-----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, FJn7RIl84AvgHe1+5G343Bxnb9bXjFf4b5w3+tcovd1OdFyrzRGyLlX8AdxAIYna ngx0XVr1o4jH5dubaOHycQ== 0000891618-97-003472.txt : 19970815 0000891618-97-003472.hdr.sgml : 19970815 ACCESSION NUMBER: 0000891618-97-003472 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROBUSINESS SERVICES INC CENTRAL INDEX KEY: 0001028751 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23189 FILM NUMBER: 97663014 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/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997 REGISTRATION NO. 333-23189 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO 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 KENNETH L. GUERNSEY ELIZABETH R. FLINT KARYN R. SMITH ELIZABETH M. KURR RICHARD S. JASEN THOMAS I. SAVAGE COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI ONE MARITIME PLAZA PROFESSIONAL CORPORATION 20TH FLOOR 650 PAGE MILL ROAD SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304-1050 (415) 693-2000 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 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 AUGUST 14, 1997 LOGO 2,000,000 SHARES COMMON STOCK All of the shares of Common Stock offered hereby are being sold by ProBusiness Services, Inc. ("ProBusiness" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. --------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================= 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 $1,585,000. (2) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. --------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY WILLIAM BLAIR & COMPANY The date of this Prospectus is , 1997 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....................................................................... 15 Dividend Policy....................................................................... 15 Capitalization........................................................................ 16 Dilution.............................................................................. 17 Selected Financial Data............................................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 19 Business.............................................................................. 26 Management............................................................................ 35 Certain Transactions.................................................................. 42 Principal Stockholders................................................................ 43 Description of Capital Stock.......................................................... 44 Shares Eligible for Future Sale....................................................... 47 Underwriting.......................................................................... 48 Legal Matters......................................................................... 50 Experts............................................................................... 50 Change in Accountants................................................................. 50 Additional Information................................................................ 50 Index to Financial Statements......................................................... F-1
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 June 30, 1997, the Company provided services to approximately 1,100 clients and provided payroll processing services to 425 clients with an aggregate of approximately 380,000 employees and an average of approximately 900 employees. For the quarter ended June 30, 1997, the Company processed 2.9 million checks for the Company's payroll clients. The Company's clients include: 3Com Corporation, Abbott Laboratories, Airtouch Communications Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell Computer Corporation, The Gillette Company, Kellogg USA Inc., LSI Logic Corporation, Michaels Stores, Inc., Netscape Communications Corp., Sunglass Hut International, Inc., TCI Cablevision, Toyota Motor Corporation, Watkins-Johnson Company and Williams-Sonoma, Inc. Many large businesses have found that outsourcing non-core functions reduces costs, improves service, quality and efficiency, allows personnel to focus on core competencies and enhances productivity through access to advanced technologies. In recent years, payroll processing and benefits administration have increased in complexity due to continual changes in regulations and increasingly sophisticated employee benefits plans. As a result, the demand for outsourcing employee administrative services has grown significantly and is expected to continue to grow over the next several years. According to a third-party industry study, it is estimated that third-party payroll and payroll tax services alone generated approximately $3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in revenue in 2000. The Company differentiates itself from its competitors through its proprietary technology, high quality, responsive and professional client service and focus on the needs of large employers. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team of specialists led by a personal account manager who proactively manages each client's account and marshals the resources of the team to meet the client's specific needs. ProBusiness maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company believes that its low client-to-account manager ratio and its focus on client service are key factors in enabling the Company to achieve a high payroll client retention rate, which was approximately 92% for fiscal year 1997. The Company's objective is to be the premier provider of employee administrative services for large employers. The Company's strategy to accomplish its objective includes expanding its client base by increasing its direct sales force, offering additional services to existing clients, developing a comprehensive and fully integrated suite of employee administrative services, and increasing the breadth of its service offerings and features. The Company is committed to maintaining the high levels of professional and personal service that it believes have allowed it to establish a competitive advantage in its industry. In March 1997, entities affiliated with General Atlantic Partners LLC ("General Atlantic") purchased $10.0 million of Preferred Stock of the Company. As a result, General Atlantic will own approximately 11% of the Company's outstanding Common Stock upon the completion of this offering. General Atlantic is a private equity investment firm. 4 6 THE OFFERING Common Stock offered by the Company............................ 2,000,000 shares Common Stock to be outstanding after this offering............. 10,147,301 shares(1) Use of proceeds................................................ To repay indebtedness and for working capital and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... PRBZ
SUMMARY FINANCIAL DATA (in thousands, except per share data)
YEAR ENDED JUNE 30, -------------------------------------------- PRO FORMA 1995 1996 1997 1997(2) ------ ------- ------- --------- STATEMENTS OF OPERATIONS DATA: Revenue............................................ $7,095 $13,863 $27,374 $29,030 Operating expenses: Cost of providing services....................... 2,703 6,435 13,659 14,541 General and administrative expenses.............. 1,304 2,054 4,282 5,719 Research and development expenses................ 1,038 1,257 2,841 2,841 Client acquisition costs......................... 2,943 5,388 11,706 12,514 Acquisition of in-process technology............. -- 711 -- -- ------- ------ ------- ------- Total operating expenses........................... 7,988 15,845 32,488 35,615 ------- ------ ------- ------- Loss from operations............................... (893) (1,982) (5,114) (6,585) Interest expense................................... (86) (473) (1,190) (1,212) Other income....................................... -- 69 59 59 ------- ------ ------- ------- Net loss........................................... $ (979) $(2,386) $(6,245) $(7,738) ======= ====== ======= ======= Pro forma net loss per share(3).................... $ (0.74) $ (0.92) ======= ======= Shares used in computing pro forma net loss per share(3)......................................... 8,451 8,451 ======= =======
JUNE 30, 1997 --------------------------------- PRO FORMA ACTUAL AS ADJUSTED(2)(4) -------- -------------------- BALANCE SHEET DATA: Cash and cash equivalents.............................................. $ 5,047 $ 17,772 Payroll tax funds invested............................................. 177,626 177,626 Working capital........................................................ 534 13,259 Total assets........................................................... 200,435 213,160 Payroll tax funds collected but unremitted............................. 177,626 177,626 Long-term debt and note payable to stockholder, less current portion... 8,917 2,858 Capital lease obligations, less current portion........................ 1,898 1,898 Total stockholders' equity............................................. 3,869 22,653
