower or its employees, any relationship or agreement between Coast and Borrower, any actual or alleged failure of Coast to comply with any writ of attachment or other legal process relating to Borrower or any of its property, or any other matter, cause or thing whatsoever occurred, done, omitted or suffered to be done by Coast relating to Borrower or the Obligations (except any such amounts sustained or incurred as the result of the gross negligence or willful misconduct of Coast). Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary or useful in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"); provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one (1) year each, upon written notice by Borrower to Coast, not less than sixty (60) days prior to the next Maturity Date, that Borrower elects to renew this Agreement effective on the next Maturity Date. If this Agreement is renewed pursuant to this Section 6.1, Borrower shall pay to Coast a renewal fee (the "Renewal Fee") in the amount shown on the Schedule. The Renewal Fee shall be due and payable on the effective date of renewal and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans. 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three (3) Business Days after written notice of termination is given to Coast; or (ii) by Coast at any time after the occurrence of an Event of Default, effective immediately upon notice. If this Agreement is terminated by Borrower or by Coast under this Section 6.2. Borrower shall pay to Coast a termination fee (the "Early Termination Fee") in the amount shown on the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the rate applicable to the Receivable Loans; provided, however, that such Early Termination Fee shall be waived by Coast if such early termination is the result of the initial public offering of Borrower's common stock. 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Coast immediate written notice thereof: (a) Any material warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents, not or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay within five (5) days after due any Loan or any interest thereon or any other monetary Obligation; or 7 8 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- (c) The total Loans and other Obligations outstanding at any time shall exceed the Credit Limit, which is not cured within five (5) days after the occurrence thereof; or (d) Borrower shall fail to deliver the proceeds of Collateral to Coast as provided in Section 4.5 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 5.4 above, or shall breach any negative covenant set forth in Section 5.5 above; or (e) Borrower shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (f) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five (5) Business Days after the date due; or (g) Any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (h) Any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or (j) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) The commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within forty-five (45) days after the date commenced; or (l) Revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) Revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (n) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations, other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) Except as a result of the initial public offering of Borrower's common stock on a nationally recognized market, there shall be a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of Coast; or (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) There shall be any Material Adverse Effect, as defined in Section 8 hereof. Coast may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred. 7.2 REMEDIES. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment 8 9 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ----------------------------------------------------------------------------- payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Coast seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower's general, special or other Deposit Accounts with Coast; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast with respect to the foregoing shall be due from the Borrower to Coast within five (5) Business Days following receipt of a detailed invoice. Coast may charge the same to Borrower's loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Receivable Loans. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non-specific terms; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; 9 10 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - --------------------------------------------------------------------------- (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence, and during the continuance, of any Event of Default, without limiting Coast's other rights and remedies, Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner; (a) Execute on behalf of Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrower's loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Receivable Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Coast shall have 10 11 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ----------------------------------------------------------------------------- all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast [Band Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Account Debtor" means the obligor on a Receivable. "Acquisitions" means those certain acquisitions as more fully described on Schedule 5.5 attached hereto. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which Coast is open for business. "Closing Date" means the date of the initial funding under this Agreement. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 2.1 above. "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Deposit Account" has the meaning set forth in Section 9105 of the Code. "EBIT" means, in any fiscal period, Borrower's net income (other than extraordinary or non-recurring items of Borrower for such period), plus (i) the amount of all interest expense and income tax expense of Borrower for such period, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's net income for such period. "EBITDA" means, in any fiscal period, Borrower's net income (other than extraordinary or non-recurring items of Borrower for such period), plus (i) the amount of all interest expense, income tax expense, depreciation and amortization of Borrower for such period, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's net income for such period. "Eligible Receivables" means Receivables arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Coast, in its good faith business judgment, shall deem eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. "Equipment" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, computer equipment, check processors, readers, office partitions, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "Event of Default" means any of the events set forth in Section 7.1 of this Agreement. "General Intangibles" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). 11 12 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- "Inventory" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "Material Adverse Effect" means a material adverse effect on (i) the business, assets, condition (financial or otherwise) or results of operations of Borrower or any subsidiary of Borrower, (ii) the ability of Borrower to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due), or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "Maximum Dollar Amount" means the aggregate amount of Four Million Dollars ($4,000,000); provided, however, such amount shall increase to an aggregate amount of Six Million Dollars ($6,000,000) after January 1, 1997 if (i) Borrower's EBITDA is equal to at least 1.1 times Borrower's total debt service for any consecutive three (3) month period, including the three (3) month period ending December 31, 1996, (ii) Borrower has, and shall maintain, a Minimum Tangible Net Worth (including subordinated debt) equal to or greater than Three Million Dollars ($3,000,000), and (iii) Borrower shall have complied with the terms and conditions of this Agreement. "Obligations" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Coast, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Coast. "Permitted Liens" means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Coast, which consent shall not be unreasonably withheld; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens in favor of Coast; (viii) liens in existence on the date hereof; (ix) any judgment, attachment or similar lien, which is fully covered by insurance or has been discharged or execution thereof is effectively stayed and bonded against pending appeal within thirty (30) days of the entry thereof; (x) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (xi) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated 12 13 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ----------------------------------------------------------------------------- organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Receivables" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "Subordinated Debt Holders" means the holders of subordinated debt of Borrower listed on Schedule 1.5(a) hereto. "Subordination Agreements" means those certain Subordination Agreements, executed by certain of the Subordinated Debt Holders of Borrower, each in favor of Coast. "Tangible Net Worth" means, as of the date any determination thereof is to be made, the difference of: (a) Borrower's total stockholder's equity; minus (b) the sum of: (i) all intangible assets of Borrower; (ii) all amounts due to Borrower from its Affiliates, the first Resources acquisition calculated on a consolidated basis under generally accepted accounting principles. "Warrants" mean those certain Warrants (including, but not limited to, the anti-dilution agreement and registration rights agreement between Coast and Borrower entered into in connection therewith), dated as of , issued by Borrower. Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations two (2) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 11:00 AM on any day shall be deemed received on the next Business Day. Coast shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Coast in its reasonable discretion, and Coast may charge Borrower's loan account for the amount of any item of payment which is returned to Coast unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Coast may also, in its discretion, charge any monetary Obligations to Borrower's Deposit Accounts maintained with Coast. 9.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account constitute prima facie evidence of the items stated and shall be an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrower notifies Coast in writing to the contrary within thirty days after each account is rendered, describing the nature of any alleged errors or omissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Coast or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage prepaid. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Coast and supersede all prior and contemporaneous negotiations and 13 14 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - ----------------------------------------------------------------------------- oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 9.8 WAIVERS. The failure of Coast at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for its own gross negligence or willful misconduct. 9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Coast. 9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrower. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrower shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorney's fees, costs and charges to which Coast may be entitled pursuant to this Paragraph may be charged by Coast to Borrower's loan account and shall thereafter bear interest at the same rate as the Receivable Loans. 9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Coast; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrower from its liability for the Obligations. 9.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 9.15 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.16 LIMITATION OF ACTIONS. Any claim of cause of action by Borrower against Coast, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating 14 15 COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Coast, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Coast, or on any other person authorized to accept service on behalf of Coast, within thirty (30) days thereafter; provided, however, that Borrower may not bring any such claim or cause of action, or any part thereof, if there are facts in existence, not concealed, which Borrower could reasonably have discovered after due inquiry, upon which such claim or cause of action, or any part thereof, could be based, more than one (1) year after the last to occur of the acts giving rise to such claim or cause of action. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Coast. This provision shall survive any termination of this Loan Agreement or any other present or future agreement. 9.17 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Coast acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. 9.18 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to Coast to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER. IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: PROBUSINESS, INC., a California corporation By /s/ Steve Klei ---------------------------------- Title: Vice President/CFO ------------------------------- COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association By ---------------------------------- Title: Vice President ------------------------------ By ---------------------------------- Title: Vice President ------------------------------ 15 16 COAST SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: PROBUSINESS, INC., A CALIFORNIA CORPORATION ADDRESS: 5934 GIBRALTER DR., SUITE 201 PLEASANTON, CALIFORNIA 94588 DATE: APRIL 30, 1996 This Schedule forms an integral part of the Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Thrift & Loan Association, and the above-borrower of even date. - ------------------------------------------------------------------------------ 1. CREDIT LIMIT (Section 1.1): Loans in a total amount at any time outstanding not to exceed the lesser of the then applicable Maximum Dollar Amount, or the sum of (a) and (b) below: (a) Loans (the "Receivable Loans") in an amount not to exceed three (3) times Borrower's average monthly collections of Eligible Receivables, less One Hundred Fifty Thousand Dollars ($150,000), for the preceding three (3) month period, to be decreased by a factor of one (1) times for each thirty percent (30%) decrease in Borrower's revenues, measured on a quarterly basis, plus (b) Subject to the provisions of Section 7(3) of this Schedule, Loans (the "Equipment Acquisition Loans"), in minimum advances of One Hundred Thousand Dollars ($100,000), with interest only payable monthly on each drawdown for six (6) months from the date of each such drawdown followed by a thirty-six (36) month monthly amortization of principal plus interest with the remaining balance due on April 30, 1998, in a total amount not to exceed the lesser of: (1) 80% of the invoice cost of new Equipment less taxes and installation charges, plus, 80% of the appraised liquidation value of used Equipment acquired by Borrower less taxes and installation charges, or (2) One Million Dollars ($1,000,000). 16 17 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - ------------------------------------------------------------------------------- 2. INTEREST. Interest Rate (Section 1.2): The Loans shall bear interest payable monthly at a rate equal to the "Prime Rate" plus one percent (1.0% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for each month shall be based on the highest "Prime Rate" in effect during said month, but in no event shall the rate of interest charged on any Loans in any month be less than seven and one-half percent (7.5%) per annum. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prim Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the month, as the base rate on corporate loans at large U.S. money center commercial banks. Minimum Annual Interest (including any Rate Adjustment) Payable Quarterly (Section 1.2): Thirty Thousand Dollars($30,000) per quarter. 3.FEES (Section 1.3) Origination Fee: Ninety Thousand Dollars ($90,000), payable in installments of Forty - Five Thousand Dollars ($45,000) due on the Closing Date, and Forty - Five Thousand Dollars ($45,000) due on the first anniversary of the Closing Date. Facility Fee: One Thousand Eight Hundred Dollars ($1,800) per calendar quarter, payable in advance (prorated for any partial quarter at the beginning of the term of this Agreement). Renewal Fee: .5% of the Maximum Dollar Amount per year. Yield Fee: On the last day of each calendar quarter. Borrower shall pay a yield fee equal to 1% per annum of the average daily balance of the Loans outstanding during the previous three (3) months calculated on the basis of a 360 day year for actual days elapsed, pursuant to the formula set forth below: (average annual loan balance) --------------------------x 3 12 17 18 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 4. MATURITY DATE (Section 6.1): April 30, 1998, subject to automatic renewal as provided in Section 6.1 above, and early termination as provided in Section 6.2 above. EARLY TERMINATION (Section 6.2): An amount equal to two percent (2%) of the Maximum Dollar Amount (as defined in the Schedule), if termination occurs on or before the first anniversary of the date of this Agreement; one percent (1%) of the Maximum Dollar Amount, if termination occurs after the first anniversary and on or before the second anniversary of the date of this Agreement; and one percent (1%) of the Maximum Dollar Amount, if termination occurs after the second anniversary and on or before the third anniversary of the date of this Agreement if Borrower renews this Agreement pursuant to Section 6.1 hereof. Such fees shall be waived if public trading of Borrower's common stock is commenced. 5. REPORTING. (Section 5.3): Borrower shall provide Coast with the following: (1) Monthly Receivable agings, aged by invoice date, within ten (10) days after the end of each month. (2) Monthly accounts payable agings, aged by invoice date within ten (10) days after the end of each month. (3) Monthly within fifteen (15) days after the end of each month outstanding or held check registers. (4) Monthly internally prepared financial statements, as soon as available, and in any event within thirty (30) days after the end of each month. (5) Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower. (6) Semi-Annual customer lists, including customer name, address, and phone number. (7) Annual financial statements, as soon as available, and in any event within ninety (90) days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to Coast. 19 COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 6. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): ProBusiness Centers, Inc. PRIOR TRADE NAMES OF BORROWER (Section 3.2): None EXISTING TRADE NAMES OF BORROWER (Section 3.2): None OTHER LOCATIONS AND ADDRESSES (Section 3.3): 18400 Von Karman Avenue Suite 340 Irvine, CA 92714 MATERIAL ADVERSE LITIGATION (Section 3.10): None 7. OTHER PROVISIONS (Section 5.1): (1) Borrower shall maintain minimum Tangible Net Worth of (a) at least Two Million Dollars ($2,000,000) at all times when the Maximum Dollar Amount is equal to Four Million Dollars ($4,000,000), and (b) at least Three Million Dollars ($3,000,000) at all times when the Maximum Dollar Amount is equal to Six Million Dollars ($6,000,000). (2) Borrower shall at all times maintain a ration of cash to implementation and technical support expenditures of at least .75:1.0 determined on a monthly basis. (3) Borrower shall not obtain any Equipment Acquisition Loans hereunder, unless Borrower has attained, as of the date of such requested Equipment Acquisition Loans, EBIT coverage at 1.1 times total debt service for immediately preceding three (3) consecutive months. 20 Company Name Address City, State Zip In connection with the examination of our accounts receivable records by the accountants William John and Company, 12121 Wilshire Blvd., Suite 1111, Los Angeles, CA 90025, we would appreciate it if you would furnish them with the following information regarding your balance due to us. (1) Account Receivable outstanding as of 4/1/96 per our records See attached schedule) ------------. (2) Terns of Sale Net 10 (3) Are there any credits due to you? YES NO --------- --------- Please verify this balance and note any discrepancies in the space below. - ------------------------------ - ------------------------------ Signature -------------------------- Your Name Printed ------------------ Title ------------------------------ THIS IS A VERIFICATION OF ACCOUNTS ONLY-NOT A DEMAND FOR PAYMENT Please fax your reply directly to: William John and Company Attn: ? Phone # (310) 828-2346 Fax # (310) 979-5827 If you have any questions regarding this matter or your balance due, please call me at (310) 734-9990 x 111. I would appreciate it if you would reply by Friday, April 26. Sincerely, Cathy Cruz Senior Accountant 21 AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT, dated as of October 25, 1996 (this "Amendment"), amends that certain Loan and Security Agreement, dated as of April 30, 1996, by and between PROBUSINESS, INC., a California corporation ("Borrower"), and COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association, a California corporation ("Coast"), as amended from time to time (the "Loan Agreement"). All initially capitalized terms used in this Amendment shall have the meanings ascribed thereto in the Loan Agreement unless specifically defined herein. RECITALS WHEREAS, Borrower has requested, and Coast has agreed, that Coast increase the Maximum Dollar Amount available to Borrower under the Loan Agreement and to amend certain other provisions of the Loan Agreement; and WHEREAS, subject to the terms and conditions hereof, Coast has agreed to amend the Loan Agreement as hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows: AMENDMENT Section 1. AMENDMENTS. 1.1 AMENDMENT TO SECTION 8 OF LOAN AGREEMENT. Section 8 of the Loan Agreement is hereby amended by deleting from such Section the definition of "Maximum Dollar Amount" in its entirety and replacing it with the following: "Maximum Dollar Amount" means the aggregate amount of Ten Million Dollars ($10,000,000) 1.2 AMENDMENT TO SECTION 1 OF SCHEDULE. Section 1 of the Schedule to the Loan Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following: 22 "1. CREDIT LIMIT (Section 1.1): Loans in a total amount at any time outstanding not to exceed the lesser of the then applicable Maximum Dollar Amount, or the sum of (a) and (b) below: (a) Loans (the "Receivable Loans") in an amount not to exceed four (4) times Borrower's average monthly collections of Eligible Receivables, less One Hundred Fifty Thousand Dollars ($150,000), for the preceding four (4) month period, to be decreased by a factor of one (1) times for each thirty percent (30%) decrease in Borrower's revenues, measured on a quarterly basis, plus (b) Subject to the provisions of Section 7(3) of this Schedule, Loans (the "Equipment Acquisition Loans"), in minimum advances of One Hundred Thousand Dollars ($100,000), with interest only payable monthly on each draw-down for six (6) months from the date of each such draw-down followed by a thirty-six (36) month monthly amortization of principal plus interest with the remaining balance due on April 30, 1998, in a total amount not to exceed the lesser of: (1) 80% of the invoice cost of new Equipment less taxes and installation charges, plus, 80% of the appraised liquidation value of used Equipment acquired by Borrower less taxes and installation charges, or (2) One Million Dollars ($1,000,000)." 1.3 AMENDMENT TO SECTION 3 OF SCHEDULE. Section 3 of the Schedule to the Agreement is hereby amended such that the Forty-Five Thousand Dollar ($45,000) balance of the Origination Fee shall be due and payable upon the effective date of Amendment Number One to this Loan Agreement. 1.4 AMENDMENT TO SECTION 7 OF SCHEDULE. Section 7 of the Schedule to the Agreement is hereby amended to delete therefrom the minimum Tangible Net Worth covenant in subsection (1) and to replace it with the following: "(1) Intentionally blank." Section 2. CONDITION PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon: 2.1 Receipt by Coast of an executed original of this Amendment; 2 23 2.2 Receipt by Coast of an executed original of an amendment to the Warrant to Purchase Stock, dated as of April 30, 1996, increasing to 19,000 the Series E Preferred Stock subject to such Warrant, and otherwise in form and substance satisfactory to Coast, or a new Warrant to Purchase Stock providing for such an increase in stock subject to the Warrant and otherwise in form and substance satisfactory to Coast; 2.3 Receipt by Coast of payment of all fees and costs, including legal fees and costs, incurred in connection with the preparation, negotiation and execution of this Amendment and the amendment to the Warrant to Purchase Stock; and 2.4 Receipt by Coast of payment of the accelerated Forty-Five Thousand Dollar balance of the Origination Fee. Section 3. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby, embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. Borrower represents, warrants and agrees that in entering into the Loan Agreement and consenting to this Amendment, it has not relied on any representation, promise, understanding or agreement, oral or written, of, by or with, Coast or any of its agents, employees, or counsel, except the representations, promises, understandings and agreements specifically contained in or referred to in the Loan Agreement, as amended hereby. Section 4. CONFLICTING TERMS. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Loan Agreement, the terms of this Amendment shall govern. In all other respects, the Loan Agreement, as amended and supplemented hereby, shall remain in full force and effect. Section 5. MISCELLANEOUS. This Amendment shall be governed by and construed in accordance with the laws of the State of California. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any party hereto may execute this Amendment by signing such counterpart. 3 24 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER: PROBUSINESS, INC. a California corporation By /s/ Steven Klei ------------------------------ Title: VP/CFO ------------------------ COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association By ------------------------------ Title: ------------------------ 4 25 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER: PROBUSINESS, INC. a California corporation By /s/ Steven Klei ------------------------------ Title: VP/CFO ------------------------ COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association By [/s/ ILLEGIBLE] ------------------------------ Title: Vice President ------------------------ 4 26 AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT, dated as of January 6, 1997 (this "Amendment"), amends that certain Loan and Security Agreement, dated as of April 30, 1996, as amended by that certain Amendment Number One to Loan and Security Agreement, dated as of October 25, 1996 (as amended from time to time, the "Loan Agreement"), by and between PROBUSINESS, INC., a California corporation ("Probusiness"), and COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association, a California corporation ("Coast"), on the other hand. All initially capitalized terms used in this Amendment shall have the meanings ascribed thereto in the Loan Agreement unless specifically defined herein. R E C I T A L S WHEREAS, Probusiness, and Benesphere Administrators, Inc., a Washington corporation ("Benesphere") and/or the individual shareholders of Benesphere ("Selling Shareholders") have entered into an agreement for the purchase and sale of stock dated on or about January 4, 1997 (the "Benesphere Purchase Agreement"), whereby Probusiness agreed to purchase all of the issued and outstanding capital stock of Benesphere (the "Acquisition"); and WHEREAS, in order to consummate such acquisition, Probusiness has requested Coast's consent to utilize funds obtained pursuant to the Loan Agreement; and WHEREAS, Coast, as a condition to its consent to allow Probusiness to use such funds for the aforementioned acquisition, has required, and Probusiness and Benesphere (collectively, the "Borrowers") have agreed, to amend the Loan Agreement in accordance with the terms and provisions of this Amendment. A M E N D M E N T NOW, THEREFORE, the parties hereto agree as follows: A. AMENDMENTS. 1. The definition of "Borrower" as set forth in the introductory paragraph to the Loan Agreement is hereby amended to include Benesphere, joint and severally, as an additional borrower. 2. The definition of "Borrowers' Addresses" as set forth in the introductory paragraph to the Loan Agreement is hereby amended to add 10900 NE 4th, 12th Floor, Bellevue, Washington 98015 as the chief executive office of Benesphere. 1 27 3. Coast shall establish a reserve against Borrowers' borrowing availability such that, on or before April 15, 1997, the amount of the reserve will be $525,000, such reserve to be released upon the payment of the $250,000 obligation due the Selling Shareholders under the Benesphere Purchase Agreement and the $275,000 note payable to Alison Elder. B. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon receipt of an executed copy of this Amendment, together with the following: 1. Review and approval by Coast of an executed copy of the Benesphere Purchase Agreement. 2. Receipt by Coast of payment of all fees and costs, including legal fees and costs, incurred in connection with the preparation, negotiation and execution of this Amendment and the documents related hereto; and 3. Receipt by Coast of each of the following documents in form and substance satisfactory to Coast in its sole and absolute discretion: a. Amended and Restated Secured Promissory Note, in the original principal amount of One Million Dollars ($1,000,000), executed by Borrowers in favor of Coast; b. Joint and Several Borrower Rider, executed by Borrowers in favor of Coast; and c. A confirmation of that certain Subordination Agreement among Coast and the Subordinated Debt Holders or an opinion of Borrower's counsel to the effect that such Subordination Agreement remains in full force and effect notwithstanding this Amendment. C. ADDITIONAL CONDITIONS PRECEDENT TO BENESPHERE ADVANCES. Loans advanced in reliance upon the Acquisition and the effectiveness of the amendments to the Loan Agreement contemplated herein in connection therewith are expressly conditioned upon the receipt by Coast, in form and substance satisfactory to Coast in its sole and absolute discretion, of (i) evidence that the acquisition contemplated in the Benesphere Purchase Agreement has been consummated, and (ii) results of "of record" searches reflecting Coast's Uniform Commercial Code filings against Benesphere indicating that Coast has a perfected, first priority lien in and upon all of the assets of Benesphere, subject only to Permitted Liens. D. ENTIRE AGREEMENT. The Loan Agreement, as amended hereby, embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. Borrowers 2 28 represent, warrant and agree that in entering into the Loan Agreement and consenting to this Amendment, they have not relied on any representation, promise, understanding or agreement, oral or written, of, by or with, Coast or any of its agents, employees, or counsel, except the representations, promises, understandings and agreements specifically contained in or referred to in the Loan Agreement, as amended hereby. E. CONFLICTING TERMS. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Loan Agreement, the terms of this Amendment shall govern. In all other respects, the Loan Agreement, as amended and supplemented hereby, shall remain in full force and effect. F. MISCELLANEOUS. This Amendment shall be governed by and construed in accordance with the laws of the State of California. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any party hereto may execute this Amendment by signing such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the date first above written. BORROWERS: PROBUSINESS, INC., a California corporation By /s/ Steven Klei ------------------------------------ President or Vice President By /s/ Steven Klei ------------------------------------ Secretary or Ass't Secretary BENESPHERE ADMINISTRATORS, INC., a Washington corporation By /s/ Steven Klei ------------------------------------ President or Vice President By /s/ Steven Klei ------------------------------------ Secretary or Ass't Secretary 3 29 COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association By -------------------------------------------- Title --------------------------------- 4 30 JOINT AND SEVERAL BORROWER RIDER This JOINT AND SEVERAL BORROWER RIDER (this "Rider"), dated as of January 6, 1997, is executed by PROBUSINESS, INC., a California corporation ("Probusiness") and BENESPHERE ADMINISTRATORS, INC., a California corporation ("Benesphere", together with Probusiness are sometimes collectively referred to herein as "Borrowers" and individually as a "Borrower"), in favor of and delivered to COAST BUSINESS CREDIT ("COAST"), A DIVISION OF SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION, a California corporation. WHEREAS, Borrowers are contemporaneously herewith executing and delivering to Coast (a) that certain Amendment Number Two to Loan and Security Agreement, dated as of even date herewith, amending that certain Loan and Security Agreement, dated as of April 30, 1996, as previously amended by that certain Amendment Number One to Loan and Security Agreement, dated as of October 25, 1996 (as amended, the "Agreement"), and (b) that certain Amended and Restated Secured Promissory Note (Equipment Acquisition Loans), dated as of even date herewith (the "Note") (the Agreement and the Note, together with any and all other agreements, instruments and documents executed by Borrowers in connection therewith, and as all of the foregoing may be amended, restated, supplemented or modified from time to time in accordance with their terms, are collectively referred to herein as the "Loan Documents"); WHEREAS, each Borrower is interested in the financial success of the other Borrowers and each Borrower will directly and materially benefit from the financial accommodations which Coast will extend to all Borrowers pursuant to the Loan Documents; and WHEREAS, in order to induce Coast to extend financial accommodations to Borrowers, and in consideration thereof, Borrowers have agreed to execute and deliver this Rider to Coast, which Rider shall be a rider to the Loan Documents. NOW THEREFORE, the parties hereto agree as follows: 1. Each Borrower agrees that it is jointly and severally, directly and primarily liable to Coast for payment in full of all amounts owing to Coast under the Loan Documents, whether for principal, interest or otherwise (collectively, the "Obligations") and that such liability is independent of the duties, obligations, and liabilities of the other Borrowers. Coast may bring a separate action or actions on each, any, or all of the Obligations against any Borrower, whether action is brought against the other Borrowers or whether the other Borrowers are joined in such action. In the event that any Borrower fails to make any payment of any Obligations on or before the due date thereof, the other Borrowers immediately shall cause such payment to be made or each of such Obligations to be performed, kept, observed, or fulfilled. 1 31 2. The Loan Documents are a primary and original obligation of each Borrower, are not the creation of a surety relationship, and are an absolute, unconditional, and continuing promise of payment and performance which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the Loan Documents. Each Borrower agrees that its liability under the Loan Documents shall be immediate and shall not be contingent upon the exercise or enforcement by Coast or whatever remedies it may have against the other Borrowers, or the enforcement of any lien or realization upon any security Coast may at any time possess. Each Borrower consents and agrees that Coast shall be under no obligation to marshal any assets of any Borrower against or in payment of any or all of the Obligations. 3. Each Borrower acknowledges that it is presently informed as to the financial condition of the other Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower hereby covenants that it will continue to keep informed as to the financial condition of the other Borrowers, the status of the other Borrowers and of all circumstances which bear upon the risk of nonpayment. Absent a written request from any Borrower to Coast for information, such Borrower hereby waives any and all rights it may have to require Coast to disclose to such Borrower any information which Coast may now or hereafter acquire concerning the condition or circumstances of the other Borrowers. 4. The liability of each Borrower under the Loan Documents includes Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Obligations after prior Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, each Borrower hereby waives any right to revoke its liability under the Loan Documents as to future indebtedness, and in connection therewith, each Borrower hereby waives any rights it may have under Section 2815 of the California Civil Code. If such a revocation is effective notwithstanding the foregoing waiver, each Borrower acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Coast, (b) no such revocation shall apply to any Obligations in existence on such date (including, any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Coast in existence on the date of such revocation, (d) no payment by such Borrower or from any other source prior to the date of such revocation shall reduce the maximum obligation of the other Borrowers hereunder, and (e) any payment of such Borrower or from any source other than Borrowers, subsequent to the date of such revocation, shall first be applied to that portion of the Obligations as to which the revocation is effective and which are not, therefore, guaranteed hereunder, and to the extent so applied shall not reduce the maximum obligation of each Borrower hereunder. 2 32 5. (a) Each Borrower absolutely, unconditionally, knowingly, and expressly waives: (i) (1) notice of acceptance hereof; (2) notice of any loans or other financial accommodations made or extended under the Loan Documents or the creation or existence of any Obligations; (3) notice of the amount of the Obligations, subject, however, to each Borrower's right to make inquiry of Coast to ascertain the amount of the Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of the other Borrowers or of any other fact that might increase such Borrower's risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any instruments among the Loan Documents; (6) notice of any unmatured event of default or event of default under the Loan Documents; and (7) all other notices (except if such notice is specifically required to be given to Borrowers hereunder or under the Loan Documents) and demands to which such Borrower might otherwise be entitled. (ii) its right, under Sections 2845 or 2850 of the California Civil Code, or otherwise, to require Coast to institute suit against, or to exhaust any rights and remedies which Coast has or may have against, the other Borrowers or any third party, or against any collateral for the Obligations provided by the other Borrowers, or any third party. In this regard, each Borrower agrees that it is bound to the payment of all Obligations, whether now existing or hereafter accruing, as fully as if such Obligations were directly owing to Coast by such Borrower. Each Borrower further waives any defense arising by reason of any disability or other defense (other than the defense that the Obligations shall have been fully and finally performed and indefeasibly paid) of the other Borrowers or by reason of the cessation from any cause whatsoever of the liability of the other Borrowers in respect thereof. (iii) (1) any rights to assert against Coast any defense (legal or equitable), set-off, counterclaim, or claim which such Borrower may now or at any time hereafter have against the other Borrowers or any other party liable to Coast; (2) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Obligations or any security therefor; (3) any defense such Borrower has to performance hereunder, and any right such Borrower has to be exonerated, provided by Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise, arising by reason of: the impairment or suspension of Coast's rights or remedies against the other Borrowers; the alteration by Coast of the Obligations; any discharge of the other Borrowers' obligations to Coast by operation of law as a result of Coast's intervention or omission; or the acceptance by Coast of anything in partial satisfaction of the Obligations; (4) the benefit of any statute of limitations affecting such Borrower's liability hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the Obligations shall similarly operate to defer or 3 33 delay the operation of such statute of limitations applicable to such Borrower's liability hereunder. (b) Each Borrower absolutely, unconditionally, knowingly, and expressly waives any defense arising by reason of or deriving from (i) any claim or defense based upon an election of remedies by Coast including any defense based upon an election of remedies by Coast under the provisions of Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or any similar law of California or any other jurisdiction; or (ii) any election by Coast under Bankruptcy Code Section 1111(b) to limit the amount of, or any collateral securing, its claim against the Borrowers. Pursuant to California Civil Code Section 2856(b): "Each Borrower waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed such Borrower's rights of subrogation and reimbursement against the other Borrowers by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise." If any of the Obligations at any time are secured by a mortgage or deed of trust upon real property, Coast may elect, in its sole discretion, upon a default with respect to the Obligations, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing the Loan Documents, without diminishing or affecting the liability of any Borrower hereunder except to the extent the Obligations are repaid with the proceeds of such foreclosure. Each Borrower understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures, an election by Coast nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Borrower against the other Borrowers or other guarantors or sureties, and (b) absent the waiver given by such Borrower, such an election would prevent Coast from enforcing the Loan Documents against such Borrower. Understanding the foregoing, and understanding that such Borrower is hereby relinquishing a defense to the enforceability of the Loan Documents, such Borrower hereby waives any right to assert against Coast any defense to the enforcement of the Loan Documents, whether denominated "estoppel" or otherwise, based on or arising from an election by Coast nonjudicially to foreclose any such mortgage or deed of trust. Each Borrower understands that the effect of the foregoing waiver may be that each Borrower may have liability hereunder for amounts with respect to which such Borrower may be left without rights of subrogation, reimbursement, contribution, or indemnity against the other Borrower or other guarantors or sureties. Each Borrower also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure shall have no applicability with respect to the determination of such Borrower's liability under the Loan Documents. (c) Each Borrower hereby absolutely, unconditionally, knowingly, and expressly waives; (i) any right of subrogation such Borrower has or may have as against 4 34 the other Borrowers with respect to the Obligations; (ii) any right to proceed against the other Borrowers or any other person or entity, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which such Borrower may now have or hereafter have as against the other Borrowers with respect to the Obligations; and (iii) any right to proceed or seek recourse against or with respect to any property or asset of the other Borrowers. (d) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS RIDER, EACH BORROWER HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE. 6. Each Borrower consents and agrees that, without notice to or by such Borrower, and without affecting or impairing the liability of such Borrower hereunder, Coast may, by action or inaction: (a) compromise, settle, extend the duration or the time for the payment of, or discharge the performance of, or may refuse to or otherwise not enforce the Loan Documents, or any part thereof, with respect to the other Borrowers; (b) release the other Borrowers or grant other indulgences to the other Borrowers in respect thereof; or (c) release or substitute any other guarantor, if any, of the Obligations, or enforce, exchange, release, or waive any security for the Obligations or any other guaranty of the Obligations, or any portion thereof. 7. Coast shall have the right to seek recourse against each Borrower to the fullest extent provided for herein, and no election by Coast to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Coast's right to proceed in any other form of action or proceeding or against other parties unless Coast has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Coast under the Loan Documents shall serve to diminish the liability of any Borrower under this Rider except to the extent the Coast finally and unconditionally shall have realized indefeasible payment by such action or proceeding. 5 35 8. The Obligations shall not be considered indefeasibly paid for purposes of this Rider unless and until all payments to Coast are no longer subject to any right on the part of any person, including any Borrower, any Borrower as a debtor in possession, or any trustee (whether appointed pursuant to 11 U.S.C., or otherwise) of any Borrowers' assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. Upon such full and final performance and indefeasible payment of the Obligations, Coast shall have no obligation whatsoever to transfer or assign its interest in the Loan Documents to any Borrower. In the event that, for any reason, any portion of such payments to Coast is set aside or restored, whether voluntarily or involuntarily, after the making thereof, then the obligation intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made, and each Borrower shall be liable for the full amount Coast is required to repay plus any and all costs and expenses (including attorneys' fees and attorneys' fees incurred pursuant to 11 U.S.C.) paid by Coast in connection therewith. 9. At the request of Borrowers to facilitate and expedite the administration and accounting processes and procedures of their borrowings under the Agreement, Coast has agreed, in lieu of maintaining separate loan accounts on Coast's books in the name of each of the Borrowers, that Coast may maintain a single loan account under the name of all of the Borrowers (the "Loan Account"). Loans made under the Agreement shall be made jointly and severally to Borrowers and shall be charged to the Loan Account, together with all interest and other charges as permitted under and pursuant to this Agreement. The Loan Account shall be credited with all repayments of Obligations received by Coast, on behalf of Borrowers, from any Borrower pursuant to the terms of the Agreement. 10. Coast shall render to Probusiness, on behalf of Borrowers, one statement of the Loan Account, which shall be deemed to be an account stated as to each Borrower and which will be deemed correct and accepted by each Borrower unless Coast receives a written statement of exceptions from any Borrower within thirty (30) days after such statement has been rendered by Coast. Each Borrower hereby expressly agrees and acknowledges that Coast shall have no obligation to account separately to such Borrower. 11. Requests for advances under the Agreement may be made by any Borrower, pursuant to the terms thereof. Each Borrower expressly agrees and acknowledges that Coast shall have no responsibility to inquire into the correctness of the apportionment or allocation of or any disposition by any of Borrowers of (a) any advances or loans under the Agreement, or (b) any of the expenses and other items charged to the Loan Account pursuant to the Agreement. All such advances and loans and such expenses and other items shall be made for the collective, joint, and several account of Borrowers and shall be charged to the Loan Account. 12. Each Borrower agrees and acknowledges that the administration of the Agreement on a combined basis, as set forth in this Rider, is being done as an 6 36 accommodation to Borrowers and at their request, and that Coast shall incur no liability to any of Borrowers as a result thereof. To induce Coast to do so, and in consideration thereof, each of Borrowers hereby agrees to indemnify and hold Coast harmless from and against any and all liability, expense, loss, damage, claim of damage, or injury, made against Coast by any Borrowers or by any other person or entity, arising from or incurred by reason of such administration of the Agreement. 13. Each Borrower represents and warrants to Coast that the collective administration of the loans is being undertaken by Coast pursuant to this Rider because Borrowers are integrated in their operation and administration and require financing on a basis permitting the availability of credit from time to time to each of Borrowers. Each Borrower will derive benefit, directly and indirectly, from such collective administration and credit availability because the successful operation of each Borrower is enhanced by the continued successful performance of the integrated group. 14. This Rider shall append and shall be part and parcel of the Loan Documents; and the Rider shall be governed by and construed in accordance with all of the terms of the Loan Documents. IN WITNESS WHEREOF, this Rider has been executed and delivered as of the date first above written. PROBUSINESS, INC. a California corporation By /s/ Steven Klei ------------------------------ Title VP/CFO ------------------------ BENESPHERE ADMINISTRATORS, INC. a Washington corporation By /s/ Steven Klei ------------------------------ Title VP/CFO ------------------------ 7 37 COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association By /s/ [Illegible] ----------------------------------------- Title VP ------------------------------- 4 EX-10.14 34 PROMISSORY NOTE DATED DECEMBER 5, 1996 1 EXHIBIT 10.14 NOTE $543,750 Pleasanton, California December 5, 1996 FOR VALUE RECEIVED, Robert E. Schneider promises to pay to ProBusiness, Inc., a California corporation (the "Company"), or order, the principal sum of Five Hundred Forty-Three Thousand Seven Hundred Fifty Dollars ($543,750) together with interest on the unpaid principal hereof from the date hereof at the rate of 6.31% per annum, compounded annually. Principal and interest shall be due and payable on December 5, 2000. Should the undersigned fail to make full payment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of December 3, 1996. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ______________________________________ Robert E. Schneider 1252 Quandt Road Lafayette, CA 94549 EX-10.15 35 PROMISSORY NOTE DATED DECEMBER 31, 1996 1 Exhibit 10.15 NOTE $543,750 Bellevue, Washington January 7, 1997 FOR VALUE RECEIVED, Alison M. Elder promises to pay to ProBusiness, Inc., a California corporation (the "Company"), or order, the principal sum of Five Hundred and Forty-Three Thousand Seven Hundred Fifty Dollars ($543,750) together with interest on the unpaid principal hereof from the date hereof at the rate of 6.10% per annum, compounded annually. Principal and interest shall be due and payable on January 7, 2001. Should the undersigned fail to make full payment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of January 7, 1997. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ________________________________ Alison M. Elder 1300 Hampton Court Byron, CA 94514 EX-10.16 36 PROMISSORY NOTE DATED JANUARY 31, 1996 1 EXHIBIT 10.16 NOTE $250,000 Pleasanton, California January 31, 1997 FOR VALUE RECEIVED, Jeffrey M. Bizzack ("Borrower") promises to pay to ProBusiness, Inc., a California corporation (the "Company"), the principal sum of Two Hundred Fifty Thousand Dollars ($250,000) together with interest on the unpaid principal hereof from the date hereof at the rate of 6.10% per annum, compounded annually. Beginning on the date twenty-five months from the date hereof, Borrower promises to pay to the Company on a monthly basis accrued interest on the aggregate amount of outstanding principal and accrued but unpaid interest under this Note on the date twenty-four months from the date hereof. All outstanding principal and accrued but unpaid interest shall be due and payable forty-eight months from the date of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. Notwithstanding the foregoing, in the event Borrower's employment with the Company terminates, Borrower promises to the Company all outstanding principal and accrued but unpaid interest under this Note on the date (i) twelve months from the date employment termination, if Borrower voluntarily terminates employment with the Company, with interest accruing during such twelve months to be paid on a monthly basis, or (ii) twenty-four months from the date of employment termination, if the Company terminates Borrower's employment for any reason. Provided however, in no event shall the outstanding principal and accrued but unpaid interest under this Note be due and payable later than the date forty-eight months from the date of this Note. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. The holder of this Note shall have full recourse against the undersigned in the event of default. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. ----------------------------------- Jeffrey M. Bizzack 426 Pala Avenue Piedmont, CA 94611 EX-10.17 37 OFFICE BUILDING LEASE DATED AS OF NOVEMBER 7, 1994 1 EXHIBIT 10.17 OFFICE BUILDING LEASE BETWEEN KOLL CENTER IRVINE NUMBER TWO LANDLORD AND PRO BUSINESS, INC. TENANT 2 STANDARD LEASE [SHORT FORM]