- --------------- (1) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to outstanding options; (ii) 171,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan; and (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. Also excludes a warrant issued after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock and 249,250 shares of Common Stock issuable upon exercise of options granted after June 30, 1997 with an exercise price of $9.00 per share. See "Management -- Stock Plans," "Description of Capital Stock -- Warrants" and Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. (2) The pro forma statement of operations for the year ended June 30, 1997 has been prepared as if the acquisitions of BeneSphere Administrators, Inc. and Dimension Solutions, Inc. had occurred as of July 1, 1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial Information. (3) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed Consolidated Financial Information for explanations of the determination of the shares used in computing pro forma net loss per share. (4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company and the receipt and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 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 June 30, 1997, the Company had an accumulated deficit of approximately $19.0 million. The establishment of new client relationships involves lengthy and extensive sales and implementation processes. The sales process generally takes three to nine months or longer, and the implementation process generally takes three to six months or longer. In connection with the acquisition of each new client, the Company incurs substantial client acquisition costs, which consist primarily of sales and implementation expenses and, to a lesser extent, marketing expenses. The Company's ability to achieve profitability will depend in part upon its ability to attract and retain new clients, offer new services and features and achieve market acceptance of new services. There can be no assurance that the Company will achieve or sustain profitability in the future. The Company has made acquisitions in the past and intends to pursue acquisitions in the future. In connection with acquisitions, the Company has in the past incurred and will likely incur in the future costs associated with adding personnel, integrating technology and increasing overhead to support the acquired business, acquiring in-process technology and amortization expenses related to goodwill. As a result, such acquisitions have had and any future acquisition could have an adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS The Company's business is characterized by significant seasonality. As a result, the Company's revenue has been subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters, primarily due to new clients beginning services in January (the beginning of the tax year and the Company's third fiscal quarter) and higher interest income earned on tax funds. Further, the Company's operating expenses are typically higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company's quarterly operating results have in the past and will in the future vary significantly depending on a variety of factors, including the number and size of new clients starting services, the decision of one or more clients to delay or cancel implementation or ongoing services, interest rates, seasonality, the ability of the Company to design, develop and introduce new services and features for existing services on a timely basis, transition costs to new technologies, expenses incurred for geographic expansion, risks associated with payroll tax and benefits administration services, price competition, a reduction in the number of employees of its clients, and general economic factors. Revenue from new clients represents a significant portion of quarterly revenue in the third and fourth fiscal quarters. A substantial majority of the Company's operating expenses, particularly personnel and related costs, depreciation and rent, is relatively fixed in advance of any particular quarter. The Company's agreements with its clients generally do not have significant penalties for cancellation. As a result, any decision by a client to delay or cancel implementation of the Company's services or the Company's underutilization of personnel may cause significant variations in operating results in a 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 and results of operations or on the market price of the Company's Common Stock. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION SERVICES The Company's payroll tax service is subject to various risks resulting from errors and omissions in filing client tax returns and paying tax liabilities owed to tax authorities on behalf of clients. The Company's clients calculate and transfer to the Company contributed employer and employee tax funds. The Company processes the data received from the client and remits the funds along with a tax return to the appropriate tax authorities when due. Tracking, processing and paying such tax liabilities is complex. Errors and omissions have occurred in the past and may occur in the future in connection with such service. The Company is subject to large cash penalties imposed by tax authorities for late filings or underpayment of taxes. To date, such penalties have not been significant. However, there can be no assurance that any liabilities associated with such penalties will not have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that the Company's reserves or insurance for such penalties will be adequate. In addition, failure by the Company to make timely or accurate tax return filings or pay tax liabilities when due on behalf of clients may damage the Company's reputation and could adversely affect its relationships with existing clients and its ability to gain new clients. The Company's payroll tax service is also dependent upon government regulations, which are subject to continuous changes. Failure by the Company to implement these changes into its services and technology in a timely manner would have a material adverse effect on the Company's business, 7 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 on collected but unremitted payroll tax funds, changes in policies relating to withholding federal or state income taxes or reduction in the time allowed for taxpayers to remit payment for taxes owed to government authorities would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's benefits administration services are subject to various risks resulting from errors and omissions in processing and filing COBRA or other benefit plan forms in accordance with governmental regulations and the respective plans. The Company processes data received from employees and employers and is subject to penalties for any late or misfiled plan forms. There can be no assurance the Company's reserves or insurance for such penalties will be adequate. In addition, failure to properly file plan forms would have a material adverse effect on the Company's reputation, which could adversely affect its relationships with existing clients and its ability to gain new clients. The Company's benefits administration services are also dependent upon government regulations which are subject to continuous changes that could reduce or eliminate the need for benefits administration services. The Company has access to confidential information and to client funds. As a result, the Company is subject to potential claims by its clients for the actions of the Company's employees arising from damages to the client's business or otherwise. There can be no assurance that the Company's fidelity bond and errors and omissions insurance will be adequate to cover any such claims. Such claims could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Service Offerings." INVESTMENT RISKS The Company invests funds, including payroll tax funds transferred to it by clients until the Company remits the funds to tax authorities when due. The Company typically invests these funds in short-term financial instruments such as overnight U.S. government direct and agency obligations repurchase agreements, commercial paper rated A-1 and/or P-1 and money market funds with underlying credit quality of AA or better. These investments are exposed to several risks, including credit risks from the possible inability of the borrowers to meet the terms of their obligations under the financial instruments. The Company would be liable for any losses on such investments. Interest income earned from investing these funds represents a significant portion of the Company's results of operations. As a result, the Company's business, financial condition and results of operations are significantly impacted by interest rate fluctuations. The Company has recently entered into an interest rate swap agreement to minimize the impact of interest rate fluctuations. In the event the dollar amount of the Company's invested funds falls below a specified threshold, the Company would have swap payment obligations, which could have a material adverse effect on the Company's results of operations. There can be no assurance that the Company would have sufficient funds to meet any such swap payment obligations. A default by the Company under the swap agreement could result in acceleration and set-off by the bank of all outstanding contracts under the swap agreement, and could result in cross-defaults of other debt agreements of the Company, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGEMENT OF GROWTH The Company's business has grown significantly in size and complexity over the past three years, which has placed significant demands on the Company's management, systems, internal controls, and financial and physical resources. In order to meet such demands, the Company intends to continue to hire new employees, open new offices to gain clients in new geographic regions and invest in new equipment or make other capital expenditures. In addition, the Company expects that it will need to develop further its financial and managerial controls and reporting systems and procedures to accommodate any future growth. Failure to expand any of the foregoing areas in an efficient manner 8 10 could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently in the process of integrating BeneSphere's business with the Company's business. The Company has established a processing center in Southern California and intends to open new sales offices to gain new clients. In addition, the Company has leased a larger facility to house its operations in Pleasanton, California, which the Company expects will be completed in late 1997. There can be no assurance that the Company will be able to effectively integrate BeneSphere's business or establish such facilities on a timely basis. In addition, the Company's growth may depend to some extent on its ability to successfully complete strategic acquisitions to expand or complement its existing business. There can be no assurance that suitable acquisitions can be identified, consummated or successfully integrated into the Company's operations. Any inability to manage growth effectively could have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL COMPETITION The market for the Company's services is intensely competitive, subject to rapid change and significantly affected by new service introductions and other market activities of industry participants. The Company primarily competes with several public and private payroll service providers such as Automatic Data Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller, regional competitors. Many of these companies have longer operating histories, greater financial, technical, marketing and other resources, greater name recognition and a larger number of clients than the Company. In addition, many of these companies offer more services or features than the Company and have processing facilities located throughout the United States. The Company also competes with in-house employee services departments and, to a lesser extent, banks and local payroll companies. With respect to benefits administration services, the Company competes with insurance companies, benefits consultants and other local benefits outsourcing companies. The Company may also compete with marketers of related products and services that may offer payroll or benefits administration services in the future. The Company has experienced, and expects to continue to experience, competition from new entrants into its markets. Increased competition could result in pricing pressures, loss of market share and loss of clients, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. The failure of the Company to compete successfully would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; RISKS OF SOFTWARE DEFECTS The technologies in which the Company has invested to date are rapidly evolving and have short life cycles, which requires the Company to anticipate and rapidly adapt to technological changes. In addition, the Company's industry is characterized by increasingly sophisticated and varied needs of clients, frequent new service and feature introductions and emerging industry standards. The introduction of services embodying new technologies and the emergence of new industry standards and practices can render existing services obsolete and unmarketable. The Company's future success will depend, in part, on its ability to develop advanced technologies, enhance its existing services with new features, add new services that address the changing needs of its clients, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. Several of the Company's competitors invest substantially greater amounts in research and development than the Company, which may allow them to introduce new services or features before the Company. Even if the Company is able to develop new technologies in a timely manner, it may incur substantial costs in deploying new services and features to its clients, including costs of additional personnel. If the Company is unable to develop and introduce new services and new features of existing services in a timely or cost-effective manner, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business -- Service Offerings" and "-- Research and Development." 9 11 Application software used by the Company may contain defects or failures when introduced or when new versions or enhancements are released. The Company has in the past discovered software defects in certain of its applications, in some cases only after its systems have been used by clients. There can be no assurance that future defects will not be discovered in existing or new applications or releases. Any such occurrence could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Technology" and "-- Research and Development." DEPENDENCE ON THIRD-PARTY PROVIDERS The Company depends on third-party courier services to deliver paychecks to clients. The Company does not have any formal written agreements with any of the courier services that it uses. Such courier services have been in the past and may be in the future unable to timely pick up or deliver the paychecks from the Company to its clients for a variety of reasons, including employee strikes, storms or other adverse weather conditions, earthquakes or other natural disasters, logistical or mechanical failures or accidents. Failure by the Company to deliver client paychecks on a timely basis would have a material adverse effect on the Company's business, financial condition and results of operations and could damage the Company's reputation and adversely affect its relationships with existing clients and its ability to gain new clients. DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA The Company currently conducts substantially all of its payroll and payroll tax processing and production at the Company's headquarters located in Pleasanton, California. The Company has recently established an alternative processing center in Irvine, California and is in the process of establishing a back-up facility at that site. The Company establishes for each client a complete set of payroll data at the Pleasanton processing center. In the event of a disaster in Pleasanton, clients would be able to process payroll checks based on the data they have on site if necessary. There can be no assurance that the Company's disaster recovery procedures are sufficient or that the data recovered at the client site would be sufficient to allow the client to calculate and produce payroll in a timely fashion. The Company's operations are dependent on its ability to protect its computer systems against damage from a major catastrophe (such as an earthquake or other natural disaster), fire, power loss, security breach, telecommunications failure or similar event. No assurance can be given that the precautions that the Company has taken to protect itself from or minimize the impact of such events will be adequate. Any damage to the Company's data centers, failure of telecommunications links or breach of the security of the Company's computer systems could result in an interruption of the Company's operations or other loss which may not be covered by the Company's insurance. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL The Company's success depends to a significant degree on its ability to attract and retain experienced employees. There is substantial competition for experienced personnel, which the Company expects to continue. Many of the companies with which the Company competes for experienced personnel have greater financial and other resources than the Company. The Company may in the future experience difficulty in recruiting sufficient numbers of qualified personnel. The inability to attract and retain experienced personnel as required could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition," "-- Employees" and "Management." 