TABLE OF CONTENTS Page ---- 1. BASIC LEASE TERMS................................................... 1 2. PREMISES AND COMMON AREAS........................................... 2 3. TERM................................................................ 2 4. POSSESSION.......................................................... 2 5. RENT................................................................ 2 6. OPERATING EXPENSES.................................................. 2 7. SECURITY DEPOSIT.................................................... 3 8. USE................................................................. 3 9. NOTICES............................................................. 4 10. BROKERS............................................................. 4 11. SURRENDER, HOLDING OVER............................................. 4 12. TAXES ON TENANT'S PROPERTY.......................................... 4 13. ALTERATIONS......................................................... 4 14. REPAIRS............................................................. 4 15. LIENS............................................................... 5 16. ENTRY BY LANDLORD................................................... 5 17. UTILITIES AND SERVICES.............................................. 5 18. ASSUMPTION OF RISK AND INDEMNIFICATION.............................. 5 19. INSURANCE........................................................... 6 20. DAMAGE OR DESTRUCTION............................................... 7 21. EMINENT DOMAIN...................................................... 7 22. DEFAULTS AND REMEDIES............................................... 8 23. LANDLORD'S DEFAULT.................................................. 9 24. ASSIGNMENT AND SUBLETTING........................................... 9 25. SUBORDINATION....................................................... 9 26. ESTOPPEL CERTIFICATE................................................ 10 27. BUILDING PLANNING................................................... 10 28. RULES AND REGULATIONS............................................... 10 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS... 10 30. DEFINITION OF LANDLORD.............................................. 10 31. WAIVER ............................................................. 10 32. PARKING............................................................. 11 33. FORCE MAJEURE....................................................... 11 34. SIGNS............................................................... 11 35. LIMITATION ON LIABILITY............................................. 11 36. FINANCIAL STATEMENTS................................................ 11 37. QUIET ENJOYMENT..................................................... 11 38. MISCELLANEOUS....................................................... 12 39. EXECUTION OF LEASE.................................................. 12
EXHIBITS: A-I Floor Plan A-II Site Plan B (Section deleted and initialed by ME) C Description of Landlord's Work D Tenant's Insurance Requirements E Definition of Operating Expenses F Standards For Utilities and Services G Estoppel Certificate H Rules and Regulations 3 STANDARD LEASE [Short Form] This STANDARD LEASE ("Lease") is entered into as of the 7th day of November, 1994, by and between KOLL CENTER IRVINE NUMBER TWO, a California limited partnership ("Landlord"), and PRO BUSINESS, INC., a California corporation ("Tenant"). 1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the following definitions and meanings: (a) LANDLORD'S ADDRESS (FOR NOTICES): 18500 Von Karman Avenue, Suite 150 Irvine, CA 92715 Attention: Asset Manager or such other place as Landlord may from time to time designate by notice to Tenant. (b) TENANT'S ADDRESS (PREMISES): 18400 Von Karman Avenue, Suite 340 Irvine, CA 92715 Attention: Mitch Everton (c) PREMISES: Suite(s) 340 of the building located at 18400 Von Karman Avenue as shown on Exhibit "A-I" (the "Building"), which Premises contains approximately 2,721 rentable square feet and which Building contains approximately 218,922 rentable square feet. The Premises are located within the development commonly known as Koll Center Irvine ("Development") shown on Exhibit "A-II" in the City of Irvine ("City"), County of Orange ("County"), State of California ("State"). (d) TENANT'S PERCENTAGE: 1.2429 % (e) TERM: three (3) Lease Years and Zero (0) Months. (f) COMMENCEMENT DATE: November 15, 1994. (g) EXPIRATION DATE: November 14, 1997. (h) MONTHLY BASE RENT: $ 4,081.50, subject to adjustment as otherwise provided in this Lease. (Portion deleted and initialed by ME) (i) OPERATING EXPENSE ALLOWANCE: That portion of Tenant's Percentage of Operating Expenses as described in paragraph 6 below which Landlord has included in Monthly Base Rent, which, for purposes of this Lease, will be an amount equal to Tenant's Percentage of Operating Expenses for the 1995 calendar year. (j) SECURITY DEPOSIT: $4,489.65 (k) PERMITTED USE: General office use consistent with other Class "A" office tenants located within Koll Center Irvine and no other use without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. (l) PARKING: Subject to the terms and conditions of Paragraph 32 below and the Rules and Regulations regarding parking contained in Exhibit "H" attached hereto, Tenant shall be entitled to four (4) unreserved employee parking spaces at $30.00 per space per month, four (4) additional unreserved parking spaces at $30.00 per space per month commencing February 1, 1995, and an additional two (2) unreserved parking spaces at $30.00 per space per month commencing May 1, 1995. (m) BROKER(S): Lee & Associates Commercial Real Estate Services, Inc. (n) GUARANTOR(S): N/A (o) INTEREST RATE: The greater of ten percent (10%) per annum or two percent (2%) in excess of the prime lending or reference rate of Wells Fargo Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Interest Rate imposition; provided, however, the Interest Rate will in no event exceed the maximum interest rate permitted to be charged by applicable law. (p) EXHIBITS: "A-1" through "H-3", inclusive (excluding Exhibit "B") which Exhibits are attached to this Lease and incorporated herein by this reference. This Paragraph 1 represents a summary of the basic terms and definitions of this Lease. In the event of any inconsistency between the terms contained in this Paragraph 1 and any specific provision of this Lease, the terms of the more specific provision shall prevail. 4 2. PREMISES AND COMMON AREAS. (a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises upon and subject to the terms, covenants and conditions contained in this Lease to be performed by each party. (b) TENANT'S USE OF COMMON AREAS. During the Term of this Lease, Tenant shall have the non-exclusive right to use in common with Landlord and all parties conducting business in the Development, subject to the terms of this Lease, the Rules and Regulations referenced in Paragraph 28 below and all covenants, conditions and restrictions now or hereafter affecting the Development, the following "Common Areas": all common entrances, hallways, lobbies, public restrooms, elevators, stairways and accessways, if any, loading docks, ramps, drives and platforms and any passageways and serviceways thereto, and the common pipes, conduits, wires and appurtenant equipment within the Building which serve the Premises, the parking facilities of the Development, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, plaza areas, fountains and similar areas and facilities situated within the Development which are not reserved for the exclusive use of any other parties. (c) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the Premises is not interfered with in an unreasonable manner, Landlord reserves for itself and for all other owner(s) and operator(s) of the Common Areas and the balance of the Development, the right from time to time to: (i) install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas of the Building; (ii) make changes to the design and layout of the Development, including, without limitation, changes to buildings, driveways, entrances, loading and unloading areas, direction of traffic, landscaped areas and walkways, parking spaces and parking areas; and (iii) use or close temporarily the Common Areas, and/or other portions of the Development while engaged in making improvements, repairs or alterations to the Building, the Development, or any portion thereof. 3. TERM. The term of this Lease ("Term") will be for the period designated in Subparagraph 1(e), commencing on the Commencement Date, and ending on the Expiration Date. Each consecutive twelve (12) month period of the Term of this Lease, commencing on the Commencement Date, will be referred to herein as a "Lease Year". 4. POSSESSION. (a) DELIVERY OF POSSESSION. Landlord will deliver possession of the Premises to Tenant in its current "as-is" condition with the addition of only those items of work, if any, described on Exhibit "C" to be completed by Landlord at Landlord's cost on or before the Commencement Date. If, for any reason, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, this Lease will not be void or voidable, nor will Landlord be liable to Tenant for any loss or damage resulting from such delay, but in such event, the Commencement Date and Tenant's obligation to pay rent will not commence until Landlord delivers possession to Tenant. If the delay in possession is caused by Tenant, then the Term and Tenant's obligation to pay rent will commence as of the Commencement Date even though Tenant does not yet have possession. Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant until Landlord has received from Tenant all of the following: (i) a copy of this Lease fully executed by Tenant and the guaranty of Tenant's obligations under this Lease, if any, executed by the Guarantor(s); (ii) the Security Deposit and the first installment of Monthly Base Rent; and (iii) copies of policies of insurance or certificates thereof as required under Paragraph 19 of this Lease. (b) CONDITION OF PREMISES. By taking possession of the Premises, Tenant will be deemed to have acknowledged that there are no additional items needing work or repair by Landlord. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Development or any portions thereof or with respect to the suitability of same for the conduct of Tenant's business and Tenant further acknowledges that Landlord will have no obligation to construct or complete any additional buildings or improvements within the Development. 5. RENT. (a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for the Premises (subject to adjustment as hereinafter provided) in advance on the first day of each calendar month during the Term without prior notice or demand, except that Tenant agrees to pay the Monthly Base Rent for the first month of the Term directly to Landlord concurrently with Tenant's delivery of the executed Lease to Landlord. All rent must be paid to Landlord, without any deduction or offset, in lawful money of the United States of America, at the address designated by Landlord or to such other person or at such other place as Landlord may from time to time designate in writing. Monthly Base Rent will be adjusted during the Term of this Lease as provided in Exhibit "B". (b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses, insurance, repairs and parking, will be considered additional rent for purposes of this Lease, and "rent" as used in this Lease will include all such additional rent unless the context specifically or clearly implies that only Monthly Base Rent is intended. (c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of additional rent will be subject to interest and a late charge as provided in Subparagraph 22(f) below. 6. OPERATING EXPENSES. (a) OPERATING EXPENSES. In addition to Monthly Base Rent, throughout the Term of this Lease, Tenant agrees to pay Landlord as additional rent in accordance with the terms of this Paragraph 6, Tenant's Percentage of Operating Expenses as defined in Exhibit "E" attached hereto to the extent Tenant's Percentage of Operating Expenses exceeds Tenant's Operating Expense Allowance. (b) ESTIMATE STATEMENT. Prior to the Commencement Date and on or about March 1st of each subsequent calendar year during the Term of this Lease, Landlord will endeavor to deliver to Tenant a statement ("Estimate Statement") wherein Landlord will estimate Tenant's Percentage of Operating Expenses for the then current calendar year. If the estimate of Tenant's Percentage of Operating Expenses in the Estimate Statement exceeds Tenant's Operating Expense Allowance, Tenant agrees to pay Landlord, as "additional rent", one-twelfth (1/12th) of such excess each month thereafter, beginning with the next installment of rent due, until such time as Landlord issues a revised Estimate Statement or the Estimate Statement for the succeeding calendar year; except that, concurrently with the regular monthly rent payment next due following the receipt of each such Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly installment of such excess (less any applicable Operating Expenses already paid) multiplied by the number of months from January, in the current calendar year, to the month of such rent payment next due, all months inclusive. If at any time during the Term of this Lease, but not more often than quarterly, Landlord reasonably determines that Tenant's Percentage of Operating Expenses for the -2- 5 current calendar year will be greater than the amount set forth in the then current Estimate Statement, Landlord may issue a revised Estimate Statement and Tenant agrees to pay Landlord, within ten (10) days of receipt of the revised Estimate Statement, the difference between the amount owed by Tenant under such revised Estimate Statement and the amount owed by Tenant under the original Estimate Statement for the portion of the then current calendar year which has expired. Thereafter Tenant agrees to pay Tenant's Percentage of Operating Expenses based on such revised Estimate Statement until Tenant receives the next calendar year's Estimate Statement or a new revised Estimate Statement for the current calendar year. In the event Tenant's Percentage of Operating Expenses for any calendar year is less than Tenant's Operating Expense Allowance, Tenant will not be entitled to a credit against any rent, additional rent or Tenant's Percentage of future Operating Expenses payable hereunder. (c) ACTUAL STATEMENT. By March 1st of each calendar year during the Term of this Lease, Landlord will also endeavor to deliver to Tenant a statement ("Actual Statement") which states the actual Operating Expenses for the preceding calendar year. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is more than the total Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Tenant agrees to pay Landlord the difference in a lump sum within ten (10) days of receipt of the Actual Statement. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is less than the Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Landlord will credit any overpayment toward the next monthly installment(s) of Tenant's Percentage of the Operating Expenses due under this Lease. (d) MISCELLANEOUS. Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a waiver of its right to require an increase in rent nor will it relieve Tenant of its obligations pursuant to this Paragraph 6, except that Tenant will not be obligated to make any payments based on such Estimate Statement or Actual Statement until ten (10) days after receipt of such Estimate Statement or Actual Statement. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Percentage of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall promptly be rebated by Landlord to Tenant. Such obligation shall be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year. 7. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease, Tenant will deposit with Landlord the Security Deposit designated in Subparagraph 1(j). The Security Deposit will be held by Landlord as security for the full and faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Term hereof. The Security Deposit is not, and may not be construed by Tenant to constitute, rent for the last month or any portion thereof. If Tenant defaults with respect to any provisions of this Lease including, but not limited to, the provisions relating to the payment of rent or additional rent, Landlord may (but will not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant agrees, within ten (10) days after Landlord's written demand therefor, to deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall constitute a default under this Lease. Landlord is not required to keep Tenant's Security Deposit separate from its general funds, and Tenant is not entitled to interest on such Security Deposit. 8. USE. (a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses set forth in Subparagraph 1(k) only, and Tenant will not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Nothing in this Lease will be deemed to give Tenant any exclusive right to such use in the Building or the Development. (b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure, maintain and hold available for Landlord's inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant's business from the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or allow the Premises to be used, altered or occupied in violation of, and Tenant, at its sole cost and expense, agrees to use and occupy the Premises and cause the Premises to be used and occupied in compliance with: (i) any and all laws, statutes, zoning restrictions, ordinances, rules, regulations, orders and rulings now or hereafter in force and any requirements of any insurer, insurance authority or duly constituted public authority having jurisdiction over the Premises, the Building or the Development now or hereafter in force, (ii) the requirements of the Board of Fire Underwriters and any other similar body (iii) the Certificate of Occupancy issued for the Building, and (iv) any recorded covenants, conditions and restrictions and similar regulatory agreements, if any, which affect the use, occupation or alteration of the Premises, the Building and/or the Development. Tenant agrees to comply with the Rules and Regulations referenced in Paragraph 28 below. Tenant agrees not to do or permit anything to be done in or about the Premises which will in any manner obstruct or interfere with the rights of other tenants or occupants of the Development, or injure or unreasonably annoy them, or use or allow the Premises to be used for any unlawful or unreasonably objectionable purpose. Tenant agrees not to cause, maintain or permit any nuisance or waste in, on, under or about the Premises or elsewhere within the Development. (c) HAZARDOUS MATERIALS. Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Development by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "Tenant's Parties"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or sooner termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Development, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Development or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Development and which are caused or permitted by Tenant or -3- 6 any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials at the Premises, the Building or any other portion of the Development which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). As used in this Lease, the term "Hazardous Materials" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. The provisions of this Subparagraph 8(c) will survive the expiration or earlier termination of this Lease. 9. NOTICES. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by overnight courier or an express mailing service) or by mail, if sent by registered or certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at the Premises and notices to Landlord shall be sufficient if delivered to Landlord at the address designated in Subparagraph l(a). Either party may specify a different address for notice purposes by written notice to the other, except that the Landlord may in any event use the Premises as Tenant's address for notice purposes. 10. BROKERS. The parties acknowledge that the broker(s) who negotiated this Lease are stated in Subparagraph 1(m). Landlord and Tenant each agree to promptly indemnify, protect, defend and hold harmless the other from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and court costs) resulting from any breach by the indemnifying party of the foregoing representation, including, without limitation, any claims that may be asserted by any broker, agent or finder undisclosed by the indemnifying party. The foregoing mutual indemnity shall survive the expiration or earlier termination of this Lease. 11. SURRENDER; HOLDING OVER. (a) SURRENDER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies. Upon the expiration or earlier termination of this Lease, Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in a state of good order, repair and condition, ordinary wear and tear and casualty damage excepted, with all of Tenant's personal property and alterations removed from the Premises to the extent required under Paragraph 13 and all damage caused by such removal repaired as required by Paragraph 13. The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof alone will not be sufficient to constitute a termination of this Lease or a surrender of the Premises. (b) HOLDING OVER. If Tenant holds over after the expiration or earlier termination of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, and such continued occupancy by Tenant shall be subject to all of the terms, covenants and conditions of this Lease, so far as applicable, except that the Monthly Base Rent for any such holdover period shall be equal to one hundred fifty percent (150%) of the Monthly Base Rent in effect under this Lease immediately prior to such holdover. Acceptance by Landlord of rent after such expiration or earlier termination will not result in a renewal of this Lease. If Tenant fails to surrender the Premises upon the expiration of this Lease in accordance with the terms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord harmless from all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and costs), including, without limitation, costs and expenses incurred by Landlord in returning the Premises to the condition in which Tenant was to surrender it and claims made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises. The provisions of this Subparagraph 11(b) will survive the expiration or earlier termination of this Lease. 12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all taxes and assessments (real and personal) levied against Tenant's business operations or any personal property, improvements, alterations, trade fixtures or merchandise placed by Tenant in or about the Premises. 13. ALTERATIONS. Tenant shall not make any alterations to the Premises or any other aspect of the Development, without Landlord's prior written consent, which consent Landlord may withhold in its reasonable but subjective discretion. All permitted alterations must be performed in compliance with Landlord's standard rules and regulations regarding alterations. All alterations will become the property of Landlord and will remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may require Tenant to remove any or all alterations at the expiration or earlier termination of this Lease. If Tenant fails to remove by the expiration or earlier termination of this Lease all of its personal property, or any alterations identified by Landlord for removal, Landlord may, at its option, treat such failure as a hold-over pursuant to Subparagraph 11 (b) above, and/or Landlord may (without liability to Tenant for loss thereof) treat such personal property and/or alterations as abandoned and, at Tenant's sole cost and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten (10) days' prior notice to Tenant, sell, discard or otherwise dispose of all or any such items at private or public sale for such price as Landlord may obtain or by other commercially reasonable means. Tenant shall be liable for all costs of disposition of Tenant's abandoned property and Landlord shall have no liability to Tenant with respect to any such abandoned property. Landlord agrees to apply the proceeds of any sale of any such property to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 14. REPAIRS. (a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain the structural portions of the Building and the plumbing, heating, ventilating, air conditioning, elevator and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are (i) attributable to items installed in Tenant's Premises which are above standard interior improvements (such as, for example, custom lighting, special HVAC and/or electrical panels or systems, kitchen or restroom facilities and appliances constructed or installed within Tenant's Premises) or (ii) caused in part or in whole by the act, neglect or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant will pay to Landlord, as additional rent, the reasonable cost of such maintenance and repairs. Except as provided in this Subparagraph 14(a), Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. Landlord will not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Paragraph 20, Tenant will not be entitled to any abatement of rent and Landlord will not have any liability by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any -4- 7 portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute, ordinance, rule, regulation, order or ruling (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Sections 1941 and 1942 and any successor statutes or laws of a similar nature). (b) TENANT'S OBLIGATIONS. Tenant agrees to keep, maintain and preserve the Premises in a state of condition and repair consistent with the Building and, when and if needed, at Tenant's sole cost and expense, to make all repairs to the Premises and every part thereof. Any such maintenance and repairs will be performed by Landlord's contractor, or at Landlord's option, by such contractor or contractors as Tenant may choose from an approved list to be submitted by Landlord. Tenant agrees to pay all costs and expenses incurred in such maintenance and repair within seven (7) days after billing by Landlord or such contractor or contractors. Tenant agrees to cause any mechanics' liens or other liens arising as a result of work performed by Tenant or at Tenant's direction to be eliminated as provided in Paragraph 15 below. If Tenant refuses or neglects to repair and maintain the Premises properly as required hereunder to the reasonable satisfaction of Landlord, Landlord, at any time following ten (10) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, may enter upon the Premises and make such repairs and/or maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as additional rent, Landlord's costs for making such repairs plus an amount not to exceed ten percent (10%) of such costs for overhead, within ten (10) days of receipt from Landlord of a written itemized bill therefor. Any amounts not reimbursed by Tenant within such ten (10) day period will bear interest at the Interest Rate until paid by Tenant. 15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Development, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. At Landlord's request, Tenant agrees to provide Landlord with enforceable, conditional and final lien releases (or other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials at the Premises. Landlord will have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant will, at its sole cost and expense, promptly cause such liens to be released of record or bonded so that it no longer affects title to the Development, the Building or the Premises. If Tenant fails to cause any such liens to be so released or bonded within ten (10) days after filing thereof, such failure will be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Paragraph 22 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens. Tenant agrees to pay to Landlord within ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all reasonable times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or tenants, to post notices of nonresponsibility, and/or to repair the Premises as permitted or required by this Lease. In exercising such entry rights, Landlord will endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and will provide Tenant with reasonable advance notice of any such entry (except in emergency situations). Landlord will at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Except in the case of the gross negligence or willful misconduct of Landlord, any entry to the Premises obtained by Landlord will not be construed or deemed to be a forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises and Landlord will not be liable to Tenant for any damages or losses resulting from any such entry. 17. UTILITIES AND SERVICES. Throughout the Term of the Lease so long as the Premises are occupied, Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described in the Standards for Utilities and Services attached hereto as Exhibit "F". Landlord will not be liable to Tenant for any failure to furnish any of the foregoing utilities and services if such failure is caused by all or any of the following: (i) accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance or labor dispute of any character; (iii) governmental regulation, moratorium or other governmental action or inaction; (iv) inability despite the exercise of reasonable diligence to obtain electricity, water or fuel; or (v) any other cause beyond Landlord's reasonable control. In addition, in the event of any stoppage or interruption of services or utilities, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in Subparagraphs 20(f) or 21 (b) if such failure results from a damage or taking described therein), no eviction of Tenant will result from such failure and Tenant will not be relieved from the performance of any covenant or agreement in this Lease because of such failure. In the event of any failure, stoppage or interruption thereof, Landlord agrees to diligently attempt to resume service promptly. If Tenant requires or utilizes more water or electrical power than is considered reasonable or normal by Landlord, Landlord may at its option require Tenant to pay, as additional rent, the cost, as fairly determined by Landlord, incurred by such extraordinary usage and/or Landlord may install separate meter(s) for the Premises, at Tenant's sole expense, and Tenant agrees thereafter to pay all charges of the utility providing service and Landlord will make an appropriate adjustment to Tenant's Operating Expenses calculation to account for the fact Tenant is directly paying such metered charges, provided Tenant will remain obligated to pay its proportionate share of Operating Expenses subject to such adjustment. 18. ASSUMPTION OF RISK AND INDEMNIFICATION. (a) ASSUMPTION OF RISK. Tenant, as a material part of the consideration to Landlord, agrees that neither Landlord nor any Landlord Indemnified Parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, (i) any and all damage to property or injury to persons in, upon or about the Premises, the Building or the Development resulting from any act or omission (except for the grossly negligent or intentionally willful act or omission of Landlord or its agent or employees), (ii) any such damage caused by other tenants or persons in or about the Building or the Development, or caused by quasi-public work, (iii) any damage to property entrusted to employees of the Building, (iv) any loss of or damage to property by theft or otherwise, or (v) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas, electricity, water or rain which may leak from any part of the Building or any other portion of the Development or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness. Neither Landlord nor any Landlord Indemnified Parties will be liable for consequential damages arising out of any loss of the use of the Premises or any equipment or facilities therein by Tenant or any Tenant Parties or for interference with light. Tenant agrees to give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, or of defects therein or in the fixtures or equipment. (b) INDEMNIFICATION. Tenant will be liable for, and agrees to the maximum extent permissible under applicable law, to promptly indemnify, protect, defend and hold harmless Landlord and all Landlord Indemnified Parties from and against, any and all claims, -5- 8 damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or resulting from (i) any act or omission of Tenant or any Tenant Parties (as defined in Subparagraph 8(c) above); (ii) the use of the Premises and Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere within the Development; and/or (iii) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant's sole cost and expense by counsel approved in writing by Landlord, which approval Landlord will not unreasonably withhold. (c) SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligations under Subparagraph 18(b) will survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification obligation in Subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease. 19. INSURANCE. (a) TENANT'S INSURANCE. On or before the earlier to occur of (i) the Commencement Date, or (ii) the date Tenant commences any work of any type in the Premises pursuant to this Lease (which may be prior to the Commencement Date), and continuing throughout the entire Term hereof and any other period of occupancy, Tenant agrees to keep in full force and effect, at its sole cost and expense, the insurance specified on Exhibit "D" attached hereto. Landlord reserves the right to require any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which, a prudent tenant would protect itself, but only to the extent coverage for such risks and amounts are available in the insurance market at commercially acceptable rates. Landlord makes no representation that the limits of liability required to be carried by Tenant under the terms of this Lease are adequate to protect Tenant's interests and Tenant should obtain such additional insurance or increased liability limits as Tenant deems appropriate. (b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS. All policies must be in a form reasonably satisfactory to Landlord and issued by an insurer admitted to do business in the state in which the Building is located. All policies must be issued by insurers with a policyholder rating of "A" and a financial rating of "X" in the most recent version of Best's Key Rating Guide. All policies must contain a requirement to notify Landlord (and Landlord's property manager and any mortgagees or ground lessors of Landlord who are named as additional insureds, if any) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after placing the required insurance, but in any event within the time frame specified in Subparagraph 19(a) above, certificate(s) of insurance and/or if required by Landlord, certified copies of each policy evidencing the existence of such insurance and Tenant's compliance with the provisions of this Paragraph 19. Tenant agrees to cause replacement policies or certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the time(s) specified herein, Landlord will have the right, but not the obligation, to obtain such insurance as Landlord deems necessary to protect Landlord's interests at Tenant's expense. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 19, Landlord agrees to deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed and Tenant agrees to promptly reimburse Landlord for such costs as additional rent. General Liability and Automobile Liability policies under Paragraphs 1 and 5 of Exhibit "D" attached hereto must name Landlord and Landlord's property manager (and at Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has been informed in writing) as additional insureds and must also contain a provision that the insurance afforded by such policy is primary insurance and any insurance carried by Landlord and Landlord's property manager or Landlord's mortgagees or ground lessors, if any, will be excess over and non-contributing with Tenant's insurance. (c) TENANT'S USE. Tenant will not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Building or the Development Common Areas. If Tenant's occupancy or business in, or on, the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance periodically carried by Landlord with respect to the Building or the Development or results in the need for Landlord to maintain special or additional insurance, Tenant agrees to pay Landlord the cost of any such increase in premiums or special or additional coverage as additional rent within ten (10) days after being billed therefor by Landlord. Tenant agrees to promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. (d) CANCELLATION OF LANDLORD'S POLICIES. If any of Landlord's insurance policies are canceled or cancellation is threatened or the coverage reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on the Premises and, if Tenant fails to remedy the condition giving rise to such cancellation, threatened cancellation, reduction of coverage, threatened reduction of coverage, increase in premiums, or threatened increase in premiums, within forty-eight (48) hours after notice thereof, Tenant will be deemed to be in material default of this Lease and Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay Landlord the reasonable costs of such remedy as additional rent. If Landlord is unable, or elects not to remedy such condition, then Landlord will have all of the remedies provided for in this Lease in the event of a default by Tenant. (e) WAIVER OF SUBROGATION. Tenant's property insurance shall contain a clause whereby the insurer waives all rights of recovery by way of subrogation against Landlord. Tenant shall also obtain and furnish evidence to Landlord of the waiver by Tenant's worker's compensation insurance carrier of all rights of recovery by way of subrogation against Landlord. -6- 9 20. DAMAGE OR DESTRUCTION (a) PARTIAL DESTRUCTION. If the Premises or the Building are damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor reasonably estimates in a writing delivered to Landlord and Tenant that the damage thereto may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred eighty (180) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Subparagraph 20(e) below to cover Tenant's obligation for the costs of repair, reconstruction and restoration of any portion of the tenant improvements and any alterations for which Tenant is responsible under this Lease), then Landlord agrees to commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease will continue in full force and effect. (b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the Premises or the Building which Landlord is not obligated to repair pursuant to Subparagraph 20(a) above will be deemed a substantial destruction. In the event of a substantial destruction, Landlord may elect to either: (i) repair, reconstruct and restore the portion of the Building or the Premises damaged by such casualty, in which case this Lease will continue in full force and effect, subject to Tenant's termination right contained in Subparagraph 20(d) below; or (ii) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. (c) NOTICE. Under any of the conditions of Subparagraph 20(a) or (b) above, Landlord agrees to give written notice to Tenant of its intention to repair or terminate, as permitted in such paragraphs, within the earlier of sixty (60) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor (the applicable time period to be referred to herein as the "Notice Period"). (d) TERMINATION RIGHTS. If Landlord elects to repair, reconstruct and restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's contractor estimates that as a result of such damage, Tenant cannot be given reasonable use of and access to the Premises within three hundred sixty-five (365) days after the date of such damage, then either Landlord or Tenant may terminate this Lease effective upon delivery of written notice to the other within ten (10) days after Landlord delivers notice to Tenant of its election to so repair, reconstruct or restore. (e) TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Premises, Tenant agrees to immediately (i) notify Landlord thereof, and (ii) deliver to Landlord all property insurance proceeds received by Tenant with respect to any tenant improvements installed by or at the cost of Tenant and any alterations, but excluding proceeds for Tenant's furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Improvements installed by or at the cost of Tenant and any alterations from any and all casualties), Tenant fails to receive insurance proceeds covering the full replacement cost of any such tenant improvements and any alterations which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destruction thereto, Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. (f) ABATEMENT OF RENT. In the event of any damage, repair, reconstruction and/or restoration described in this Paragraph 20, rent will be abated or reduced, as the case may be, from the date of such casualty, in proportion to the degree to which Tenant's use of the Premises is impaired during such period of repair until such use is restored. Except for abatement of rent as provided hereinabove, Tenant will not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises or for lost profits or any other consequential damages of any kind or nature, which result from any such damage, repair, reconstruction or restoration. (g) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each have the right to terminate this Lease if any damage to the Premises or the Building occurs during the last twelve (12) months of the Term of this Lease where Landlord's contractor estimates in a writing delivered to Landlord and Tenant that the repair, reconstruction or restoration of such damage cannot be completed within sixty (60) days after the date of such casualty. If either party desires to terminate this Lease under this Subparagraph (h), it shall provide written notice to the other party of such election within ten (10) days after receipt of Landlord's contractor's repair estimates. (h) WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that the foregoing provisions of this Paragraph 20 are to govern their respective rights and obligations in the event of any damage or destruction and supersede and are in lieu of the provisions of any applicable law, statute, ordinance, rule, regulation, order or ruling now or hereafter in force which provide remedies for damage or destruction of leased premises (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor statute or laws of a similar nature). 21. EMINENT DOMAIN. (a) SUBSTANTIAL TAKING. If the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises, as contemplated by this Lease, is taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party will have the right to terminate this Lease effective as of the date possession is required to be surrendered to such authority. (b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of the Premises which does not substantially interfere with Tenant's use and occupancy of the Premises, then, neither party will have the right to terminate this Lease and Landlord will thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent will be abated with respect to the part of the Premises which Tenant is deprived of on account of such taking. Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Development is taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days' prior written notice to Tenant if Landlord also terminates the leases of the other tenants of the Building which are leasing comparably sized space for comparable lease terms. (c) CONDEMNATION AWARD. In connection with any taking of the Premises or the Building, Landlord will be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value will be the sole property of Landlord. -7- 10 Tenant agrees not to assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant will have the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. (d) TEMPORARY TAKING. In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease will remain unaffected thereby and rent will not abate, and (ii) Tenant will be entitled to receive such portion or portions of any award made for such use with respect to the period of the taking which is within the Term, provided that if such taking remains in force at the expiration or earlier termination of this Lease, Tenant will then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 11 with respect to surrender of the Premises and upon such payment Tenant will be excused from such obligations. For purpose of this Subparagraph 2l(d), a temporary taking shall be defined as a taking for a period of ninety (90) days or less. 22. DEFAULTS AND REMEDIES. (a) DEFAULTS. The occurrence of any one or more of the following events will be deemed a default by Tenant: (i) The abandonment or vacation of the Premises by Tenant. (ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure continues for a period of three (3) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, the provisions of California Code of Civil Procedure Section 1161 regarding unlawful detainer actions or any successor statute or law of a similar nature). (iii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 22(a)(i) or (ii) above, where such failure continues for a period of five (5) days after written notice thereof from Landlord to Tenant. The provisions of any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, California Code of Civil Procedure Section 1161 regarding unlawful detainer actions and any successor statute or similar law). If the nature of Tenant's default is such that more than five (5) days are reasonably required for its cure, then Tenant will not be deemed to be in default if Tenant, with Landlord's concurrence, commences such cure within such five (5) day period and thereafter diligently prosecutes such cure to completion. (iv) (A) The making by Tenant of any general assignment for the benefit of creditors; (B) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (D) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within thirty (30) days. (b) LANDLORD'S REMEDIES; TERMINATION. In the event of any default by Tenant, in addition to any other remedies available to Landlord at law or in equity under applicable law (including, without limitation, to the extent the Premises arc located in California, the remedies of Civil Code Section 1951.4 and any successor statute or similar law), Landlord will have the immediate right and option to terminate this Lease and all rights of Tenant hereunder. If Landlord elects to terminate this Lease then, to the extent permitted under applicable law, Landlord may recover from Tenant: (i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, results therefrom including, but not limited to: attorneys' fees and costs; brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the Premises, and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, alterations, the tenant improvements and any other items which Tenant is required under this Lease to remove but does not remove, as well as the unamortized value of any free rent, reduced rent, free parking, reduced rate parking and any tenant improvement allowance or other costs or economic concessions provided, paid, granted or incurred by Landlord pursuant to this Lease. The unamortized value of such concessions shall be determined by taking the total value of such concessions and multiplying such value by a fraction, the numerator of which is the number of months of the Lease Term not yet elapsed as of the date on which the Lease is terminated, and the denominator of which is the total number of months of the Lease Term. As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate. As used in Subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord will also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere and/or disposed of at the sole cost and expense of and for the account of Tenant in accordance with the provisions of Paragraph 13 of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 22(c) will be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. (d) LANDLORD'S REMEDIES; RE-LETTING. If Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof on terms and conditions as Landlord in its sole and absolute discretion may deem advisable with the right to make alterations and repairs to the Premises in connection with such reletting. If Landlord elects to relet the Premises, then rents received by Landlord from such reletting will be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises incurred in connection with such reletting; fourth, to the payment of rent due and unpaid hereunder and the residue, if any, will be held by Landlord and applied to payment of future rent as the same may become due and payable hereunder. Should that portion of such rents received from such -8- 11 reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency will be calculated and paid monthly. (e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants and agreements to be performed by Tenant under any of the terms of this Lease are to be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant fails to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or if Tenant fails to perform any other act on its part to be performed hereunder, and such failure continues for ten (10) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from its obligations, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Interest Rate, from the date of such payment by Landlord until reimbursed by Tenant. This remedy shall be in addition to any other right or remedy of Landlord set forth in this Paragraph 22. (f) LATE PAYMENT. If Tenant fails to pay any installment of rent within five (5) days of when due or if Tenant fails to make any other payment for which Tenant is obligated under this Lease within five (5) days of when due, such late amount will accrue interest at the Interest Rate and Tenant agrees to pay Landlord as additional rent such interest on such amount from the date such amount becomes due until such amount is paid. In addition, Tenant agrees to pay to Landlord concurrently with such late payment amount, as additional rent, a late charge equal to five percent (5%) of the amount due to compensate Landlord for the extra costs Landlord will incur as a result of such late payment. Acceptance of any such interest and late charge will not constitute a waiver of the Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord. If Tenant incurs a late charge more than three (3) times in any period of twelve (12) months during the Lease Term, then, notwithstanding that Tenant cures the late payments for which such late charges are imposed, Landlord will have the right to require Tenant thereafter to pay all installments of Monthly Base Rent quarterly in advance throughout the remainder of the Lease Term. (g) RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Lease will be construed and held to be cumulative, and no one of them will be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Paragraph 22 will be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord will not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any default by Landlord, Tenant may exercise any of its rights provided at law or in equity, subject to the limitations on liability set forth in Paragraph 35 of this Lease. 24. ASSIGNMENT AND SUBLETTING. (a) RESTRICTION ON TRANSFER. Except as expressly provided in this Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease or the like will sometimes be referred to as a "Transfer"), without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold. For purposes of this Paragraph 24, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of twenty-five percent (25%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, will be deemed a Transfer and will be subject to all of the restrictions and provisions contained in this Paragraph 24. (b) TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at least thirty (30) days prior to the date when Tenant desires the Transfer to be effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the "Transfer Notice"), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as "Transferee"), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require. (c) LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee's financial responsibility, Landlord will notify Tenant of its election to do one of the following: (i) consent to the proposed Transfer subject to such reasonable conditions as Landlord may impose in providing such consent; (ii) refuse such consent, which refusal shall be on reasonable grounds; or (iii) terminate this Lease as to all or such portion of the Premises which is proposed to be sublet or assigned and recapture all or such portion of the Premises for reletting by Landlord. (d) ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, in form and substance reasonably satisfactory to Landlord. Tenant agrees to pay to Landlord, as additional rent, all sums and other consideration payable to and for the benefit of Tenant by the assignee or sublessee in excess of the rent payable under this Lease for the same period and portion of the Premises. In calculating excess rent or other consideration which may be payable to Landlord under this paragraph, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys' fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord. No Transfer will release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus Landlord's reasonable attorneys' fees. 25. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or beneficiary with a deed of trust encumbering the Building and/or the -9- 12 Development, or any lessor of a ground or underlying lease with respect to the Building, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building, and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed for which the Building, the Development or any leases thereof, or Landlord's interest and estate in any of said items, is specified as security. Notwithstanding the foregoing, Landlord reserves the right to subordinate any such ground leases or underlying leases or any such liens to this Lease. If any such ground lease or underlying lease terminates for any reason or any such mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant agrees to attorn to and become the tenant of such successor in which event Tenant's right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease. Tenant hereby waives its rights under any law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant's attornment agreement with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. If Tenant fails to sign and return any such documents within ten (10) days of receipt, Tenant will be in default hereunder. 26. ESTOPPEL CERTIFICATE. Within ten (10) days following any written request which Landlord may make from time to time, Tenant agrees to execute and deliver to Landlord an estoppel certificate, in a form substantially similar to the form of Exhibit "G" attached hereto or as may reasonably be required by Landlord's lender. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. Tenant's failure to deliver such statement within such time will be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's rent has been paid in advance. Without limiting the foregoing, if Tenant fails to deliver any such statement within such ten (10) day period, Landlord may deliver to Tenant an additional request for such statement and Tenant's failure to deliver such statement to Landlord within ten (10) days after delivery of such additional request will constitute a default under this Lease. Tenant agrees to indemnify and protect Landlord from and against any and all claims, damages, losses, liabilities and expenses (including attorneys' fees and costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord as required by this Paragraph 26. 27. BUILDING PLANNING. If Landlord requires the Premises for use in conjunction with another suite or for other reasons connected with the planning program for the Building or the Development, Landlord will have the right, upon sixty (60) days' prior written notice to Tenant, to move Tenant to other space in the Building of substantially similar size as the Premises, and with tenant improvements of substantially similar age, quality and layout as then existing in the Premises. Any such relocation will be at Landlord's cost and expense, including the cost of providing such substantially similar tenant improvements (but not any furniture or personal property) and Tenant's reasonable moving, telephone installation and stationary reprinting costs. If Landlord so relocates Tenant, the terms and conditions of this Lease will remain in full force and effect and apply to the new space, except that (a) a revised Exhibit "A-I" will become part of this Lease and will reflect the location of the new space, (b) Paragraph 1 of this Lease will be amended to include and state all correct data as to the new space, (c) the new space will thereafter be deemed to be the "Premises", and (d) all economic terms and conditions (e.g. rent, total Operating Expense Allowance, etc.) will be adjusted on a per square foot basis based on the total number of rentable square feet of area contained in the new space. Landlord and Tenant agree to cooperate fully with one another in order to minimize the inconvenience to Tenant resulting from any such relocation. 28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the "Rules and Regulations," a copy of which is attached hereto and incorporated herein by this reference as Exhibit "H", and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord will not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building of any of the Rules and Regulations. 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Building or the Development, the lender or ground lessor requests modifications to this Lease, Tenant, within ten (10) days after request therefor, agrees to execute an amendment to this Lease incorporating such modifications, provided such modifications are reasonable and do not increase the obligations of Tenant under this Lease or adversely affect the leasehold estate created by this Lease. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises or ground lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). 30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, means and includes only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title (other than a transfer for security purposes only), Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) will be automatically relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, so long as the transferee assumes in writing all such covenants and obligations of Landlord arising after the date of such transfer. Landlord and Landlord's transferees and assignees have the absolute right to transfer all or any portion of their respective title and interest in the Development, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer will not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. WAIVER. The waiver by either party of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor will any custom or practice which may develop between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of either party to insist upon performance in strict accordance with said terms. The subsequent acceptance of rent or any other payment hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of a lesser sum than the basic rent and additional rent or other sum then due will be deemed to be other than on account of the earliest installment of such rent or other amount due, nor will am endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or other amount or pursue any other remedy provided in this Lease. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or -10- 13 approval will not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. 32. PARKING. So long as this Lease is in effect and provided Tenant is not in default hereunder, Landlord grants to Tenant a license to use the number and type of parking spaces designated in Subparagraph 1(l) subject to the terms and conditions of this Paragraph 32 and the Rules and Regulations regarding parking contained in Exhibit "H" attached hereto. So long as this Lease is in effect, Tenant's visitors and guests will be entitled to use those specific parking areas which are designated for short term visitor parking and which are located within the surface parking area(s), if any, and/or within the parking structure(s) which serve the Building. Tenant will not use or allow any of Tenant's employees or guests to use any parking spaces which have been specifically assigned by Landlord to other tenants or occupants or for other uses such as visitor parking or which have been designated by any governmental entity as being restricted to certain uses. As consideration for the use of Tenant's parking spaces, Tenant agrees to pay to Landlord or, at Landlord's election, directly to Landlord's parking operator, as additional rent under this Lease, the prevailing parking rate for each such parking space as established by Landlord in its discretion from time to time. Tenant agrees that all parking charges will be payable on a monthly basis concurrently with each monthly payment of Monthly Base Rent. Except as provided in Subparagraph 1(l), Landlord reserves the right to set and increase monthly fees and/or daily and hourly rates for parking privileges from time to time during the Term of the Lease. For the duration of the Term, Tenant is obligated to pay for all of the parking stalls allocated to Tenant, whether or not Tenant actually uses such stalls. Landlord may assign any unreserved and unassigned parking spaces and/or make all or any portion of such spaces reserved, if Landlord reasonably determines that it is necessary for orderly and efficient parking or for any other reasonable reason. Except in connection with an assignment or sublease which is expressly permitted under this Lease, Tenant's parking rights and privileges described herein are personal to Tenant and may not be assigned or transferred, or otherwise conveyed, without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. In any event, under no circumstances may Tenant's parking rights and privileges be transferred, assigned or otherwise conveyed separate and apart from Tenant's interest in this Lease. Tenant shall comply with all rules and regulations regarding parking set forth in Exhibit "H" attached hereto and Tenant agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to comply with such rules and regulations. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. 33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or prevented from the performance of any act required under this Lease by reason of strikes, lock-outs, labor troubles, inability to procure standard materials, failure of power, restrictive governmental laws, regulations or orders or governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations which is not the result of the action or inaction of the party claiming such delay), riots, civil unrest or insurrection, war, fire, earthquake, flood or other natural disaster, unusual and unforeseeable delay which results from an interruption of any public utilities (e.g., electricity, gas, water, telephone) or other unusual and unforeseeable delay not within the reasonable control of the party delayed in performing work or doing acts required under the provisions of this Lease, then performance of such act will be excused for the period of the delay and the period for the performance of any such act will be extended for a period equivalent to the period of such delay. The provisions of this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent or any other payments required under the provisions of this Lease. 34. SIGNS. Landlord will designate the location on the Premises, if any, for one or more Tenant identification sign(s). Tenant agrees to have Landlord install and maintain Tenant's identification sign(s) in such designated location in accordance with this Paragraph 34 at Tenant's sole cost and expense. Tenant has no right to install Tenant identification signs in any other location in, on or about the Premises or the Development and will not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building or from within the Building in any interior or exterior common areas. The size, design, color and other physical aspects of any and all permitted sign(s) will be subject to (i) Landlord's written approval prior to installation, which approval may be withheld in Landlord's discretion, (ii) any covenants, conditions or restrictions governing the Premises, and (iii) any applicable municipal or governmental permits and approvals. Tenant will be solely responsible for all costs for installation, maintenance, repair and removal of any Tenant identification sign(s). If Tenant fails to remove Tenant's sign(s) upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord to effect any installation, maintenance or removal on Tenant's account, which amount will be deemed additional rent, and may include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and actual attorneys' fees with interest thereon at the Interest Rate from the date of Landlord's demand until paid by Tenant. Any sign rights granted to Tenant under this Lease are personal to Tenant and may not be assigned, transferred or otherwise conveyed to any assignee or subtenant of Tenant without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 35. LIMITATION ON LIABILITY. In consideration of the benefits accruing hereunder, Tenant on behalf of itself and all successors and assigns of Tenant covenants and agrees that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) Tenant's recourse against Landlord for monetary damages will be limited to Landlord's interest in the Building including, subject to the prior rights of any Mortgagee, Landlord's interest in the rents of the Building and any insurance proceeds payable to Landlord; (b) except as may be necessary to secure jurisdiction of the partnership, no partner of Landlord shall be sued or named as a party in any suit or action and no service of process shall be made against any partner of Landlord; (c) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (d) no judgment will be taken against any partner of Landlord and any judgment taken against any partner of Landlord may be vacated and set aside at any time after the fact; (e) no writ of execution will be levied against the assets of any partner of Landlord; (f) the obligations under this Lease do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (g) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. 36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and at any time during the Term of this Lease upon ten (10) days prior written notice from Landlord, Tenant agrees to provide Landlord with a current financial statement for Tenant and any guarantors of Tenant and financial statements for the two (2) years prior to the current financial statement year for Tenant and any guarantors of Tenant. Such statements are to be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, audited by an independent certified public accountant. 37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease. -11- 14 38. MISCELLANEOUS (a) CONFLICT OF LAWS. This Lease shall be governed by and construed solely pursuant to the laws of the State, without giving effect to choice of law principles thereunder. (b) SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant should bring suit against the other with respect to this Lease, then all costs and expenses, including without limitation, actual professional fees and costs such as appraisers', accountants' and attorneys' fees and costs, incurred by the party which prevails in such action, whether by final judgment or out of court settlement, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. As used herein, attorneys' fees and costs shall include, without limitation, attorneys' fees, costs and expenses incurred in connection with any (i) postjudgment motions; (ii) contempt proceedings; (iii) garnishment, levy, and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation. (d) TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (e) TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. (f) PRIOR AGREEMENT; AMENDMENTS. This Lease constitutes and is intended by the parties to be a final, complete and exclusive statement of their entire agreement with respect to the subject matter of this Lease. This Lease supersedes any and all prior and contemporaneous agreements and understandings of any kind relating to the subject matter of this Lease. There are no other agreements, understandings, representations, warranties, or statements, either oral or in written form, concerning the subject matter of this Lease. No alteration, modification, amendment or interpretation of this Lease shall be binding on the parties unless contained in a writing which is signed by both parties. (g) SEPARABILITY. The provisions of this Lease shall be considered separable such that if any provision or part of this Lease is ever held to be invalid, void or illegal under any law or ruling, all remaining provisions of this Lease shall remain in full force and effect to the maximum extent permitted by law. (h) RECORDING. Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other. (i) COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. (j) NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Development, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease. (k) NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 39. EXECUTION OF LEASE. (a) JOINT AND SEVERAL OBLIGATIONS. If more than one person or entity executes this Lease as Tenant, their execution of this Lease will constitute their covenant and agreement that (i) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant, and (ii) the term "Tenant" as used in this Lease means and includes each of them jointly and severally. The act of or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, will be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. (b) TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as a corporation or partnership, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that such entity is duly qualified and in good standing to do business in California and that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf, and in the case of a corporation, in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution hereof, if requested by Landlord, and in accordance with the by-laws of Tenant, and, in the case of a partnership, in accordance with the partnership agreement and the most current amendments thereto, if any, copies of which are to be delivered to Landlord on execution hereof, if requested by Landlord, and that this Lease is binding upon Tenant in accordance with its terms. -12- 15 (c) EXAMINATION OF LEASE. Submission of this instrument by Landlord to Tenant for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by their duly authorized representatives as of the date first above written. TENANT: PRO BUSINESS, INC., a California corporation By: /s/ Mitch Everton ------------------------------------------ Print Name: Mitch Everton ----------------------------- Print Title: EVP - OPERATIONS & ASST SECRETARY ----------------------------- By: ------------------------------------------ Print Name: ------------------------------ Print Title: ----------------------------- LANDLORD: KOLL CENTER IRVINE NUMBER TWO, a California limited partnership By: Connecticut General Life Insurance Company, General Partner By: Cigna Investments, Inc. Its Authorized Agent By: /s/ STEPHEN J. OLSTEIN ---------------------------------- Print Name: /s/ STEPHEN J. OLSTEIN ---------------------- Print Title: MANAGING DIRECTOR --------------------- 16 DESCRIPTION OF LANDLORD'S WORK Tenant shall lease the Premises from Landlord on an "AS-IS" basis with the exception that Landlord shall shampoo the carpeting to the best of Landlord's ability. 17 TENANT'S INSURANCE REQUIREMENTS This outlines the insurance requirements of your Lease. To assure compliance with these terms, we suggest you send a copy of this Exhibit to your insurer or agent. Initial Certificates must be provided to Landlord prior to occupancy of the Premises ,renewals ten (10) days before expiration. 1. Comprehensive or Commercial General Liability Insurance: $1,000,000 Combined Single Limit, each occurrence $1,000,000 Aggregate (minimum) this location $1,000,000 Products/Completed Operations Aggregate $ 50,000 Fire Legal Liability Limit, per fire Bodily Injury, Property Damage, Personal Injury and Advertising Injury; Blanket Contractual Liability-Covering Indemnity Section 18(b); Products and Completed Operations Liability; Landlord as an Additional Insured; Severability of Interest, permitting Cross liability among insureds; provision stating that tenant's insurance is primary and non-contributing with any insurance carried by Landlord. 2. Tenant's Property Insurance: All Risks coverage of Property owned by Tenant or for which the Tenant is legally liable; full replacement cost basis. 3. Tenant's Business Interruption Insurance: All Risks coverage of operations at leased premises; covering one-year's business interruption due to insured peril. 4. Tenant's Workers' Compensation and Employer's Liability Insurance: Statutory Limits and terms required by State; $1,000,000 Employer's Liability Limit. 5. Tenant's Automobile Insurance: $1,000,000 Combined Limit per accident; covering all owned, non-owned, hired autos (Symbol 1 - any auto). All insurance is to be with licensed insurers having a Best's rating of "A X" or better, and must include the following: Waiver of Subrogation in favor of Landlord Thirty (30) day pre-notice of cancellation/non renewal to Landlord SEND CERTIFICATE TO: (Name of Landlord from project file) KMS Risk Management Services c/o Johnson & Higgins 695 Town Center Drive, Suite 700 Costa Mesa, California 92626 PLEASE INCLUDE ADDRESS OF PREMISES. 18 DEFINITION OF OPERATING EXPENSES 1. ITEMS INCLUDED IN OPERATING EXPENSES. The term "Operating Expenses" as used in the Lease to which this Exhibit "E" is attached means: all costs and expenses of operation and maintenance of the Building and the Common Areas (as such terms are defined in the Lease), as determined by standard accounting practices, calculated assuming the Building is ninety-five percent (95%) occupied, including the following costs by way of illustration but not limitation, but excluding those items specifically set forth in Paragraph 3 below: (a) Real Property Taxes and Assessments (as defined in PARAGRAPH 2 below) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Building pursuant to any covenants, conditions and restrictions affecting the Development, the Common Areas or the Building; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any government or quasi-government authority in connection with the use, occupancy or alteration of the Building or the Premises or the parking facilities serving the Building or the Premises; (e) costs of insurance obtained by Landlord pursuant to PARAGRAPH 19 of the Lease; (f) waste disposal and janitorial services; (g) security; (h) labor; (i) costs incurred in the management of the Building, including, without limitation: (i) supplies, (ii) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the management, operation and maintenance of the Building, (iii) Building management office rental, supplies, equipment and related operating expenses, and (iv) a management/administrative fee determined as a percentage of the annual gross revenues of the Building exclusive of the proceeds of financing or a sale of the Building and an administrative fee for the management of the Development Common Area determined as a percentage of Development Common Area Operating Expenses; (j) supplies, materials, equipment and tools including rental of personal property used for maintenance; (k) repair and maintenance of the elevators and the structural portions of the Building, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord; (l) maintenance, costs and upkeep of all parking and Development Common Areas; (m) depreciation on a straight line basis and rental of personal property used in maintenance; (n) amortization on a straight line basis over the useful life [together with interest at the Interest Rate on the unamortized balance] of all capitalized expenditures which are: (i) reasonably intended to produce a reduction in operating charges or energy consumption; or (ii) required under any governmental law or regulation that was not applicable to the Building at the time it was originally constructed; or (iii) for replacement of any Building equipment needed to operate the Building at the same quality levels as prior to the replacement; (o) costs and expenses of gardening and landscaping; (p) maintenance of signs (other than signs of tenants of the Building); (q) personal property taxes levied on or attributable to personal property used in connection with the Building or the Common Areas; (r) reasonable accounting, audit, verification, legal and other consulting fees; and (s) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves. When calculating Operating Expenses for purposes of establishing Tenant's Operating Expense Allowance, Operating Expenses shall not include Real Property Taxes and Assessments attributable to special assessments, charges, costs, or fees or due to modifications or changes in governmental laws or regulations including, but not limited to, the institution of a split tax roll, and shall exclude market-wide labor-rate increases due to extraordinary circumstances including, but not limited to, boycotts and strikes and utility increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages. 2. REAL PROPERTY TAXES AND ASSESSMENTS. The term "Real Property Taxes and Assessments", as used in this Exhibit "E", means: any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Premises, Building, Common Areas or the Development (as such terms are defined in the Lease), adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building ready for occupancy, including the following by way of illustration but not limitation: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purposes of this Lease; (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Building or the rent payable by Tenant hereunder or other tenants of the Building, including, without limitation, any gross receipts tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part. Notwithstanding the foregoing, if at any time after the Commencement Date, the amount of Real Property Taxes and Assessments decreases, then for purposes of all subsequent Lease Years, including the Lease Year in which such decrease in Real Property Taxes and Assessments occurs, Tenant's Operating Expense Allowance shall be decreased by an amount equal to such decrease in Real Property Taxes and Assessments. 3. ITEMS EXCLUDED FROM OPERATING EXPENSES. Notwithstanding the provisions of PARAGRAPHS 1 AND 2 above to the contrary, "Operating Expenses" will not include: (a) Landlord's federal or state income, franchise, inheritance or estate taxes; (b) any ground lease rental; (c) costs incurred by Landlord for the repair of damage to the Building to the extent that Landlord is reimbursed by insurance or condemnation proceeds or by tenants, warrantors or other third persons; (d) depreciation, amortization and interest payments, except as specifically provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with standard accounting practices; (e) brokerage commissions, finders' fees, attorneys' fees, space planning costs and other costs incurred by Landlord in leasing or attempting to lease space in the Building; (f) costs of a capital nature, including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools, all as determined in accordance with standard accounting practices; provided, however, the capital expenditures set forth in Subparagraph l(n) above will in any event be included in the definition of Operating Expenses; (g) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt encumbering the Building or the Development; (h) costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Building (including the original Tenant Improvements for the Premises), or incurred in renovating or otherwise improving, decorating, painting or redecorating space for tenants 19 or other occupants of the Building, including space planning and interior design costs and fees; (i) attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Building; provided, however, that Operating Expenses will include those attorneys' fees and other costs and expenses incurred in connection with negotiations, disputes or claims relating to items of Operating Expenses, enforcement of rules and regulations of the Building, and such other matters relating to the maintenance of standards required of Landlord under the Lease; (j) except for the administrative/management fees described in SUBPARAGRAPH 1(i) above, costs of Landlord's general corporate overhead; (k) all items and services for which Tenant or any other tenant in the Building reimburses Landlord (other than through operating expense pass-through provisions); (l) electric power costs for which any tenant directly contracts with the local public service company; and (m) costs arising from Landlord's charitable or political contributions. E-2 20 STANDARDS FOR UTILITIES AND SERVICES The following standards for utilities and services are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto. Subject to the terms and conditions of the Lease and provided Tenant remains in occupancy of the Premises, Landlord will provide or make available the following utilities and services: 1. Provide non-attended automatic elevator facilities Monday through Friday, except holidays, from 8 a.m. to 6 p.m., and have one elevator available for Tenant's use at all other times. 2. On Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and on Saturday from 8 a.m. to 12 Noon (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours, when in the reasonable judgment of Landlord it may be required for the comfortable occupancy of the Premises. The air conditioning system achieves maximum cooling when the window coverings are extended to the full length of the window opening and adjusted to a 45 degrees angle upwards. Landlord will not be responsible for room temperatures if Tenant does not keep all window coverings in the Premises extended to the full length of the window opening and adjusted to a 45 degrees angle upwards whenever the system is in operation. Tenant agrees to cooperate fully at all times with Landlord, and to abide by all reasonable regulations and requirements which Landlord may prescribe for the proper function and protection of said air conditioning system. Tenant agrees not to connect any apparatus, device, conduit or pipe to the chilled and hot water air conditioning supply lines of the Building. Tenant further agrees that neither Tenant nor its servants, employees, agents, visitors, licensees or contractors shall at any time enter the mechanical installations or facilities of the Building or the Development or adjust, tamper with, touch or otherwise in any manner affect said installations or facilities. The cost of maintenance and service calls to adjust and regulate the air conditioning system will be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Exhibit, including keeping window coverings extended to the full length of the window opening and adjusted to a 45 degrees angle upwards. Such work will be charged at hourly rates equal to then-current journeyman's wages for air conditioning mechanics. 3. Landlord will make available to the Premises, 24 hours per day, seven days a week, electric current as required by the Building standard office lighting and fractional horsepower office business machines including copiers, personal computers and word processing equipment in an amount not to exceed six (6) watts per square foot per normal business day. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the average cost per kilowatt hour charged to the Building during the period. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, such cost will be established by an independent licensed engineer selected in Landlord's reasonable discretion, whose fee shall be shared equally by Landlord and Tenant. Tenant agrees not to use any apparatus or device in, upon or about the Premises (other than standard office business machines, personal computers and word processing equipment) which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without the written consent of Landlord. Should Tenant use the same to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge will constitute a breach of the obligation to pay rent under this Lease and will entitle Landlord to the rights therein granted for such breach. Tenant's use of electric current will never exceed the capacity of the feeders to the Building, or the risers or wiring installation and Tenants will not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises (except standard office business machines, personal computers and word processing equipment) without the prior written consent of Landlord. 4. Water will be available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purpose in addition to ordinary drinking and lavatory purposes, of which fact Tenant constitutes Landlord to be the sole judge, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant agrees to pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant will keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on such meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made by Landlord for any of the reasons or purposes hereinabove stated will be deemed to be additional rent payable by Tenant and collectible by Landlord as such. 5. Landlord will provide janitor service to the Premises, provided the same are used exclusively as offices, and are kept reasonably in order by Tenant, and unless otherwise agreed to by Landlord and Tenant no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they will be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord. Tenant agrees to pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. 6. Landlord reserves the right to stop service of the elevator, plumbing, ventilation, air conditioning and electrical systems, when necessary, by reason of accident or emergency or for repairs, alterations or improvements, when in the judgment of Landlord such actions are desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed, and Landlord will have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations or by reason of the requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel supply. It is expressly understood and agreed that any covenants on Landlord's part to furnish any services pursuant to any of the terms, covenants, conditions, provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, will not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control. 21 ESTOPPEL CERTIFICATE The undersigned,____________________________________________________ ("Tenant"), hereby certifies to ____________________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated _______________ ,19__, between_________________________________ , a _____________________________ ("Landlord") and Tenant (the "Lease"), regarding the premises located at _______________________________________________________ (the "Premises"). The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Paragraph 4 below. 2. The Term of the Lease commenced on _________________, 19__ . 3. The Term of the Lease shall expire on ___________________ 19,__ . 4. The Lease has: (Initial one) (_______) not been amended, modified, supplemented, extended, renewed or assigned. (_______) been amended, modified, supplemented, extended, renewed or assigned by the following described terms or agreements, copies of which are attached hereto: _______________________________________________________________________ _______________________________________________________________________ 5. Tenant has accepted and is now in possession of the Premises. 6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will be assigned to ______________________________ and that no modification, adjustment, revision or cancellation of the Lease or amendments thereto shall be effective unless written consent of___________________________ _______________________________ is obtained, and that until further notice, payments under the Lease may continue as heretofore. 7. The amount of Monthly Base Rent is $___________ . 8. The amount of security deposits (if any) is $______________ . No other security deposits have been made except as follows: _________ ______________________________________________________________________________ . 9. Tenant is paying the full lease rental which has been paid in full as of the date hereof. No rent or other charges under the Lease have been paid for more than thirty (30) days in advance of its due date except as follows: ______________________________________________________________________________ . 10. All work required to be performed by Landlord under the Lease has been completed except as follows: _____________________________________________ ______________________________________________________________________________ . 11. There are no defaults on the part of the Landlord or Tenant under the Lease except as follows: __________________________________________________ ______________________________________________________________________________ . 12. Neither Landlord nor Tenant has any defense as to its obligations under the Lease and claims no set-off or counterclaim against the other party except as follows: _____________________________________________________________ ______________________________________________________________________________ . 13. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies other than as provided in the Lease except as follows: ___________________________________ ______________________________________________________________________________ . All provisions of the Lease and the amendments thereto (if any) referred to above are hereby ratified. The foregoing certification is made with the knowledge that _________________________________is about to fund a loan to Landlord or ____________________ is about to purchase the Building from Landlord and that ___________________ is relying upon the representations herein made in funding such loan or in purchasing the Building. IN WITNESS WHEREOF, this certificate has been duly executed and delivered by the authorized officers of the undersigned as of _________, l9__ . TENANT: _______________________________________, a______________________________________ By:____________________________________ Print Name:____________________________ Title:_________________________________ SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "G" 22 RULES AND REGULATIONS A. GENERAL RULES AND REGULATIONS. The following rules and regulations govern the use of the Building and the Development Common Areas. Tenant will be bound by such rules and regulations and agrees to cause Tenant's Authorized Users, its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same. 1.Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice may be installed or displayed on any part of the outside or inside of the Building or the Development without the prior written consent of Landlord. Landlord will have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls are to be printed, painted, affixed or inscribed at the expense of Tenant and under the direction of Landlord by a person or company designated or approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant will immediately discontinue such use. Tenant agrees not to place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises including from within any interior common areas. 3. Tenant will not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Development. The halls, passages, exits, entrances, elevators and stairways are not open to the general public, but are open, subject to reasonable regulations, to Tenant's business invitees. Landlord will in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Development and its tenants, provided that nothing herein contained will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building. 4. Tenant will not obtain for use on the Premises ice, drinking water, food, food vendors, beverage, towel or other similar services or accept barbering or bootblacking service upon the Premises, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. Landlord expressly reserves the right to absolutely prohibit solicitation, canvassing, distribution of handbills or any other written material, peddling, sales and displays of products, goods and wares in all portions of the Development except as may be expressly permitted under the Lease. Landlord reserves the right to restrict and regulate the use of the common areas of the Development and Building by invitees of tenants providing services to tenants on a periodic or daily basis including food and beverage vendors. Such restrictions may include limitations on time, place, manner and duration of access to a tenant's premises for such purposes. Without limiting the foregoing, Landlord may require that such parties use service elevators, halls, passageways and stairways for such purposes to preserve access within the Building for tenants and the general public. 5. Landlord reserves the right to require tenants to periodically provide Landlord with a written list of any and all business invitees which periodically or regularly provide goods and services to such tenants at the premises. Landlord reserves the right to preclude all vendors from entering or conducting business within the Building and the Development if such vendors are not listed on a tenant's list of requested vendors 6. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. the following business day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building or has a pass or is properly identified. Tenant will be responsible for all persons for whom it requests passes and will be liable to Landlord for all acts of such persons. Landlord will not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 7. The directory of the Building or the Development will be provided exclusively for the display of the name and location of tenants only and Landlord reserves the right to exclude any other names therefrom. 8. All cleaning and janitorial services for the Development and the Premises will be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord will be employed by Tenant or permitted to enter the Development for the purpose of cleaning the same. Tenant will not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 9. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any new additional lock or bolt on any door of the Premises. Tenant, upon the termination of its tenancy, will deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, will pay Landlord therefor. 10. If Tenant requires telegraphic, telephonic, burglar alarm, satellite dishes, antennae or similar services, it will first obtain Landlord's approval, and comply with, Landlord's reasonable rules and requirements applicable to such services, which may include separate licensing by, and fees paid to, Landlord. 11. Freight elevator(s) will be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its discretion, deems appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and subsequent deliveries of bulky items, such as furniture, safes and similar items will, unless otherwise agreed in writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m. or on Saturday or Sunday. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries will be made which impede or interfere with other tenants or the operation of the Building. 12. Tenant will not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord will have the right to reasonably prescribe the weight, size and position of all safes, heavy equipment, files, materials, furniture or other property brought into the Building. Heavy objects will, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms will be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to any tenants in the Building or Landlord, are to be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devises sufficient to eliminate noise or vibration. Tenant will be responsible for all structural engineering required to determine structural load, as well as the expense thereof. The persons employed to move such equipment in or out of the Building must be reasonably acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property will be repaired at the expense of Tenant. EXHIBIT "H" 23 13. Tenant will not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant will not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor will Tenant bring into or keep in or about the Premises any birds or animals. 14. Tenant will not use any method of heating or air conditioning other than that supplied by Landlord without Landlord's prior written consent. 15. Tenant will not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and will refrain from attempting to adjust controls. Tenant will keep corridor doors closed, and shall keep all window coverings pulled down. 16. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. Without the written consent of Landlord, Tenant will not use the name of the Building or the Development in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 17. Tenant will close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and lighting or gas before Tenant and its employees leave the Premises. Tenant will be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 18. The toilet rooms, toilets, urinals, wash bowls and other apparatus will not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule will be borne by the tenant who, or whose employees or invitees, break this rule. Cleaning of equipment of any type is prohibited. Shaving is prohibited. 19. Tenant will not sell, or permit the sale at retail of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant will not use the Premises for any business or activity other than that specifically provided for in this Lease. Tenant will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 20. Tenant will not install any radio or television antenna, loudspeaker, satellite dishes or other devices on the roof(s) or exterior walls of the Building or the Development. Tenant will not interfere with radio or television broadcasting or reception from or in the Development or elsewhere. 21. Except for the ordinary hanging of pictures and wall decorations, Tenant will not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant will not cut or bore holes for wires. Tenant will not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 22. Tenant will not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord. 23. Landlord reserves the right to exclude or expel from the Development any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant will store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant will not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal is to be made in accordance with directions issued from time to time by Landlord. 25. The Premises will not be used for lodging or for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking will be done or permitted on the Premises without Landlord's consent, except the use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, and the use of a microwave oven for employees use will be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 26. Neither Tenant nor any of its employees, agents, customers and invitees may use in any space or in the public halls of the Building or the Development any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant will not bring any other vehicles of any kind into the Building. 27. Tenant agrees to comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. To the extent Landlord reasonably deems it necessary to exercise exclusive control over any portions of the Common Areas for the mutual benefit of the tenants in the Building or the Development, Landlord may do so subject to reasonable, non-discriminatory additional rules and regulations. 30. Landlord may prohibit smoking in the Building and may require Tenant and any of its employees, agents, clients, customers, invitees and guests who desire to smoke, to smoke within designated smoking areas within the Development. 31. Tenant's requirements will be attended to only upon appropriate application to Landlord's asset management office for the Development by an authorized individual of Tenant. Employees of Landlord will not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 32. These Rules and Regulations are in addition to, and will not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Development. H-2 24 33. Landlord reserves the right to make such other and reasonable and non-discriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Development and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated and any additional reasonable and non-discriminatory rules and regulations which are adopted. Tenant is responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. B. PARKING RULES AND REGULATIONS. The following rules and regulations govern the use of the parking facilities which serve the Building. Tenant will be bound by such rules and regulations and agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same: 1. Tenant will not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, subtenants, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. No vehicles are to be left in the parking areas overnight and no vehicles are to be parked in the parking areas other than normally sized passenger automobiles, motorcycles and pick-up trucks. No extended term storage of vehicles is permitted. 2. Vehicles must be parked entirely within painted stall lines of a single parking stall. 3. All directional signs and arrows must be observed. 4. The speed limit within all parking areas shall be five (5) miles per hour. 5. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles or on ramps; (c) where "no parking" signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated from time to time by Landlord or Landlord's parking operator. 6. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicle if such vehicle's audio theft alarm system remains engaged for an unreasonable period of time. 7. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 8. Landlord may refuse to permit any person to park in the parking facilities who violates these rules with unreasonable frequency, and any violation of these rules shall subject the violator's car to removal, at such car owner's expense. Tenant agrees to use its best efforts to acquaint its employees, subtenants, assignees, contractors, suppliers, customers and invitees with these parking provisions, rules and regulations. 9. Parking stickers, access cards, or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Parking identification devices, if utilized by Landlord, must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Parking identification devices, if any, are not transferable and any device in the possession of an unauthorized holder will be void. Landlord reserves the right to refuse the sale of monthly stickers or other parking identification devices to Tenant or any of its agents, Employees or representatives who willfully refuse to comply with these rules and regulations and all unposted city, state or federal ordinances, laws or agreements. 10. Loss or theft of parking identification devices or access cards must be reported to the management office in the Development immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device or access card at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have a parking identification device or valid access card. Any parking identification device or access card which is reported lost or stolen and which is subsequently found in the possession of an unauthorized person will be confiscated and the illegal holder will be subject to prosecution. 11. All damage or loss claimed to be the responsibility of Landlord must be reported, itemized in writing and delivered to the management office located within the Development within ten (10) business days after any claimed damage or loss occurs. Any claim not so made is waived. Landlord is not responsible for damage by water or fire, or for the acts or omissions of others, or for articles left in vehicles. In any event, the total liability of Landlord, if any, is limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any car. Landlord is not responsible for loss of use. 12. The parking operators, managers or attendants are not authorized to make or allow any exceptions to these rules and regulations, without the express written consent of Landlord. Any exceptions to these rules and regulations made by the parking operators, managers or attendants without the express written consent of Landlord will not be deemed to have been approved by Landlord. 13. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicles which are used or parked in violation of these rules and regulations. 14. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. H-3 25 DEVELOPMENT SITE PLAN [MAP OF KOLL CENTER IRVINE] EXHIBIT "A-II" 26 PREMISES FLOORPLAN [FLOORPLAN KOLL CENTER IRVINE NATIONAL EDUCATION BLDG.] EXHIBIT "A-1" 27 [KOLL CENTER IRVINE LETTER HEAD] March 13, 1996 Mr. Mitch Everton PRO BUSINESS, INC. 5934 Gibraltar, Suite 201 Pleasanton, California 94588 Re: Fully Executed Amendment No. #1 by and between Koll Center Irvine Number Two, Landlord, and Pro Business, Inc., Tenant. Dear Mitch: Please find enclosed one (1) fully executed copy of the above-referenced Amendment No. 1 for Suite 340 in the building located at 18400 Von Karman Avenue, Irvine, California. If I can be of any further assistance, please contact me at (714) 474-1800. Sincerely yours, KOLL MARKETING GROUP /s/ John D. Weiner - ----------------------------------- John D. Weiner Senior Marketing Consultant JDW:jek Enclosure cc: Brad Schweitzer, Esq. Craig Ersek 28 AMENDMENT NO. 2 TO OFFICE BUILDING LEASE This AMENDMENT NO. 2 TO OFFICE BUILDING LEASE ("Amendment") is made as of the ___ day of April, 1996, by and between KOLL CENTER IRVINE NUMBER TWO, a California limited partnership ("Landlord"), and PRO BUSINESS, INC., a California corporation ("Tenant"), with reference to the facts set forth in the Recitals below. RECITALS A. Landlord and Tenant are parties to that certain Office Building Lease dated November 7, 1994 (the "Original Lease"), and Amendment No. I thereto dated March 8, 1996 (the "First Amendment"), pursuant to which Landlord currently leases to Tenant certain space in the building commonly known as 18400 Von Karman Avenue, Irvine, California (the "Premises"). The Premises presently consists of approximately 4,471 Rentable Square Feet of space on the 3rd floor of the Building, commonly known as Suites 340 and 350. B. The Original Lease as amended by the First Amendment is collectively referred to in this Amendment as the "Lease". Capitalized terms not defined in this Amendment have the meanings given to them in the Lease. C. Landlord and Tenant desire to further amend the Lease in order to memorialize certain terms concerning demolishing a wall in the Premises. AGREEMENT NOW THEREFORE, in consideration of the above Recitals and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Upon execution of this Amendment by Tenant, Tenant shall pay to Landlord the sum of $2,730.00 toward the costs incurred by Landlord in demolishing a wall in the Premises Upon expiration or the earlier termination of the Additional Space Term (as defined in the First Amendment), Tenant shall pay to Landlord, as additional rent under the Lease as amended hereby, an amount equal to $1,654.80 to compensate Landlord for the cost of reinstalling the demolished wall following Tenant's vacation of the Additional Space. 