10 12 RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION A substantial majority of the Company's revenue has been derived from clients located in the western United States. The Company's ability to achieve significant future revenue growth will in large part depend on its ability to gain new clients throughout the United States. Currently, the Company has eight sales representatives located outside of California, and the Company intends to locate additional sales representatives in major metropolitan areas throughout the United States. The Company opened a sales office in Irvine, California in February 1995. Substantially all production for the Company's clients has been maintained at the Company's headquarters in Pleasanton, California. The Company recently moved a portion of the production services to its new facility in Irvine, California. The Company also expects to open additional sales offices in the future. This growth has resulted in new and increased responsibilities for management personnel and has placed and continues to place a significant strain on the Company's management and operating and financial systems. The Company will be required to continue to implement and improve its systems on a timely basis and in such a manner as is necessary to accommodate the increased number of transactions and clients and the increased size of the Company's operations. Any failure to implement and improve the Company's systems or to hire and retain the appropriate personnel to manage its operations would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, an increase in the Company's operating expenses from its planned expansion will have a material adverse effect on the Company's business, financial condition and results of operations if revenue does not increase to support such expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW SERVICES FEATURES The Company's future business, financial condition and results of operations will continue to depend upon the Company's ability to add new services or enhancements to existing services that address the needs of the market. Failure by the Company to successfully design, develop and introduce new services or enhancements on a timely basis could prevent the Company from maintaining existing client relationships, gaining new clients or expanding its markets and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Research and Development." DEPENDENCE ON KEY PERSONNEL The Company's success will depend on the performance of the Company's senior management and other key employees. The Company's senior management team does not have prior executive management experience in publicly traded companies. The loss of the services of any senior management or other key employee could have a material adverse effect on the Company's business, financial condition and results of operations. The Company generally does not enter into employment or noncompetition agreements with its employees. If one or more of the Company's key employees resigns from the Company to join a competitor or to form a competitor, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on the Company's business, financial condition and results of operations. In the event of the loss of any key personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its technical knowledge, practices, procedures or client lists by a former employee or that such disclosure or use would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's success is dependent in part upon its proprietary software technology. The Company has no patents, patent applications or registered copyrights. The Company relies on a combination of contract, copyright and trade secret laws to establish and protect its proprietary technology. The Company distributes its services under software license agreements that grant clients 11 13 licenses to use the Company's services and contain various provisions protecting the Company's ownership and the confidentiality of the underlying technology. The Company generally enters into confidentiality and/or license agreements with its employees and existing and potential clients, and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology. There can be no assurance that the Company's services and technology do not infringe any existing patents, copyrights or other proprietary rights of others, or that third parties will not assert infringement claims in the future. If any such claims are asserted and upheld, the costs of defense could be substantial and any resulting liability to the Company could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Proprietary Rights." CONCENTRATION OF STOCK OWNERSHIP Upon completion of this offering, the Company's directors and executive officers and their respective affiliates will beneficially own over 45% of the outstanding Common Stock. As a result, these stockholders, if they act together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have power to influence any stockholder action or approval requiring a majority vote. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change of control of the Company. See "Principal Stockholders" and "Description of Capital Stock." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiation among the Company and the representatives of the Underwriters based upon several factors and may not be indicative of the market price of the Company's Common Stock following this offering. The market price of the Company's Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new services by the Company or its competitors, market conditions in the information services industry, quarterly fluctuations in the Company's operating results, changes in financial estimates by securities analysts or other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology and services companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the marketplace for a company's securities, securities class action litigation often has been instituted. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS This offering will provide substantial benefits to current stockholders of the Company. Consummation of this offering is expected to create a public market for the Common Stock held by the Company's current stockholders, including directors and executive officers of the Company. Current stockholders paid approximately $23.4 million for an aggregate of approximately 8,147,301 shares of Common Stock. This offering will result in a gross unrealized gain to such stockholders in the aggregate amount of approximately $66.2 million, assuming an initial public offering price of $11.00 per share. In addition, the Company will use a portion of the net proceeds from the sale of Common Stock offered by the Company in this offering to repay a substantial portion of the Company's outstanding indebtedness, which consists of (i) approximately $4.0 million of subordinated debt due to certain 12 14 stockholders of the Company, (ii) $250,000 of indebtedness incurred in connection with the acquisition of Dimension Solutions, Inc. and (iii) approximately $1.9 million under the Company's line of credit. The Company also may use a portion of the remainder of the net proceeds of this offering to pay up to $4.5 million of the BeneSphere contingent purchase price, to the extent certain financial conditions are met by BeneSphere. See "-- No Prior Public Market for Common Stock; Possible Volatility of Stock Price," "Use of Proceeds" and "Dilution." SUBSTANTIAL DILUTION The assumed initial public offering price is substantially higher than the pro forma net tangible book value per share of the outstanding Common Stock. As a result, purchasers of the Common Stock offered hereby will incur immediate, substantial dilution in the amount of $9.19 per share. To the extent that outstanding options or warrants to purchase the Company's Common Stock are exercised, there will be further dilution. The Company has in the past granted a substantial number of options to purchase Common Stock to employees as part of compensation packages, and the Company expects that it will continue to grant a substantial number of options in the future. In addition, the Company has adopted an employee stock purchase plan that will provide employees an opportunity to purchase shares below prevailing market value. The Company also may issue shares of its Common Stock in connection with strategic acquisitions or alliances, which could also result in dilution to stockholders. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 10,147,301 shares of Common Stock, based upon the number of shares outstanding as of June 30, 1997. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"). The remaining 8,147,301 shares of Common Stock held by existing stockholders (the "Restricted Shares") are "restricted securities," as that term is defined in Rule 144 under the Securities Act. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) 2,000 Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) 1,000 Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; (iii) 8,144,301 Restricted Shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus. In addition, certain of the Restricted Shares are subject to vesting. As of June 30, 1997, options to purchase 875,776 shares of Common Stock were outstanding, of which options to purchase 186,301 shares were then exercisable. The Company intends to file a Form S-8 registration statement under the Securities Act immediately after the date of this Prospectus to register 2,206,971 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan and 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. In addition, as of June 30, 1997, warrants to purchase 171,892 shares of Common Stock were outstanding, all of which will be eligible for sale 180 days after the date of this Prospectus. Pursuant to agreements between the Company and certain stockholders and warrantholders (or their permitted transferees), approximately 6,349,026 shares of Common Stock and 121,892 shares issuable upon exercise of warrants are entitled to certain registration rights under the Securities Act. See "Description of Capital Stock" and "Shares Eligible for Future Sale." 13 15 ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. The Company has no present plans to issue shares of Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Further, certain other provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. These provisions include a classified board, advance notice procedures for stockholders to nominate candidates for election as directors of the Company, authorization of the Board of Directors to alter the number of directors without stockholder approval, limitations on persons who can call stockholder meetings, lack of cumulative voting and prohibition of stockholder actions by written consent. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter and Bylaw Provisions." 14 16 USE OF PROCEEDS The net proceeds from the sale of the 2,000,000 shares of Common Stock in this offering are estimated to be approximately $18.9 million ($21.9 million if the Underwriters' over-allotment option is exercised in full) at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriters' discounts and commissions and offering expenses payable by the Company. The Company intends to use approximately $6.2 million of the net proceeds to repay a substantial portion of the Company's outstanding indebtedness, which consists of (i) approximately $4.0 million of subordinated debt due in 1998 or 30 days after the completion of this offering, which bears interest at 8.0% per annum, (ii) $250,000 of indebtedness incurred in connection with the acquisition of Dimension Solutions, Inc. ("Dimension Solutions"), which is due in 1999 and bears interest at the prime rate plus 2.5%, and (iii) $1.9 million of the $3.1 million of indebtedness outstanding at August 14, 1997 under the Company's line of credit, which expires April 1998 and bears interest at the prime rate plus 1%. See "Certain Transactions" and Note 3 of Notes to the Consolidated Financial Statements -- ProBusiness Services, Inc. The remainder of the net proceeds to the Company of this offering, approximately $12.7 million, will be used for general corporate purposes, including capital expenditures and working capital. The Company also may use a portion of the net proceeds to pay up to $4.5 million of the BeneSphere contingent purchase price, to the extent certain financial conditions are met by BeneSphere. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 of Notes to the Consolidated Financial Statements -- ProBusiness Services, Inc. The Company also may use a portion of the net proceeds for the acquisition of companies, technology or services that complement the business of the Company, however, no such transactions currently are planned or being negotiated. The amounts actually expended may vary depending upon numerous factors. Pending the foregoing uses, the Company intends to invest the net proceeds from this offering in investment-grade, short-term, interest-bearing securities, money market funds or similar short-term investments. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain its earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's working capital line of credit agreement prohibits the payment of cash dividends without the lender's prior approval. 15 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1997 on an actual basis and on a pro forma as adjusted basis to give effect to (i) the conversion of all outstanding shares of Preferred Stock into Common Stock automatically upon the completion of this offering and (ii) the sale and issuance of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) and receipt and application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be reviewed in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1997 ------------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt and notes payable to stockholders, less current portion(1)........................................................ $ 8,917 $ 2,858 Capital lease obligations, less current portion(1).................. 1,898 1,898 Stockholders' equity: Preferred Stock, $.01 par value; 6,000,000 shares authorized, 3,228,034 shares issued and outstanding, actual; $.001 par value; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted............................. 33 -- Common Stock, $.01 par value; 20,000,000 shares authorized, 1,530,277 shares issued and outstanding, actual; $.001 par value; 60,000,000 shares authorized, 10,147,301 shares issued and outstanding, pro forma as adjusted(2)...................... 15 10 Additional paid-in capital.......................................... 23,861 42,774 Accumulated deficit................................................. (18,952) (19,043) Notes receivable from stockholders.................................. (1,088) (1,088) -------- -------- Total stockholders' equity.............................. 3,869 22,653 -------- -------- Total capitalization............................... $ 14,684 $ 27,409 ======== ========
- --------------- (1) See Notes 3 and 4 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. (2) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to outstanding options; (ii) 171,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan and; (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. Also excludes a warrant issued after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock and 249,250 shares of Common Stock issuable upon exercise of options granted after June 30, 1997 with an exercise price of $9.00 per share. See "Management -- Stock Plans," "Description of Capital Stock -- Warrants" and Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. 16 18 DILUTION The pro forma net tangible book value (deficit) the Company as of June 30, 1997 was approximately $(540,000) or $(0.07) per share of Common Stock. Pro forma net tangible book value per share represents the amount of the Company's total net tangible assets less total liabilities, divided by the pro forma number of shares of Common Stock issued and outstanding at that date, after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock automatically upon the completion of this offering. Net tangible book value dilution per share to new stockholders represents the difference between the amount paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after the completion of this offering. After giving effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of June 30, 1997, would have been approximately $18.3 million or $1.81 per share. This represents an immediate increase in net tangible book value of $1.88 per share to existing stockholders and an immediate dilution of $9.19 per share to new stockholders purchasing Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share...................... $11.00 Pro forma net tangible book value (deficit) per share at June 30, 1997............................................................ $(0.07) Increase in pro forma net tangible book value per share attributable to new stockholders................................ 1.88 ------ Pro forma net tangible book value per share after the offering..... 1.81 ------ Dilution per share to new stockholders............................... $ 9.19 ======
The following table summarizes, on a pro forma basis as of June 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by purchasers of the shares offered hereby, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, at an assumed initial public offering price of $11.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------ ----------- ------ --------- Existing stockholders....................... 8,147,301 80.3% $23,388,000 51.5% $ 2.87 New stockholders............................ 2,000,000 19.7 22,000,000 48.5 11.00 ---------- ------ ----------- Total............................. 10,147,301 100.0% $45,388,000 100.0% ========== ====== =========== ======
The foregoing assumes no exercise of options to purchase Common Stock after June 30, 1997. Excludes, as of June 30, 1997 (i) 875,776 shares of Common Stock subject to outstanding options; (ii) 171,892 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan; and (iv) 500,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan. Also excludes a warrant issued after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock and 249,250 shares of Common Stock issuable upon exercise of options granted after June 30, 1997 with an exercise price of $9.00 per share. See "Management -- Stock Plans," "Description of Capital Stock -- Warrants" and Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. 17 19 SELECTED FINANCIAL DATA The following selected statements of operations data for the years ended June 30, 1995, 1996, and 1997 and the balance sheet data at June 30, 1996 and 1997 are derived from the consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The statement of operations data for the year ended June 30, 1994 and the balance sheet data at June 30, 1994 and 1995 are derived from consolidated financial statements of the Company that have been audited by Ernst & Young LLP that are not included in this Prospectus. The statement of operations data for the year ended June 30, 1993 and the balance sheet data at June 30, 1993 are derived from unaudited consolidated financial statements not included in this Prospectus. The pro forma statement of operations data for the year ended June 30, 1997 has been derived from selected unaudited pro forma condensed consolidated financial information which is included elsewhere in this Prospectus. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
YEAR ENDED JUNE 30, ------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997(1) ------- ------- ------ ------- ------- -------- (in thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Revenue............................................ $ 1,864 $ 4,069 $7,095 $13,863 $27,374 $29,030 Operating expenses: Cost of providing services....................... 1,117 1,629 2,703 6,435 13,659 14,541 General and administrative expenses.............. 1,023 1,202 1,304 2,054 4,282 5,719 Research and development expenses................ 787 1,202 1,038 1,257 2,841 2,841 Client acquisition costs......................... 701 1,467 2,943 5,388 11,706 12,514 Acquisition of in-process technology............. -- -- -- 711 -- -- ------- ------- ------- ------ ------- ------- Total operating expenses....................... 3,628 5,500 7,988 15,845 32,488 35,615 ------- ------- ------- ------ ------- ------- Loss from operations............................... (1,764) (1,431) (893) (1,982) (5,114) (6,585) Interest expense................................... -- (46) (86) (473) (1,190) (1,212) Other income....................................... 4 -- -- 69 59 59 ------- ------- ------- ------ ------- ------- Net loss........................................... $(1,760) $(1,477) $ (979) $(2,386) $(6,245) $(7,738) ======= ======= ======= ====== ======= ======= Pro forma net loss per share(2).................... $ (0.74) $ (0.92) ======= ======= Shares used in computing pro forma net loss per share(2)......................................... 8,451 8,451 ======= =======
JUNE 30, ------------------------------------------------------ 1993 1994 1995 1996 1997 ------ ------ ------ -------- -------- (in thousands) BALANCE SHEET DATA: Cash and cash equivalents........................... $ 277 $ 114 $ 852 $ 4,041 $ 5,047 Payroll tax funds invested.......................... -- -- -- 106,339 177,626 Working capital (deficiency)........................ 255 (119) 69 3,022 534 Total assets........................................ 1,213 2,019 4,134 117,228 200,435 Payroll tax funds collected but unremitted.......... -- -- -- 106,339 177,626 Long-term debt and note payable to stockholder, less current portion................................... 22 394 1,016 8,072 8,917 Capital lease obligations, less current portion..... 83 174 168 253 1,898 Total stockholders' equity (deficit)................ 832 705 1,366 (136) 3,869 PRO FORMA AS ADJUSTED 1997(1)(3) ---------------------- BALANCE SHEET DATA: Cash and cash equivalents........................... $ 17,772 Payroll tax funds invested.......................... 177,626 Working capital (deficiency)........................ 13,259 Total assets........................................ 213,160 Payroll tax funds collected but unremitted.......... 177,626 Long-term debt and note payable to stockholder, less current portion................................... 2,858 Capital lease obligations, less current portion..... 1,898 Total stockholders' equity (deficit)................ 22,653
- --------------- (1) The pro forma statement of operations for the year ended June 30, 1997 has been prepared as if the acquisition of BeneSphere had occurred as of July 1, 1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial Information. (2) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed Consolidated Financial Information for explanations of the determination of the pro forma shares used in computing pro forma net loss per share. (3) Adjusted to reflect the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following discussion also should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus. OVERVIEW ProBusiness Services, Inc. is a leading provider of employee administrative services for large employers. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. Since 1994, the Company has experienced significant growth of its revenue, client base and average client size. Revenue increased from $4.1 million in fiscal 1994 to $27.4 million in fiscal 1997. From June 30, 1994 to June 30, 1997, the client base for payroll processing services increased from 200 to 425 clients, while the average size of the Company's payroll clients increased from approximately 400 employees to approximately 900 employees. The number of checks that the Company processed for its payroll clients increased from 566,000 to 2.9 million for the quarters ended June 30, 1996 and 1997, respectively. As of June 30, 1997, the Company serviced approximately 1,100 clients. The Company's revenue growth is primarily due to continued growth in its client base, the introduction of its payroll tax service in fiscal 1996, an increase in the average size of its clients, the introduction of new features and other services and a high retention rate of existing clients (approximately 92% for fiscal year 1997). The Company does not anticipate it will sustain this rate of growth in the future. The establishment of new client relationships involves lengthy and extensive sales and implementation processes. The sales process generally takes three to nine months or longer, and the implementation process generally takes three to six months or longer. In connection with the acquisition of each new client, the Company incurs substantial client acquisition costs, which consist primarily of sales and implementation expenses and, to a lesser extent, marketing expenses. In addition, the Company's revenue is subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters primarily due to new clients beginning services in January (the beginning of the tax year and the Company's third fiscal quarter) and higher interest income earned on tax funds. Further, the Company's operating expenses are typically higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company expects this pattern to continue. The Company has experienced significant operating losses since its inception and expects to incur significant operating losses in the future due to continued client acquisition costs, investments in research and development and costs associated with expanding its sales efforts and operations to new geographic regions. As of June 30, 1997, the Company had an accumulated deficit of approximately $19.0 million. There can be no assurance that the Company will achieve or sustain profitability in the future. The Company has made acquisitions of businesses in the past and intends to pursue acquisitions in the future. In connection with acquisitions, the Company has in the past incurred and will likely incur in the future costs associated with adding personnel, integrating technology, increasing overhead to support the acquired businesses, acquiring in-process technology and amortizing expenses related to intangible assets. As a result, such acquisitions have had and any future acquisition could have an adverse effect on the Company's results of operations. 19 21 In January 1997, the Company acquired all of the outstanding capital stock of BeneSphere for an initial purchase price of $3.1 million, with up to an additional $4.5 million to be paid in quarterly installments, beginning April 1998 through January 2000, if certain financial conditions are met. In connection with the acquisition of BeneSphere, the Company recorded $2.3 million of goodwill, which will be amortized ratably over 20 years and could be increased by up to an additional $4.5 million if the purchase price increases. In May 1996, the Company acquired substantially all of the business and assets of Dimension Solutions for a purchase price of $1.3 million. In connection with the acquisition of Dimension Solutions, the Company recorded a one-time charge of $711,000 in fiscal 1996 relating to the purchase of in-process technology. The Company derives its revenue from fees charged to clients for services and income earned from investing payroll tax funds. The Company typically invests payroll tax funds collected from clients and their employees in federally insured or investment-grade securities, which are subject to credit risks and interest rate fluctuations. See "Risk Factors -- Investment Risks." The Company generally recognizes revenue from services when such services are performed and recognizes income from investments when earned. Payroll and payroll tax clients generally are subject to contracts with an initial term of 36 months. Interest income earned on collected, but unremitted payroll tax funds amounted to $5.9 million, $1.9 million and none, for fiscal years 1997, 1996 and 1995, respectively. Benefits administration and human resources software clients generally are