2. Except as modified in this Amendment, all other terms and conditions of the Lease shall remain unchanged and in full force and effect. To the extent of a conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. TENANT: LANDLORD: PRO BUSINESS, INC., KOLL CENTER IRVINE NUMBER TWO, a California corporation a California limited partnership By: Connecticut General Life Insurance By: /s/ Mitch Everton Company, General Partner __________________________ Name: Mitch Everton _____________________ Title: EVP - OPERATIONS ________________________ By: Cigna Investments, Inc. Its Authorized Agent By:______________________________ Name:________________________ By: /s/ Chuel D. Hwang ____________________________ Title:_______________________ Name: Chuel D. Hwang _______________________ Title: Vice President ______________________ 29 AMENDMENT NO. I TO OFFICE BUILDING LEASE This AMENDMENT NO. I TO OFFICE BUILDING LEASE ("Amendment") is made as of the 8th day of March, 1996, by and between KOLL CENTER IRVINE NUMBER TWO, a California limited partnership ("Landlord"), and PRO BUSINESS, INC., a California corporation ("Tenant"), with reference to the facts set forth in the Recitals below. RECITALS A. Landlord and Tenant are parties to that certain Office Building Lease dated November 7, 1994 (the "Lease"), pursuant to which Landlord leased to Tenant certain space in the building (the "Building") commonly known as 18400 Von Karman Avenue, Irvine, California (the "Original Premises"). The Original Premises presently consists of approximately 2,721 Rentable Square Feet of space on the 3rd floor of the Building, commonly known as Suite 340. B. Capitalized terms not defined in this Amendment have the meanings given to them in tile Lease. C. Landlord and Tenant desire to amend the Lease in order to expand the Original Premises by approximately 1,750 Rentable Square Feet on the terms hereinafter provided. AGREEMENT. NOW THEREFORE, in consideration of the above Recitals and other good and valuable consideration, THE receipt of which is hereby acknowledged, the parties agree as follows.- 1. Additional Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, as of the date hereof, the approximately 1,750 Rentable Square Feet adjacent to the Original Premises depicted on Exhibit "A" attached hereto (the "Additional Space"). Tenant's leasing of the Additional Space shall be on all of the terms and conditions of the Lease as relate to the Original Premises, except as expressly set forth in this Amendment. The Additional Space together with the Original Premises shall sometimes be referred to in this Amendment as the "New Premises," and the New Premises shall consist of a total of approximately 4,471 Rentable Square Feet. From and after the date hereof, except as expressly set forth in this Amendment, the defined term "Premises" as used in the Lease shall mean and refer to the New Premises. The term of Tenant's leasing of the Additional Space (the "Additional Space Term") shall commence on March 1, 1996 and shall expire on February 28, 1997. Monthly Base Rent on the Additional Space during the Additional Space Term shall be $1.55/RSF/mo. or $2,712.50 per month. 2. Operating Expenses and Tenant's Percentage. The Operating Expense Allowance for the Additional Space shall be Tenant's Percentage of Operating Expenses for the 1996 calendar year. Tenant's Percentage for the Additional Space shall be .7994%. 3. Condition of Additional Space. Tenant shall accept the Additional Space in its "AS IS" existing condition and acknowledges that Landlord shall not be obligated to improve or pet-form any work in the Additional Space. 4. Parking. In accordance with the terms of the Lease, Tenant shall be entitled to use, and shall pay for whether or not it uses, two (2) unreserved employee parking stalls for the Additional Space at the rate of $30.00 per space per month during the Additional Space Term. 5. Brokers Landlord and Tenant each represent and warrant to the other that it is not aware of any brokers or finders, other than Lee & Associates, who may claim a fee or commission in connection with tile consummation of the transactions contemplated by this Amendment. If any other claims for brokers' or finders' fees in connection with the transactions contemplated by this Amendment arise, then Tenant agrees to indemnify, protect, hold harmless and defend Landlord (with counsel satisfactory to Landlord) from 30 and against any such claims if they shall be based upon any statement, representation or agreement made by Tenant, and Landlord agrees to indemnify, protect, hold harmless and defend Tenant (with counsel satisfactory to Tenant) if such claims are based upon any statement, representation or agreement made by Landlord. 6. No Other Modifications. Except as modified in this Amendment, all other terms and conditions of the Lease shall remain unchanged and in full force and effect. To the extent of a conflict between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall prevail. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. TENANT: LANDLORD: PRO BUSINESS, INC., a California KOLL CENTER IRVINE NUMBER TWO, corporation a California limited partnership By: /s/ Mitch Everton _____________________________ By: Connecticut General Life Insurance Name: Mitch Everton Company, General Partner _______________________ Title: EVP - OPERATIONS By: Cigna Investments, Inc. _______________________ Its Authorized Agent By:______________________________ Name:_______________________ Title:______________________ By: /s/ Leon Pouncy ______________________________ Name: ________________________ Title: LEON POUNCY ________________________ MANAGING DIRECTOR 31 DEPICTION OF ADDITIONAL SPACE [FLOOR PLAN - FLOOR 3 KOLL CENTER IRVINE] 32 [KOLL LETTERHEAD] November 29, 1994 Mr. Mitch Everton Pro-Business, Inc. 18400 Von Karman Ave, Inc. Suite 340 Irvine, CA 92715 Dear Mitch: This letter confirms that Pro-Business, Inc. is ready to begin occupancy of Suite 340, in the 18400 Building at Koll Center Irvine. Upon execution of this letter, by yourself or representatives of your firm, acknowledging Pro-Business's acceptance of the leased premises, we will tender possession to you so that you may take occupancy on November 29, 1994. Your lease will commence effective November 29, 1994. Sincerely, /s/ Craig T. Ersek _________________________ Craig T. Ersek Manager Koll Center Irvine Accepted this 29th day of November, 1994 PRO-BUSINESS, INC. By: /s/ Terri Berg ____________________________________ Its:____________________________________ EX-10.18 38 LEASE BETWEEN CALLAHAN PENTZ AND PROBUSINESS 1 Exhibit 10.18 Date(s) Revised:___________________ TENANT (LEASE) SUMMARY FULL SERVICE OFFICE Lease Execution Date: 10/9/87 Lease Amendments (purpose, date): Letter metering expenses -- 12/16/87 Landlord: Hacienda Park Associates Address: 4637 Chabot Drive, Suite 300 Pleasanton, CA 94566 Contact: Joe Callahan Tenant: Johansen Investment Corp. dba SCJ Insurance Serv. Address: 4698 Willow Rd. Pleasanton, CA 94566 Contact: Shirley Rapp Phone #: 463-1374 Broker: Ted Helgans Company: CPS Phone #: 463-2300 PROPERTY INFORMATION: Property/Project: Site 30A -- Saratoga Center Bldg.: A&B Acreage: 5,575 APN: 941-2759-20 Sqft.: A-41,656 1B-41,574 (bldg.) 13,179/B-2117 (tenant) Address: 5934 Gibraltar Drive Suite: 100 & 202 Pleasanton, CA 94566 *Tenant's Project %: 15.8-A/2.5-B Tenant's Building %: 31.6-A/5%-B Lease Term: 5 years 0 months Estimated Lease Commencement date: 10/15/87 Actual Date: 10/15/87 Lease Expiration Date: 9/14/92 Late Payment Charges: 5 days or 5% Deposit Received: (Security) N/A (Mo. rent) 1 mo. Renewal Option (term, base rent, notice date): Holdover @ 100% of existing rent rate. No option presided. Landlord's Tenant Improvements: (AT&T moved into Spec Bldg 2 space.) Information below if from Spec Bldg 2 Construction File. Architect (company): Interform (contact): D. Gould General Contractor (company): Vanderson (contact): J. Merryman Consultants (by Specialty): Building Permit #: 9496-1 Building Permit #:_________________ Type: TI Type:______________________________ Date Issued: 9/ /8 Date Issued:_______________________ Date Final: 7/25/87 Date Final:________________________ Notice of Completion: (dt) / /8 #- 828 (dt)___________#________ Executed Plans, Specs (Date): / As Built Drawings (Date): N/A Comments (punchlist, etc.): Signed punchlist 10/26/87 Page 1 of 2 2 Tenant Improvement Cost Allowance - Turnkey Total Allowance ($/sq.ft.): 29.37 = Existing: 8.97 + New: 20.40 Actual Tenant Improvement Cost ($/sq.ft.): 29.57 Construction Cost (Gen'l Cont.): +29,451 Change Orders (Date Executed, Amount): (1)Dt: 10/20/87 Amt: 2634 -------- -------- (2)Dt: 11/9/87 Amt: 353 (3)Dt: Amt: -------- -------- -------- -------- (4)Dt: Amt: (5)Dt: Amt: -------- -------- -------- -------- (5)Dt: Amt: (7)Dt: Amt: -------- -------- -------- -------- Indirect Cost (Permits, A&E, etc.): A&E-3,616.45, allowance-31,795.76 _______________________________________________________________________ _______________________________________________________________________ Excess Tenant Improvements: Actual Amount Over Allowance ($/sq.ft.): N/A Rent Adjustment Factor: N/A Maximum T.I. Amount ($/sq.ft.): N/A Monthly Rental: Operating Expenses (base year 1987) Total Monthly Outside Area Building Rental Period Base Rent Expense Expense ----------------------- (Month) (Rate/sf/mo) + (Rate/sf/mo) + (Rate/sf/mo) = (Rate/sf/mo) ($Amount) - ------- ------------ ------------ ------------ ------------ --------- 5 .22 $0.43 Inc. $0.65 10,000 25 1.22 $0.43 Inc. 1.65 25,200 30 1.38 0.43 Inc. 1.81 27,720 NNN Rent - per limitation expenses, any $ paid by landlord must be deducted from base rent to get NNN. Additional Rent (Item, Payment Cycle, Rate/SF/Mo): Adj operating as needed with actual start due 120 days after EOY. Use 10% vacancy to calculate estimate. Rental Escalations (Date, Reason, Rate/SF/Mo):_________________________________ _______________________________________________________________________________ Miscellaneous (Limitations on Expenses, etc.): Expenses do not include optional services. Operating expenses capped at $0.43 1st year only_______________________________ Lease Amendment Required: (Date, Reason, Adj to Rate/SF/Mo): Site moving expenses. Operating Expenses: Landlord: Tenant pays estimated base year operating expenses per Exhibit D of the lease. Operating expenses include building expenses not limited to real property taxes and assessments, insurance, gas and electric service for normal business hours (7:00 a.m. to 6:30 p.m.), HVAC maintenance and repair, property management at 3% of the annual gross income, domestic and irrigation water and sewer rental, general building maintenance, building supplies, fire, alarm, and HVAC system monitoring and repair. Outside area expenses include but are not limited to landscape irrigation and landscaping maintenance, replacement and repair. Tenant: None except off hour PG&E usage and adjustments to Base Year. Utilities & Services: By Tenant, gas, electrical, telephone, domestic water and sewer rental separatley metered for Tenant. Comments (General): Lease form used: Full Service Office. Page 2 of 2 3 Date: November 16, 1989 CALLAHAN PROPERTY COMPANY - SUMMARY OF LEASE COSTS TENANT: SCJ INSURANCE SERVICES ----------------------------------- PROJECT: SARATOGA CENTER - SITE 30A SQUARE FEET: 3,100 ----------------------------------- --------------
ESTIMATE FINAL -------- ----- TENANT IMPROVEMENT COSTS: - ------------------------ Date: 11/15/89 Date: ---------- ---------- General Contractor VCI: $22,455 ---------- ---------- Change Orders #1: ---------- ---------- Change Orders #2: ---------- ---------- Other Contractors: 1. TELCO COMMUNICATION $ 5,950 ----------------------- ---------- ---------- 2. ----------------------- ---------- ---------- 3. ----------------------- ---------- ---------- Landlord Pre-Purchased Materials: 1. ----------------------- ---------- ---------- 2. ----------------------- ---------- ---------- 3. ----------------------- ---------- ---------- Sub Total: $28,405 Other Costs: Permits and Plan Check: INCLUDED IN VCI --------------- ---------- Other Municipal Fees: ---------- ---------- Space Planning $ 2,500 ---------- ---------- Other Costs: 1. MOVING EXPENSE $ 2,100 ----------------------- ---------- ---------- 2. ----------------------- ---------- ---------- SIGNAGE Commissions - None - No rent increase Callahan Property Company ---------- ---------- Other ---------- ---------- Sub Total: $ 4,600 ========== ========== TOTAL: $33,005 BY: GTC ---------- ----------
4 LEASE (FULL SERVICE OFFICE LEASE) BY AND BETWEEN CALLAHAN PENTZ PROPERTIES, PLEASANTON - SITE 30A, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD") AND JOHANSEN INVESTMENT CORPORATION dba SCJ INSURANCE SERVICE ("TENANT") OCT. 9, 1987 FOR THE APPROXIMATELY 13,179 SF PREMISES AT 5934 GIBRALTAR DRIVE, PLEASANTON, CA 94566 AND 2,117 SF PREMISES AT 4698 WILLOW ROAD, PLEASANTON, CA 94566 5 LEASE SUMMARY FULL SERVICE OFFICE LEASE LEASE DATE: October 9, 1987 LANDLORD: Callahan Pentz Properties, Pleasanton - Site 30A LANDLORD'S ADDRESS: 4637 Chabot Drive, Suite 300 Pleasanton, CA 94566 TENANT: Johansen Investment Corporation dba SCJ Insurance Service TENANT'S ADDRESS: 4698 Willow Road, Pleasanton, CA 94566 CONTACT: Shirley Lapp TELEPHONE: (415) 463-1374 PREMISES: Premises A: 13,179 Square Feet, 5934 Gibraltar Drive, Pleasanton, CA 94566 and Premises B: 2,117 Square Feet, 4698 Willow Road, Pleasanton, CA 94566 BUILDING SQUARE 41,656 Square Feet at 5934 Gibraltar FOOTAGE: 41,574 Square Feet at 4698 Willow Road PROJECT ACREAGE: 4,575 ANTICIPATED COMMENCEMENT DATE: October 15, 1987 TERM: October 15, 1987, to September 14, 1992 NET MONTHLY RENT: $3,434.35/month ESTIMATED OPERATING $5,930.55/month (Premises A) EXPENSE BASE: $ 635.10/month (Premises B) TOTAL: $10,000.00/month NET MONTHLY RENT March 15, 1988 - $18,634.35 INCREASES: April 15, 1990 - $21,154.35 SECURITY DEPOSIT: N/A. TENANT'S PERCENTAGE: 31.6% at 5934 Gibraltar Drive 5% at 4698 Willow Road
6 TABLE OF CONTENTS (FULL SERVICE OFFICE LEASE)
PARAGRAPH PAGE 1. BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . 1 2. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 2 4. LEASE TERM . . . . . . . . . . . . . . . . . . . . . . . . 4 5. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. LATE PAYMENT CHARGES . . . . . . . . . . . . . . . . . . . 5 7. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . 5 8. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . 6 9. TENANT IMPROVEMENTS . . . . . . . . . . . . . . . . . . . 6 10. CONDITION OF PREMISES . . . . . . . . . . . . . . . . . . 6 11. USE OF THE PREMISES . . . . . . . . . . . . . . . . . . . 6 12. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . 7 13. ALTERATIONS . . . . . . . . . . . . . . . . . . . . . . . 7 14. SURRENDER OF THE PREMISES . . . . . . . . . . . . . . . . 7 15. OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . 8 16. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 12 17. UTILITIES AND SERVICES . . . . . . . . . . . . . . . . . . 13 18. REPAIR AND MAINTENANCE . . . . . . . . . . . . . . . . . . 13 19. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 20. LANDLORD'S RIGHT TO ENTER THE PREMISES . . . . . . . . . . 14 21. SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 22. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . 15
i 7 23. WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . 16 24. DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . 17 25. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . 18 26. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . 18 27. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 19 28. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . 21 29. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . 22 30. ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . 22 31. TENANT STATEMENTS . . . . . . . . . . . . . . . . . . . . 22 32. TRANSFER OF THE BUILDING BY LANDLORD . . . . . . . . . . . 23 33. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS . . . . . . 23 34. TENANT'S REMEDY . . . . . . . . . . . . . . . . . . . . . 23 35. MORTGAGEE PROTECTION . . . . . . . . . . . . . . . . . . . 23 36. BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . 23 37. ACCEPTANCE . . . . . . . . . . . . . . . . . . . . . . . . 23 38. RECORDING . . . . . . . . . . . . . . . . . . . . . . . . 23 39. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . 23 40. PARKING . . . . . . . . . . . . . . . . . . . . . . . . . 24 41. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . 24 42. TERMINATION AGREEMENT . . . . . . . . . . . . . . . . . . 25
ii 8 LIST OF EXHIBITS EXHIBIT A The Premises EXHIBIT B The Project EXHIBIT C Work Letter Agreement EXHIBIT D Commencement Date Memorandum EXHIBIT E Rules and Regulations EXHIBIT F Utilities and Services EXHIBIT G Termination Agreement
iii 9 LEASE (FULL SERVICE OFFICE LEASE) THIS LEASE (the "Lease"), for reference purposes only dated October 9, 1987, is entered into by and between Callahan Pentz Properties, Pleasanton - Site 30A ("Landlord"), whose address is 4637 Chabot Drive, Suite 300, Pleasanton, California and Johansen Investment Corporation, a California corporation dba SCJ Insurance Service ("Tenant"), whose address is 4698 Willow Road, Pleasanton, California. 1. BASIC LEASE PROVISIONS. 1.1 PREMISES. Approximately thirteen thousand one hundred and seventy-nine (13,179) square feet (Premises A), commonly known as the street address of 5934 Gibraltar Drive, Suite No. 100, and Suite No. 202, and two thousand one hundred seventeen (2,117) square feet (Premises B), commonly known as the street address of 4698 Willow Road, in the City of Pleasanton (the "City"), County of Alameda (the "County"), California, as more particularly described in EXHIBIT A. Premises A and Premises B are sometimes hereafter referred to collectively as the "Premises". 1.2 BUILDING. The Building in which each of the respective Premises is located. 1.3 ANTICIPATED COMMENCEMENT DATE. October 15, 1987. 1.4 TERM. Five (5) years and zero (0) months, commencing upon the Commencement Date as defined in Paragraph 3.3 and ending October 14, 1992. 1.5 USE. General office purposes, subject to Paragraph II. 1.6 MONTHLY RENT. Commencing on the first month of the Term and continuing on the first day of each month thereafter, Tenant shall pay to Landlord Total Monthly Rent consisting of the following: 1.6.1 NET MONTHLY RENT: Commencing on the first day of the first month of the Term, Tenant shall pay Three Thousand Four Hundred and Thirty-four and 35/100ths ($3,434.35) Dollars. 1.6.2 OPERATING EXPENSE BASE. The amount of Operating Expenses for Premises A, as defined in Paragraph 15.1.1, is Five Thousand Nine Hundred and Thirty and 55/100ths ($5,930.55) Dollars per month. The Operating Expense Base is forty-five hundredths Dollars ($.45) per rentable square foot of the Premises per month. The amount of Operating Expenses for Premises B, as defined in Paragraph 15.1.2, is Six Hundred and Thirty-five and 10/100ths ($635.10) Dollars for Premises B per month. The Operating Expense Base is thirty hundredths ($.30) Dollars per rentable square foot of the Premises per month. 1.7 NET MONTHLY RENT ADJUSTMENTS. The Monthly Rent shall be increased during the Term as follows: March 15, 1988, to Eighteen Thousand Six Hundred and Thirty-four and 35/100ths ($18,634.35) Dollars and then April 15, 1990, to Twenty-one Thousand One Hundred and Fifty-four and 35/100ths ($21,154.35) Dollars. 1 10 Landlord hereby acknowledges receipt of one month's payment of Monthly Rent to be applied toward the first month of the Term. 1.8 SECURITY DEPOSIT. N/A. 1.9 TENANT'S PERCENTAGE. The percentage determined by dividing the approximate square footage of the Premises by the approximate total square footage of the Building. Tenant's Percentage is to be 31.6% for the purposes of this Lease at 5934 Gibraltar Drive and 5.0% at 4698 Willow Road. 1.10 PROJECT. The real property upon which the Building is located consisting of approximately 4.575 acres, as more particularly described in EXHIBIT B. 1.11 CC&R'S. Those Covenants, Conditions and Restrictions recorded as Instrument No. 85-1439.6, of the Official Records of the County, on January 24, 1987, as amended, incorporated herein by this reference. By placing its initials below, Tenant hereby acknowledges that it has received and read a complete copy of the CC&R's. Tenant's Initials: [SIG] ----------------- 1.12 BROKER(S) N/A. 1.13 ADDENDUM PROVISIONS. Options to renew: N/A 2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises together with a right in common to the Common Area, as defined in Paragraph 3.2, and the Outside Area, as defined in Paragraph 3.7. Tenant's right to use the Common Area shall be a right in common with other tenants of the Building, and Tenant's right to use the Outside Area shall be a right in common with other tenants of the Project. 3. DEFINITIONS. The following terms shall have the following meanings in this Lease: 3.1 ALTERATIONS. Any alterations, additions or improvements made in, on or about the Building or the Premises after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, partitioning, drapery and carpentry installations. 3.2 COMMON AREA. All areas and facilities within the Building provided and designated by Landlord for the general use, convenience or benefit of Tenant and other tenants and occupants of the Building, including, without limitation, hallways, stairs, elevators, entrances and exits, restrooms, appurtenant equipment serving the Building, and trash disposal facilities, subject to the reasonable rules and regulations and changes therein from time to time promulgated by Landlord governing the use of the Common Area. 3.3 COMMENCEMENT DATE. If no Tenant Improvements are to be constructed, the Commencement Date shall be the Anticipated Commencement Date set forth in Paragraph 1.3. If Tenant Improvements are to be constructed, the Commencement Date shall be the earliest occurring of the following: 2 11 3.3.1 The date the City has approved the Tenant Improvements constructed pursuant to EXHIBIT C in accordance with its building code, evidenced by its completion of a final inspection and written approval of such improvements as so completed in accordance with the building permit issued for such improvements; or 3.3.2 The date Landlord's architect and general contractor have both certified in writing to Tenant that all work described in the plans approved by Landlord and Tenant for the Tenant Improvements to be constructed pursuant to EXHIBIT C has been substantially completed in accordance with such plans; or 3.3.3 The date Tenant commences occupancy of the Premises. Once the actual Commencement Date has been determined pursuant to the foregoing, the parties shall execute a Commencement Date Memorandum in the form attached hereto as EXHIBIT D. 3.4 HVAC. Heating, ventilating and air conditioning. 3.5 INTEREST RATE. Twelve percent (12%) per annum, however, in no event to exceed the maximum rate of interest permitted by law. 3.6 LANDLORD'S AGENTS. Landlord's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.7 OUTSIDE AREA. All areas and facilities within the Project, exclusive of the interior of the Building and any other buildings on the Project, provided and designated by Landlord for the general use and convenience of Tenant and other tenants and occupants of the Project, including, without limitation, the parking areas, access and perimeter roads, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas and facilities, subject to the reasonable rules and regulations and changes therein from time to time promulgated by Landlord governing the use of the Outside Area. 3.8 REAL PROPERTY TAXES. Any form of assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Project or any part thereof or the rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Project or the buildings thereon or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in all or any part of the Project; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Project whether or not now customary or within the contemplation of the parties; or (v) surcharged against the Outside Area. 3.9 RENT. Monthly Rent plus the Additional Rent defined in Paragraph 5.2. 3.10 SUBLET. Any transfer, sublet, assignment, license or concession agreement, change of ownership, mortgage, or hypothecation of this Lease or the Tenant's interest in the Lease or in and to all or a portion of the Premises. 3 12 3.11 SUBRENT. Any consideration of any kind received, or to be received, by Tenant from a subtenant if such sums are related to Tenant's interest in this Lease or in the Premises, including, but not limited to, bonus money and payments (in excess of fair market value) for Tenant's assets including its trade fixtures, equipment and other personal property, goodwill, general intangibles, and any capital stock or other equity ownership of Tenant. 3.12 SUBTENTANT. The person or entity with whom a Sublet agreement is proposed to be or is made. 3.13 TENANT IMPROVEMENTS. Those improvements to the Premises to be constructed by Landlord pursuant to EXHIBIT C, if any. 3.14 TENANT'S PERSONAL PROPERTY. Tenant's trade fixtures, furniture, equipment and other personal property in the Premises. 4. LEASE TERM. 4.1 TERM. The Term shall be as set forth in Paragraph 1.4, as it may be renewed pursuant to any options to renew granted herein. 4.2 DELIVERY OF POSSESSION. If Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to liability therefor, nor shall such failure effect the validity of this Lease, the obligations of Tenant, or extend the Term. In such case, subject to the provisions of Section 4.3, Tenant shall not be obligated to pay Rent or perform any other obligations of Tenant under this Lease, except as may be otherwise provided herein, until possession of the Premises is tendered to Tenant; provided, however, if Landlord has not delivered possession of the Premises within sixty (60) days from the Commencement Date, Tenant may, at Tenant's option with notice in writing to Landlord within ten (10) days thereafter, cancel this Lease. If such notice is not received by Landlord within such ten (10) day period, Tenant's right to cancel this Lease shall terminate and be of no further force and effect. 4.3 TENANT DELAYS. If the Commencement Date has not occurred on or before the Anticipated Commencement Date set forth in Paragraph 1.3, due to the fault of the Tenant, then notwithstanding any other provision hereof, the Commencement Date of this Lease shall be the date specified as the Anticipated Commencement Date and Tenant shall commence payment to Landlord of the Monthly Rent set forth in Paragraph 1.6. Delays "due to the fault" of Tenant shall include those caused by: 4.3.1 Tenant's failure to furnish information to Landlord for the preparation of plans and drawings for the Tenant Improvements in accordance with EXHIBIT C; 4.3.2 Tenant's request for special materials, finishes or installations which are not readily available; 4.3.3 Tenant's failure to reasonably approve the space plan for the Tenant Improvements in accordance with the time period set forth in EXHIBIT C; 4.3.4 Tenant's changes in the space plan or the Final Plans after their approval by Landlord; 4 13 4.3.5 Tenant's failure to complete any of its own improvement work to the extent Tenant delays completion by the City of its final inspection and approval of the Tenant Improvements described in EXHIBIT C; or 4.3.6 Interference with Landlord's work caused by Tenant or by Tenant's contractors or subcontractors. 4.4. EARLY ENTRY. If Tenant is permitted to occupy the Premises prior to the Commencement Date for the purpose of fixturing or any other purpose permitted by Landlord, such early entry shall be at Tenant's sole risk and subject to all the terms and provisions hereof, except for the payment of Monthly Rent which shall commence on the date set forth in Paragraph 1.6. Landlord shall have the right to impose such additional conditions on Tenant's early entry as Landlord shall deem appropriate, and shall further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. 5. RENT. 5.1 MONTHLY RENT. Tenant shall pay to Landlord, in lawful money of the United States, commencing on the date specified in Paragraph 1.6 and continuing on the first day of each calendar month thereafter throughout the Term, the Monthly Rent, subject to adjustments as provided in Paragraph 1.7. Monthly Rent shall be payable in advance, without abatement, deduction, claim, offset, prior notice or demand and shall be prorated for any partial month. 5.2 ADDITIONAL RENT. All monies required to be paid by Tenant under this Lease, including, without limitation, Accrued Excess and Estimated Excess of Operating Expenses, as defined in Paragraph 15.3, and insurance premiums shall be deemed Additional Rent. 6. LATE PAYMENT CHARGES. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. Therefore, if any installment of Rent or any other charge due from Tenant is not received by Landlord within five (5) days of its due date, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge for every month or portion thereof that the Rent or other charges remain unpaid. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Landlord's Tenant's Initials /SIG/ Initials /SIG/ ---------------- ---------------- 7. SECURITY DEPOSIT. Tenant shall deposit with Landlord on the Commencement Date the Security Deposit set forth in Paragraph 1.9 for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any provision of this Lease, Landlord may apply all or any part of the Security Deposit for the payment of any Rent or other sum in default, the repair of such damage to the Premises or the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default to the full extent permitted by law. If any portion of the Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. If the Monthly Rent increases during the Term, Landlord shall have the right, upon ten (10) days' notice to Tenant, to 5 14 require that the Security Deposit be increased by an amount equal to the increase in the Monthly Rent. If Tenant is not otherwise in default, the Security Deposit or any balance thereof shall be returned to Tenant within thirty (30) days of termination of the Lease. 8. HOLDING OVER. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only and not a renewal hereof or any extension for any further term, and in such case, Rent and other monetary sums due hereunder shall be payable in the amount and at the time applicable at the time of expiration and at the time specified in this Lease and such month-to-month tenancy shall be subject to every other term, covenant and agreement of this Lease. 9. TENANT IMPROVEMENTS. Landlord agrees to construct the Tenant Improvements, if any, pursuant to the terms of EXHIBIT C. 10. CONDITION OF PREMISES. If no Tenant Improvements are to be constructed by Landlord, Tenant acknowledges that Tenant has inspected the Premises and accepts the Premises as of the Commencement Date in their "as is" condition. If Tenant Improvements are to be constructed by Landlord, within ten (10) days after completion of the Tenant Improvements, Tenant shall conduct a walk-through inspection of the Premises with Landlord and complete a punch-list of items needing additional work by Landlord. Other than the items specified in the punch-list, by taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as improved with the Tenant Improvements in good, clean and completed condition and repair, subject to all applicable laws, codes and ordinances. The punch-list to be prepared by Tenant shall not include any damage to the Premises caused by Tenant's move-in, which damage shall be repaired or corrected by Tenant, at its expense. Tenant acknowledges that neither Landlord nor its Agents have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its Agents agreed to undertake any Alterations or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. If Tenant fails to submit a punch-list to Landlord within such ten (10) day period, it shall be deemed that there are no items needing additional work or repair. Landlord's contractor shall complete all reasonable punch-list items within thirty (30) days after the walk-through inspection or as soon as practicable thereafter. Upon completion of such punch-list items, Tenant shall approve such completed items in writing to Landlord. If Tenant fails to reasonably approve such items within seven (7) days of completion, such items shall be deemed approved by Tenant. 11. USE OF THE PREMISES. 11.1 TENANT'S USE. Tenant shall use the Premises solely for the purposes specified in Paragraph 1.5 and shall not use the Premises for any other purpose without obtaining the prior written consent of Landlord. Tenant's use of the Premises, the Common Area, and the Outside Area shall be subject to the Rules and Regulations set forth in EXHIBIT E as amended from time to time by Landlord. Tenant agrees that the Project is subject and this Lease is subordinate to the CC&R's. Tenant acknowledges that it has read the CC&R's and knows the contents thereof. Throughout the Term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereof. Tenant shall hold Landlord and its Agents harmless and indemnify Landlord and its Agents against any loss, expense, damage, attorneys' fees and costs or liability arising out of or in connection with the failure of Tenant to so perform or comply with the CC&R's. 6 15 11.2 COMPLIANCE. Tenant shall not use the Premises or suffer or permit anything to be done in or about the Project which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of duly constituted public authorities now in force or which may hereafter be in force, or the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises or the Project. Tenant shall continuously and uninterruptedly conduct its business in the Premises during the Term and shall not abandon the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupant of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided, if any. Tenant shall not store or permit to be stored or otherwise placed any other material of any nature whatsoever outside the Building. In particular, Tenant, at its sole cost, shall comply with all laws relating to the storage, use and disposal of hazardous, toxic or radioactive matter, including those materials identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code, Division 4, Chapter 30 ("Title 22") as they may be amended from time to time (collectively "Toxic Materials"). If Tenant does store, use or dispose of any Toxic Materials, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. 12. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have the quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. 13. ALTERATIONS. After the Commencement Date, Tenant shall not make or permit any Alterations in, on or about the Premises, except for nonstructural Alterations not exceeding Five Thousand and no/100ths Dollars ($5,000.00) in cost, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and according to plans and specifications reasonably approved in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without the prior written consent of the Landlord, make any (i) alterations to the exterior of the Building; (ii) alterations to and penetrations of the roof of the Building; or (iii) alterations visible from outside the Building to which Landlord may withhold Landlord's consent on wholly aesthetic grounds. All Alterations shall be installed at Tenant's sole expense, in compliance with all applicable laws, permit requirements and the CC&R's, by a licensed contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date, and shall not diminish the value of either the Building or the Premises. All Alterations made by Tenant shall be and become the property of Landlord upon installation and shall not be deemed Tenant's Personal Property; provided, however, that Landlord may, at its option, require that Tenant, at Tenant's expense, remove any or all nonstructural Alterations installed by Tenant and return the Premises to their condition as of the Commencement Date of this Lease, normal wear and tear excepted and subject to the provisions of Paragraph 24. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any Alterations made by it to the Premises. 14. SURRENDER OF THE PREMISES. Upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, normal wear and tear and fire or other casualty excepted, with all interior areas cleaned. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 13, and all Tenant's Personal Property and repair any damage and perform any restoration work caused by such removal. If Tenant fails to remove such Alterations 7 16 and Tenant's Personal Property, and such failure continues after the termination of this Lease, Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. 15. OPERATING EXPENSES. The term "Operating Expenses" shall be defined to include the "Building Expenses" and the "Outside Area Expenses," as defined in Paragraphs 15.1.1, 15.1.2 and 15.2. 15.1.1 (PREMISES A) BUILDING EXPENSES. The term "Building Expenses" for Premises A shall mean all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay in connection with the ownership, maintenance, repair and operation of the Building and Common Area and such additional Building or Common Area facilities in subsequent years as may be determined by Landlord to be necessary, including, but not limited to, the following: (i) Wages and salaries of all employees engaged in the operation, maintenance and security of the Building and Common Area, including taxes, insurance and benefits relating thereto; and the rental cost and overhead of any office and storage space used to provide such services; (ii) Cost of all supplies, materials and labor used in the operation, repair, replacement and maintenance of the Building and Common Area; (iii) Cost of all utilities, including surcharges, for the Building and Common Area, including the cost of water, sewer, gas, power, heating, lighting, air conditioning and ventilating; (iv) Cost of all maintenance and service agreements for the Building and Common Area and the equipment thereon, including, but not limited to, security and energy management services, tenant security phone line monitoring, window cleaning, floor waxing, elevator maintenance, janitorial service, including janitorial service to interior leased premises, if Landlord elects to provide such service, engineers, gardeners, and trash removal services; (v) Cost of all insurance which Landlord or Landlord's lender deems necessary for the Building and Common Area such as the cost of "All-Risk" property insurance, including, at Landlord's option, earthquake and flood coverage, insurance against loss of rents on an "All-Risk" basis, a lender's loss payable endorsement in favor of Landlord's lender, and naming Landlord and its subsidiaries, directors, agents, officers and employees as named insureds; and casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith, naming Landlord and its subsidiaries, directors, agents, officers and employees as additional insureds, all as more particularly described in Paragraph 22; (vi) Cost of repairs and maintenance of the Building and Common Area (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Building); (vii) A reasonable management fee for the manager of the Building; 8 17 (viii) The costs of any additional services not provided to the Building and Common Area at the Commencement Date but thereafter provided by Landlord in its management of the same; (ix) The cost of any capital improvements made to the Building after the Commencement Date required by the CC&R's, or by any committee or association formed in connection therewith, or any governmental law or regulation, or that reduce other operating expenses, provided that such cost together with interest at the Interest Rate shall be amortized over such reasonable period as Landlord shall determine, and only the monthly amortized cost shall be included in the Building Operating Expenses; (x) Accounting and attorneys' fees; and (xi) Licenses, permits, and inspection and related governmental fees. The cost of additional or extraordinary services provided to Tenant and not paid or payable by Tenant pursuant to other provisions of this Lease shall be payable by Tenant and may be included by Landlord with Tenant's Percentage of the Building Expenses payable by Tenant on a monthly basis or may be billed to Tenant separately, in a lump sum, as Landlord shall elect. Building Expenses shall not include: (i) the cost of any additional or extraordinary services provided to other tenants of the Building; (ii) costs paid for directly by Tenant; (iii) principal and interest payments on loans secured by deed of trust recorded against the Building; (iv) real estate sales or leasing brokerage commissions; or (v) executive salaries of off-site personnel employed by Landlord except for the management fee referenced in Paragraph 15.1(vii) above; (vi) janitorial service. 15.1.2 (PREMISES B) BUILDING EXPENSES. The term "Building Expenses" for Premises B shall mean all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay in connection with the ownership, maintenance, repair and operation of the Building and Common Area and such additional Building or Common Area facilities in subsequent years as may be determined by Landlord to be necessary, including, but not limited to, the following: (i) Wages and salaries of all employees engaged in the operation, maintenance and security of the Building and Common Area, including taxes, insurance and benefits relating thereto; and the rental cost and overhead of any office and storage space used to provide such services; (ii) Cost of all supplies, materials and labor used in the operation, repair, replacement and maintenance of the Building and Common Area; (iii) Cost of all utilities, including surcharges, for the Building and Common Area, including the cost of water, sewer, gas, power, heating, lighting, air conditioning and ventilating; (iv) Cost of all maintenance and service agreements for the Building and Common Area and the equipment thereon, including, but not limited to, security and energy management services, window cleaning, engineers, gardeners, and trash removal services. 9 18 (v) Cost of all insurance which Landlord or Landlord's lender deems necessary for the Building and Common Area such as the cost of "All-Risk" property insurance, including, at Landlord's option, earthquake and flood coverage, insurance against loss of rents on an "All-Risk" basis, a lender's loss payable endorsement in favor of Landlord's lender, and naming Landlord and its subsidiaries, directors, agents, officers and employees as named insureds; and casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith, naming Landlord and its subsidiaries, directors, agents, officers and employees as additional insureds, all as more particularly described in Paragraph 22; (vi) Cost of repairs and maintenance of the Building and Common Area (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Building); (vii) A reasonable management fee for the manager of the Building; (viii) The costs of any additional services not provided to the Building and Common Area at the Commencement Date but thereafter provided by Landlord in its management of the same; (ix) The cost of any capital improvements made to the Building after the Commencement Date required by the CC&R's, or by any committee or association formed in connection therewith, or any governmental law or regulation, or that reduce other operating expenses, provided that such cost together with interest at the Interest Rate shall be amortized over such reasonable period as Landlord shall determine, and only the monthly amortized cost shall be included in the Building Operating Expenses; (x) Accounting and attorneys' fees; and (xi) Licenses, permits, and inspection and related governmental fees. The cost of additional or extraordinary services provided to Tenant and not paid or payable by Tenant pursuant to other provisions of this Lease shall be payable by Tenant and may be included by Landlord with Tenant's Percentage of the Building Expenses payable by Tenant on a monthly basis or may be billed to Tenant separately, in a lump sum, as Landlord shall elect. Building Expenses shall not include: (i) the cost of any additional or extraordinary services provided to other tenants of the Building; (ii) costs paid for directly by Tenant; (iii) principal and interest payments on loans secured by deed of trust recorded against the Building; (iv) real estate sales or leasing brokerage commissions; or (v) executive salaries of off-site personnel employed by Landlord except for the management fee referenced in Paragraph 15.1(vii) above; (vi) janitorial service. 15.2 Outside Area Expenses. The term "Outside Area Expenses" shall mean all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay in connection with the Outside Area, including, without limitation, the cost of any policies of insurance covering the Outside Area, the Real Property Taxes for the Project, dues payable to any owner's association established pursuant to the CC&R`s (the "Owners' Association"), and the cost of labor, materials, supplies and services used or consumed in operating, maintaining, repairing and replacing the Outside Area, including, without limitation, the following: 10 19 (i) Maintaining, repairing and replacing landscaping and sprinkler systems; (ii) Maintaining, repairing and replacing concrete walkways and paved parking area; (iii) Maintaining, repairing and replacing signs and site lighting; (iv) All utilities provided to the Outside Area; and (v) Alterations or improvements to the Outside Areas required by governmental laws or regulations, the CC&R's or the Owners' Association. If there is more than one (1) building on the Project, Outside Area Expenses shall be allocated among the buildings on the Project for all Operating Expense accounting purposes, including the determination of the amount of Operating Expense increases chargeable to Tenant pursuant to Paragraph 15.3, on the basis of the ratio of the square footage of each building to the total square footage of all buildings on the Project. 15.3 ACCOUNTING. If Tenant's Percentage of the Operating Expenses paid or incurred by Landlord for any calendar year during which this Lease is in effect exceeds the Operating Expense Base included in the Monthly Rent, then Tenant shall pay such excess ("Accrued Excess") as Additional Rent. Within one hundred twenty (120) days after the end of each calendar year, Landlord shall give to Tenant a statement of any Accrued Excess payable by Tenant for the previous calendar year which shall be due and payable within five (5) days of receipt of such statement. In addition, for each calendar year or portion thereof after the first (1st) calendar year or portion thereof that this Lease is in effect, Tenant shall pay Tenant's Percentage of Landlord's estimate of the amount by which the Operating Expenses for that year exceed the Operating Expense Base (the "Estimated Excess"). Tenant shall pay to Landlord, concurrently with the regular Monthly Rent payment next due following receipt of the statement of the Estimated Excess, an amount equal to one monthly installment of the Estimated Excess multiplied by the number of months from January in the calendar year in which such statement is submitted to the month of such payment, both months inclusive. Subsequent installments of the Estimated Excess shall be paid concurrently with the regular Monthly Rent payments for the balance of that calendar year as Additional Rent, and shall continue until the next calendar year's statement is delivered. If, in any calendar year, Tenant's Percentage of actual Operating Expenses is less than the estimate for that year, then, upon receipt of Landlord's annual statement, any overpayments of Estimated Excess made by Tenant shall be credited toward the next Monthly Rent falling due and the monthly installments of Estimated Excess for the current year shall be adjusted to reflect such lower Operating Expenses. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Percentage of Operating Expenses for the year in which this Lease terminates, Tenant shall immediately pay any increase due over the estimated Operating Expenses paid and, conversely, any overpayment made if the Operating Expense decrease shall be rebated by Landlord to Tenant. Operating Expenses shall be calculated using standard accounting principles and a vacancy factor of ten percent (10%). 15.4 PRORATION. Tenant's liability to pay for Expenses shall be prorated on the basis of a 365-day year to account for any fractional portion of a year included at the commencement or expiration of the Term of this Lease. 11 20 15.5 AUDIT. Tenant, at its expense, shall have the right at all reasonable times and upon reasonable written notice to Landlord to audit Landlord's books and records relating to the Operating Expenses for the first year of the Term and any year or years for which Accrued Excess payments become due; or at Landlord's sole discretion Landlord will provide such audit and work papers prepared by a certified public accountant. 16. TAXES. 16.1 PAYMENT BY TENANT. Real Property Taxes for the Project shall be included within the Operating Expenses pursuant to Paragraph 15.2 16.2 TAXES ON TENANT IMPROVEMENTS AND PERSONAL PROPERTY. Notwithstanding any other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises and the Project for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. 16.3 INCLUDED ASSESSMENTS. With respect to any assessments which may be levied against or upon the Project, or which under the laws then in force may be evidenced by improvements or other bonds or may be paid in annual installments, only the amount of such annual installment (with appropriate proration for any partial year) and interest due thereon shall be included within the computation of the annual Real Property Taxes levied against the Project. 16.4 DESCRIPTION. Real Property Taxes and Assessments shall have that definition set forth in the Lease. The term "assessment" as used in such definition shall include any payment for assessment districts and other funding mechanisms, including, but not limited to, improvement districts, maintenance districts, landscaping and lighting districts, public utility districts, special utility districts, special service zones or districts or any combination thereof (collectively "Assessment Districts") for the construction, operation and maintenance of on-site and off-site improvement or services, as required by the City or other governmental entity for construction of certain public improvements which shall benefit the Premises, the Project or Hacienda Business Park. The Assessment Districts may include the following: (a) ASSESSMENT DISTRICT NUMBER 1986-7. Assessment District No. 1986-7, North Pleasanton Improvement District No. 2; (b) NORTH PLEASANTON IMPROVEMENT DISTRICT (FREEWAYS). Assessment District, North Pleasanton Improvement District (Freeways). The funding provides for the design and construction of interchanges for Interstates 580 and 680; and (c) FIRE ASSESSMENT DISTRICT. The North Pleasanton Fire Refunding District No. 1986-4. 16.5 TENANT'S CONSENT. Tenant hereby consents to the formation of the Assessment Districts or any other districts formed for maintenance, utilities, landscaping lighting special service zones or other improvements in Hacienda Business Park. Tenant hereby waives any right of notice and protest of formation, evidencing such consent and waiver upon request of Landlord or the City. 12 21 17. UTILITIES AND SERVICES. Utilities and services shall be provided to the Premises pursuant to the Standards for Utilities and Services set forth in EXHIBIT F, subject to the conditions and in accordance with the terms of such exhibit. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except that resulting from the act or neglect of Landlord. Any utilities which are not separately metered to the Premises shall be charged to Tenant on an equitable basis as determined by Landlord. 18. REPAIR AND MAINTENANCE. 18.1 BUILDING. 18.1.1 LANDLORD'S OBLIGATIONS. Landlord shall keep in good order, condition and repair the structural parts of the Building, which structural parts include only the foundation, subflooring, exterior walls and roof of the Building, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or caused by Alterations made by Tenant or by Tenant's agents, employees or contractors, which shall be Tenant's responsibility. Landlord shall also maintain, repair and replace the HVAC system for the Premises. It is a condition precedent to all obligations of Landlord to repair and maintain under this Paragraph 18.1.1 that Tenant shall have notified Landlord in writing of the need for such repairs or maintenance. The cost of the repair, maintenance and replacement expenses incurred by Landlord under this paragraph shall be included in the Operating Expenses payable pursuant to Paragraph 15. 18.1.2 TENANT'S OBLIGATIONS. Tenant shall at all times and at its own expense clean, keep and maintain in first class condition and repair every part of the Premises which is not within Landlord's obligation pursuant to Paragraph 18.1.1. Tenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls, floors, ceilings, interior windows, store front, doors, entrances, plateglass, showcases, skylights, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. All glass is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality. 