subject to contracts with an initial term of 12 months. The Company's contracts generally do not have significant penalties for cancellation. In fiscal 1997, no client accounted for more than 4% of the Company's revenue. The Company's cost of providing services consists primarily of ongoing account management, tax and benefits administration operations and production costs and, to a lesser extent, amortization of capitalized software development costs. The Company capitalizes software development costs after technological feasibility of the software relating to a service has been established and amortizes such costs using the greater of (i) the straight-line basis over the estimated useful life of the software, which is generally 36 months, or (ii) the ratio of current revenue to the total of current revenue and anticipated future revenue over the life of the related product. General and administrative expenses consist primarily of personnel costs, professional fees and other overhead costs for finance and corporate services. Research and development expenses consist primarily of personnel costs. Client acquisition costs consist of all sales and implementation expenses and, to a lesser extent marketing expenses. As of June 30, 1997, the Company had federal and state net operating loss carryforwards of approximately $14.0 million and $3.9 million, respectively. The net operating loss carryforwards will expire at various dates beginning in the tax year 1998 through 2012, if not utilized. The Company's utilization of the net operating loss carryforwards may be subject to annual limitations under the Internal Revenue Code as a result of changes in the Company's ownership, which limitations could significantly restrict or partially eliminate their utilization. No income tax expense has been recorded since the Company's inception. 20 22 RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of revenue for the periods indicated:
YEAR ENDED JUNE 30, ----------------------------- 1995 1996 1997 ----- ----- ----- STATEMENTS OF OPERATIONS DATA: Revenue......................................................... 100.0% 100.0% 100.0% ----- ----- ----- Operating expenses: Cost of providing services.................................... 38.1 46.4 49.9 General and administrative expenses........................... 18.4 14.8 15.6 Research and development expenses............................. 14.6 9.1 10.4 Client acquisition costs...................................... 41.5 38.9 42.8 Acquisition of in-process technology.......................... -- 5.1 0.0 ----- ----- ----- Total operating expenses................................... 112.6 114.3 118.7 ----- ----- ----- Loss from operations............................................ (12.6) (14.3) (18.7) Interest expense................................................ (1.2) (3.4) (4.3) Other income.................................................... -- 0.5 0.2 ----- ----- ----- Net loss........................................................ (13.8)% (17.2)% (22.8)% ===== ===== =====
YEARS ENDED JUNE 30, 1997 AND 1996 Revenue. Revenue increased 97.5% to $27.4 million in fiscal 1997 from $13.9 million in fiscal 1996, primarily due to an increase in the number and average size of the Company's payroll clients, the introduction of the Company's payroll tax service in January 1996 and, to a lesser extent, the introduction of the Company's benefits administration services in January 1997. Interest income earned on payroll tax funds invested was $5.9 million and $1.9 million for fiscal 1997 and 1996, respectively. Cost of Providing Services. Cost of providing services increased 112.3% to $13.7 million in fiscal 1997 from $6.4 million in fiscal 1996 and increased as a percentage of revenue to 49.9% from 46.4%. The increases were primarily due to hiring additional managers for payroll account management, operations expense related to the Company's benefits administration services and, to a lesser extent, production expenses related to an increase in the number of payroll clients and increased personnel expenses related to the Company's payroll tax service, which was introduced in January 1996. General and Administrative Expenses. General and administrative expenses increased 108.5% to $4.3 million in fiscal 1997 from $2.1 million in fiscal 1996 and increased as a percentage of revenue to 15.6% from 14.8%. The increases were primarily a result of the hiring of additional management and administrative personnel to support the Company's growth. Research and Development Expenses. Research and development expenses increased 126.0% to $2.8 million in fiscal 1997 from $1.3 million in fiscal 1996 and increased as a percentage of revenue to 10.4% from 9.1%. The increases were primarily a result of additional personnel and equipment to develop enhancements and new features to the Company's existing services. Capitalized software development costs were $1.4 million in fiscal 1997 and $645,000 in fiscal 1996. Client Acquisition Costs. Client acquisition costs increased 117.3% to $11.7 million in fiscal 1997 from $5.4 million in fiscal 1996 and increased as a percentage of revenue to 42.8% from 38.9%. The increases were primarily due to expenses resulting from the establishment of a separate sales force to market the Company's payroll tax service on a stand-alone basis, increased expenses resulting from the expansion of the Company's payroll sales force and, to a lesser extent, implementation expenses related to an increased number of new clients that started services in January 1997. 21 23 Interest Expense. Interest expense increased 151.6% to $1.2 million in fiscal 1997 from $473,000 in fiscal 1996, primarily due to increased borrowing under the Company's line of credit, the issuance of promissory notes to certain investors in October and December 1995 and an increased amount of capitalized equipment leases. YEARS ENDED JUNE 30, 1996 AND 1995 Revenue. Revenue increased 95.4% to $13.9 million in fiscal 1996 from $7.1 million in fiscal 1995, primarily due to an increase in the number and average size of the Company's payroll clients and the introduction of the Company's payroll tax service in January 1996. Interest income earned on payroll tax funds invested amounted to $1.9 million in fiscal 1996. No interest income was earned in fiscal 1995. Cost of Providing Services. Cost of providing services increased 138.1% to $6.4 million in fiscal 1996 from $2.7 million in fiscal 1995 and increased as a percentage of revenue to 46.4% from 38.1%. The increases were primarily due to hiring personnel for the introduction of the Company's payroll tax service in January 1996, hiring additional managers for payroll account management and, to a lesser extent, hiring account management personnel for the Company's human resources software. General and Administrative Expenses. General and administrative expenses increased 57.5% to $2.1 million in fiscal 1996 from $1.3 million in fiscal 1995, but decreased as a percentage of revenue to 14.8% from 18.4%. The increase in absolute dollars resulted primarily from the hiring of additional management and administrative personnel to support the Company's growth. Research and Development Expenses. Research and development expenses increased 21.1% to $1.3 million in fiscal 1996 from $1.0 million in fiscal 1995, but decreased as a percentage of revenue to 9.1% from 14.6%. Research and development expenses decreased as a percentage of revenue due in part to higher revenue and an increase in the amount of expenses that were capitalized in fiscal 1996. Capitalized software development costs were $645,000 in fiscal 1996 and $137,000 in fiscal 1995. Client Acquisition Costs. Client acquisition costs increased 83.1% to $5.4 million in fiscal 1996 from $2.9 million in fiscal 1995 but decreased as a percentage of revenue to 38.9% from 41.5%. The increase in absolute dollars was primarily due to increased expenses resulting from the expansion of the Company's payroll sales force and, to a lesser extent, implementation expenses relating to an increased number of new clients. Acquisition of In-Process Technology. In fiscal 1996, the Company recorded a one-time charge of $711,000 relating to the purchase of in-process technology in connection with the Company's acquisition of Dimension Solutions in May 1996. Interest Expense. Interest expense increased to $473,000 in fiscal 1996 from $86,000 in fiscal 1995, primarily due to increased borrowings under the Company's line of credit and the issuance of promissory notes to certain investors in October and December 1995. 22 24 QUARTERLY RESULTS The following table sets forth selected unaudited quarterly financial information for each of the seven quarters in the period ended June 30, 1997, as well as such data expressed as a percentage of the Company's revenue for the periods presented. This information has been derived from unaudited statements of operations data that, in the opinion of management, are stated on a basis consistent with the audited financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The Company's results of operations for any quarter are not necessarily indicative of the results to be expected in any future period.