18.2 COMMON AREA AND OUTSIDE AREA. 18.2.1 LANDLORD'S OBLIGATIONS. Landlord shall maintain and repair the Common Area and Outside Area in a good, safe and sanitary manner. Landlord shall at all times have exclusive control of the Common Area and Outside Area and may at any reasonable time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant who use such areas in accordance with the reasonable rules and regulations as Landlord may from time to time promulgate, and may reasonably change the configuration or location of the Common Area or Outside Area. In exercising any such rights, Landlord shall use diligent efforts to minimize any disruption of Tenant's business. Landlord shall have the right to reconfigure the parking area and ingress to and egress from the parking area, and to modify the directional flow of traffic of the parking area. 13 22 18.2.2 COMMON AREA AND OUTSIDE AREA EXPENSES. All costs and expenses as may be paid or incurred by Landlord in maintaining, operating, repairing and replacing the Common Area and Outside Area shall be included within the Operating Expenses pursuant to Paragraph 15. 18.3 WAIVER. Tenant waives the provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease. 18.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at its cost, comply with, including the making by Tenant of any Alteration to the Premises, all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including state, municipal, County and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of, or applicable to, the Premises or the Project or privileges appurtenant thereto. 19. LIENS. Tenant shall keep the Building and the Project free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within ten (10) days after written request by Landlord. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice reasonably deemed proper by Landlord. If Tenant fails to so remove any such lien within the prescribed ten (10) day period, then landlord may do so and Tenant shall reimburse Landlord upon demand. Such reimbursement shall include all sums incurred by Landlord including Landlord's reasonable attorneys' fees, with interest thereon at the Interest Rate. 20. LANDLORD'S RIGHT TO ENTER THE PREMISES. Tenant shall permit Landlord and its Agents to enter the Premises at all reasonable times with reasonable notice, except for emergencies in which case no notice shall be required, to inspect the same, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any reasonable time within one hundred eighty (180) days prior the expiration of the Term, to place upon the Building or in the Outside Area ordinary "For Lease" signs and to show the Premises to prospective tenants. The above rights are subject to reasonable security regulations of Tenant, and to the requirement that Landlord shall at all times act in a manner to cause the least possible interference with Tenant's business. 21. SIGNS. Landlord shall provide Tenant a listing in the Building directory. Tenant shall have no right to maintain Tenant identification signs in any other location in, on or about the Premises, the Building or the Project and shall not display or erect any other Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The size, design, color and other physical aspects of any permitted sign shall be subject to the Landlord's written reasonable approval prior to installation, any Design Guidelines established pursuant to the CC&R's and any appropriate municipal or other governmental approvals. The cost of the sign installation, and its maintenance and removal expense shall be Tenant's sole expenses. If Tenant fails to maintain any of its permitted signs, or, if Tenant fails to remove any such sign upon termination 14 23 of this Lease, Landlord may do so at tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. 22. INSURANCE. 22.1 INDEMNIFICATION. Tenant hereby agrees to defend, indemnify and hold harmless Landlord and its Agents from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or in any way attributable to the use or occupancy of the Premises, the Building or the Project or any part thereof and adjacent areas by the Tenant, the acts or omissions of the Tenant, its agents, employees or any contractors brought onto the Premises, the Building or the Project by Tenant, except to the extent caused by the negligence or willful misconduct of Landlord or its Agents. Tenant agrees that the obligations assumed herein shall survive this Lease. 22.2 TENANT'S INSURANCE. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers acceptable to Landlord which afford the following coverages: 22.2.1 LIABILITY. Comprehensive general liability insurance in an amount not less than Three Million and no/100ths Dollars ($3,000,000.00) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, products liability, and fire damage legal (in an amount not less than Twenty-Five Thousand and no/100ths Dollars ($25,000.00)), naming Landlord and its Agents as additional insureds. 22.2.2 PERSONAL PROPERTY. "All Risk" property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal Property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO All-Risk form. 22.3 ALL-RISK INSURANCE. During the Term, Landlord shall maintain "All Risk" property insurance (including, at Landlord's option, inflation endorsement, sprinkler leakage endorsement, and earthquake and flood coverage) on the Building, excluding coverage of all Tenant's Personal Property located on or in the Premises, but including the Tenant Improvements. Such insurance shall also include insurance against loss of rents on an "All Risk" basis, including earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of at least twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement). The cost of such policy shall be included in the Operating Expenses payable pursuant to Paragraph 15. If such insurance premiums are increased after the Commencement Date due to Tenant's use of the Premises or any other cause solely attributable to Tenant, Tenant shall pay the full amount of the increase within ten (10) days of notice of such increase. Landlord shall have the right to insure the Building on a policy which includes other buildings on the Project, if any. In such case, the amount of the 15 24 policy cost to be included in the Building Expenses shall be determined by dividing the square footage of the Premises by the square footage of all buildings covered by such policy. 22.4 CERTIFICATES. Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. The certificates shall expressly provide that the interest of Landlord therein shall not be affected by any breach of Tenant of any policy provision for which such certificates evidence coverage. All certificates shall expressly provide that no less than thirty (30) days' prior written notice shall be given Landlord in the event of cancellation of the coverages evidenced by such certificates. 22.5 CO-INSURER. If, due to Tenant's failure to comply with the foregoing provisions, Landlord is adjudged a co-insurer by its insurance carrier, then, any loss or damage Landlord sustains by reason thereof, including attorneys' fees and costs, shall be borne by Tenant and shall be immediately paid by Tenant upon receipt of a bill therefor and evidence of such loss. 22.6 INSURANCE REQUIREMENTS. All insurance shall be in a form satisfactory to Landlord and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary as to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon, if any, shall be deposited with Landlord prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may, upon written notice to Tenant, order such insurance at Tenant's expense and Tenant shall reimburse Landlord. Such reimbursement shall include all sums incurred by Landlord, including Landlord's reasonable attorneys' fees and costs, with interest thereon at the Interest Rate. 22.7 LANDLORD'S DISCLAIMER. Landlord and its Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Building, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or whatsoever, unless caused by or due to the negligence or willful acts of Landlord. Landlord and its Agents shall not be liable for interference with the light, air, or any latent defect in the Premises. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. 23. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss and damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. 16 25 24. DAMAGE OR DESTRUCTION. 24.1 PARTIAL DAMAGE - INSURED. If the Premises are damaged by any casualty which is covered under the "All-Risk" insurance carried by Landlord pursuant to Paragraph 22.3, then Landlord shall restore such damage, provided insurance proceeds are available to pay at least ninety percent (90%) or more of the cost of restoration and provided such restoration can be completed within ninety (90) days after the commencement of the work in the reasonable opinion of a registered architect or engineer appointed by Landlord for such determination. In such event, this Lease shall continue in full force and effect, except that Tenant shall be entitled to a proportionate reduction of Monthly Rent while such restoration takes place, such proportionate reduction to be based upon the extent to which the restoration efforts interfere with Tenant's use of the Premises, as reasonably agreed upon between Tenant and Landlord. Any dispute between Landlord and Tenant as to the amount of such rent reduction shall be resolved by arbitration. 24.2 PARTIAL DAMAGE - UNINSURED. If the Premises or the Building is damaged by a risk not covered by Landlord's insurance, or the proceeds of available insurance are less than ninety percent (90%) of the cost of restoration, or the restoration cannot be completed within one hundred twenty (120) days after the commencement of work, in the reasonable opinion of the registered architect or engineer appointed by Landlord for such determination, then Landlord shall have the option either to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the Monthly Rent to be proportionately abated as provided in Paragraph 24.1; or (ii) give notice to Tenant at any time within thirty (30) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than thirty (30) nor more than sixty (60) days after giving such notice. If notice of termination is given, this Lease shall expire and all interest of Tenant in the Premises shall terminate on such date so specified in such notice and the Monthly Rent, reduced by any proportionate reduction based upon the extent, if any, to which such damage interfered with the use of the Premises by Tenant, shall be paid to the date of such termination. 24.3 TOTAL DESTRUCTION. If the Premises or the Building is totally destroyed or the Premises or Building, as the case may be, cannot be reasonably restored under applicable laws and regulations or due to the presence of hazardous factors such as earthquake faults, chemical waste and similar dangers, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective the date of the damage. 24.4 LANDLORD'S OBLIGATIONS. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any restoration or replacement of any panelings, decorations, partitions, railings, floor coverings, office fixtures which are Alterations or Personal Property installed in the Premises by Tenant or at the expense of Tenant. Tenant shall be required to restore or replace the same. Except for abatement of Monthly Rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration; nor shall Tenant have the right to terminate this Lease as the result of any statutory provision now or hereafter in effect pertaining to the damage and destruction of the Premises, except as expressly provided herein. 24.5 DAMAGE NEAR END OF TERM. Anything herein to the contrary notwithstanding, if the Premises or the Building is destroyed or damaged during the last twelve (12) months of the Term, then Landlord may cancel and terminate this Lease as of the date of 17 26 the occurrence of such damage. If Landlord does not elect to so terminate this Lease, the repair of such damage shall be governed by the other provisions of this Paragraph 24. 25. CONDEMNATION. If title to all of the Premises, the Building or the Project or so much thereof is taken or appropriated for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises or the Building will not, in Landlord's and Tenant's mutual reasonable judgment, result in the Premises being suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or Building or part thereof be taken. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. If any part of the Premises, the Building or the Project is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises or Building is taken. If the Premises is so partially taken the Rent and other sums payable hereunder shall be reduced in the same proportion that Tenant's use and occupancy of the Premises is reduced. If the parties disagree as to suitability of the Premises for Tenant's continued occupancy or the amount of any applicable Rent reduction, the matter shall be resolved by arbitration. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its good will. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to any abatement of Rent. Any award made to Tenant by reason of such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this paragraph. 26. ASSIGNMENT AND SUBLETTING. 26.1 LANDLORD'S CONSENT. Tenant shall not enter into a Sublet without Landlord's prior written consent, which consent shall not be unreasonably withheld. Any attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and shall be deemed a material default of this Lease. Each Subtenant shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from personal liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. 26.2 INFORMATION TO BE FURNISHED. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; and (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. 18 27 26.3 LANDLORD'S ALTERNATIVES. At any time within thirty (30) days after Landlord's receipt of the information specified in Paragraph 26.2, Landlord may, by written notice to Tenant, elect: (i) to lease for its own account the Premises or the portion thereof so proposed to be Sublet by Tenant, upon the same terms as those offered to the proposed Subtenant but on a form acceptable to Landlord; (ii) to lease for its own account the Premises or the portion thereof so proposed to be Sublet by Tenant to any person upon any terms desired by Landlord; (iii) to consent to the Sublet by Tenant; or (iv) to refuse its consent to the Sublet. If Landlord consents to the Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 26.2, subject, however, to the condition that any excess of the Subrent over the Rent required to be paid by Tenant hereunder shall be paid to Landlord as and with the Monthly Rent. 26.4 PRORATION. If a portion of the Premises is Sublet, the pro rata share of the Rent attributable to such partial area of the Premises shall be determined by Landlord by dividing the Rent payable by Tenant hereunder by the total square footage of the Premises and multiplying the resulting quotient (the per square foot rent) by the number of square feet of the Premises which are Sublet. 26.5 EXECUTED COUNTERPART. No Sublet shall be valid nor shall any Subtenant take possession of the Premises until an executed counterpart of the Sublet agreement has been delivered to Landlord. 26.6 EXEMPT SUBLETS. Notwithstanding the above, Landlord's prior written consent shall not be required for an assignment of this Lease to a subsidiary, affiliate or parent corporation of Tenant, or a corporation into which Tenant merges or consolidates, if Tenant gives Landlord prior written notice of the name of any such assignee, and if the assignee assumes, in writing, all of Tenant's obligations under the Lease. An assignment or other transfer of this Lease to a purchaser of all or substantially all of the assets of Tenant shall be deemed a Sublet requiring Landlord's prior written consent. 27. DEFAULT. 27.1 TENANT'S DEFAULT. A default under this Lease by Tenant shall exist if any of the following events shall occur. 27.1.1 If Tenant fails to pay Rent or any other sum required to be paid hereunder when due; or 27.1.2 If Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure such breach within twenty (20) days after written notice from Landlord where such breach could reasonably be cured within such twenty (20) day period; provided, however, that where such failure could not reasonably be cured within the twenty (20) day period, that Tenant shall not be in default if it commences such performance within the twenty (20) day period and diligently thereafter prosecutes the same to completion; or 27.1.3 If Tenant assigns its assets for the benefit of its creditors; or 19 28 27.1.4 If the sequestration or attachment of or execution on any material part of Tenant's Personal Property essential to the conduct of Tenant's business occurs, and Tenant fails to obtain a return or release of such Personal Property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or 27.1.5 If a court shall make or enter any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days. 27.2 REMEDIES. Upon a default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: 27.2.1 Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due. 27.2.2 Landlord may terminate Tenant's right to possession of the Premises at any time by giving written notice to that effect, and relet the Premises or any part thereof. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Reletting may be for a period shorter or longer than the remaining Term of this Lease. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount necessary which is to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such 20 29 acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraph 27.2.2(a) and 27.2.2(b) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 27.2.2(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 27.2.3 Landlord may, with or without terminating this Lease, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this paragraph shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. 27.3 LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within twenty (20) days after receipt of written notice by Tenant to Landlord specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than twenty (20) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such twenty (20) day period and thereafter diligently prosecute the same to completion. 28. SUBORDINATION. This Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Premises, the Building, or the Project, to the CC&R's and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease to be prior and superior thereto, within ten (10) days of written request of Landlord to Tenant. Tenant shall execute, have acknowledged and deliver any and all documents or instrument, in the form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises, the Building, or the Project, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, Holder agrees to recognize Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute any and all documents required by Landlord or the Holder required to effectuate such subordination to make this Lease subordinate to any lien of the Encumbrance. If Tenant fails to do so, it shall be deemed that this lease is so subordinated. Notwithstanding 21 30 anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Building at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 29. NOTICES. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally served or in lieu of personal service may be given by mail. If given by mail, such notice shall be deemed to have been given when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, registered or certified, and postage prepaid, addressed to the party to be served. At the date of execution of this Lease, the addresses of Landlord and Tenant are as set forth in the first paragraph of this Lease. After the Commencement Date, the address of Tenant shall be the address of the Premises. Either party may change its address by giving notice of same in accordance with this paragraph. 30. ATTORNEY'S FEES. If either party brings any action or legal proceeding for damages for an alleged breach of any provision of this Lease, to recover rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. 31. TENANT STATEMENTS. Tenant shall within seven (7) days following written request by Landlord: 31.1 ESTOPPEL CERTIFICATES. Execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord, or if there are uncured defaults on the part of Landlord, stating the nature of such uncured defaults, and (c) evidencing the status of the Lease as may be required either by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Building or the Property or a purchase of the Building or Property from Landlord. Tenant's failure to deliver an estoppel certificate within seven (7) days after delivery of Landlord's written request therefor shall be conclusive upon Tenant (a) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (b) that there are now no uncured defaults in Landlord's performance, and (c) that no Rent has been paid in advance. If Tenant fails to so deliver a requested estoppel certificate within the prescribed time it shall be deemed that there exist no defaults under this Lease on the part of Landlord, that the rent is current and that Tenant has no claims against Landlord. 31.2 FINANCIAL STATEMENTS. Deliver to Landlord the current financial statements of Tenant, and financial statements of the two (2) years prior to the current financial statements year, with an opinion of a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. 32. TRANSFER OF THE BUILDING BY LANDLORD. In the event of any conveyance of the Building or the Project and assignment by Landlord of this Lease, Landlord shall be and is hereby entirely released from all liability under any and all of its covenants and 22 31 obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, provided such transferee assumes Landlord's obligations under this Lease, and Tenant agrees to attorn to such transferee. 33. LANDLORD'S RIGHT TO PERFORM TENANTS COVENANTS. If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, provided that Landlord has delivered to Tenant written notice, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligations of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection therewith shall be due and payable by Tenant on the next day after any such payment by Landlord, together with interest thereon at the Interest Rate from such date to the date of payment by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Rent. 34. TENANT'S REMEDY. If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Building and out of Rent or other income from the Building receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Building, and neither Landlord nor its Agents shall be liable for any deficiency. 35. MORTGAGEE PROTECTION. If Landlord defaults under this Lease, Tenant will notify by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Building or the Project, and offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Building or the Project by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 36. BROKERS. Tenant warrants and represents that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, except for the broker(s) referred to in Paragraph 1. 14 and that it knows of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Tenant agrees to defend, indemnify and hold Landlord and its Agents from and against any and all liabilities or expenses, including attorneys' fees and costs, arising out of or in connection with claims made by any other broker or individual for commissions or fees resulting from Tenant's execution of this Lease. 37. ACCEPTANCE. Delivery of this Lease, duly executed by Tenant, constitutes an offer to lease the Premises, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. 38. RECORDING. Neither party shall record this Lease nor a short form memorandum thereof. 39. DISCLOSURE. The principals of Landlord are licensed real estate brokers or salesmen and are principals or employees of Callahan, Sweeney and O'Brien, Inc. 23 32 40. PARKING. Tenant shall have the right to park on the Project's parking facilities in common with other tenants of the Project upon the terms and conditions, including imposition of a reasonable parking charge as may from time to time be established by Landlord. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of the parking facilities. Landlord reserves the right in its discretion to determine whether the parking facilities are becoming crowded and to allocate and assign parking spaces among Tenant and the other tenants. 41. GENERAL. 41.1 CAPTIONS. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. 41.2 EXECUTED COPY. Any fully executed copy of this Lease shall be deemed an original for all purposes. 41.3 TIME. Time is of the essence for the performance of each term, condition and covenant of this Lease. 41.4 SEPARABILITY. If one or more of the provisions contained herein, except for the payment of Rent, is for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. 41.5 CHOICE OF LAW. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 41.6 GENDER, SINGULAR, PLURAL. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. 41.7 BINDING EFFECT. The covenants and agreement contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. 41.8 WAIVER. The waiver by Landlord of any breach of any term, condition or covenant of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach at the time of acceptance of such payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord. 41.9 ENTIRE AGREEMENT. This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed 24 33 herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 41.10 AUTHORITY. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Tenant to deliver the same to Landlord within seven (7) days of Landlord's request therefor shall be deemed a default under this Lease. 41.11 EXHIBITS. All exhibits, amendments, riders and addendums attached hereto are hereby incorporated herein and made a part hereof. 42. TERMINATION AGREEMENT. Concurrent with execution of this lease, Landlord and Tenant have executed a Termination Agreement, a copy of which is attached as Exhibit G. THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. LANDLORD: TENANT: CALLAHAN PENTZ PROPERTIES, JOHANSEN INVESTMENT CORPORATION, PLEASANTON - SITE 30A, a a California Corporation, d/b/a California General Partnership SCJ Insurance Service By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: PRESIDENT ---------------------------- By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: VICE-PRESIDENT ---------------------------- Dated 12/3, 1987 Dated 10/10, 1987 25 34 EXHIBIT A THE PREMISES (to be attached) A-1 35 SITE 30A TOTAL: 20,390 LEASED: 20,390 AVAILABLE: 0
[FLOOR PLAN GRAPHIC] BUILDING A FIRST FLOOR PLAN 5934 GIBRALTAR DRIVE 36 SITE 30A TOTAL: 21,266 LEASED: 20,359 AVAILABLE: 907
[FLOOR PLAN GRAPHIC] BUILDING A SECOND FLOOR PLAN 5934 GIBRALTAR DRIVE 37 TOTAL: 41,574 LEASED: 41,574 AVAILABLE: 41,574
[FLOOR PLAN GRAPHIC] 4698 WILLOW ROAD 38 EXHIBIT B THE PROJECT (to be attached) B-1 39 GIBRALTAR DRIVE NORTH [GRAPHIC OF BUILDING & GROUND AREA] SARATOGA ONE TWO STORY 6934 GIBRALTAR DRIVE SARATOGA TWO ONE STORY 6920 GIBRALTAR DRIVE WILLOW ROAD 40 EXHIBIT C WORK LETTER AGREEMENT In connection with the Tenant Improvements to be installed on the Premises, the parties hereby agree as follows: 1. PLANS AND SPECIFICATIONS. The Tenant Improvements shall include only those improvements described in EXHIBIT C-1 attached hereto. Landlord shall retain ____________ as the architect ("Architect") for the completion of final working architectural and engineering plans and specifications for the Tenant Improvements to be constructed on the Premises ("Final Plans and Specifications"). Landlord reserves the right to substitute the Architect with another architect of its selection. Tenant shall cooperate diligently with the Architect, and shall furnish on or before _____________, 19___, all information required by the Architect for completion of the Final Plans and Specifications. Landlord and Tenant shall indicate their approval of the Final Plans and Specifications by initialing them and attaching them hereto as EXHIBIT C-2. Either party shall have the right to terminate this Lease upon notice to the other party, if the Final Plans and Specifications are not approved by Tenant and Landlord in writing on or before _______________, 19__ through no fault of the terminating party. 2. LANDLORD TO CONSTRUCT. Landlord shall complete construction of the Tenant Improvements, in a good and workmanlike manner at Landlord's sole cost and expense, except as provided in Paragraph 3. 3. TENANT IMPROVEMENTS COST. The Tenant Improvements cost ("Tenant Improvements Cost") to be paid by Landlord shall include: (a) All costs of preliminary and final architectural and engineering plans and specifications for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; (b) All costs of obtaining building permits and other necessary authorizations from the City; (c) All direct and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises, including, but not limited to, the construction fee for overhead and profit and the cost of all on-site supervisory and administrative staff, office, equipment and temporary services rendered by Landlord's contractor in connection with construction of the Tenant Improvements; (d) Sewer connection fees; and (e) All costs of the Building Standard Work, described in EXHIBIT C-3. In no event shall the Tenant Improvement Costs include any costs of procuring, constructing or installing in the Premises any of Tenant's Personal Property. 4. CHANGE REQUESTS. No revisions to the approved Final Plans and Specifications shall be made by either Landlord or Tenant unless approved in writing by both parties. Tenant agrees to make all changes: (i) required by any public agency to conform with governmental C-1 41 regulations, or (ii) requested in writing by Tenant and approved in writing by Landlord which approval shall not be unreasonably withheld. Any costs related to such changes shall be added to the Tenant Improvements Cost and shall be paid for by Tenant in cash within ten (10) days of receipt of a statement therefor. The billing for such additional costs to Tenant shall be accompanied by evidence of the amounts billed as is customarily used in the business. Costs related to changes shall include, without limitation, any architectural or design fees, and Landlord's general contractor's price for effecting the change. 5. TERMINATION. If the Lease is terminated prior to the Commencement Date and prior to completion of the Tenant Improvements, either by Landlord pursuant to the provisions of Paragraph 1 of this Work Letter Agreement, or for any reason due to the default of Tenant hereunder, Tenant shall pay to Landlord, within five (5) days of receipt of a statement therefor, any costs incurred by Landlord through the date of termination in connection with the Tenant Improvements. 6. CONDITION. If Landlord is unable to obtain a building permit for the Tenant Improvements within one hundred twenty (120) days from the date of execution hereof, then either party shall have the right to terminate this Lease upon written notice to the other. LANDLORD: TENANT: By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: PRESIDENT ---------------------------- By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: VICE-PRESIDENT ---------------------------- Dated 10/3, 1987 Dated 10/10, 1987 --------------------------- --------------------------- C-2 42 EXHIBIT D COMMENCEMENT DATE MEMORANDUM LANDLORD: Callahan Pentz Properties, Pleasanton Site 30A TENANT: Johansen Investment Corp., dba SCJ Insurance Services LEASE DATE: October 9, 1987 13,179 5934 Gibraltar Drive Pleasanton PREMISES: 2,117 square feet at 4698 Willow Road, Pleasanton Pleasanton, CA 94566 The Commencement Date of the above referenced Lease is hereby established as October 15, 1987 LANDLORD: TENANT: CALLAHAN PENTZ PROPERTIES, JOHANSEN INVESTMENT CORPORATION, PLEASANTON - SITE 30A, a a California Corporation, d/b/a California General Partnership SCJ Insurance Service By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: PRESIDENT ---------------------------- By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: VICE-PRESIDENT ---------------------------- D-1 43 EXHIBIT E RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Building. The halls, driveways, passages, exits, entrances, elevators, escalators and stairways are not open to the general public. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Property and its tenants; provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof penetrations. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom. 5. All cleaning and janitorial services for the Building shall be provided exclusively through Landlord, and, except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises or the Building. Landlord shall not in any way be responsible to any tenant for any loss of property on the Premises, however occurring, or for any damage to any of Tenant's property by the janitor or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys and for having any locks changed. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. E-1 44 8. Any freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or flammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed and shall close window coverings at the end of each business day. 13. Landlord reserves the right, exercisable, without notice and without liability to Tenant, to change the name and street address of the Building. 14. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. E-2 45 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and turn off all lights and other equipment which is not required to be continuously run. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. Tenant shall not obtain for use on the Premises ice, drinking water, food, beverage, towel or other similar services or accept barbering service upon the Premises, except at such hours and under such regulations as may be fixed by Landlord and Landlord's prior written approval. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 18. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants or occupants of the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 19. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 21. Tenant shall not install, maintain or operate upon the Premises any vending machine without the written consent of Landlord. 22. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and each tenant shall cooperate to prevent same. 23. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or other substance or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. The Premises shall not be used for the storage of merchandise held for sale to the general public or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectional purpose. No cooking shall be done or permitted by any tenant on the Premises, except that use by Tenant of Underwriters' Laboratory approved equipment for E-3 46 brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes ordinances, rules and regulations. 26. Tenant shall not use in any space or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 29. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 30. The requirements of Tenant will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 31. Tenant and its employees shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles, or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space. 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 34. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and the Property, and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. E-4 47 EXHIBIT F UTILITIES AND SERVICES The following standards for utilities and services for Premises A are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto. As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, Landlord shall: (a) Provide unattended automatic elevator facilities Monday through Friday, except holidays, from 7 a.m. to 8 p.m., and have at least one (1) elevator available at all other times. (b) On Monday through Friday, except holidays, from 7 a.m. to 6 p.m. (and other times for a reasonable additional charged to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours when in the judgment of Landlord it may be required for the comfortable occupancy of the Premises. The air conditioning system achieves maximum cooling when the window coverings are closed. Landlord shall not be responsible for room temperatures if Tenant does not keep all window coverings in the Premises closed whenever the system is in operation. Tenant agrees to cooperate fully at all times with Landlord and to abide by all regulations and requirements which Landlord may prescribe for the proper functioning and protection of said air conditioning system. Tenant agrees not to connect any apparatus, device, conduit or pipe to the Building's chilled and hot water air conditioning supply lines. Tenant further agrees that neither Tenant nor its servants, employees, agents, visitors, licensees or contractors shall at any time enter mechanical installations or facilities of the Building or adjust, tamper with, touch or otherwise in any manner affect said installations or facilities. (c) Furnish to the Premises, during the usual business hours on business days, electric current as required by the Building Standard office lighting and fractional horsepower office business machines in the amount of approximately two and one-half (2.5) watts per square foot. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the terms, classifications and rate charges to similar consumers by the public utility serving the neighborhood in which the Building is located. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, as established by an independent licensed engineer. Tenant agrees not to use any apparatus or device in, or upon, or about the Premises which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without written consent of Landlord. Should Tenant use such services to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge shaH constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights therein granted for such breach. At all times Tenant's use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installation and Tenant shall not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises without the prior written consent of Landlord. (d) Make water available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purposes in addition to ordinary F-1 48 drinking and lavatory purposes of which fact Tenant constitutes Landlord to be the sole judge, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Landlord for the cost of the meter and the cost of the installation thereof, and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on said meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made, by Landlord for any of the reasons or purposes hereinabove stated shall be deemed to be Additional Rent payable by Tenant and collectible by Landlord as such. (e) Provide janitorial service to the Premises, provided the same are used exclusively as offices, and are kept reasonably in order by Tenant, and if to be kept clean by Tenant, no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they shall be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish, to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. (f) Landlord reserves the right to stop service of the elevator, plumbing, ventilation, air conditioning and electric systems, when necessary by reason of accident or emergency or for repairs, alterations or improvements, in the judgment of Landlord desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed, and shall further have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations - requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel. It is expressly understood and agreed that any covenants on Landlord's part to furnish any service pursuant to any of the terms, covenants, conditions, provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, shall not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control. F-2 49 EXHIBIT G TERMINATION AGREEMENT This TERMINATION AGREEMENT ("Agreement") between CALLAHAN PENTZ PROPERTIES, PLEASANTON - SITE 30A, ("Landlord"), a California general partnership and JOHANSEN INVESTMENT CORPORATION dba SCJ Insurance Service ("Tenant"), is entered as of this __________ day of October 1987. R E C I T A L S A. Landlord and Tenant entered a Lease dated April 17, 1985, for certain premises ("Premises") located at 5920 Gibraltar Drive, Pleasanton, CA. B. The Term of the Lease was scheduled to expire on December 14, 1990. C. Tenant desires to terminate the Lease as of October 14, 1987. Unless otherwise provided herein, all defined terms shall be as defined in the Lease. A copy of the Lease is attached hereto as EXHIBIT A. NOW, THEREFORE, the parties do agree as follows: 1. Termination. Upon satisfaction of all the terms and conditions contained in this Agreement, Landlord agrees to terminate the Lease as of October 14, 1987, ("Termination Date"). 2. Consideration. As consideration for this Agreement, Tenant shall simultaneously execute a lease for the following locations (i) 4,581 square feet on the first floor and 8,598 square feet on the second floor of Building A, located at 5934 Gibraltar Drive, Pleasanton, CA and (ii) 2,117 square feet located at 4698 Willow Road, Pleasanton, CA. In addition, Landlord shall be responsible for the reasonable cost of moving computers and telephones. 3. Operating Expenses. In addition to the consideration specified in Paragraph 2, Tenant shall pay to Landlord Tenant's Estimated Operating Expenses and Estimated Outside Area Expenses through the Termination Date. 4. Surrender. Tenant shall surrender the Premises as provided in Section 3 of the Lease and Tenant shall be liable to Landlord for cost of removing Alterations and Tenant's Personal Property, if any, as provided in Section 14. G-1 50 5. Survival. The obligations specified in Paragraphs 3 and 4, in addition to the covenants which are specified in the Lease to survive termination of the Lease, shall continue after the Termination Date. IN WITNESS WHEREOF, this Termination Agreement is executed as of the 10th day of October, 1987. LANDLORD: TENANT: CALLAHAN PENTZ PROPERTIES JOHANSEN INVESTMENT CORPORATION, PLEASANTON - SITE 30A, a California Corporation, dba a California general SCJ Insurance Service partnership By: [SIG] By: [SIG] ------------------------------- ------------------------------- Its: Managing General Partner Its: ------------------------------ By: [SIG] By: [SIG] ------------------------------- ------------------------------- Its: Managing General Partner Its: Vice President ------------------------------ G-2 51 TENANT (LEASE) SUMMARY AMENDMENT #1 Amendment Execution Date: 12/16/87 Original Lease Execution Date: 10/9/87 Amendment Purpose: expense payment Tenant: SCI Insurance Service Landlord: Site 30A -- Hacienda Park Associates Address: 5934 Gibraltar Dr. & 4698 Willow Pleasanton, CA 94566 Sqft: 41656/41974 (bldg) 10179 - A/2117 - B (tenant) LANDLORD'S TENANT IMPROVEMENTS APPLICABLE TO AMENDMENT: Architect (company):____________________ (contact):____________________ General Contractor (company):____________________ (contact):____________________ Consultants (by Specialty):_____________________________________________________ Building Permit #:________________________ Type:___________________ Date Issued:____________ Date Final:_____________ Notice of completion: (dt)______________#________________ Executed Plans, Specs (Date):____________________________ As Built Drawings (Date):________________________________ Comments (punchlist, etc.):_____________________________________________________ TENANT IMPROVEMENT COST ALLOWANCE APPLICABLE TO TENANT: Total Allowance ($/sq.ft.):___________ = Existing:____________ + New:___________ Actual Tenant Improvement Cost ($/sq.ft.):______________ Construction Cost (Gen'l Cont.):________________ Change Orders (Date Executed, Amount): (1)Dt:__________ Amt:___________ (2)Dt:__________ Amt:_________ (3)Dt:__________ Amt:___________ Indirect cost (Permits, A&E, etc.):____________________________________ EXCESS TENANT IMPROVEMENTS: Actual Amount Over Allowance ($/sq.ft.):______________ Rent Adjustment Factor:_______________________________ Maximum T.I. Amount ($/sq.ft.):_______________________ Addtional Deposits (amount, purpose):_________________ REVISED MONTHLY RENTAL: Operating Expenses (base year 1986)
Total Monthly Outside Area Building Rental Period Base Rent Expense Expense ------------- (Month) (Rate/sf/mo) + (Rate/sf/mo) + (Rage/sf/mo) = (Rate/sf/mo) ($Amount) - ------ ------------ ------------ ------------ ------------ ---------- 2 $0.43 $0.43 Inc 0 0 1 $0.19 $0.43 Inc 9,530.74 2 $0.22 $0.43 Inc .65 10,000 25 $1.22 $0.43 Inc .65 25,200 30 $1.38 $0.43 Inc .81 27,720
Additional Rent (Item, Payment Cycle, Rate/SF/Mo):______________________________ Rental Escalations (Date, Reason, Rate/S.F./Mo):________________________________ Miscellaneous (Limitations on Expenses, etc.):__________________________________ Next Lease Amendment Required: (Date, Reason, Adj to Rate/S.F./Mo):_____________ Comments (General):_____________________________________________________________ Page 1 of 1 52 FIRST AMENDMENT TO LEASE AGREEMENT THIS AMENDMENT to that certain Lease by and between Callahan Pentz Properties, Pleasanton - Site 30-A, a California general partnership (hereinafter "Landlord"), and Johansen Investment Corporation, a California corporation dba SCJ Insurance Service (hereinafter "Tenant"), dated October 9, 1987, for the Premises designated as Premises A: 5934 Gibraltar Drive and Premises B: 4698 Willow Road is entered into this 16th day of December, 1987. R E C I T A L S: A. Pursuant to a Termination Agreement between Landlord and Tenant dated October 10, 1987, Landlord agreed to pay Tenants reasonable moving expenses. B. In lieu of the provisions of the Termination Agreement, respecting reimbursement for moving expenses, the parties have agreed to provide for an offset against Tenant's rental obligation. NOW THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS: Paragraph 5.1 Rent. Tenant shall receive a credit against Rent and estimated operating expenses in the amount of $10,000.00 for the month of December 1987 and a credit against Rent and operating expenses in the amount of $10,000.00 for the month of January 1988, and a partial abatement in the amount of $469.26 for the month of February 1988. Except as amended herein, the Lease is and shall remain in full force and effect. Executed on the date and year first written above. ACKNOWLEDGED AND AGREED: TENANT: LANDLORD: JOHANSEN INVESTMENT CORPORATION, CALLAHAN PENTZ PROPERTIES - SITE 30A, a California corporation, dba a California general partnership SCJ Insurance Service By: [SIG] By: /s/ J.W. CALLAHAN ---------------------------------- --------------------------------- Its: President Its: Managing General Partner ---------------------------------- --------------------------------- By: [SIG] --------------------------------- Its: Managing General Partner 53 EXHIBIT G TERMINATION AGREEMENT This TERMINATION AGREEMENT ("Agreement") between CALLAHAN PENTZ PROPERTIES, PLEASANTON - SITE 30A, ("Landlord"), a California general partnership and JOHANSEN INVESTMENT CORPORATION dba SCJ Insurance Service ("Tenant"), is entered as of this _____________ day of October 1987. R E C I T A L S: A. Landlord and Tenant entered a Lease dated April 17, 1985, for certain premises ("Premises") located at 5920 Gibraltar Drive, Pleasanton, CA. B. The Term of the Lease was scheduled to expire on December 14, 1990. C. Tenant desires to terminate the Lease as of October 14, 1987. Unless otherwise provided herein, all defined terms shall be as defined in the Lease. A copy of the Lease is attached hereto as EXHIBIT A. NOW, THEREFORE, the parties do agree as follows: 1. Termination. Upon satisfaction of all the terms and conditions contained in this Landlord agrees to terminate the Lease as of October 14, 1987, ("Termination Date"). 2. Consideration. As consideration for this Agreement, Tenant shall simultaneously execute a lease for the following locations (i) 4,581 square feet on the first floor and 8,598 square feet on the second floor of Building A, located at 5934 Gibraltar Drive, Pleasanton, CA and (ii) 2,117 square feet located at 4698 Willow Road, Pleasanton, CA. In addition, Landlord shall be responsible for the reasonable cost of moving computers and telephones. 3. Operating Expenses. In addition to the consideration specified in Paragraph 2, Tenant shall pay to Landlord Tenant's Estimated Operating Expenses and Estimated Outside Area Expenses through the Termination Date. 4. Surrender. Tenant shall surrender the Premises as provided in Section 3 of the Lease and Tenant shall be liable to Landlord for cost of removing Alterations and Tenant's Personal Property, if any, as provided in Section 14. G-1 54 5. SURVIVAL. The obligations specified in Paragraphs 3, 4, in addition to the covenants which are specified in the Lease to survive termination of the Lease, shall continue after the Termination Date. IN WITNESS WHEREOF, this Termination Agreement is executed as of the 10th day of October, 1987. LANDLORD: TENANT: CALLAHAN PENTZ PROPERTIES, JOHANSEN INVESTMENT CORPORATION, PLEASANTON - SITE 30A, a California Corporation, dba a California General Partnership SCJ Insurance Service By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: ---------------------------- By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Managing General Partner Its: VICE PRESIDENT ---------------------------- G-2 55 TENANT (LEASE) SUMMARY AMENDMENT #: 2 Amendment Execution Date: 10/25/89 Original Lease Execution Date: 10/9/87 Amendment Purpose: Surrender of 2,117 square feet in Building B and addition of 3,100 square feet in Building A Tenant: SCJ INSURANCE Landlord: HACIENDA PARK ASSOCIATES Address: 5674 Stoneridge Drive Suite: 209 Pleasanton, CA 94566 Sqft 41,656 (bldg) 16,279 (tenant) LANDLORD'S TENANT IMPROVEMENTS APPLICABLE TO AMENDMENT: Architect (company): INTERFORM (contact):------ General Contractor (company): VANDERSON CONSTRUCTION INC. (contact):------ Consultants (by Specialty): Computer/phone cabeling Telco Communications Building Permit #: ________________________________ Type: ________________________________ Date Issued: ________________________________ Date Final: ________________________________ Notice of Completion: (dt) __________#___________ Executed Plans, Specs (Date): ________________________________ As Built Drawings (Date): ________________________________ Comments (punchlist, etc.): __________________________________________________ TENANT IMPROVEMENT COST ALLOWANCE APPLICABLE TO TENANT: Total Allowance ($/sq.ft.): __________ = Existing: __________ + New: __________ Actual Tenant Improvement Cost ($/sq.ft.): ________________________________ Construction Cost (Gen'l Cont.): ________________________________ Change Orders (Date Executed, Amount): (1)Dt ___________ Amt ___________ (2)Dt ___________ Amt ___________ (3)Dt ___________ Amt ___________ Indirect Cost (Permits, A&E, etc.): ____________________________________ ________________________________________________________________________ Excess Tenant Improvements: Actual Amount Over Allowance ($/sq.ft.): _____________ Rent Adjustment Factor: _____________ Maximum T.I. Amount ($/sq.ft.): _____________ Additional Deposits (amount, purpose): ________________________________________ REVISED MONTHLY RENTAL: OPERATING EXPENSES (base year 19__)
TOTAL MONTHLY OUTSIDE AREA BUILDING RENTAL PERIOD BASE RENT EXPENSE EXPENSE ------ (MONTH) (RATE/SF/MO) + (RATE/SF/MO) + (RATE/SF/MO) = (RATE/SF/MO) ($AMOUNT) - ------- ------------ ------------ ------------ ------------ --------- - ------- ------------ ------------ ------------ ------------ --------- NO CHANGE IN RENTAL RATE -- THERE IS A CHANGE TO ??? RENTAL RATE -- - ------- ------------ ------------ ------------ ------------ --------- PER SQ.FT. PER MONTH - ------- ------------ ------------ ------------ ------------ --------- - ------- ------------ ------------ ------------ ------------ ---------
Additional Rent (Item, Payment Cycle, Rate/SF/Mo): ____________________________ _______________________________________________________________________________ Rental Escalations (Date, Reason, Rate/S.F./Mo): ______________________________ _______________________________________________________________________________ Miscellaneous (Limitations on Expenses, etc.): Landlord to provide moving costs to Tenant not to exceed an amount of $2,100. Next Lease Amendment Required: (Date, Reason, Adj to Rate/S.F./Mo): ___________ _______________________________________________________________________________ Comments (General): ___________________________________________________________ Page 1 of 1 INITIAL ------- ------- 56 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE ("AMENDMENT") IS ENTERED INTO THIS 23RD DAY OF OCTOBER, 1989 AND AMENDS THAT CERTAIN LEASE BY AND BETWEEN HACIENDA PARK ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD") SUCCESSOR IN INTEREST TO CALLAHAN PENTZ PROPERTIES, PLEASANTON - SITE 30A AND SCJ INSURANCE SERVICES, A CALIFORNIA CORPORATION SUCCESSOR IN INTEREST TO JOHANSEN INVESTMENT CORPORATION, A CALIFORNIA CORPORATION, ("TENANT") DATED OCTOBER 9, 1987. Recitals A. Landlord and Tenant have entered into a Lease for approximately thirteen thousand one hundred seventy-nine (13,179) square feet (Premise A) commonly known as the street address of 5934 Gibraltar Drive, Suite 100 and Suite 202, Pleasanton, CA and two thousand one hundred seventeen (2,117) square feet (Premises B) commonly known as the street address of 4698 Willow Road, Pleasanton, CA. Premises A and Premises B are referred to as the "Premise". The Property on which the Premises are located is shown on Exhibit A attached hereto. B. The Net Monthly Rent for the Premises for the period March 15, 1988 to April 14, 1990 is $18,634.35 and the Net Monthly Rent shall be increased on April 15, 1990 to Twenty-One Thousand One Hundred Fifty-Four and 35/100ths Dollars ($21,154.35). C. Landlord and Tenant desire to expand the Premises A to include Suite 208 ("New Premises") at 5934 Gibraltar Drive attached hereto as Exhibit B, and to remove from the Premises, Premises B at 4698 Willow Road. NOW, THEREFORE, the parties agree as follows: 1. PREMISES: Section 1.1 of the Lease is amended to provide that the Premises shall include thirteen thousand one hundred seventy-nine (13,179) square feet, original Premises A and an additional three thousand one hundred square feet (3,100) square feet known as Suite 208 ("New Premises"), and the Tenant shall surrender use of two thousand one hundred and seventeen (2,117) square feet consisting of Premises B at 4698 Willow Road, Pleasanton, CA. 2. TENANT'S PERCENTAGE: Section 1.9 of the Lease is amended to provide that Tenant's Building Percentage is to be thirty-nine and one tenths percent (39.1%) for the purposes of the Premises at 5934 Gibraltar Drive and zero percentage (0%) at 4698 Willow Road. 3. TENANT IMPROVEMENTS: Suite 208 has been improved by the Landlord. The Landlord shall modify such improvements and install an exterior doorway in Suite 100 of Premises A. The Landlord shall construct the Tenant Improvements in accordance with the Work Letter Agreement attached as Exhibit C. 1 57 Second Amendment to Lease SCJ Insurance Service October 23, 1989 Page 2 4. OCCUPANCY OF NEW PREMISES: The Landlord anticipates completion of the improvement of the Original Premises and the New Premises by December 1, 1989. Tenant agrees to relocate its property from and surrender the possession of Premises B at 4698 Willow Road by December 8, 1989. 5. Except as expressly provided herein, the Lease shall remain in full force and effect and unamended. LANDLORD: TENANT: HACIENDA PARK ASSOCIATES SCJ INSURANCE SERVICES, A CALIFORNIA GENERAL PARTNERSHIP A CALIFORNIA CORPORATION BY: SIG BY: SIG ------------------------------- ------------------------------- ITS: MANAGING PARTNER ITS: PRESIDENT ------------------------------- ------------------------------- BY: BY: ------------------------------- ------------------------------- ITS: ITS: ------------------------------- ------------------------------- 2 58 THE PROJECT Real Property in the City of Pleasanton, County of Alameda, State California. Shell construction for a 85,090 square foot, two building R&D complex situated on 5.577 acres described as Lot 30A, Parcel Map 4147, filed January 9, 1984 in Book 141 of Maps, Page 89, Alameda County Records, APN Number 941-2759-20. [GRAPHIC] 59 EXHIBIT B THE PREMISES Site 30A - Saratoga Center 5934 Gibraltar Drive Pleasanton, California [GRAPHIC] 60 EXHIBIT C WORK LETTER AGREEMENT SCJ INSURANCE SERVICES In connection with the Tenant Improvements to be installed on the Premises, the parties hereby agree as follows: 1. PLANS AND SPECIFICATIONS. The Tenant Improvements shall include only those improvements described in the Preliminary Plans and Specifications attached hereto as EXHIBIT C-1. Landlord shall retain INTERFORM as the architect ("Architect") for the completion of final working architectural and engineering plans and specifications for the Tenant Improvements to be constructed on the Premises ("Final Plans and Specifications"). Tenant shall cooperate diligently with the Architect, and shall furnish on or before October 13, 1989, all information required by the Architect for completion of the Final Plans and Specifications. Landlord and Tenant shall indicate their approval of the Final Plans and Specifications by initialing them and attaching them hereto as EXHIBIT C-2. 2. CONSTRUCTION OF TENANT IMPROVEMENTS. 2.1 Landlord shall employ VANDERSON CONSTRUCTION, INC. ("the Contractor") as the General Contractor for the construction of the Tenant Improvements in the Premises. The Contractor shall construct the Tenant Improvements substantially in conformance with the Plans and Specifications as set forth in Exhibits C-1 and C-2 hereof. In the event any materials required for the Tenant Improvements are not readily available, Landlord and/or the Contractor may substitute equivalent materials provided, however, Landlord shall notify Tenant of the substitution of said materials. Contractor shall construct the Tenant Improvements in a timely fashion to provide Tenant occupancy of the Premises as set forth in Paragraph 3.2 of the Lease for the Tenant Improvement Cost, as set forth in Paragraph 3 hereof. Contractor shall construct the Tenant Improvements in a timely and workmanlike fashion in accordance with the Final Plans and Specifications, attached hereto as Exhibit C-2. 2.2 Tenant may construct improvements to the Premises that are constructed at its sole cost and expense, or install personal property such as telephones, data cabling, etc. that are required to effect its occupancy of the Premises concurrently with Landlord's Contractor's construction of the Tenant Improvements. Such activity by Tenant shall not cause delays in Landlord's construction or cause the cost of the Landlord's Tenant Improvements to be increased. In such event, Tenant shall be responsible for such increased cost. 3. Tenant Improvements Cost. The Tenant Improvements Cost ("Tenant Improvements Cost") to be paid by Landlord shall be defined to include all direct and indirect costs associated with Landlord's construction of the Tenant Improvements in accordance with Exhibit C-1 and C-2, including but not limited to those items as follows: (a) all costs of preliminary and final architectural and engineering plans and specifications, including as-built drawings, for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; (b) All costs of obtaining building permits and other necessary authorizations from the appropriate governmental agencies; Exhibit C Page 1 61 THIRD AMENDMENT TO LEASE THIS THIRD AMENDMENT TO LEASE ("AMENDMENT") IS ENTERED INTO THIS 6TH DAY OF MARCH, 1992 AND AMENDS THAT CERTAIN LEASE BY AND BETWEEN HACIENDA PARK ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD") SUCCESSOR IN INTEREST TO CALLAHAN PENTZ PROPERTIES, PLEASANTON -- SITE 30A AND SCJ INSURANCE SERVICES, A CALIFORNIA CORPORATION SUCCESSOR IN INTEREST TO JOHANSEN INVESTMENT CORPORATION, A CALIFORNIA CORPORATION, ("TENANT") DATED OCTOBER 9, 1987, ATTACHED AS EXHIBIT "A". NOW, THEREFORE, the parties agree as follows: 1. TERM: Section 1.4 of the Lease is amended to provide the term as sixty-six (66) months, commencing September 1, 1992 and terminating February 28, 1998. 2. NET MONTHLY RENT: Section 1.6.1 of the Lease is amended to provide that the monthly rent commencing on the first day of the first month of the term, Tenant shall pay Nineteen Thousand Five Hundred Thirty-Four and 80/100 ($19,534.80) Dollars. 3. OPERATING EXPENSE BASE: Section 1.6.2 of the Lease is amended to provide that the operating expense base shall be the actual operating expenses incurred during 1992 as defined in Paragraphs 15 and 16. In the event the building is less than one hundred percent (100%) leased during 1992, the expenses shall be adjusted to reflect a one hundred percent (100%) leased building. Notwithstanding anything to the contrary, Tenant shall not be obligated to pay for any increases in operating expenses resulting from any increases in the North Pleasanton Assessment districts referred to in 1.6.4 a, b, and c. In the event the building is sold during the base lease term and the sale results in an increase in real property taxes, Landlord shall credit the tenant at the close of escrow an amount equal to the resulting real property tax increase discounted by the prevailing prime rate at the close of escrow. This payment shall only apply to the increase in taxes Tenant would be subject to in the base lease term and does not apply to any subsequent extensions. 4. NET MONTHLY RENT ADJUSTMENTS: Section 1.7 of the Lease is amended to provide that the rent be increased during the term as follows: March 1, 1993 to Twenty thousand Three Hundred Forty-eight and 75/100ths ($20,348.75), March 1, 1995 to Twenty-One Thousand Nine Hundred Seventy-Six and 65/100ths ($21,976.65) dollars March 1, 1997 to Twenty-Two Thousand Seven Hundred Ninety and 60/100ths ($22,790.60) dollars. 62 THIRD AMENDMENT TO LEASE Page 2 5. Tenant Improvements: Landlord shall paint and recarpet the Tenant's Premises located on the second floor of the building and recarpet the ground floor reception area only at Landlord's sole cost with building standard materials which are of similar quality to the existing carpet and paint.* Tenant and Landlord shall mutually agree on an acceptable time for the work to be completed. Landlord shall not be obligated to paint or recarpet Tenant's space known as Suite 100, located on the ground floor of the building, except as stated above. 6. Notification of Available Space: In the event space comes available within the building during tenant's lease term. Landlord shall notify Tenant in writing of the availability. Landlord shall have no obligation to hold available space off the market and shall only be obligated to notify Tenant of the availability of the space. 7. Option to Renew: Provided that Tenant is not in default hereunder either at the time of exercise or at the time extended term commences, Tenant shall have the option to extend the Lease for one (1) extended five (5) year term on the same terms, covenants and conditions provided herein, except that upon such renewal the monthly base rent due hereunder shall be determined pursuant to Paragraph B. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least one hundred eighty (180) days prior to the expiration of the initial term of this Lease. B. Option Period Monthly Rent. The Monthly Rent for the Option Period, which shall include the initial Monthly Rent and all adjustments, shall be determined as follows: (i) The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period based upon the then fair market rental value of the Premises as defined in Paragraph B (iii). If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. (ii) If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option period shall be the then current fair market value of the Premises as determined in accordance with Paragraph B (iv). (iii) The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Pleasanton. In no event shall the fair market monthly value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. *Tenant shall be responsible for moving Tenant's furniture and equipment both prior to commencement and after completion of Landlord's work. [Initial] 63 THIRD AMENDMENT TO LEASE Page 3 (iv) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 51.B(ii), each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full time commercial appraisal experience in the area in which the Premises are located to appraise and set the then fair market rental value of the Premises for the Option Period. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the then fair market rental value of the Premises. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then President of the Alameda County Superior court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the then fair market value of the Premises. If a majority of the appraisers are unable to set the then fair market rental value of the Premises within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the then fair market rental value of the Premises. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the then fair market rental value of the Premises. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the then fair market rental value of the Premises. 64 THIRD AMENDMENT TO LEASE Page 4 After the then fair market rental value of the Premises has been set, the appraisers shall immediately notify the parties and the Monthly Rent for the Option Period shall be such amount. 8. Except as expressly provided herein, the Lease shall remain in full force and effect. LANDLORD: TENANT: Hacienda Park Associates SCJ Insurance Services A California General Partnership A California Corporation By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Vice President Its: President ---------------------------- ---------------------------- After Hour HVAC/Lights: Landlord shall make the necessary adjustments to the building HVAC/Energy Management system to allow Tenant the ability to turn lights on during non-business hours, free of after-hour charges, but Tenant shall be responsible for paying reasonable charges for HVAC usage during non-business hours. [SIG] 65 FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE ("AMENDMENT") IS ENTERED INTO THIS 18TH DAY OF AUGUST, 1992 AND AMENDS THAT CERTAIN LEASE BY AND BETWEEN HACIENDA PARK ASSOCIATES, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD") SUCCESSOR IN INTEREST TO CALLAHAN PENTZ PROPERTIES, PLEASANTON - SITE 30A AND SCJ INSURANCE SERVICES, A CALIFORNIA CORPORATION SUCCESSOR IN INTEREST TO JOHANSEN INVESTMENT CORPORATION, A CALIFORNIA CORPORATION, ("TENANT") DATED OCTOBER 9, 1987, ATTACHED AS EXHIBIT "A". NOW, THEREFORE, the parties agree as follows: 1. PREMISES: Section 1.1 of the Lease is amended to provide that the Premises, upon the completion of the tenant improvements described in Exhibit "C" is approximately 8,882 rentable square feet located on the first and second floor of 5934 Gibraltar Drive as outlined Exhibit "B" attached hereto. 2. NET MONTHLY RENT: Section 1.7 is amended to provide that the rent would be adjusted as follows: Upon completion of the tenant improvements as described in Exhibit "C" attached hereto, the monthly rental rate shall be $12,878.90. 3. SECURITY DEPOSIT: Section 1.8 and Section 7 is amended to provide that upon execution of this document, Tenant shall provide Landlord with a security deposit of $13,000.00. Provided Tenant has not been in default during the first twenty-four (24) months of the lease term, Landlord shall return to Tenant said security deposit. 4. TENANT'S PERCENTAGE: Upon completion of the tenant improvements described in Exhibit "C", Tenant's percentage in Section 1.9 shall be 21.32 percent of 5934 Gibraltar Drive and 10.67 percent of the Project. 5. TENANT IMPROVEMENTS: Landlord shall modify the Premises at its sole cost as described in Exhibit "C" attached hereto. Tenant shall be responsible for, at its sole cost and expense, removal and replacement of all its furniture from the areas described in Exhibit "C" at the request of the general contractor to accommodate tenant improvement construction. In the event Tenant fails to move said furniture, Landlord shall do so and Tenant shall promptly reimburse Landlord for the cost associated there with. 6. NOTIFICATION OF AVAILABLE SPACE: In the event space comes available within the building during tenant's lease term, Landlord shall notify Tenant in writing of the availability. Landlord shall have no obligation to hold available space off the market and shall only be obligated to notify Tenant of the availability of the space. 7. Except as expressly provided herein, the Lease and First, Second, and Third amendments shall remain in full force and effect. LANDLORD: TENANT: Hacienda Park Associates SCJ Insurance Services A California General Partnership A California Corporation By: [SIG] By: [SIG] ----------------------------- ----------------------------- Its: Vice President Its: President ---------------------------- ---------------------------- 66 MUTUAL RELEASE In consideration of the mutual covenants contained in that certain Agreement Regarding Landlord's Consent to Assignment, dated as of February 29, 1996, (the "Agreement") by and among SCJ Insurance Services, a California corporation ("Assignor"), Pro Business, Inc., a Delaware corporation ("Assignee"), and Hacienda Park Associates, a California general partnership ("Landlord"), Landlord fully releases and discharges Assignor and its partners, employees, agents, brokers, contractors, officers and directors from any actions, causes of action, claims and demands, costs, from, and relinquish all rights, claims and actions that Landlord may have against Assignor which arise under that certain Lease; dated as of October 9, 1987, as amended, between Landlord and Assignee (the "Lease"). Landlord represents and warrants that it has not sold, assigned, or otherwise transferred any of the claims released by this Mutual Release. In consideration of the mutual covenants contained in the Agreement, Assignor and Assignee fully release and discharge Landlord and its partners, employees, agents, brokers, contractors, officers and directors and their respective employees, officers and directors from any actions, causes of action, claims and demands, costs, from, and relinquish all rights, claims and actions that either Assignor or Assignee may have against Landlord which arise under the Lease and which relate to obligations of Landlord under the Lease to be performed or accruing prior to the date of this Mutual Release. Assignor and Assignee each represents and warrants that it has not sold, assigned, or otherwise transferred any of the claims released by this Mutual Release. Each party agrees that all rights under Civil Code Section 1542 and under any other applicable, similar law are expressly waived. California Civil Code Section 1542 provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Each party represents and warrants to the other party that the party has read and understood this Mutual Release and the releases contained herein and that each party has had the legal effect of this Mutual Release explained by competent legal counsel of that party's own choice and that each party is executing this Mutual Release of that party's own free will. EXHIBIT A 1 67 This Mutual Release may be executed in counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one Release. This Mutual Release shall be governed by and construed in accordance with the laws of the State of California. If any lawsuit is filed which relates to or arises out of this Mutual Release, the prevailing party shall be entitled to recover from each other party such attorneys' fees as the court may award in addition to such other costs and expenses of suit as may be allowed by law. A party need not be entitled to recover a monetary judgment in order to be found to be the "prevailing party". DATED: , 1996 ------------------ LANDLORD: HACIENDA PARK ASSOCIATES, a California general partnership By PaineWebber Equity Partners Two Limited Partnership, a Virginia limited partnership, Its General Partner By: Second Equity Partners, Inc. Its Managing General Partner By: /s/ SIG ---------------------------- Its: VICE PRESIDENT ---------------------------- EXHIBIT A 2 68 ASSIGNOR: SCJ Insurance Services, a California corporation By: /s/ SHIRLEY LAPP ---------------------------- Shirley Lapp, President ASSIGNEE: Pro Business, Inc., a Delaware corporation By: [SIG] ---------------------------- Its: EVP-OPERATIONS ---------------------------- EXHIBIT A 3 69 ASSIGNMENT AND ASSUMPTION OF LEASE THIS ASSIGNMENT AND ASSUMPTION OF LEASE (this "Assignment"), dated as of February 29, 1996, is entered into by and between SCJ Insurance Services, a California corporation ("Assignor"), and Pro Business, Inc., a Delaware corporation ("Assignee"). WITNESSETH: WHEREAS, Assignor is the tenant under that certain lease by and between Hacienda Park Associates, a California general partnership ("Landlord"), and Assignor, dated as of October 9, 1987, as amended by that certain First Amendment, dated October 9, 1987, that certain Second Amendment, dated October 30, 1989, that certain Third Amendment, dated March 6, 1992, and that certain Fourth Amendment, dated August 18, 1992 (collectively, the "Lease"); and WHEREAS, Assignor desires to assign its interest as tenant under the Lease to Assignee, and Assignee desires to accept such assignment and has agreed to assume Assignor's obligations under the Lease. NOW, THEREFORE, in consideration of the promises and conditions contained herein, Assignor and Assignee hereby agree as follows: 1. Assignor hereby assigns to Assignee all of its right, title and interest in and to the Lease, effective as of October 1, 1996 (the "Effective Date"). Assignor and Assignee may mutually agree upon an earlier Effective Date provided that they give Landlord written notice of such earlier Effective Date. 2. Assignee hereby assumes all obligations of Assignor under the Lease, effective as of the Effective Date. 3. Assignor hereby acknowledges that its obligations under the Lease shall not be diminished or relieved in any way by reason of this Assignment or any modification of the Lease made subsequent to the date of this Assignment and that it shall remain liable for all obligations under the Lease to be performed or accruing prior to the Effective Date. 4. This Assignment shall be binding on and inure to the benefit of the parties hereto and their successors in interest and assigns. 5. Assignor agrees to pay all rent and other sums payable under the Lease when due and not to otherwise default under the Lease so as to prevent Landlord's consent to assignment of the Lease upon the Effective Date. Assignee agrees to pay all 70 rent and other sums payable when due and not to otherwise default under that certain Lease, dated as of August 12, 1992, by and between Landlord and Assignee's predecessor-in-interest so as to prevent Landlord's consent to assignment of the Lease upon the Effective Date. 6. Assignor agrees to timely keep, perform and discharge all of the obligations as tenant under the Lease that shall have accrued and/or are to have been performed prior to the Effective Date. Assignor shall indemnify, defend and hold Assignee harmless from and against any and all claims, demands, liabilities and obligations of tenant under the Lease arising out of or relating to the period prior to the Effective Date. Assignee agrees to timely keep, perform and discharge all of the obligations of tenant under the Lease that shall accrue and/or are to be performed after the Effective Date. Assignee shall indemnify, defend and hold Assignor harmless from and against any and all claims, demands, liabilities and obligations of tenant under the Lease arising out of or relating to the period after the Effective Date. 7. Notwithstanding Paragraph 6 above, Assignor and Assignee agree that (a) Assignee shall be entitled to receive any refund or credit given by Landlord after the Effective Date as a result of the overpayment by Assignor of its prorata share of operating expenses, common area expenses and real property taxes applicable to any period prior to the Effective Date; and (b) Assignee shall pay the amount of the shortfall, if any, determined by Landlord after the Effective Date in the amount paid by Assignor of its prorata share of operating expenses, common area expenses and real property taxes applicable to any period prior to the Effective Date. 2 71 IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the date first above written. ASSIGNOR: SCJ Insurance Services, a California corporation By: /s/ SHIRLEY LAPP ---------------------------- Shirley Lapp, President ASSIGNEE: Pro Business, Inc., a Delaware corporation By: [SIG] ---------------------------- Its: EVP-OPERATIONS ---------------------------- 3 72 AGREEMENT REGARDING LANDLORD'S CONSENT TO ASSIGNMENT THIS AGREEMENT REGARDING LANDLORD'S CONSENT TO ASSIGNMENT (this "Agreement"), dated as of February 29, 1996, is entered into by and among SCJ Insurance Services, a California corporation ("Assignor"), Pro Business, Inc., a Delaware corporation ("Assignee"), and Hacienda Park Associates, a California general partnership.("Landlord"). WITNESSETH: WHEREAS, Assignor is the tenant under that certain lease by and between Landlord and Assignor, dated as of October 9, 1987, as amended by that certain First Amendment, dated October 9, 1987, that certain Second Amendment, dated October 30, 1989, that certain Third Amendment, dated March 6, 1992, and that certain Fourth Amendment, dated August 18, 1992 (collectively, the "Lease"); and WHEREAS, Assignor desires to assign its interest as tenant under the Lease to Assignee, effective as of October 1, 1996 (the "Effective Date"), and Assignee desires to accept such assignment and has agreed to assume Assignor's obligations under the Lease effective as of the Effective Date. NOW, THEREFORE, in consideration of the promises and conditions contained herein, Assignor and Landlord hereby agree as follows: 1. Assignor and Assignee may designate an earlier Effective Date upon not less than fifteen (15) days written notice signed by Assignor and Assignee to Landlord. 2. Landlord agrees to consent to the assignment of the interest of Assignor under the Lease to Assignee as of the Effective Date and to release and discharge Assignor from its obligations under the Lease to be performed or accruing after the Effective Date upon the written request of Assignor and Assignee delivered to Landlord not earlier than fifteen (15) days prior to or more than fifteen (15) days following the Effective Date; provided that as of the Effective Date (a) Assignor is not in material default under the Lease, (b) there has then occurred no event which would constitute a material default under the Lease with notice or the passage of time, or both, (c) Assignee is not in material default under that certain Lease, dated as of August 12, 1992, by and between Landlord and Assignee's predecessor-in-interest ("Assignee's Lease"'), (d) there has then occurred no event which would constitute a material default under Assignee's Lease with notice or the passage of time, or both, (e) Assignor has vacated the leased premises in the condition required by the Lease and (f) Assignor and Assignee release and discharge Landlord in writing from all obligations under to be performed by Landlord prior to the Effective Date. In furtherance of the foregoing Assignor agrees that Landlord 73 shall have no obligation to release Assignor as of the Effective Date unless Assignor shall have made all payments, including, without limitation, base rent, reimbursements of operating expenses, common area expenses and real property taxes required by the Lease when due under the Lease and within the periods allowed for such payments under the Lease. A monetary default under the Lease shall be deemed to be a material default thereunder. Prior to executing and delivering the release referred to above Landlord shall have the right to inspect the leased premises in order to ascertain their condition. The parties agree that the release referred to above shall be in the form of Exhibit A attached hereto. 2. Assignor hereby releases and discharges Landlord, and its partners, employees, agents, brokers and contractors from the obligations of Landlord and any claims which Assignor may have relating to the obligations of Landlord, and its partners, employees, agents, brokers and contractors under the Lease accruing or arising prior to the date of this Agreement. 3. Notwithstanding Paragraph 6 of that certain Assignment and Assumption of Lease of even date herewith between Assignor and Assignee (a) Assignee shall be entitled to receive any refund or credit given by Landlord after the Effective Date as a result of the overpayment by Assignor of its prorata share of operating expenses, common area expenses and real property taxes applicable to any period prior to the Effective Date; and (b) Assignee shall pay the amount of the shortfall, if any, determined by Landlord after the Effective Date in the amount paid by Assignor of its prorata share of operating expenses, common area expenses and real property taxes applicable to any period prior to the Effective Date. Assignee hereby expressly assumes the obligation to pay the amount of the shortfall, if any, determined by Landlord after the Effective Date in the amount paid by Assignor of its prorata share of operating expenses, common area expenses and real property taxes applicable to any period prior to the Effective Date. 2 74 4. This Agreement shall be binding on and inure to the benefit of the parties hereto and their successors in interest and assigns. IN WITNESS WHEREOF, Assignor and Landlord have executed this Assignment as of the date first above written. LANDLORD: HACIENDA PARK ASSOCIATES, a California general partnership By PaineWebber Equity Partners Two Limited Partnership, a Virginia limited partnership, Its General Partner By: Second Equity Partners, Inc. Its Managing General Partner By: [SIG] ---------------------------- Its: VICE PRESIDENT ---------------------------- ASSIGNOR: SCJ Insurance Services, a California corporation By: /s/ SHIRLEY LAPP --------------------------------- Shirley Lapp, President ASSIGNEE: Pro Business, Inc., a Delaware corporation By: [SIG] --------------------------------- Its: EVP-OPERATIONS --------------------------------- 3 75 ACCESS AND HOLD HARMLESS AGREEMENT This agreement is dated May 8, 1996 and entered into by SCJ Insurance Services (SCJ), a California corporation and Pro Business, Inc. (Pro Business), a Delaware corporation. WHEREAS, SCJ and Pro Business have mutually agreed that the assumption effective date of the Assignment and Assumption of Lease by and between SCJ Insurance Services, a California Corporation and Pro Business Inc., a Delaware Corporation dated February 29, 1996 and the assumption effective date of the Agreement Regarding Landlord's Consent to Assignment by and among Hacienda Park Associates, a California general partnership, Pro Business Inc., a Delaware corporation and SCJ Insurance Services, a California corporation dated February 29, 1966 has been revised to July 1, 1996; WHEREAS, Pro Business desires access to such premises covered by the Assignment and Assumption of Lease prior to July 1, 1996 but not earlier than May 13, 1996 for the sole purpose of preparing the premises for their occupancy on or after July 1, 1996; WHEREAS, SCJ has agreed to allow Pro Business access to such premises covered by the Assignment and Assumption of Lease prior to the July 1, 1996 but not earlier than May 13, 1996 for the sole purpose of preparing the premises for Pro Business's occupancy on or after July 1, 1996; WHEREAS, Pro Business has examined the premises in detail and agrees to accept the space in "AS IS" condition and Pro Business agrees that all costs associated with improvements or modifications required for their occupancy are Pro Business's responsibility; WHEREAS, has agreed to pay Pro Business $6,000 on July 1, 1996; WHEREAS, Pro Business acknowledges and agrees that their occupancy on or after July 1, 1996 is contigent upon Hacienda Park Associates, a California general partnership, signing that certain release shown as Exhibit "A" to the Agreement Regarding Landlord's Consent to Assignment by and among Hacienda Park Associates, a California general partnership, SCJ Insurance Services, a California corporation and Pro Business Inc., a Delaware corporation dated February 29, 1996. In other words Pro Business may not occupy the premises prior to Hacienda Park Associates signing the Exhibit "A" release in favor of SCJ. NOW, THEREFORE, in consideration of the promises and conditions contained herein, Pro Business hereby agrees to defend and hold harmless SCJ Insurance Services and its employees, agents, brokers, contractors, officers, and directors from any actions, causes of action, claims and demands or costs of any type, including attorney fees, directly or indirectly related to or in any manner caused by Pro Business in preparation of the premises for occupancy or any activity by Pro Business, its employees, agents, brokers, contractors, officers and directors. 76 This agreement, the Assignment and Assumption agreement dated February 29, 1996 and the Landlord's Consent to Assignment dated February 29, 1996 represent all of the agreements between Pro Business and SCJ related to the assignment and assumption of the lease. No other representations, understanding or agreements have been made or relied upon. IN WITNESS WHEREOF, SCJ and Pro Business have executed this as of the date first above written. SCJ Insurance Services, 5860 West Las Positas Blvd., Suite 25 Pleasanton, CA 94588 By: _________________________________ John B. McKenzie, CFO Dated: ______________________________ Pro Business Inc., 5934 Gibralter Drive, Suite 101 Pleasanton, CA 94588 By: _________________________________ Its: ________________________________ Dated: ______________________________ 77 June 24, 1996 Mitch Everton Vice President - Operations Pro Business 5934 Gibralter Drive Pleasanton, CA 94588 Re: Assignment and Assumption of Lease Dear Mitch: This letter is an addendum to the Access and Hold Harmless Agreement dated May 8, 1996 by and between SCJ Insurance Service, a California Corporation and Pro Business Inc., a Delaware Corp[oration. We have agreed to the following changes: * The requirement that SCJ Insurance Services pay Pro Business $6,000 on July 1, 1996 or at any time is hereby eliminated. * Pro Business may occupy the premises at any time on or after June 24, 1996. Mitch, I believe this summarizes what we talked about. If so, please sign and return a copy of this letter for my records. Sincerely, John B. McKenzie, CFO Accepted and agreed by Pro Business Inc. By: ___________________________ Its: __________________________ Dated: ________________________ EX-10.19 39 PROMISSORY NOTE, DATED JANUARY 31, 1997 1 EXHIBIT 10.19 PROMISSORY NOTE U.S. $275,000 December 31, 1996 Benesphere Administrators, Inc. (the "Company") for value received, hereby promises to pay Alison M. Elder ("Holder"), her heirs, successors or assigns, or order, the principal sum of TWO HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($275,000), and to pay interest thereon at the rate of 9% per annum from the date hereof. All principal and interest shall be payable on April 15, 1997 (the "Maturity Date") at Benesphere Administrators, Inc., 7041 Koll Center Parkway, Suite 275, Pleasanton, California 94566; provided, however, that any such payment may be made at the option of the Holder by check mailed to the address of the Holder as such address shall appear on the records of the Company. Interest shall be computed by dividing the interest rate by 365 which results in a daily factor ("factor"). The outstanding principal balance shall then be multiplied by that factor which results in the daily interest amount. The accrued daily interest amount is payable monthly and if not so paid shall become part of the principal, at the option of Holder. All payments shall be applied first to accrued interest due and payable, and the remainder, if any, to principal. The Company may prepay the Note in whole or in part at any time without penalty. Any partial prepayment shall be applied to the payment of interest accrued to date and the balance to principal. The Company hereby acknowledges that late payment by the Company to Holder of any payment hereunder will cause Holder to incur costs not contemplated by this Note, the exact amount of which will be extremely difficult to ascertain. Accordingly, if any payment hereunder shall not be received by Holder within five days after such amount shall be due, the Company shall pay to Holder a late charge of four cents ($.04) for each dollar ($1.00) which is not paid when due. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Holder will incur by reason of late payment by the Company. Acceptance of such late charge by Holder shall in no event constitute a waiver of the Company's default with respect to such overdue amount, nor prevent Holder from exercising any of the other rights and remedies available hereunder. The Company promises to pay all reasonable costs and expenses of collection and all reasonable attorneys' fees incurred by Holder on account of such collection, whether or not suit is filed thereon. Such costs and expenses shall be payable on demand and if not so paid shall become part of the principal at the option of Holder. The Company waives all rights to require Holder to do the following: (a) demand payment of amounts due (presentment); (b) give notice that amounts due have not been paid (notice of dishonor); and (c) obtain an official certification of non-payment (protest). Any waiver by Holder or modification of this Note, shall not be effective unless it is in writing and signed by Holder on the reverse side of the original of this Note. EX-10.20 40 SERIES F PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.20 ---------- PROBUSINESS, INC. SERIES F PREFERRED STOCK PURCHASE AGREEMENT MARCH 12, 1997 ---------- 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 Authorization and Sale of Preferred Stock.............................................................. 4 1.1 Authorization................................................................................... 4 1.2 Sale of Series F Preferred...................................................................... 4 1.3 Use of Proceeds................................................................................. 4 SECTION 2 Closing Date; Delivery................................................................................. 4 2.1 Closing Date.................................................................................... 4 2.2 Delivery........................................................................................ 5 SECTION 3 Representations and Warranties of the Company.......................................................... 5 3.1 Organization and Standing; Articles of Incorporation and Bylaws................................. 5 3.2 Corporate Power................................................................................. 5 3.3 Subsidiaries.................................................................................... 5 3.4 Capitalization.................................................................................. 5 3.5 Authorization................................................................................... 6 3.6 No Contravention................................................................................ 7 3.7 Financial Statements............................................................................ 7 3.8 Employees....................................................................................... 7 3.9 Governmental Consent, etc....................................................................... 8 3.10 Brokers or Finders; Other Offers................................................................ 8 3.11 No Material Liabilities......................................................................... 8 3.12 FIRPTA.......................................................................................... 8 3.13 Registration Rights............................................................................. 8 3.14 Environmental Matters........................................................................... 8 3.15 Litigation...................................................................................... 9 3.16 Compliance with Laws............................................................................ 9 3.17 No Default or Breach; Contractual Obligations................................................... 9 3.18 Taxes........................................................................................... 9 3.19 No Material change; Ordinary Course of Business................................................. 10 3.20 Investment Company.............................................................................. 10 3.21 Labor Relations................................................................................. 10 3.22 Employee Benefit Plans.......................................................................... 10 3.23 Title to Assets................................................................................. 10 3.24 Intellectual Property........................................................................... 10 3.25 Year 2000 Compliance............................................................................ 11 3.26 Potential Conflicts of Interest................................................................. 11 3.27 Trade Relations................................................................................. 11 3.28 Insurance....................................................................................... 11 3.29 Disclosure...................................................................................... 11
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- SECTION 4 Representations and Warranties of the Purchasers....................................................... 12 4.1 Investment Representations and Covenants of the Purchasers...................................... 12 4.2 No Public Market................................................................................ 13 4.3 Receipt of Information.......................................................................... 13 4.4 Authorization................................................................................... 13 4.5 Brokers or Finders.............................................................................. 14 4.6 Tax Advisors.................................................................................... 14 4.7 Investor Counsel................................................................................ 14 SECTION 5 Conditions to Closing of the Purchasers................................................................ 14 5.1 Representations and Warranties Correct.......................................................... 14 5.2 Covenants....................................................................................... 14 5.3 Compliance Certificate.......................................................................... 14 5.4 Opinion of Company's Counsel.................................................................... 15 5.5 Blue Sky........................................................................................ 15 5.6 Legal Matters................................................................................... 15 5.7 Registration Rights Agreement. ................................................................ 15 5.8 Secretary's Certificate......................................................................... 15 5.9 Documents....................................................................................... 15 5.10 Filing of Amendment to Certificate of Incorporation............................................. 15 5.11 Shares.......................................................................................... 15 5.12 Shareholders Agreement.......................................................................... 15 SECTION 6 Conditions to Closing of Company....................................................................... 16 6.1 Representations and Warranties.................................................................. 16 6.2 Blue Sky........................................................................................ 16 6.3 Legal Matters................................................................................... 16 6.4 Board and Shareholder Approval.................................................................. 16 6.5 Registration Rights Agreements.................................................................. 16 6.6 Shareholders Agreement.......................................................................... 16 6.7 Lockup.......................................................................................... 16 SECTION 7 Affirmative Covenants of the Company and the Purchasers................................................ 17 7.1 Financial Information........................................................................... 17 7.2 Rights of Inspection............................................................................ 17 7.3 Assignment of Rights to Financial Information................................................... 18 7.4 Termination of Covenants........................................................................ 18 7.5 Reservation of Common Stock and Preferred Stock................................................. 18
-ii- 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- SECTION 8 Miscellaneous.......................................................................................... 18 8.1 Governing Law................................................................................... 18 8.2 Survival........................................................................................ 18 8.3 Successors and Assigns.......................................................................... 18 8.4 Entire Agreement; Amendment..................................................................... 19 8.5 Notices, etc.................................................................................... 19 8.6 Delays or Omissions............................................................................. 19 8.7 California Corporate Securities Law............................................................. 20 8.8 Expenses........................................................................................ 20 8.9 Counterparts.................................................................................... 20 8.10 Severability.................................................................................... 20 8.11 Further Assurances.............................................................................. 20 8.12 Publicity....................................................................................... 20
-iii- 5 EXHIBITS A. Schedule of Purchasers B. Certificate of Amendment of Articles of Incorporation C. Schedule of Exceptions D. Employee Confidential Information Agreement E. Compliance Certificate F. Opinion of Company's Counsel G. Amended and Restated Registration Rights Agreement H. Stockholders' Agreement I. Lock-up Agreement -iv- 6 PROBUSINESS, INC. SERIES F PREFERRED STOCK PURCHASE AGREEMENT This Series F Preferred Stock Purchase Agreement (the "AGREEMENT") is made as of the 12th day of March 1997 by and between ProBusiness, Inc., a California corporation (the "COMPANY"), with its principal office at 5934 Gibraltar Drive, Pleasanton, California 94588, and the persons listed on the Schedule of Purchasers attached hereto as Exhibit A (the "PURCHASERS"). In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" shall mean, with respect to any Person, any other Person who controls, is controlled by or is under common control with such Person. In addition, the following shall be deemed to be Affiliates of GAP LP: (a) GAP, LLC, the members of GAP LLC and the limited partners of GAP LP; (b) any Affiliate of GAP LLC, the members of GAP LLC and the limited partners of GAP LP; and (c) any limited liability company or partnership a majority of whose members or partners, as the case may be, are members of GAP LLC. In addition, GAP LP and GAP Coinvestment shall be deemed to be Affiliates of one another. "Agreement" shall have the meaning as defined above. "Articles of Incorporation" means the Articles of Incorporation of the Company, as amended and as in effect as of the Closing Date. "Board of Directors" means the Board of Directors of the Company. "Bylaws" means the bylaws of the Company as amended and as in effect as of the Closing Date. "Certificate" shall have the meaning as defined in Section 1.1. "Closing" shall have the meaning as defined in Section 2.1. "Closing Date" shall have the meaning as defined in Section 2.1. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute thereto. 7 "Commission" shall have the meaning as defined in Section 4.1(c). "Common Stock" means Common Stock, par value $.01 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Common Stock Equivalents" means any security or obligation which is by its terms convertible into or exchangeable for shares of Common Stock, including, without limitation the Preferred Stock, and any option, warrant or other subscription or purchase right with respect to Common Stock and Preferred Stock. "Condition of the Company and the Subsidiary" means the assets, business, properties, operations or financial condition of the Company and the Subsidiary, taken as a whole. "Contractual Obligations" means any agreement, note, contract, indenture, mortgage, deed of trust or other instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or any of their respective properties are bound. "Copyrights" means any foreign or United States copyright registrations and applications for registration thereof and any non-registered copyrights. "Environmental Laws" means federal, state, local and foreign laws, principles of common law, civil law, regulations and codes relating to pollution, protection of the environment or public health and safety. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Financial Statements" shall have the meaning set forth in Section 3.7. "GAAP" means generally accepted accounting principles in effect from time to time. "GAP LLC" means General Atlantic Partners, LLC, a Delaware limited liability company and the general partner of GAP LP, and any successor to such entity. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising, executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Intellectual Property" shall have the meaning as defined in Section 3.24. "Internet Assets" means any internet domain names and other computer user identifiers and any rights in and to sites on the Worldwide Web, including rights in and to any text, graphics, audio and video files and html or other code incorporated in such sites. -2- 8 "Lien" means any mortgage, deed of trust, pledge, assignment, encumbrance, lien (statutory or other) or other charge. "Mask Works" means any mask works and registrations and applications for registrations thereof. "Orders" shall have the meaning as set forth in Section 3.6 hereof. "Patents" means any foreign or United States patents and patent applications, including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "Permits" shall have the meaning as defined in Section 3.16(b)(i). "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Preferred Stock" shall have the meaning as defined in Section 3.4. "Registration Rights Agreement" shall mean the Amended and Restated Registration Rights Agreement dated the date hereof between the Company, the Purchasers and the Original Holders (as defined therein). "Requirements of Law" means any law, statute, treaty, rule, or regulation of a court or other Governmental Authority, in each case applicable or binding upon the Company, the Subsidiary or any of their respective property or to which the Company, the Subsidiary or any of their respective properties are bound. "Securities Act" shall have the meaning as defined in Section 3.13. "Securities Exchange Act" shall have the meaning as defined in Section 4.1(c). "Series F Preferred" shall have the meaning as defined in Section 1.1. "Software" means any computer software programs, source code, object code and manuals and other written material with respect thereto. "Stockholders' Agreement" shall mean the Stockholders' Agreement dated the date hereof between the Company, the Purchasers and the Sinton Stockholders (as defined therein). "Subsidiary" means BeneSphere Administrators, Inc. -3- 9 "Trade Secrets" means any trade secrets, research records, processes, procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), invention disclosures and improvements thereto. "Trademarks" means any foreign or United States trademarks, service marks, trade dress, trade names, brand names, designs and logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. "Transaction Documents" means the Agreement, the Stockholders' Agreement and the Registration Rights Agreement. SECTION 1 AUTHORIZATION AND SALE OF PREFERRED STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to 574,733 shares (the "SHARES") of its Series F Preferred Stock (the "SERIES F PREFERRED"), having rights, privileges and preferences as set forth in the Certificate of Amendment to the Articles of Incorporation (the "CERTIFICATE") in the form attached to this Agreement as Exhibit B. The Company's Certificate authorizes the issuance of up to 574,733 shares of Series F Preferred. 1.2 SALE OF SERIES F PREFERRED. Subject to the terms and conditions hereof, the Company will severally issue and sell to the Purchasers and the Purchasers will severally purchase from the Company, at the Closing, the respective number of shares of Series F Preferred indicated on the Schedule of Purchasers at a purchase price of $17.40 per share, for the aggregate purchase price for each Purchaser as indicated thereon. 1.3 USE OF PROCEEDS. Company intends to use the net proceeds received by it from the sale of the Shares contemplated hereby to repay a portion of its outstanding indebtedness and, the remainder will be used for other general working capital purposes. SECTION 2 CLOSING DATE; DELIVERY 2.1 CLOSING DATE. The closing of the execution of this Agreement and the sale and purchase of the Shares hereunder shall be held at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 at 5:00 p.m., local time, on March 12, 1997 (the "CLOSING") or at such other time and place upon which the Company and the Purchasers shall agree (the date of the Closing is hereinafter referred to as the "CLOSING DATE"). -4- 10 2.2 DELIVERY. At the Closing, the Company will deliver to each Purchaser an executed counterpart of this Agreement together with a certificate, registered in such Purchaser's name, representing the number of Shares to be issued on the Closing Date as set forth beside such Purchaser's name on the Schedule of Purchasers, against delivery of an executed counterpart of this Agreement, together with payment of the purchase price for the Shares by check payable to the Company or wire transfer per the Company's instructions. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on the "Schedule of Exceptions" attached hereto as Exhibit C, the Company hereby represents and warrants to the Purchasers as of the Closing Date as follows: 3.1 ORGANIZATION AND STANDING; ARTICLES OF INCORPORATION AND BYLAWS. Each of the Company and the Subsidiary is a corporation duly organized and validly existing under, and by virtue of, the laws of the state of its incorporation and is in good standing under such laws. Each of the Company and the Subsidiary has requisite corporate power and authority to own, lease and operate its respective properties and assets and to carry on its respective business as presently conducted and as proposed to be conducted. Neither the Company, nor the Subsidiary is presently qualified to do business as a foreign corporation in any jurisdiction where the failure to be so qualified would have a material adverse effect on the Condition of the Company and the Subsidiary. No jurisdiction has claimed in writing or otherwise, that either the Company or the Subsidiary is required to qualify as a foreign corporation therein. Except as set forth on Schedule 3.1, the Company does not own, lease or operate property in any jurisdiction other than its jurisdiction of incorporation. The Company has furnished to the Purchasers or their special counsel copies of its Articles of Incorporation, as amended, and Bylaws, as amended. Said copies are true, correct and complete and contain all amendments through the Closing Date. 3.2 CORPORATE POWER. The Company has all requisite legal and corporate power and authority to execute and deliver this Agreement, to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Shares and to carry out and perform its obligations under the terms of the Transaction Documents. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity except for BeneSphere Administrators, Inc., a Washington Corporation. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, par value $.01 per share, 1,518,868 of which are issued and outstanding as of the Closing Date, and 6,000,000 shares of Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"), 920,000 of which have been designated Series A Preferred Stock (the "SERIES A PREFERRED"), all of which are issued and outstanding as of the Closing Date, 1,500,000 of -5- 11 which have been designated Series B Preferred Stock (the "SERIES B PREFERRED"), of which 919,400 are issued and outstanding as of the Closing Date, 1,500,000 of which have been designated Series C Preferred Stock (the "SERIES C PREFERRED"), of which 260,785 are issued and outstanding as of the Closing Date, 500,000 of which have been designated Series D Preferred Stock (the "SERIES D PREFERRED"), of which 300,000 are issued and outstanding as of the Closing Date, 500,000 of which have been designated Series E Preferred Stock (the "SERIES E PREFERRED"), of which 253,116 are issued and outstanding as of the Closing Date, and 574,733 of which have been designated Series F Preferred Stock (the "SERIES F PREFERRED"), none of which are issued and outstanding immediately before the Closing. No other series of Preferred Stock has been designated. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable and were issued in compliance with the registration and qualification requirements of all applicable federal and state securities laws. The Company has reserved 574,733 shares of Series F Preferred for issuance hereunder, 1,149,466 shares of Common Stock for issuance upon conversion of the Series F Preferred, 506,232 shares of Common Stock for issuance upon the conversion of the Series E Preferred, 600,000 shares of Common Stock for issuance upon the conversion of the Series D Preferred, 521,570 shares of Common Stock for issuance upon conversion of the Series C Preferred, 1,838,800 shares of Common Stock for issuance upon conversion of the Series B Preferred, 1,840,000 shares of Common Stock for issuance upon conversion of the Series A Preferred, 777,787 shares of Common Stock for issuance upon exercise of options granted and 1,440,593 shares of Common Stock for issuance upon exercise of options not yet granted under the Company's 1989 Stock Option Plan and Executive Stock Option Plan. The Series F Preferred shall have the rights, preferences, privileges and restrictions set forth in the Certificate. The Company has reserved 186,872 shares of Series E Preferred for issuance upon exercise of warrants to purchase Series E Preferred and 373,744 shares of Common Stock for issuance upon conversion of the Series E Preferred issued pursuant to exercise of warrants. The Company has reserved 50,000 shares of Common Stock for issuance upon exercise of warrants to purchase Common Stock. Schedule 3.4 sets forth a true and complete list of (i) the stockholders of the Company and, opposite the name of each stockholder, the amount of all outstanding capital stock and Common Stock Equivalents owned by such stockholder and (ii) the holders of Common Stock Equivalents (other than the stockholders set forth in clause (i) above) and, opposite the name of each such holder, the amount of all outstanding Common Stock Equivalents owned by such holder. Except as set forth in the Stockholders' Agreement and on Schedule 3.4, there are no options, warrants or other rights, including convertible debentures or notes, granted or issued by or binding upon the Company to purchase any of the Company's capital stock or other conversion or preemptive rights, co-sale rights or rights of first refusal or rights of first offer granted by the Company to any Person, or voting, proxy or other stockholder agreements granting such similar rights to any Person to which the Company is a party. None of the rights set forth in Schedule 3.4 is in preference to or in conflict with the rights granted to the Purchasers by the Company in the Transaction Documents. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of the Transaction Documents by the Company, the authorization, sale, issuance and delivery of the Shares (and the Common Stock issuable upon conversion of the Shares) and the performance of all of the Company's obligations hereunder and thereunder have been taken or will be taken prior to the Closing. Each of -6- 12 the Transaction Documents, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, except, (i) as limited by laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies and (ii) to the extent that the enforceability of the indemnification provisions of the Registration Rights Agreement and the involuntary transfers and corporate governance provisions of the Stockholders' Agreement may be limited by applicable law. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable and will have the rights, preferences and privileges described in the Certificate. The Common Stock issuable upon conversion of the Shares has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Certificate, will be validly issued, fully paid and nonassessable. The Shares and such Common Stock will be issued in compliance with registration and qualification requirements of all applicable federal and state securities laws subject to restrictions on transfer under state and/or federal securities laws as set forth herein and will be free of any liens or encumbrances, assuming the Purchasers take the Shares with no notice thereof, and other than any liens or encumbrances created by or imposed upon the holders through no action of the Company. The Shares are not subject to any preemptive rights, co-sale rights, rights of first refusal or rights of first offer. 3.6 NO CONTRAVENTION. Except as set forth in Section 3.6, the execution, delivery and performance by the Company of each of the Transaction Documents and the transactions contemplated hereunder and thereunder (a) do not contravene the terms of the Articles of Incorporation or the Bylaws; (b) do not violate, conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation, or any Requirement of Law, except where the violation, conflict, breach, contravention or Lien would not have a material adverse effect on the Condition of the Company and the Subsidiary; and (c) do not violate any material provision of any judgment, injunction, writ, award, decree or order of any nature (collectively, "ORDERS") of any Governmental Authority against, or binding upon, the Company. 3.7 FINANCIAL STATEMENTS. The Company has delivered to each Purchaser the Company's unaudited financial statements (balance sheet and statement of operations) for the six months ended December 31, 1996, and the audited financial statements for the twelve-month periods ending June 30, 1995 and June 30, 1996 (the "FINANCIAL STATEMENTS"), which are complete and correct in all material respects and were prepared in accordance with generally accepted accounting principles applied on a consistent basis except that the unaudited financial statements do not contain footnotes or typical year end adjustments. The Financial Statements accurately set out in all material respects and describe the financial condition, operating results and cash flows of the Company as of the respective dates and for the respective periods indicated except that the unaudited financial statements do not contain typical year end adjustments. 3.8 EMPLOYEES. To the best of the Company's knowledge, no employee of the Company or the Subsidiary is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or the Subsidiary or any other party because of the nature of the business conducted or to be conducted by the Company or the Subsidiary. Each employee of the Company and the Subsidiary with access to -7- 13 confidential or proprietary information has executed an Employee Confidential Information Agreement in a form substantially similar to the agreement attached hereto as Exhibit D. 3.9 GOVERNMENTAL CONSENT, ETC. No consent, approval, qualification, order or authorization of, or filing with, any Governmental Authority on the part of the Company is required in connection with the valid execution, delivery or performance by, or enforcement against the Company of any of the Transaction Documents, or the offer, sale or issuance of the Shares (and the Common Stock issuable upon conversion of the Shares), or the consummation of any other transaction contemplated hereby (or thereby), except the qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Shares (and the Common Stock issuable upon conversion of the Shares) under applicable Blue Sky laws, which filings and qualifications, if required, will be accomplished in a timely manner. 3.10 BROKERS OR FINDERS; OTHER OFFERS. The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with any of the Transaction Documents. 3.11 NO MATERIAL LIABILITIES. Neither the Company nor the Subsidiary has liabilities or obligations in excess of $100,000, other than: (a) liabilities and obligations disclosed in the Financial Statements; (b) liabilities incurred in the ordinary course of business since December 31, 1996; (c) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements; and (d) leases for operating headquarters and branches of the Company. 3.12 FIRPTA. The Company is not a "foreign person" within the meaning of Section 1445 of the Code. 3.13 REGISTRATION RIGHTS. Except as set forth in Schedule 3.13 and provided in the Registration Rights Agreement attached hereto as Exhibit G, the Company is not obligated to register under the Securities Act of 1933, as amended (the "Securities Act") any of its presently outstanding securities or any of its securities that may subsequently be issued. 3.14 ENVIRONMENTAL MATTERS. To the Company's knowledge, each of the Company and the Subsidiary is and has been in compliance with all applicable Environmental Laws, except to the extent that the failure to comply with such Environmental Laws would not have a material adverse effect on the Condition of the Company and the Subsidiary. There is no civil, criminal or administrative judgment, action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the knowledge of the Company, threatened against the Company or the Subsidiary pursuant to Environmental Laws which would reasonably be expected to result in a fine, penalty or other obligation, cost or expense that would have a material adverse affect on the Condition of the Company and the Subsidiary; and, to the knowledge of the Company, there are no past or present events, conditions, circumstances, activities, practices, incidents, agreements, actions or plans which may prevent compliance with, or which have given rise to or will -8- 14 give rise to liability under, Environmental Laws that would have a material adverse effect on the Condition of the Company and the Subsidiary. 3.15 LITIGATION. There are no actions, suits, proceedings, claims, complaints, disputes, arbitrations or investigations pending or, to the knowledge of the Company, threatened, at law, in equity, in arbitration or before any Governmental Authority against the Company or the Subsidiary which would, if adversely determined, have a material adverse effect on (a) the Condition of the Company and the Subsidiary or (b) the ability of the Company to perform its obligations under any of the Transaction Documents. No Order has been issued by any court or other Governmental Authority against the Company purporting to enjoin or restrain the execution, delivery or performance of any of the Transaction Documents. 3.16 COMPLIANCE WITH LAWS. (a) To its knowledge, each of the Company and the Subsidiary is in compliance with all Requirements of Law and Orders issued by any court or Governmental Authority against the Company or the Subsidiary, as the case may be, except to the extent that the failure to comply with such Requirements of Law or Orders would not have a material adverse effect on the Condition of the Company and the Subsidiary. (b) Except as set forth on Schedule 3.16, (i) Each of the Company and the Subsidiary have all licenses, permits, orders and approvals of any Governmental Authority (collectively, "PERMITS") that are necessary for the conduct of its respective business as now being conducted by it, except to the extent that the failure to have such Permits would not have a material adverse effect on the Condition of the Company and the Subsidiary; (ii) such Permits are in full force and effect; and (iii) no violations have been recorded in respect of any such Permit. 3.17 NO DEFAULT OR BREACH; CONTRACTUAL OBLIGATIONS. Except as set forth in Schedule 3.17, neither the Company nor the Subsidiary has received notice of, or is in default under, any Contractual Obligation which, could have a material adverse effect on (i) the Condition of the Company and the Subsidiary or (ii) the ability of the Company to perform its obligations under the Transaction Documents. Schedule 3.17 lists all of the Contractual Obligations to which the Company and/or the Subsidiary is a party, other than the Transaction Documents and Contractual Obligations which would not be required to be filed by the Company as an exhibit under Item 601 of Regulation S-K promulgated under the Securities Act to a registration statement filed with the Commission to register shares of Common Stock of the Company. 3.18 TAXES. Each of the Company and the Subsidiary has paid all taxes and assessments due and required to be paid by it by law through the date hereof. Each of the Company and the Subsidiary has filed all tax returns and reports as required by law to be filed by it on and through the date hereof. The returns and reports are true and correct in all material respects. The provision for taxes of the Company and the Subsidiary as shown in the Financial Statements is adequate for taxes due or accrued as of the date hereof. To the knowledge of the Company, there is no unassessed tax deficiency proposed or, to the knowledge of the Company, threatened against the Company or the -9- 15 Subsidiary and no audit is in progress with respect to any tax return filed by the Company or the Subsidiary. 3.19 NO MATERIAL CHANGE; ORDINARY COURSE OF BUSINESS. Since December 31, 1996, there has not been any material adverse change, nor to the knowledge of the Company is any such change threatened, in the Condition of the Company and the Subsidiary from that reflected in the Financial Statements, except changes in the ordinary course of business. Except as set forth in the Financial Statements, since December 31, 1996, neither the Company nor the Subsidiary have participated in any material transaction outside the ordinary course of business, including, without limitation, declaring or paying dividends or declaring or making any distribution to its stockholders, except out of the earnings of the Company. 3.20 INVESTMENT COMPANY. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 3.21 LABOR RELATIONS. There is (i) no grievance or arbitration proceeding pending or arising out of or under any collective bargaining agreements or, to the knowledge of the Company, threatened against the Company or the Subsidiary, and (ii) no strike, labor dispute, slowdown or stoppage pending or, to the knowledge of the Company, threatened against the Company or the Subsidiary. Neither the Company nor the Subsidiary is a party to any collective bargaining agreement or similar contract. To the knowledge of the Company, no union organizing activities are taking place with respect to the Company or the Subsidiary. 3.22 EMPLOYEE BENEFIT PLANS. The Company has no actual or contingent, direct or indirect, liability in respect of any employee benefit plan or arrangement, employment contract, severance arrangement or executive compensation arrangement, including any plan subject to ERISA, except as set forth in the Financial Statements and other than to make contributions under or pay benefits pursuant to the plans listed on Schedule 3.22 (collectively, the "Plans"). All of the Plans are in compliance with all applicable Requirements of Law except to the extent that noncompliance with such Requirements of Law would not have a material adverse effect on the Condition of the Company and the Subsidiary. 3.23 TITLE TO ASSETS. Except as set forth on Schedule 3.23, each of the Company and the Subsidiary owns and has good and marketable title to all of its respective properties and assets and has good title to all of its respective leasehold interests used in its respective business and reflected as owned or leased, respectively, on the Financial Statements, in each case free and clear of all Liens, except for (a) Liens specifically described in the Financial Statements, (b) Liens of current taxes not yet due and payable, and (c) Liens not material to the Condition of the Company and the Subsidiary. 3.24 INTELLECTUAL PROPERTY. Each of the Company and the Subsidiary has sufficient ownership of or has the license or right to use, sell, license or dispose of all of the Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Mask Works, Software and other proprietary rights (collectively "INTELLECTUAL PROPERTY") necessary for its respective business as presently conducted. Schedule 3.24 sets forth all of the Intellectual Property owned by, and applications for -10- 16 any of the above filed by, the Company or the Subsidiary. Schedule 3.24 sets forth all Intellectual Property licenses, sublicenses and other agreements under which the Company or the Subsidiary is either a licensor or licensee of any Intellectual Property, except such licenses, sublicenses and other agreements relating to (i) Software licensed to clients of the Company or the Subsidiary, pursuant to a standard end-user license agreement, (ii) used solely on the computers of the Company or the Subsidiary or (iii) end user license agreements for third party software generally available through commercial channels. The Company has not received any communications alleging that either the Company or the Subsidiary has violated or, by conducting its business as now conducted, would violate or infringe upon any Intellectual Property of any third party. To the knowledge of the Company, but without independent investigation, no Person is infringing upon or otherwise violating the Intellectual Property rights of the Company. None of the Intellectual Property listed on Schedule 3.24 is subject to any outstanding Order, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the knowledge of the Company, threatened, which challenges the validity, enforceability, use or ownership of the Intellectual Property listed on Schedule 3.24. 3.25 YEAR 2000 COMPLIANCE. The Software used by the Company and/or its Subsidiary will accurately process date information after January 1, 2000 without having a material adverse effect on the Condition of the Company and the Subsidiary. 3.26 POTENTIAL CONFLICTS OF INTEREST. Except for the transactions contemplated by the Transaction Documents and except as set forth on Schedule 3.26, no officer, director or 5% shareholder of the Company has entered into any transaction with the Company that would be required to be described in a registration statement filed with the Commission under Item 404 of Regulation S-K promulgated under the Securities Act. 3.27 TRADE RELATIONS. There exists no actual or, to the knowledge of the Company, threatened termination, cancellation or limitation of, or any adverse modification or change in, the business relationship of the Company or the Subsidiary with any client or clients, which individually, or in the aggregate would have a material adverse effect on the Condition of the Company and the Subsidiary. 3.28 INSURANCE. Each of the Company and the Subsidiary maintains insurance with insurance companies or associations in such amounts and covering such risks as are usually and customarily carried by Persons engaged in the business conducted by the Company and the Subsidiary, respectively. Such policies are in full force and effect. 3.29 DISCLOSURE. This Agreement and the documents and certificates furnished to the Purchasers by the Company (including, without limitation, the Form S-1 Registration Statement, dated March 11, 1997, prepared by the Company but not filed with the SEC as of the date hereof), taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading. -11- 17 SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser hereby represents and warrants (severally as to itself and not jointly) to the Company with respect to its purchase of the Shares as follows: 4.1 INVESTMENT REPRESENTATIONS AND COVENANTS OF THE PURCHASERS. (a) This Agreement is made by the Company with the Purchaser in reliance upon such Purchaser's representations and covenants made in this Section 4, which by its execution of this Agreement the Purchaser hereby confirms. The Purchaser represents that the Series F Preferred to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. The Purchaser further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Series F Preferred or any Common Stock acquired on conversion thereof. (b) The Purchaser understands and acknowledges that the offering of the Series F Preferred pursuant to this Agreement will not, and any issuance of Common Stock on conversion thereof may not, be registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on the Purchasers' representations set forth herein. (c) The Purchaser covenants that in no event will it make any disposition of any of the Series F Preferred, or any Common Stock acquired upon the conversion thereof, except in accordance with the Registration Rights Agreement and the Stockholders' Agreement. The Purchaser further covenants that it will not make any sale, transfer or other disposition of the Series F Preferred or the Common Stock issuable upon conversion thereof in violation of the Securities Act, the Securities and Exchange Act of 1934 (the "SECURITIES EXCHANGE ACT"), or the rules of the Securities and Exchange Commission (the "COMMISSION") promulgated thereunder. (d) The Purchaser represents that it is experienced in evaluating companies similar to the Company, is able to fend for itself in transactions such as the one contemplated by this Agreement, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in the Company, has the ability to bear the economic risks of the investment and is an "accredited investor" as defined by Regulation E promulgated under the Securities Act of 1933, as amended. (e) The Purchaser acknowledges and understands that the Series F Preferred, and any Common Stock acquired upon the conversion thereof, must be held indefinitely unless it is -12- 18 subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Registration Rights Agreement and Schedule 3.13, the Company is under no obligation to register either the Series F Preferred or Common Stock. (f) The Purchaser acknowledges that it has reviewed a copy of Rule 144 promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. The Purchaser understands that before the Series F Preferred, or any Common Stock issued upon conversion thereof, may be sold under Rule 144 as in effect on April 29, 1997, the following conditions must be fulfilled: (i) certain public information about the Company must be available, (ii) the sale must occur at least one year after the Purchaser purchased and paid for the Series F Preferred, (iii) the sale must be made in a broker's transaction and (iv) the number of shares of Series F Preferred sold must not exceed certain volume limitations. The Purchaser understands that the current information referred to above is not now available and the Company has no present plans to make such information available. (g) The Purchaser acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act, compliance with the Commission's Regulation A or another exemption from registration will be required for any disposition of its stock. The Purchaser understands that although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. 4.2 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Series F Preferred. 4.3 RECEIPT OF INFORMATION. The Purchaser has received and reviewed the Transaction Documents and all exhibits hereto and thereto and the draft of the Registration Statement on Form S-1 which has not been filed with the Commission. The Purchaser and its counsel have had access to and an opportunity to review all documents and other materials requested of the Company; the Purchaser and its counsel have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Series F Preferred; and, in evaluating the suitability of an investment in the Series F Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 4.4 AUTHORIZATION. The Transaction Documents when executed and delivered by the Purchaser will constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, except (i) as limited by laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies and (ii) to the extent that the enforceability of the indemnification -13- 19 provisions of the Registration Rights Agreement and the involuntary transfers and corporate governance provisions of the Stockholders' agreement may be limited by applicable law. 4.5 BROKERS OR FINDERS. The Purchasers have not, and will not, incur, directly or indirectly, as a result of any action taken by any Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement. 4.6 TAX ADVISORS. The Purchaser has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents and understands that it (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. 4.7 INVESTOR COUNSEL. The Purchaser acknowledges that it has had the opportunity to review the Transaction Documents, the exhibits and the schedules attached hereto and thereto and the transactions contemplated by the Transaction Documents with its own legal and investment counsel. The Purchaser is relying solely on such counsel and not on any statements or representations of the Company or any of its agents for legal or investment advice with respect to this investment or the transactions contemplated by the Transaction Documents. SECTION 5 CONDITIONS TO CLOSING OF THE PURCHASERS The Purchasers' obligations to purchase the Shares at the Closing and to perform any obligations hereunder are, at the option of the Purchasers, subject to the fulfillment of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects on the Closing Date as if made on such date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. 5.3 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Purchasers a certificate of the Company in the form of Exhibit E hereto, executed by the President of the Company, dated the Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement. -14- 20 5.4 OPINION OF COMPANY'S COUNSEL. The Purchasers shall have received from Wilson, Sonsini, Goodrich & Rosati, P.C., counsel to the Company, an opinion addressed to the Purchasers, dated the Closing Date, in substantially the form attached as Exhibit F. 5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series F Preferred and the Common Stock issuable upon conversion of the Series F Preferred. 5.6 LEGAL MATTERS. All material matters of a legal nature that pertain to the Transaction Documents and the transactions contemplated hereby and thereby, shall have been reasonably approved by special counsel to the Purchasers. 5.7 REGISTRATION RIGHTS AGREEMENT. The Company, each Purchaser and a majority of the Original Holders (as defined therein) shall have entered into the Registration Rights Agreement in substantially the form attached hereto as Exhibit G. 5.8 SECRETARY'S CERTIFICATE. The Purchasers shall have received a certificate from the Company, in form and substance satisfactory to the Purchasers, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying (a) that the attached copies of the Articles of Incorporation, the Bylaws and resolutions of the Board of Directors of the Company approving each of the Transaction Documents to which the Company is a party, are true, complete and correct and remain unamended and in full force and effect and (b) as to the incumbency and specimen signature of each officer of the Company executing each Transaction Document and any other document delivered at the Closing on behalf of the Company. 5.9 DOCUMENTS. The Purchasers shall have received true, complete and correct copies of such documents as they may reasonably request in connection with or relating to the sale of the Shares and the transactions contemplated hereby, all in form and substance reasonably satisfactory to the Purchasers. 5.10 FILING OF AMENDMENT TO CERTIFICATE OF INCORPORATION. The Amendment to the Articles of Incorporation shall have been filed by the Company with the Secretary of State of the State of California in accordance with the General Corporation Law of the State of California. 5.11 SHARES. The Company shall have delivered to the Purchasers certificates in definitive form representing the number of Shares set forth opposite such Purchaser's name on Exhibit A hereto, registered in the name of such Purchaser. 5.12 SHAREHOLDERS AGREEMENT. The Company, each Purchaser and Sinton (as defined therein) shall have entered into the Stockholders' Agreement, substantially in the form attached hereto as Exhibit H. -15- 21 SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares pursuant to Section 1.2 hereof and to perform any obligations hereunder, is, at the option of the Company, subject to the fulfillment as of the Closing Date of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Purchasers in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 6.2 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Shares and the Common Stock issuable upon conversion of the Shares. 6.3 LEGAL MATTERS. All material matters of a legal nature that pertain to the Transaction Documents and the transactions contemplated hereby and thereby, shall have been reasonably approved by counsel to the Company. At the time of the Closing, the purchase of the Shares shall be legally permitted by all laws and regulations to which each Purchaser and the Company are subject. 6.4 BOARD AND SHAREHOLDER APPROVAL. All approvals of the Company's Board of Directors and shareholders necessary for performance of the transactions contemplated by the Transaction Documents shall have been obtained. 6.5 REGISTRATION RIGHTS AGREEMENTS. The Company, each Purchaser and a majority of the Original Holders (as defined therein) shall have entered into the Registration Rights Agreement in substantially the form attached hereto as Exhibit G. 6.6 SHAREHOLDERS AGREEMENT. The Company, each Purchaser and Sinton (as defined therein) shall have entered into the Stockholders' Agreement, substantially in the form attached hereto as Exhibit H. 6.7 LOCKUP. Purchasers shall have signed a Lock-up agreement in the form attached hereto as Exhibit I. -16- 22 SECTION 7 AFFIRMATIVE COVENANTS OF THE COMPANY AND THE PURCHASERS The Company hereby covenants and agrees as follows: 7.1 FINANCIAL INFORMATION. The Company will furnish to each Purchaser for so long as such Purchaser holds any shares of Series F Preferred or Common Stock issued upon conversion thereof: (a) As soon as practicable after the end of each fiscal year, and in any event within 120 days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of reputable standing selected by the Company. (b) With reasonable promptness, such other information and data with respect to the Company and its subsidiaries as any such holder may from time to time reasonably request; provided, however, that the Company shall not be obligated pursuant to this Section 7.1(b) to disclose or provide any information that it reasonably considers to be a trade secret or to contain confidential proprietary information. (c) So long as such Purchaser holds 25,000 shares of Series F Preferred or Common Stock issued upon conversion thereof, as appropriately adjusted for recapitalization, stock splits, stock dividends and the like, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company and in any event within 60 days thereafter, unaudited consolidated statements of income of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception of footnotes, all in reasonable detail and signed, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of the Company. (d) So long as such Purchaser holds shares of Series F Preferred or Common Stock issued upon conversion thereof, the Company shall provide to a Purchaser, upon its written request as promptly as practicable but no later than 5 days after the end of such fiscal year of the Company, a certification signed by the President of the Company in customary form certifying that the Company is not a "foreign person" within the meaning of Section 1445 of the Code. 7.2 RIGHTS OF INSPECTION. For so long as a Purchaser is eligible to receive reports under Section 7.1(c), such Purchaser shall also have the right, at the Purchaser's expense, to visit and inspect any of the properties of the Company and to discuss its affairs, finances and accounts with its officers, all at such reasonable times and as often as may be reasonably requested, provided that the -17- 23 Company shall not be required at any time to disclose any manufacturing or trade secret or secret process or other data of a proprietary nature the disclosure of which the Company reasonably believes may adversely affect its business, provided, further, that the Company shall not be required at any time to disclose any customer data to any Purchaser or any transferee of a Purchaser, as provided in Section 7.3, engaged in a business similar to the business in which the Company is engaged at such time, and provided, further, that the Company shall not be required at any time to disclose any information or data that is classified by any governmental agency. 7.3 ASSIGNMENT OF RIGHTS TO FINANCIAL INFORMATION. The rights granted pursuant to Sections 7.1 and 7.2 may not be assigned or otherwise conveyed by a Purchaser or by any subsequent transferee of any such rights without the prior written consent of the Company; provided, however, that a Purchaser may assign such rights to any transferee, other than a competitor of the Company, and after giving notice to the Company, who acquires at least 25,000 shares (subject to appropriate adjustment for stock splits, dividends, subdivisions, combinations, recapitalizations and the like) of the Series F Preferred and/or Common Stock issued upon conversion thereof. 7.4 TERMINATION OF COVENANTS. The covenants set forth in Sections 7.1, 7.2 and 7.3 shall terminate and be of no further force or effect at such time as the Company is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act. 7.5 RESERVATION OF COMMON STOCK AND PREFERRED STOCK. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issue or delivery upon conversion of the Shares, as provided in the Articles of Incorporation, the maximum number of shares of Common Stock that may be issuable or deliverable upon such conversion. The Company shall issue such shares of Common Stock in accordance with the terms of the Articles of Incorporation and otherwise comply with the terms thereof. SECTION 8 MISCELLANEOUS 8.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California. The parties expressly stipulate that any litigation under this Agreement shall be brought in the state courts of the County of Alameda, California and in the United States District Court for the Northern District of California. The parties agree to submit to the jurisdiction and venue of those courts. 8.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by a Purchaser and the closing of the transactions contemplated hereby. 8.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and -18- 24 administrators of the parties hereto, provided, however, that the rights of a Purchaser to purchase the Series F Preferred shall not be assignable without the consent of the Company, except subject to applicable securities laws, the Purchasers may assign any of their rights under any of the Transaction Documents to any of their respective Affiliates; provided however, the Company shall not be obligated to register transfers to more than 15 such transferees, without prior written consent. 8.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated, on behalf of all holders, upon the written consent of the Company and the holders of a majority of the Common Stock issued or issuable upon the conversion of the Series F Preferred. 8.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to a Purchaser, to such Purchaser's address set forth on the Schedule of Purchasers, or at such other address as the Purchaser shall have furnished to the Company in writing with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064, Telecopy: (212) 757-3990, Attention: Matthew Nimetz, Esq., or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth at the beginning of this Agreement and addressed to the attention of the President of the Company, or at such other address as the Company shall have furnished to the Purchasers with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, Telecopy: (415) 493-6811, Attention: Alan K. Austin, Esq. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 8.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any -19- 25 waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 8.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 8.8 EXPENSES. Each of the Company and the Purchasers shall bear its own expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby. 8.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be enforceable against the party actually executing such counterpart, and all of which together shall constitute one instrument. 8.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 8.11 FURTHER ASSURANCES. Each of the parties shall execute such documents and perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any Governmental Authority or any other Person) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 8.12 PUBLICITY. Except as may be required by applicable Requirement of Law, none of the parties hereto shall issue a publicity release or public announcement or otherwise make any disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto; provided, however, that nothing in this Agreement shall restrict any Purchaser from disclosing information (a) that is already publicly available; (b) to the prospective transferee in connection with any contemplated transfer of any of the Purchased Shares; (c) to its attorneys, accountants, consultants and other advisors to the extent necessary to obtain their services in connection with such Purchaser's investment in the Company; and (d) orally to business partners. If any announcement is required by law to be made by any party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon. -20- 26 IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. PROBUSINESS, INC. By: ______________________________ Thomas H. Sinton, President -21- 27 PROBUSINESS, INC. SERIES F PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS' SIGNATURE PAGE ___________________________________ (Printed Name of Purchaser) ___________________________________ (Signature) ___________________________________ (Title, if Applicable) -22- 28 EXHIBIT A PROBUSINESS, INC. SCHEDULE OF PURCHASERS
Name and Address Number of Shares Total Purchase Price - ---------------------------------------- ---------------- -------------------- General Atlantic Partners 39, L.P. 489,184 $ 8,511,801.60 General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, Connecticut 06830 Telecopy: (203) 622-8818 Attn: Mr. Stephen P. Reynolds GAP Coinvestment Partners, L.P. 85,549 1,488,552.60 c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, Connecticut 06830 Telecopy: (203) 622-8818 Attn: Mr. Stephen P. Reynolds ------- -------------- Total 574,733 $10,000,354.20
EX-10.21 41 STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.21 ============================================================================== STOCKHOLDERS AGREEMENT among PROBUSINESS, INC., GENERAL ATLANTIC PARTNERS 39, L.P., GAP COINVESTMENT PARTNERS, L.P. THOMAS H. SINTON, JANE N. SINTON, THOMAS H. SINTON & JANE N. SINTON 1989 IRREVOCABLE TRUST, JANE N. SINTON AS CUSTODIAN FOR ROBERT HOLLISTER SINTON, JANE N. SINTON AS CUSTODIAN FOR LAUREN TAYLOR SINTON, SILAS D. SINTON TRUST ESTATE and SILAS JACK SINTON FAMILY TRUST ___________________________________ Dated: March 12, 1997 ___________________________________ ============================================================================== 2 TABLE OF CONTENTS
Page ---- 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Restrictions on Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Limitation on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Permitted Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Permitted Transfer Procedures . . . . . . . . . . . . . . . . . . . . . . . 8 2.4 Transfers in Compliance with Law; Substitution of Transferee . . . . . . . . 8 3. Right of First Offer and Tag-Along Rights. . . . . . . . . . . . . . . . . . . . . . . . 9 3.1 Proposed Voluntary Transfers. . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Involuntary Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4. Future Issuance of Shares; Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . 15 4.1 Offering Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.2 Preferred Stockholder Option; Exercise. . . . . . . . . . . . . . . . . . . 15 4.3 Preemptive Rights; Exercise . . . . . . . . . . . . . . . . . . . . . . . . 16 4.4 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.5 Sale to Subject Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . 17 5. After-Acquired Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6. Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.2 Stockholders Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.3 Election of Directors; Number and Composition . . . . . . . . . . . . . . . 18 6.4 Reduction of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.5 Removal and Replacement of Directors . . . . . . . . . . . . . . . . . . . . 19 6.6 Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 19 7. Stock Certificate Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.2 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.3 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.7 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.8 Variations in Pronouns . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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Page ---- 8.9 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.11 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 EXHIBITS A Form of Transfer Agreement (Previously issued shares)
ii 4 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated March 12, 1997 (this "AGREEMENT"), among ProBusiness, Inc., a California corporation (the "COMPANY"), General Atlantic Partners 39, L.P., a Delaware limited partnership ("GAP LP"), GAP Coinvestment Partners, L.P., a New York limited partnership ("GAP COINVESTMENT"), Thomas H. Sinton ("THS"), Jane N. Sinton ("JNS"), Thomas H. Sinton & Jane N. Sinton 1989 Irrevocable Trust ("1989 TRUST"), Jane N. Sinton as custodian for Robert Hollister Sinton ("RHS"), Jane N. Sinton as custodian for Lauren Taylor Sinton ("LTS"), Silas D. Sinton Trust Estate ("TRUST ESTATE") and Silas Jack Sinton Family Trust ("FAMILY TRUST"; and, together with THS, JNS, 1989 Trust, RHS, LTS and Trust Estate, "SINTON"). WHEREAS, on the date hereof, Sinton owns (i) 100,000 shares, par value $.01 per share, of Common Stock of the Company (the "COMMON STOCK"), (ii) 902,751 shares, par value $.01 per share, of Series A Preferred Stock of the Company ("SERIES A STOCK"), (iii) 408,362 share, par value $.01 per share, of Series B Preferred Stock of the Company ("SERIES B STOCK") and (iv) 58,921 shares, par value $.01 per share, of Series D Preferred Stock of the Company ("SERIES D STOCK"); WHEREAS, on the date hereof, the Company, GAP LP and GAP Coinvestment are entering into the Series F Preferred Stock Purchase Agreement, dated the date hereof (the "STOCK PURCHASE AGREEMENT"), pursuant to which the Company has agreed to, among other things, sell to (a) GAP LP an aggregate of 489,184 shares, par value $.01 per share, of Series F Preferred Stock of the Company (the "SERIES F STOCK") and (b) GAP Coinvestment an aggregate of 85,549 shares of Series F Stock; and WHEREAS, the parties hereto wish to restrict the transfer of the Shares (as hereinafter defined) and to provide for, among other things, first offer and preemptive rights and certain other rights under certain conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, the adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: "Affiliate" shall mean, with respect to any Person, any other Person who controls, is controlled by or is under common control with such Person. In addition, the following shall be deemed to be Affiliates of GAP LP: (a) GAP LLC, the members of GAP LLC and the limited partners of GAP LP; (b) any 5 2 Affiliate of GAP LLC, the members of GAP LLC and the limited partners of GAP LP; and (c) any limited liability company or partnership a majority of whose members or partners, as the case may be, are members of GAP LLC. In addition, GAP LP and GAP Coinvestment shall be deemed to be Affiliates of one another. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of California are closed. "Charter Documents" means the Articles of Incorporation and the By-laws of the Company as in effect on the date hereof. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $.01 per share, of the Company, or any other capital stock of the Company into which such stock is reclassified or reconstituted. "Common Stock Equivalents" means any security or obligation which is by its terms convertible into shares of Common Stock, including, without limitation, the Preferred Stock, and any option, warrant or other subscription or purchase right with respect to Preferred Stock or Common Stock. "Company" has the meaning assigned to such term in the recital to this Agreement. "Company Option" has the meaning set forth in Section 3.1.2 of this Agreement. "Company Option Period" has the meaning set forth in Section 3.1.2 of this Agreement. "Contract Date" has the meaning set forth in Section 3.1.5 of this Agreement. "Excess Offered Securities" has the meaning set forth in Section 3.1.3 of this Agreement. 6 3 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "Fair Value" has the meaning set forth in Section 3.2.2. "Family Members" has the meaning set forth in Section 2.2 of this Agreement. "GAAP" means generally accepted United States accounting principles in effect from time to time. "GAP Coinvestment" has the meaning assigned to such term in the recital to this Agreement. "GAP Director" has the meaning set forth in Section 6.3 of this Agreement. "GAP LLC" means General Atlantic Partners, LLC, a Delaware limited liability company and the general partner of GAP LP, and any successor to such entity. "GAP LP" has the meaning assigned to such term in the recital to this Agreement. "General Atlantic Stockholders" means GAP LP, GAP Coinvestment and any Permitted Transferee of either of them to which Shares are transferred in accordance with Section 2.2, and the term "General Atlantic Stockholder" shall mean any such Person. "Governmental Authority" means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Initial Public Offering" means the consummation of firm commitment underwritten initial public offering pursuant to an effective Registration Statement filed under the Securities Act covering the offer and sale of shares of Common Stock for the account of the Company. 7 4 "Involuntary Transfer" means any transfer (other than a Permitted Pledge), proceeding or action by or in which a Stockholder shall be deprived or divested of any right, title or interest in or to any of the Shares (except for any transfer, proceeding or action pursuant to the death of a Stockholder), including, without limitation, any seizure under levy of attachment or execution, any transfer in connection with bankruptcy (whether pursuant to the filing of a voluntary or an involuntary petition under the United States Bankruptcy Code of 1978, or any modifications or revisions thereto) or other court proceeding to a debtor in possession, trustee in bankruptcy or receiver or other officer or agency, any transfer to a state or to a public officer or agency pursuant to any statute pertaining to escheat or abandoned property and any transfer pursuant to a divorce or separation agreement or a final decree of a court in a divorce action. "Involuntary Transferee" has the meaning assigned such term in Section 3.2.1 of this Agreement. "IPO Effectiveness Date" means the date upon which the Company commences its Initial Public Offering. "Liens" has the meaning assigned such term in Section 3.1.4 of this Agreement. "New Issuance Notice" has the meaning set forth in Section 4.1 of this Agreement. "New Securities" has the meaning set forth in Section 4.1 of this Agreement. "Offer Price" has the meaning assigned such term in Section 3.1.1 of this Agreement. "Offered Securities" has the meaning assigned such term in Section 3.1.1 of this Agreement. "Offering Notice" has the meaning assigned such term in Section 3.1.1 of this Agreement. "Option Agreements" means those Option Agreements dated as of October 31, 1991 and March 27, 1992 between Thomas H. Sinton and the persons named therein. "Option Period" has the meaning set forth in Section 3.1.3 of this Agreement. 8 5 "Other Stockholder" means any transferee of a Sinton Stockholder or a General Atlantic Stockholder (other than a Permitted Transferee thereof) who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 2.4 and to whom Shares have been transferred in accordance with Section 3.1.5. "Permitted Pledge" has the meaning assigned to such term in Section 2.1 of this Agreement. "Permitted Transferee" has the meaning assigned such term in Section 2.2 of this Agreement. "Person" means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint stock company, trust, unincorporated organization, Governmental Authority or other entity. "Preemptive Rightholder" has the meaning set forth in Section 4.3 of this Agreement. "Preferred Stock" means, collectively, the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, par value $.01 per share, of the Company. "Preferred Stockholders" means the General Atlantic Stockholders and the Sinton Stockholders, and the term "Preferred Stockholder" shall mean any such Person. "Proportionate Percentage" has the meaning set forth in Section 4.3 of this Agreement. "Proposed Price" has the meaning set forth in Section 4.1 of this Agreement. "Registration Statement" means a registration statement filed pursuant to the Securities Act. "Rightholder" has the meaning set forth in Section 3.1.3 of this Agreement. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 9 6 "Selling Stockholder" has the meaning set forth in Section 3.1.1 of this Agreement. "Shares" means, with respect to each Stockholder, all shares, whether now owned or hereafter acquired, of Common Stock and Preferred Stock owned thereby; provided, however, for the purposes of any computation of the number of Shares either outstanding (with respect to the Company) or owned or held by any Stockholder or otherwise to be determined pursuant to Sections 2, 3, 4, 6 and 8.2(b), the shares of Common Stock issuable upon conversion, exercise or exchange of all Common Stock Equivalents shall be deemed outstanding, owned or held whether or not such conversion, exercise or exchange has actually been effected. "Sinton" means, collectively, THS, JNS, 1989 Trust, RHS, LTS, Trust Estate and Family Trust. "Sinton Stockholders" means Sinton and any Permitted Transferee thereof to which Shares are transferred in accordance with Section 2.2, and the term "Sinton Stockholder" shall mean any such Person. "Stock Purchase Agreement" has the meaning assigned to such term in the recital to this Agreement. "Stockholders" means the Sinton Stockholders and the General Atlantic Stockholders and any transferee thereof who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 2.4, and the term "Stockholder" shall mean any such Person. "Stockholders Meeting" has the meaning set forth in Section 6.1. "Subject Purchaser" has the meaning set forth in Section 4.1 of this Agreement. "Subsidiaries" means, as of the relevant date of determination, with respect to any Person, a corporation or other Person of which 50% or more of the voting power of the outstanding voting equity securities or 50% or more of the outstanding economic equity interest is held, directly or indirectly, by such Person. Unless otherwise qualified, or the context otherwise requires, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company "Tag-Along Rightholder" has the meaning set forth in Section 3.1.6(a) of this Agreement. 10 7 "transfer" has the meaning set forth in Section 2.1 of this Agreement. "Transferred Shares" has the meaning set forth in Section 3.2.1 of this Agreement. "Third Party Purchaser" has the meaning set forth in Section 3.1.1 of this Agreement. "Written Consent" has the meaning set forth in Section 6.1 of this Agreement. 2. Restrictions on Transfer of Shares. 2.1 Limitation on Transfer. No Stockholder shall sell, give, assign, hypothecate, pledge, encumber, grant a security interest in or otherwise dispose of (whether by operation of law or otherwise) (each a "TRANSFER") any Shares or any right, title or interest therein or thereto, except in accordance with the provisions of this Agreement; provided, however, that (i) as collateral for a loan to THS by a financial institution, THS may pledge (a "PERMITTED PLEDGE") to such financial institution up to 200,000 shares of Preferred Stock (subject to adjustment for stock splits, stock dividends, recapitalizations or similar events) or the Common Stock Equivalent and (ii) the Sinton Stockholders may transfer up to an aggregate of 28,612 shares of Preferred Stock (subject to adjustment as provided for in the Option Agreements) to certain holders of Series B Stock pursuant to the Option Agreements. In the event of such transfer, any transferee obtaining any record of beneficial interest or right to vote such Shares hereunder shall agree to be bound by this Agreement and shall comply with Section 2.4. Any attempt to transfer any Shares or any rights thereunder in violation of the preceding sentence shall be null and void ab initio and the Company shall not register any such transfer. 2.2 Permitted Transfers. Notwithstanding anything to the contrary contained in this Agreement, but subject to Sections 2.3 and 2.4, at any time, (a) Sinton may transfer all or a portion of Shares held by Sinton to (i) a member of such Sinton's respective immediate family, which shall include parents, spouse, siblings, children or grandchildren ("FAMILY MEMBERS") or (ii) a trust, corporation, partnership or limited liability company, all of the beneficial interests in which shall be held by Sinton or one or more Family Members of Sinton or which would otherwise be an Affiliate of Sinton; provided, however, that during the period that any such trust, corporation, partnership or limited liability company holds any right, title or interest in any Shares, no Person other than Sinton or one or more Family Members of Sinton may be or become beneficiaries, stockholders, limited or general partners or members thereof; and (b) each of GAP LP and GAP Coinvestment may transfer all or a portion of its Shares to any of its Affiliates (the Persons referred to in 11 8 the preceding clauses (a) and (b) are each referred to hereinafter as a "PERMITTED TRANSFEREE"). A Permitted Transferee of Shares pursuant to this Section 2.2 may transfer its Shares pursuant to this Section 2.2 only to the transferor Stockholder or to a Person that is a Permitted Transferee of such transferor Stockholder. Notwithstanding anything to the contrary contained in this Agreement, (a) if any Permitted Transferee of Sinton to whom or which Shares have been transferred in accordance with this Section 2.2 ceases to be a Permitted Transferee of Sinton, then, prior to such event, the Sinton Stockholders (other than such Permitted Transferee) may repurchase such Shares or, if such Sinton Stockholders do not wish to repurchase such Shares, then such Permitted Transferee shall offer the Shares held by such Permitted Transferee to the Company and the General Atlantic Stockholders in accordance with Section 3.1 and (b) if any Permitted Transferee of GAP LP or GAP Coinvestment, as the case may be, to whom or which Shares have been transferred in accordance with this Section 2.2 ceases to be an Affiliate of GAP LP or GAP Coinvestment, as the case may be, then, prior to such event, the General Atlantic Stockholders (other than such Permitted Transferee) may repurchase such Shares or, if such General Atlantic Shareholders do not wish to repurchase such Shares, then such Permitted Transferee of GAP LP or GAP Coinvestment, as the case may be, shall offer the Shares held by such Permitted Transferee to the Company and the Sinton Stockholders in accordance with Section 3.1. 2.3 Permitted Transfer Procedures. If any Stockholder wishes to transfer Shares to a Permitted Transferee under Section 2.2, such Stockholder shall give notice to the Company of its intention to make any transfer permitted under Section 2.2 not less than ten (10) days prior to effecting such transfer, which notice shall state the name and address of each Permitted Transferee to whom such transfer is proposed and the number of Shares proposed to be transferred to such Permitted Transferee. 2.4 Transfers in Compliance with Law; Substitution of Transferee. Notwithstanding any other provision of this Agreement, no transfer may be made pursuant to this Section 2 or Section 3 unless (a) the transferee has agreed in writing to be bound by the terms and conditions of this Agreement pursuant to an instrument substantially in the form attached hereto as Exhibit A, (b) the transfer complies in all respects with the applicable provisions of this Agreement and (c) the transfer complies in all respects with applicable federal and state securities laws, including, without limitation, the Securities Act. If requested by the Company in its reasonable judgment, an opinion of counsel to such transferring Stockholder shall be supplied to the Company at such transferring Stockholder's expense, to the effect that such transfer complies with the applicable federal and state securities laws. Upon becoming a party to this Agreement, (i) the Permitted Transferee of a Sinton Stockholder shall be substituted for, and shall enjoy the same rights and be subject to the same obligations as, the transferring Sinton Stockholder hereunder with respect to the Shares transferred to such Permitted Transferee, (ii) the Permitted Transferee of a 12 9 General Atlantic Stockholder shall be substituted for, and shall enjoy the same rights and be subject to the same obligations as, a General Atlantic Stockholder hereunder, (iii) an Other Stockholder shall be subject to the same obligations as, but none of the rights of, the transferring Sinton Stockholder or General Atlantic Stockholder, as the case may be, and (iv) the transferee of an Other Stockholder shall be substituted for, and shall be subject to the same obligations as, the transferring Other Stockholder hereunder with respect to the Shares transferred to such transferee. 3. Right of First Offer and Tag-Along Rights. 3.1 Proposed Voluntary Transfers. 3.1.1 Offering Notice. Subject to Section 2, if any Stockholder (a "SELLING STOCKHOLDER") wishes to transfer all or any portion of its or his Shares to any Person (other than to a Permitted Transferee) (a "THIRD PARTY PURCHASER"), such Selling Stockholder shall offer such Shares first to the Company by sending written notice (the "OFFERING NOTICE") to the Company and the other Stockholders which shall state (a) the number of Shares proposed to be transferred (the "OFFERED SECURITIES") and (b) the proposed purchase price per Share which the Selling Stockholder is willing to accept (the "OFFER PRICE"). Upon delivery of the Offering Notice, such offer shall be irrevocable unless and until the rights of first offer provided for herein shall have been waived or shall have expired. 3.1.2 Company Option; Exercise. For a period of fifteen (15) days after the giving of the Offering Notice pursuant to Section 3.1.1 (the "COMPANY OPTION PERIOD"), the Company shall have the right (the "COMPANY OPTION") to purchase any or all of the Offered Securities at a purchase price equal to the Offer Price and upon the terms and conditions set forth in the Offering Notice. The right of the Company to purchase any or all of the Offered Securities under this Section 3.1.2 shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 15-day period referred to above, to the Selling Stockholder, with a copy to the Sinton Stockholders and the General Atlantic Stockholders, which notice shall state the number of Offered Securities proposed to be purchased by the Company. The failure of the Company to respond within such 15-day period shall be deemed to be a waiver of the Company's rights under this Section 3.1.2, provided that the Company may waive its rights under this Section 3.1.2 prior to the expiration of such 15-day period by giving written notice to the Selling Stockholder, with a copy to the Sinton Stockholders and the General Atlantic Stockholders. 3.1.3 Stockholder Option; Exercise. (a) If the Company does not elect to purchase all of the Offered Securities pursuant to Section 3.1.2, then for a period of thirty (30) 13 10 days after the earlier to occur of (a) the expiration of the Company Option Period pursuant to Section 3.1.2 and (b) the date upon which the Selling Stockholder shall have received written notice from the Company of its exercise of the Company Option pursuant to Section 3.1.2 or its waiver thereof (the "OPTION PERIOD"), each of the Sinton Stockholders (in the event that the Selling Stockholder is not a Sinton Stockholder) and each of the General Atlantic Stockholders (in the event that the Selling Stockholder is not a General Atlantic Stockholder) (each, a "RIGHTHOLDER") shall have the right to purchase all, but not less than all, of the remaining Offered Securities at a purchase price equal to the Offer Price and upon the terms and conditions set forth in the Offering Notice. Each such Rightholder shall have the right to purchase that percentage of the Offered Securities determined by dividing (i) the total number of Shares then owned by such Rightholder by (ii) the total number of Shares then owned by all such Rightholders. If any Rightholder does not fully subscribe for the number or amount of Offered Securities it or he is entitled to purchase, then each other participating Rightholder shall have the right to purchase that percentage of the Offered Securities not so subscribed for (for the purposes of this Section 3.1.3, the "EXCESS OFFERED SECURITIES") determined by dividing (x) the total number of Shares then owned by such fully participating Rightholder by (y) the total number of Shares then owned by all fully participating Rightholders who elected to purchase Offered Securities. The procedure described in the preceding sentence shall be repeated until there are no remaining Excess Offered Securities. If the Company and/or the Rightholders do not purchase all, but not less than all, of Offered Securities pursuant to Section 3.1.2 and/or Section 3.1.3, then the Selling Stockholder may, subject to Section 3.1.6, sell the Offered Securities to a Third Party Purchaser in accordance with Section 3.1.5 without any of the obligations set forth in Sections 3.1.2, 3.1.3 and 3.1.4. (b) The right of each Rightholder to purchase all of the remaining Offered Securities under subsection (a) above shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 30-day period referred to in subsection (a) above, to the Selling Stockholder with a copy to the Company and the other Stockholders. Each such notice shall state (i) the number of Shares held by such Rightholder and (ii) the number of Shares that such Rightholder is willing to purchase pursuant to this Section 3.1.3. The failure of a Rightholder to respond within such 30-day period to the Selling Stockholder shall be deemed to be a waiver of such Rightholder's rights under this Section 3.1.3, provided that each Rightholder may waive its rights under this Section 3.1.3 prior to the expiration of such 30-day period by giving written notice to the Selling Stockholder, with a copy to the Company. 3.1.4 Closing. The closing of the purchases of Offered Securities subscribed for by the Company under Section 3.1.2 and/or the Rightholders under Section 3.1.3 shall be held at the principal office of the Company at 11:00 a.m., local time, on the 60th day after the giving of the Offering Notice 14 11 pursuant to Section 3.1.1 or at such other time and place as the parties to the transaction may agree. At such closing, the Selling Stockholder shall deliver certificates representing the Offered Securities, duly endorsed for transfer and accompanied by all requisite transfer taxes, if any, and such Offered Securities shall be free and clear of any liens, claims, options, charges, encumbrances or rights ("LIENS") (other than those arising hereunder and those attributable to actions by the purchasers) and the Selling Stockholder shall so represent and warrant, and further represent and warrant that it is the sole beneficial and record owner of such Offered Securities. The Company or each Rightholder, as the case may be, purchasing Offered Securities shall deliver at the closing payment in full in immediately available funds for the Offered Securities purchased by it or him. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 3.1.5 Sale to a Third Party Purchaser. Unless the Company and/or the Rightholders elect to purchase all, but not less than all, of the Offered Securities under Sections 3.1.2 and 3.1.3, the Selling Stockholder may, subject to Section 3.1.6, sell the Offered Securities to a Third Party Purchaser on the terms and conditions set forth in the Offering Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into within ninety (90) days of the earlier to occur of (i) the waiver by the Company and the Rightholders of their options to purchase the Offered Securities and (ii) the expiration of the Option Period (the earlier of such dates being offered herein as the "CONTRACT DATE"); and provided further, that such sale shall not be consummated unless and until all of the following conditions are met: (a) The Selling Stockholder shall deliver to the Company a certificate of a Third Party Purchaser stating that (i) such Third Party Purchaser is aware of the rights of the Company, the Sinton Stockholders and the General Atlantic Stockholders contained in Section 3.1 and (ii) prior to the purchase by such Third Party Purchaser of any of such Offered Securities, such Third Party Purchaser shall become a party to this Agreement and agree to be bound by the terms and conditions hereof in accordance with Section 2.4 hereof. (b) The consummation of such sale to a Third Party Purchaser shall not be subject to any conditions (other than necessary filings under the HSR Act), except that it may be conditioned upon the truth as of the closing of the proposed purchase of customary representations and warranties and conditions (including, compliance with applicable securities laws) and the delivery of stock certificates and a customary legal opinion. (c) A Third Party Purchaser shall have furnished evidence satisfactory to the Company, in its reasonable judgment, as 15 12 to the financial ability of such Third Party Purchaser to consummate the proposed purchase. If such sale is not consummated within forty-five (45) days of the Contract Date for any reason, then the restrictions provided for herein shall again become effective, and no transfer of such Offered Securities may be made thereafter by the Selling Stockholder without again offering the same to the Company, the Sinton Stockholders and the General Atlantic Stockholders in accordance with this Section 3.1. 3.1.6 Tag-Along Rights. (a) If a Sinton Stockholder is transferring Offered Securities to a Third Party Purchaser pursuant to Section 3.1.5, then each of the General Atlantic Stockholders (each, a "TAG-ALONG RIGHTHOLDER") shall have the right to sell to such Third Party Purchaser, upon the terms set forth in the Offering Notice, that number of Shares held by such Tag-Along Rightholder equal to that percentage of the Offered Securities determined by dividing (i) the total number of Shares then owned by such Tag-Along Rightholder by (ii) the total number of Shares then owned by all Tag-Along Rightholders exercising their rights pursuant to this Section 3.1.6 plus the total number of Shares then owned by the Sinton Stockholders. The Selling Stockholder and the Tag-Along Rightholder(s) shall effect the sale of the Offered Securities and such Tag-Along Rightholder(s) shall sell the number of Offered Securities required to be sold pursuant to this Section 3.1.6(a), and the number of Offered Securities to be sold to such Third Party Purchaser by the Selling Stockholder shall be reduced accordingly. (b) In order to exercise its right to sell Shares to a Third Party Purchaser pursuant to this Section 3.1.6, a Tag-Along Rightholder must agree to make substantially the same representations, warranties, covenants and indemnities and other similar agreements as a Sinton Stockholder agrees to make in connection with the proposed sale by it or him of Offered Securities to a Third Party Purchaser. Each Sinton Stockholder shall give notice to each Tag-Along Rightholder of each proposed sale by it or him of Offered Securities which gives rise to the rights of the Tag-Along Rightholders set forth in this Section 3.1.6, at least thirty (30) days prior to the proposed consummation of such sale, setting forth the name of such Sinton Stockholder, the number of Offered Securities, the name and address of the proposed Third Party Purchaser, the proposed amount and form of consideration and terms and conditions of payment offered by such Third Party Purchaser, the percent of Shares that such Tag-Along Rightholder may sell to such Third Party Purchaser (determined in accordance with Section 3.1.6(a)), and a representation that such Third Party Purchaser has been informed of the "tag-along" rights provided for in this Section 3.1.6 and has agreed to purchase Shares in accordance with the terms hereof. The tag-along rights provided by this Section 3.1.6 must be exercised by such Tag-Along Rightholder wishing to sell its Shares within fifteen (15) days following receipt 16 13 of the notice required by the preceding sentence, by delivery of a written notice to such Sinton Stockholder indicating such Tag-Along Rightholder's wish to exercise its rights and specifying the number of Shares (up to the maximum number of Shares owned by such Tag-Along Rightholder required to be purchased by such Third Party Purchaser) it wishes to sell, provided that such Tag-Along Rightholder may waive its rights under this Section 3.1.6 prior to the expiration of such 15-day period by giving written notice to the Selling Stockholder, with a copy to the Company. The failure of a Tag-Along Rightholder to respond within such 15-day period shall be deemed to be a waiver of such Tag-Along Rightholder's rights under this Section 3.1.6. If such Third Party Purchaser fails to purchase Shares from any Tag-Along Rightholder that has properly exercised its tag-along rights pursuant to this Section 3.1.6(b), then such Sinton Stockholder shall not be permitted to consummate the proposed sale of the Offered Securities, and any such attempted sale shall be null and void and the Company shall not register any such transfer. 3.2 Involuntary Transfers. 3.2.1 Rights of First Offer upon Involuntary Transfer. If an Involuntary Transfer of any Shares (the "TRANSFERRED SHARES") owned by any Stockholder shall occur, then the Company, the Sinton Stockholders and the General Atlantic Stockholders (unless such Stockholder is the Involuntary Transferee) shall have the same rights as specified in Sections 3.1.2 and 3.1.3, respectively, with respect to such Transferred Shares as if the Involuntary Transfer had been a proposed voluntary transfer by a Selling Stockholder and shall be governed by Section 3.1 except that (a) the time periods shall run from the date of receipt by the Company of actual notice of the Involuntary Transfer (and the Company shall immediately give notice to the Rightholders of the date of receipt of such notice), (b) such rights shall be exercised by notice to the transferee of such Transferred Shares (the "INVOLUNTARY TRANSFEREE") rather than to the Stockholder who suffered or will suffer the Involuntary Transfer and (c) the purchase price per Transferred Share shall be agreed upon by the Involuntary Transferee and the Company or the purchasing Rightholders, as the case may be; provided, however, that if such parties fail to agree as to such purchase price, the purchase price shall be the Fair Value thereof as determined in accordance with Section 3.2.2. 3.2.2 Fair Value. If the parties fail to agree upon the purchase price of the Transferred Shares in accordance with Section 3.2.1 hereof, then the Company or the Rightholders, as the case may be, shall purchase the Transferred Shares at a purchase price equal to the Fair Value (as hereinafter defined) thereof. The Fair Value of the Transferred Shares shall be determined by a panel of three independent appraisers, which shall be nationally recognized investment banking firms or nationally recognized experts experienced in the valuation of corporations engaged in the business conducted by the Company. Within five (5) Business Days after the date the applicable parties determine that they cannot agree as to the 17 14 purchase price, the Involuntary Transferee and the Board of Directors (in the case of a purchase by the Company) or the purchasing Rightholders, as the case may be, shall each designate one such appraiser that is willing and able to conduct such determination. If either the Involuntary Transferee or the Board of Directors or the purchasing Rightholders, as the case may be, fails to make such designation within such period, then other party that has made the designation shall have the right to make the designation on its behalf. The two appraisers designated shall, within a period of five (5) Business Days after the designation of the second appraiser, agree to designate a third appraiser. The three appraisers shall conduct their determination as promptly as practicable, and the Fair Value of the Transferred Shares shall be the average of the determination of the two appraisers that are closer to each other than to the determination of the third appraiser, which third determination shall be discarded; provided, however, that if the determination of two appraisers are equally close to the determination of the third appraiser, then the Fair Value of the Transferred Shares shall be the average of the determination of all three appraisers. Such determination shall be final and binding on the Involuntary Transferee, the Company and the Rightholders. The Involuntary Transferee shall be responsible for the fees and expenses of the appraiser designated by or on behalf of it, and the Company or the purchasing Rightholders, as the case may be, for the fees and expenses of the appraiser designated by or on behalf of the Board of Directors or the Purchasing Rightholders, as the case may be. The Involuntary Transferee and the Company or the purchasing Rightholders, as the case may be, shall each share half the fees and expenses of the appraiser designated by the appraisers. For purposes of this Section 3.2.2, the "Fair Value" of the Transferred Shares means the fair market value of such Transferred Shares determined in accordance with this Section 3.2.2 based upon all considerations that the appraisers determine to be relevant. 3.2.3 Closing. The closing of any purchase under this Section 3.2 shall be held at the principal office of the Company at 11:00 a.m., local time, on the earlier to occur of (a) the fifth Business Day after the purchase price per Transferred Share shall have been agreed upon by the Involuntary Transferee and the Company or the purchasing Rightholders, as the case may be, in accordance with Section 3.2.1(c) or (b) the fifth Business Day after the determination of the Fair Value of the Transferred Shares in accordance with Section 3.2.2, or at such other time and place as the parties to the transaction may agree. At such closing, the Involuntary Transferee shall deliver certificates, if applicable, or other instruments or documents representing the Transferred Shares being purchased under this Section 3.2, duly endorsed with a signature guarantee for transfer and accompanied by all requisite transfer taxes, if any, and such Transferred Shares shall be free and clear of any Liens (other than those arising hereunder) arising through the action or inaction of the Involuntary Transferee and the Involuntary Transferee shall so represent and warrant, and further represent and warrant that it is the beneficial owner of such Transferred Shares. The Company or each Rightholder, as the case may be, purchasing such Transferred Shares shall deliver at closing payment in full in 18 15 immediately available funds for such Transferred Shares. At such closing, all parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 3.2.4 General. In the event that the provisions of this Section 3.2 shall be held to be unenforceable with respect to any particular Involuntary Transfer, the Company and the Rightholders shall have the rights specified in Sections 3.1.2 and 3.1.3, respectively, with respect to any transfer by an Involuntary Transferee of such Shares, and each Rightholder agrees that any Involuntary Transfer shall be subject to such rights, in which case the Involuntary Transferee shall be deemed to be the Selling Stockholder for purposes of Section 3.1 of this Agreement and shall be bound by the provisions of Section 3.1 and other related provisions of this Agreement. 4. Future Issuance of Shares; Preemptive Rights. 4.1 Offering Notice. Except for (a) capital stock of the Company which may be issued to employees, consultants or directors of the Company pursuant to a stock option plan or other employee benefit arrangement approved by the Board of Directors, (b) a dividend on the outstanding shares of Common Stock in capital stock of the Company or a subdivision of the outstanding shares of Common Stock into a larger number of shares of Common Stock, (c) capital stock of the Company issued upon exercise, conversion or exchange of any Common Stock Equivalent, (d) capital stock of the Company issued in consideration of the acquisition, approved by the Board of Directors, by the Company or any of its Subsidiaries of another Person, (e) capital stock of the Company which may be issued in connection with bank or lease financings, facilities leases or strategic alliances; provided, however, that (i) aggregated on an annual basis, such issuances do not exceed 1% of the outstanding Shares of the Company and (ii) each such issuance is approved by the Board of Directors or (f) the Series F Stock purchased under the Stock Purchase Agreement (collectively, "NEW SECURITIES"), if the Company wishes to issue any shares of capital stock or any other securities convertible into or exchangeable for capital stock of the Company to any Person (the "SUBJECT PURCHASER") after the date hereof and prior to the IPO Effectiveness Date, then the Company shall offer such New Securities first to the Preferred Stockholders by sending written notice (the "NEW ISSUANCE NOTICE") to the General Atlantic Stockholders and the Sinton Stockholders, which New Issuance Notice shall state (a) the number of New Securities proposed to be issued and (b) the proposed purchase price per share of the New Securities that the Company is willing to accept (the "PROPOSED PRICE"). Upon delivery of the New Issuance Notice, such offer shall be irrevocable unless and until the rights provided for in Sections 4.2 and 4.3 shall have been waived or shall have expired. 19 16 4.2 Preferred Stockholder Option; Exercise. For a period of fifteen (15) days after the giving of the New Issuance Notice pursuant to Section 4.1, the Preferred Stockholders shall have the right (the "PREFERRED OPTION") to purchase all, but not less than all, of the New Securities at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice. The Sinton Stockholders shall have the right to purchase that percentage (the "SINTON PERCENTAGE") of the New Securities determined by dividing (i) the total number of Shares then owned by the Sinton Stockholders by (ii) the total number of Shares then outstanding. The General Atlantic Stockholders shall have the right to purchase that percentage of the New Securities equal to one (1) minus the Sinton Percentage. If any Preferred Stockholder does not fully subscribe for the number or amount of New Securities it is entitled to purchase, then each other participating Preferred Stockholder shall have the right to purchase the New Securities not so subscribed for. The right of the Preferred Stockholders to purchase all of the New Securities under this Section 4.2 shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 15-day period referred to above, to the Company, which notice shall state that the Preferred Stockholders elect to purchase all of the New Securities. The failure of the Preferred Stockholders to respond within such 15-day period shall be deemed to be a waiver of the Preferred Stockholders' rights under this Section 4.2, provided that the Preferred Stockholders may waive their rights under this Section 4.2 prior to the expiration of such 15-day period by giving written notice to the Company. 4.3 Preemptive Rights; Exercise. (a) If the Preferred Stockholders do not elect to purchase all, but not less than all, of the New Securities pursuant to Section 4.2, then for a period of fifteen (15) days after the earlier to occur of (a) the expiration of the 15-day period referred to in Section 4.2 and (b) the date upon which the Company shall have received written notice from the Preferred Stockholders of their exercise of the Preferred Option pursuant to Section 4.2 or the waiver thereof, the General Atlantic Stockholders and the Sinton Stockholders (each, a "PREEMPTIVE RIGHTHOLDER") shall have the right to purchase its Proportionate Percentage (as hereinafter defined) of the New Securities at a purchase price equal to the Proposed Price and upon the terms and conditions set forth in the New Issuance Notice. Each such Preemptive Rightholder shall have the right to purchase that percentage of the New Securities determined by dividing (a) the total number of Shares then owned by such Preemptive Rightholder exercising its rights under this Section 4.3 by (b) the total number of Shares then outstanding (the "PROPORTIONATE PERCENTAGE"). (b) The right of each Preemptive Rightholder to purchase the New Securities under subsection (a) above shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 15-day period referred to in subsection (a) above, to the Company, which notice shall state 20 17 the amount of New Securities that such Preemptive Rightholder elects to purchase pursuant to Section 4.3(a). The failure of a Preemptive Rightholder to respond within such 15-day period shall be deemed to be a waiver of such Preemptive Rightholder's rights under Section 4.3(a), provided that each Preemptive Rightholder may waive its rights under Section 4.3(a) prior to the expiration of such 15-day period by giving written notice to the Company. 4.4 Closing. The closing of the purchase of New Securities subscribed for by the Preferred Stockholders under Section 4.2 or by the Preemptive Rightholders under Section 4.3, as the case may be, shall be held at the principal office of the Company at 11:00 a.m., local time, on (a) the 30th day after the giving of the New Issuance Notice pursuant to Section 4.1, if the Preferred Stockholders elect to purchase all of the New Securities pursuant to Section 4.2, (b) the 45th day after the giving of the New Issuance Notice pursuant to Section 4.1, if the Preemptive Rightholders elect to purchase any of the New Securities under Section 4.3 or (c) at such other time and place as the parties to the transaction may agree. At such closing, the Company shall deliver certificates representing the New Securities, and such New Securities shall be issued free and clear of all Liens and the Company shall so represent and warrant, and further represent and warrant that such New Securities shall be, upon issuance thereof to the General Atlantic Stockholders or the Sinton Stockholders as the case may be, and after payment therefor, duly authorized, validly issued, fully paid and nonassessable. The General Atlantic Stockholders or the Sinton Stockholders, as the case may be, purchasing the New Securities shall deliver at the closing payment in full in immediately available funds for the New Securities purchased by him or it. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 4.5 Sale to Subject Purchaser. Unless all of the New Securities are purchased pursuant to Section 4.2 or Section 4.3, the Company may sell to the Subject Purchaser the New Securities not purchased by the Preferred Stockholders pursuant to Section 4.2 or the Preemptive Rightholders pursuant to Section 4.3 on terms and conditions that are no more favorable to the Subject Purchaser than those set forth in the New Issuance Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into within six (6) months of the earlier to occur of (i) the notice or waiver by the Preemptive Rightholders of their option to purchase the New Securities pursuant to Section 4.3 and (ii) the expiration of the 15-day period referred to in Section 4.3. If such sale is not consummated within 30 days of the contract date referred to above for any reason, then the restrictions provided for herein shall again become effective, and no issuance and sale of New Securities may be made thereafter by the Company without again offering the same in accordance with this Section 4. The closing of any issue and purchase pursuant to this Section 4.5 shall be held at the time and place as the parties to the transaction may agree. 21 18 5. After-Acquired Securities. All of the provisions of this Agreement shall apply to all of the Shares or Common Stock Equivalents now owned or which may be issued or transferred hereafter to a Stockholder in consequence of any additional issuance, purchase, exchange or reclassification of any of such Shares or Common Stock Equivalents, corporate reorganization, or any other form of recapitalization, consolidation, merger, share split or share dividend, or which are acquired by a Stockholder in any other manner. 6. Corporate Governance. 6.1 General. From and after the execution of this Agreement, each Stockholder shall vote its or his Shares at any regular or special meeting of stockholders of the Company (a "STOCKHOLDERS MEETING") or in any written consent executed in lieu of such a meeting of stockholders (a "WRITTEN CONSENT"), and shall take all other actions necessary, to give effect to the provisions of this Agreement (including, without limitation, Section 6.3 hereof) and to ensure that the Charter Documents do not, at any time hereafter, conflict in any respect with the provisions of this Agreement. 6.2 Stockholders Actions. In order to effectuate the provisions of this Section 6, each Stockholder (a) hereby agrees that when any action or vote is required to be taken by such Stockholder pursuant to Section 6 of this Agreement, such Stockholder shall use its best efforts to call, or cause the appropriate officer and directors of the Company to call, a Stockholders Meeting or to execute or cause to be executed a Written Consent to effectuate such stockholder action, (b) shall use its best efforts to cause the Board of Directors to adopt, either at a meeting of the Board of Directors or by unanimous written consent of the Board of Directors, all the resolutions necessary to effectuate the provisions of Section 6 of this Agreement and (c) shall use its best efforts to cause the Board of Directors to cause the Secretary of the Company, or if there be no secretary, such other officer of the Company as the Board of Directors may appoint to fulfill the duties of Secretary, not to record any vote or consent contrary to the terms of this Section 6. 6.3 Election of Directors; Number and Composition. Each Stockholder shall vote its or his Shares at any Stockholders Meeting, or act by Written Consent with respect to such Shares, and take all other actions necessary to ensure that the number of directors constituting the entire Board of Directors shall be not less than five (5) nor more than nine (9). Each Stockholder shall vote its or his Shares at any Stockholders Meeting called for the purpose of filling the positions on the Board of Directors, or in any Written Consent executed for such purpose, and to take all other actions necessary to ensure the election to the Board of Directors of one (1) individual designated by the General Atlantic Stockholders (who shall initially be David C. Hodgson) (the "GAP DIRECTOR"). Provided that the Stockholders have 22 19 satisfied their obligations under this Section 6.3, the Sinton Stockholders may vote their Shares (to the extent available) to elect THS to the Board of Directors. 6.4 Reduction of Directors. Notwithstanding anything to the contrary contained in this Agreement, if at any time the General Atlantic Stockholders own less than 25% of the total number of Shares purchased under the Stock Purchase Agreement, then the General Atlantic Stockholders shall no longer be entitled to designate a director pursuant to Section 6.3. 6.5 Removal and Replacement of Directors. 6.5.1 Removal of General Atlantic Directors. If at any time the General Atlantic Stockholders notify the other Stockholders of their wish to remove at any time and for any reason (or no reason) the GAP Director, then each Stockholder shall vote all of its or his Shares so as to remove such GAP Director. 6.5.2 Replacement of Directors. (a) If at any time, a vacancy is created on the Board of Directors by reason of the incapacity, death, removal or resignation of the GAP Director, then the General Atlantic Stockholders shall designate an individual who shall be appointed to fill such vacancy until the next Stockholders Meeting. (b) Upon receipt of notice of the designation of a nominee, each Stockholder shall, as soon as practicable after the date of such notice, take action, including the voting of its or his Shares, to elect the director designated by the General Atlantic Stockholders, as the case may be, to fill such vacancy. 6.6 Reimbursement of Expenses. Notwithstanding anything to the contrary contained in this Agreement, the Company shall reimburse GAP LP and GAP Coinvestment, or their respective designee, for all reasonable travel and accommodation expenses incurred by the GAP Director in connection with his attendance at a meeting of the Board of Directors or any committee thereof. 7. Stock Certificate Legend. A copy of this Agreement shall be filed with the Secretary of the Company and kept with the records of the Company. Each certificate representing Shares now held or hereafter acquired by any Stockholder shall for as long as this Agreement is effective bear legends substantially in the following forms: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE 23 20 TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR PURSUANT TO A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE STOCKHOLDERS AGREEMENT, DATED MARCH __, 1997, AMONG PROBUSINESS, INC., GENERAL ATLANTIC PARTNERS 39, L.P., GAP COINVESTMENT PARTNERS, L.P. AND SINTON (AS DEFINED THEREIN), A COPY OF WHICH MAY BE INSPECTED AT THE COMPANY'S PRINCIPAL OFFICE. THE COMPANY WILL NOT REGISTER THE TRANSFER OF SUCH SECURITIES ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF THE STOCKHOLDERS AGREEMENT. 8. Miscellaneous. 8.1 Notices. All notices, demands or other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if the Company: ProBusiness, Inc. 5934 Gibraltar Drive Pleasanton, California 94588 Telecopy: Attention: Thomas H. Sinton 24 21 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Telecopy: (415) 493-6811 Attention: Alan K. Austin, Esq. (b) if to any of the Sinton Stockholders: c/o ProBusiness, Inc. 5934 Gibraltar Drive Pleasanton, California 94588 Telecopy: Attention: Thomas H. Sinton with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Telecopy: (415) 493-6811 Attention: Alan K. Austin, Esq. (c) if to any of the General Atlantic Stockholders: c/o General Atlantic Service Corporation 3 Pickwick Plaza Greenwich, Connecticut 06830 Telecopy: (203) 622-8818 Attention: Mr. Stephen P. Reynolds with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Matthew Nimetz, Esq. (d) if to any other Stockholder, at its address as it appears on the record books of the Company. 25 22 Any party may by notice given in accordance with this Section 8.1 designate another address or Person for receipt of notices hereunder. All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. 8.2 Amendment and Waiver. (a) No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the parties hereto at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective only if it is made or given in writing and signed by (i) (x) the Company, (y) the Sinton Stockholders holding Shares representing (after giving effect to any adjustments) at least 60% of the Shares owned by all of the Sinton Stockholders and (z) the General Atlantic Stockholders holding Shares representing (after giving effect to any adjustments) at least 60% of the Shares owned by all of the General Atlantic Stockholders and (ii) only in the specific instance and for the specific purpose for which made or given. Any such amendment, supplement, modification, waiver or consent shall be binding upon the Company and all of the Stockholders. 8.3 Specific Performance. The parties hereto intend that each of the parties have the right to seek damages or specific performance in the event that any other party hereto fails to perform such party's obligations hereunder. Therefore, if any party shall institute any action or proceeding to enforce the provisions hereof, any party against whom such action or proceeding is brought hereby waives any claim or defense therein that the plaintiff party has an adequate remedy at law. 8.4 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 26 23 8.5 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 8.6 Entire Agreement. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents (as defined the Stock Purchase Agreement) are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, representations, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents supersede all prior agreements and understandings between the parties with respect to such subject matter. 8.7 Term of Agreement. This Agreement shall become effective upon the execution hereof and shall terminate upon the IPO Effectiveness Date; except that the provisions contained in Section 6 shall terminate on the earlier of (i) the date the General Atlantic Stockholders are no longer entitled to designate a director pursuant to Section 6.4 and (ii) the date of the third annual Stockholder's Meeting occurring after the IPO Effectiveness Date (the "THIRD STOCKHOLDER'S MEETING"). It is understood by the parties hereto that the Sinton Stockholders shall not be obligated to take any action or vote pursuant to Section 6 at the Third Stockholder's Meeting. 8.8 Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 8.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 8.10 Further Assurances. Each of the parties shall, and shall cause their respective Affiliates to, execute such instruments and take such action as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 27 24 8.11 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs, legatees and legal representatives. This Agreement is not assignable except in connection with a transfer of Shares in accordance with this Agreement. 8.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 28 25 IN WITNESS WHEREOF, the undersigned have executed, or have cause to be executed, this Agreement on the date first written above. PROBUSINESS, INC. By:________________________________________ Name: Title: GENERAL ATLANTIC PARTNERS 39, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, Its General Partner By:____________________________________ Name: Title: A Managing Member GAP COINVESTMENT PARTNERS, L.P. By:_________________________________________ Name: Title: A General Partner ____________________________________________ Thomas H. Sinton ____________________________________________ Jane N. Sinton 29 26 THOMAS H. SINTON & JANE N. SINTON 1989 IRREVOCABLE TRUST By:_________________________________________ Name: Title: SILAS D. SINTON TRUST ESTATE By:_________________________________________ Name: Title: SILAS JACK SINTON FAMILY TRUST By:_________________________________________ Name: Title: ____________________________________________ Jane N. Sinton, custodian for Robert Hollister Sinton ____________________________________________ Jane N. Sinton, custodian for Lauren Taylor Sinton 30 27 IN WITNESS WHEREOF, the undersigned have executed, or have cause to be executed, this Agreement on the date first written above. PROBUSINESS, INC. By:________________________________________ Name: Title: GENERAL ATLANTIC PARTNERS 39, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, Its General Partner By:____________________________________ Name: Title: A Managing Member GAP COINVESTMENT PARTNERS, L.P. By:_________________________________________ Name: Title: A General Partner ____________________________________________ Thomas H. Sinton ____________________________________________ Jane N. Sinton 31 28 THOMAS H. SINTON & JANE N. SINTON 1989 IRREVOCABLE TRUST By:_________________________________________ Name: Title: SILAS D. SINTON TRUST ESTATE By:_________________________________________ Name: Title: SILAS JACK SINTON FAMILY TRUST By:_________________________________________ Name: Title: ____________________________________________ Jane N. Sinton, custodian for Robert Hollister Sinton ____________________________________________ Jane N. Sinton, custodian for Lauren Taylor Sinton 32 29 IN WITNESS WHEREOF, the undersigned have executed, or have cause to be executed, this Agreement on the date first written above. PROBUSINESS, INC. By:________________________________________ Name: Title: GENERAL ATLANTIC PARTNERS 39, L.P. By: GENERAL ATLANTIC PARTNERS, LLC, Its General Partner By:____________________________________ Name: Title: A Managing Member GAP COINVESTMENT PARTNERS, L.P. By:_________________________________________ Name: Title: A General Partner ____________________________________________ Thomas H. Sinton ____________________________________________ Jane N. Sinton 33 30 THOMAS H. SINTON & JANE N. SINTON 1989 IRREVOCABLE TRUST By:_________________________________________ Name: Title: SILAS D. SINTON TRUST ESTATE By:_________________________________________ Name: Title: SILAS JACK SINTON FAMILY TRUST By:_________________________________________ Name: Title: ____________________________________________ Jane N. Sinton, custodian for Robert Hollister Sinton ____________________________________________ Jane N. Sinton, custodian for Lauren Taylor Sinton 34 Exhibit A (1) ACKNOWLEDGMENT AND AGREEMENT The undersigned wishes to receive from __________ ("Transferor") certain shares or certain options, warrants or other rights to purchase _____ shares, par value $.01 per share, of Common Stock or Preferred Stock, as the case may be (the "Shares"), of ProBusiness, Inc., a California corporation (the "Company"); The Shares are subject to the Stockholders Agreement, dated March __, 1997 (the "Agreement"), among the Company, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P., Thomas H. Sinton, Jane N. Sinton, Thomas H. Sinton & Jane N. Sinton 1989 Irrevocable Trust, June N. Sinton as Custodian for Robert Hollister Sinton, Jane N. Sinton as Custodian for Lauren Taylor Sinton, Silas D. Sinton Trust Estate and Silas Jack Sinton Family Trust; The undersigned has been given a copy of the Agreement and afforded ample opportunity to read it, and the undersigned is thoroughly familiar with its terms; Pursuant to terms of the Agreement, the Transferor is prohibited from transferring such Shares and the Company is prohibited from registering the transfer of the Shares unless and until the recipient of such Shares acknowledges the terms and conditions of the Agreement and agrees to be bound thereby; and The undersigned wishes to receive such Shares and have the Company register the transfer of such Shares. NOW, THEREFORE, in consideration of the mutual premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and to induce the Transferor to transfer such Shares to the undersigned and the Company to register such transfer, the undersigned does hereby acknowledge and agree that (i) he has been given a copy of the Agreement and ample opportunity to read it, and the undersigned is thoroughly familiar with its terms, (ii) the Shares are subject to the terms and conditions set forth in the Agreement, and (iii) the undersigned does hereby agree fully to be bound thereby as [a "Sinton Stockholder"](2) or [a "General Atlantic Stockholder"](3) [an "Other Stockholder"].(4) This _____ day of ____________, 19__. ___________________________________ ____________________ (1) For transfers of previously issued stock. (2) For transfers made by a Sinton Stockholder (as defined in the Agreement). (3) For transfers made by a General Atlantic Stockholder (as defined in the Agreement). (4) To be used for all other transfers. EX-11 42 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 PROBUSINESS, INC. STATEMENT REGARDING THE COMPUTATION OF NET LOSS AND PROFORMA NET LOSS PER SHARE (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX-MONTH PERIOD YEAR ENDED JUNE 30, ENDED DEC. 31, PROFORMA FOR PROFORMA FOR THE SIX- ---------------------------------- ---------------------- YEAR ENDED MONTH PERIOD ENDED 1994 1995 1996 1995 1996 JUNE 30, 1996 DECEMBER 31, 1996 ---------- ---------- ---------- ---------- ---------- ------------- --------------------- Net loss....................... $(1,477) $(979) $(2,386) $(456) $(2,974) $(2,730) $(3,678) Shares used in net loss per share computation: Weighted average shares of common stock outstanding... 3,340 7,126 129,408 47,914 211,979 129,408 211,979 Shares related to Staff Accounting Bulletin Topic 4D: Cheap stock................ 1,305,540 1,305,540 1,305,540 1,305,540 1,305,540 1,305,540 1,305,540 Common stock options....... 245,673 245,673 245,673 245,673 245,673 245,673 245,673 Preferred stock............ 1,229,466 1,229,466 1,229,466 1,229,466 1,229,466 1,229,466 1,229,466 Warrants................... 74,917 74,917 74,917 74,917 74,917 74,917 74,917 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Shares used in net loss per share computation............ 2,858,936 2,862,722 2,985,004 2,903,510 3,067,575 2,985,004 3,067,575 ========== ========== ========== ========== ========== ========== ========== Net loss per share............. $(0.52) $(0.34) $(0.80) $(0.16) $(0.97) $(0.91) $(1.20) Calculation of shares outstanding for computing pro forma net loss per share: Shares used in computing historical net loss per share (from above)....... 2,985,004 3,067,575 2,985,004 3,067,575 Adjustment to reflect the effect of the assumed conversion of convertible preferred stock from the date of issuance......... 5,226,602 5,226,602 5,226,602 5,226,602 ---------- ---------- ---------- ---------- Shares used in computing pro forma net loss per share..... 8,211,606 8,294,177 8,211,606 8,294,177 ========== ========== ========== ========== Proforma net loss per share.... $ (0.29) $ (0.36) $ (0.33) $ (0.44) ========== ========== ========== ==========
EX-16.1 43 LETTER RE CHANGE IN CERTIFYING ACCOUNTANT 1 EXHIBIT 16.1 February 3, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have read the statements made by ProBusiness, Inc. (copy attached), which we understand will be filed with the Commission, as part of the Company's Form S-1. We agree with the statements concerning our Firm in such Form S-1. Very truly yours, 2 CHANGE IN ACCOUNTANTS Effective June 1996, the Company engaged Ernst & Young as its principal independent auditors to replace Coopers & Lybrand LLP ("Coopers & Lybrand"), who were dismissed as auditors of the Company effective January 1996. The decision to change independent auditors was approved by the Company's Audit Committee and the Board of Directors. In connection with audits of the two fiscal years ended June 30, 1995, and in the subsequent interim period, there were no disagreements with Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Coopers & Lybrand, would have caused them to make reference to the matter in their report. The reports of Coopers & Lybrand on the financial statements of the Company for the past two years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. EX-21.0 44 LIST OF SUBSIDIARIES 1 EXHIBIT 21.0 Subsidiaries of the Registrant BeneSphere Administrators, Inc. (Washington) EX-23.1 45 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference of our firm under the captions "Selected Financial Data" and "Experts" and to use of our reports with respect to the financial statements of ProBusiness Services, Inc., dated March 10, 1997, Dimension Solutions, Inc., dated November 20, 1996 and BeneSphere Administrators, Inc., dated December 20, 1996 in the Registration Statement (Form S-1) and related Prospectus of ProBusiness, Inc. for the registration of 2,300,000 shares of its common stock. Our audit also includes the financial statement schedule of ProBusiness, Inc. listed in Item 16(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP --------------------------- Walnut Creek, California March 12, 1997 EX-27.1 46 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS 12-MOS 6-MOS 6-MOS JUN-30-1994 JUN-30-1995 JUN-30-1996 JUN-30-1996 JUN-30-1997 JUL-01-1993 JUL-01-1994 JUL-01-1995 JUL-01-1995 JUL-01-1996 JUN-30-1994 JUN-30-1995 JUN-30-1996 DEC-31-1995 DEC-31-1996 0 852 4,041 0 1,254 0 0 0 0 0 0 688 1,354 0 2,349 0 0 0 0 0 0 0 0 0 0 0 1,653 5,722 0 4,263 0 3,242 6,205 0 8,849 0 (1,270) (2,213) 0 (2,916) 0 4,134 10,939 0 11,904 0 1,584 2,750 0 4,231 0 0 0 0 0 0 0 0 0 0 0 11,684 12,201 0 12,362 0 3 370 0 977 0 (10,321) (12,707) 0 (16,225) 0 4,134 10,939 0 11,904 0 0 0 0 0 4,069 7,095 13,863 5,106 10,199 0 0 0 0 0 1,629 2,703 6,435 2,278 5,238 3,871 5,285 9,410 3,167 7,427 0 0 0 0 0 46 86 404 117 508 (1,477) (979) (2,386) (456) (2,974) 0 0 0 0 0 (1,477) (979) (2,386) (456) (2,974) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (1,477) (979) (2,386) (456) (2,974) 0.00 0.00 (0.29) 0.00 (0.36) 0.00 0.00 0.00 0.00 0.00
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