QUARTER ENDED ---------------------------------------------------------------------- 1995 1996 1997 ------- --------------------------------------- ------------------ DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 ------- -------- ------- -------- ------- -------- ------- (in thousands) Revenue....................... $2,676 $4,056 $ 4,701 $ 4,675 $ 5,524 $ 8,427 $ 8,748 Operating expenses: Cost of providing services................. 1,253 1,955 2,202 2,288 2,950 3,907 4,514 General and administrative expenses................. 409 533 720 622 869 1,441 1,350 Research and development expenses................. 174 421 538 625 683 732 801 Client acquisition costs.... 1,100 1,488 1,832 2,215 2,413 3,664 3,414 Acquisition of in-process technology............... -- -- 711 -- -- -- -- ------ ------ ------- ------- ------- ------- ------- Total operating expenses...... 2,936 4,397 6,003 5,750 6,915 9,744 10,079 ------ ------ ------- ------- ------- ------- ------- Loss from operations.......... (260) (341) (1,302) (1,075) (1,391) (1,317) (1,331) Interest expense.............. (88) (159) (175) (215) (305) (380) (290) Other income.................. 22 38 9 11 1 2 45 ------ ------ ------- ------- ------- ------- ------- Net loss...................... $ (326) $ (462) $(1,468) $ (1,279) $(1,695) $(1,695) $(1,576) ====== ====== ======= ======= ======= ======= =======
QUARTER ENDED ---------------------------------------------------------------------- 1995 1996 1997 ------- --------------------------------------- ------------------ DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 ------- -------- ------- -------- ------- -------- ------- (IN THOUSANDS) Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Cost of providing services... 46.8 48.2 46.8 48.9 53.4 46.4 51.6 General and administrative expenses.................. 15.3 13.1 15.3 13.3 15.7 17.1 15.4 Research and development expenses.................. 6.5 10.4 11.5 13.4 12.4 8.6 9.2 Client acquisition costs..... 41.1 36.7 39.0 47.4 43.7 43.5 39.0 Acquisition of in-process technology................ -- -- 15.1 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- Total operating expenses....... 109.7 108.4 127.7 123.0 125.2 115.6 115.2 ----- ----- ----- ----- ----- ----- ----- Loss from operations........... (9.7) (8.4) (27.7) (23.0) (25.2) (15.6) (15.2) Interest expense............... (3.3) (3.9) (3.7) (4.6) (5.5) (4.5) (3.3) Other income................... 0.8 0.9 0.2 0.2 0.0 0.0 0.5 ----- ----- ----- ----- ----- ----- ----- Net loss....................... (12.2)% (11.4)% (31.2)% (27.4)% (30.7)% (20.1)% (18.0)% ===== ===== ===== ===== ===== ===== =====
23 25 Revenue has increased during the last seven quarters primarily as a result of the increase in the Company's payroll clients, the introduction of the Company's payroll tax service in January 1996 and, to a lesser extent, the introduction of the Company's human resources software in May 1996. The increase in the Company's revenue for the third fiscal quarter in 1997 also was partially attributable to the introduction of the Company's benefits administration services in January 1997. The Company's revenue is subject to significant seasonal fluctuations, with the largest percentage of annual revenue being realized in the third and fourth fiscal quarters primarily due to new clients beginning services at the beginning of the tax year in January and higher interest income earned on tax funds. The Company's operating expenses typically are higher as a percentage of revenue in the first and second fiscal quarters as the Company increases personnel to acquire new clients and to implement and provide services to such new clients, a large percentage of which begin services in January. The Company expects this pattern to continue. Cost of providing services increased in the second and fourth quarters of fiscal 1997 primarily due to increases in account management personnel and production costs related to the Company's expanded client base. In the third fiscal quarter of 1997, the increase in general and administrative expenses was partially due to the addition of management infrastructure related to the acquisition of BeneSphere in January 1997, and the increase in client acquisition costs in absolute dollars was primarily attributable to higher sales commissions and the introduction of the Company's benefits administration services. The Company's quarterly operating results have in the past and will in the future vary significantly depending on a variety of factors, including the number and size of new clients starting services, the decision of one or more clients to delay or cancel implementation or ongoing services, interest rates, seasonality, the ability of the Company to design, develop and introduce new services and features for existing services on a timely basis, transition costs to new technologies, expenses incurred for geographic expansion, risks associated with payroll tax and benefits administration services, price competition, a reduction in the number of employees of its clients, and general economic factors. Revenue from new clients represents a significant portion of quarterly revenue in the third and fourth fiscal quarters. A substantial majority of the Company's operating expenses, particularly personnel and related costs, depreciation and rent, is relatively fixed in advance of any particular quarter. The Company's agreements with its clients generally do not have significant penalties for cancellation. As a result, any decision by a client to delay or cancel implementation of the Company's services or the Company's underutilization of personnel may cause significant variations in operating results in a particular quarter and could result in losses for such quarter. As the Company secures larger clients, the time required for implementing the Company's services increases, which could contribute to larger fluctuations in revenue. Interest income earned from investing payroll tax funds, which is a significant portion of the Company's revenue, is vulnerable to fluctuations in interest rates. In addition, the Company's business may be affected by shifts in the general health of the economy, client staff reductions, strikes, acquisitions of its client by other companies and other downturns. There can be no assurance that the Company's future revenue and results of operations will not vary substantially. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through a combination of private sales of equity securities, private debt and bank borrowings, and to a lesser extent, capital equipment leases. As of June 30, 1997, the Company had raised approximately $23.4 million in private sales of equity securities. In October and December 1995, the Company issued an aggregate principal amount of $4.0 million in subordinated promissory notes with an interest rate of 8% per annum due on the earlier of three years from the date of issuance of the note or 30 days after completion of this offering. In March 1997, General Atlantic purchased $10.0 million of Preferred Stock of the Company. In August 1997, the Company entered into an interest rate swap agreement which has a two-year term and provides for a fixed rate of 5.9%. See "Risk Factors -- Investment Risks." At June 30, 1997, the Company had approximately $5.0 million of cash and cash equivalents and a $10.0 million secured revolving line of credit, which expires April 1998. At June 30, 1997, the Company 24 26 had outstanding borrowings of approximately $4.8 million, leaving an availability of $5.2 million under the line of credit, based on borrowing restrictions, and had borrowed $1.9 million under a secured equipment lease. See Note 3 of Notes to Consolidated Financial Statements -- ProBusiness Services, Inc. The Company intends to repay a substantial portion of such outstanding debt from the net proceeds of this offering. Net cash used in operating activities for fiscal 1997, 1996 and 1995 was $4.1 million, $202,000 and $444,000, respectively. The increase in cash used in operating activities in fiscal 1997 compared to fiscal 1996 was primarily the result of net losses and, to a lesser extent, increases in accounts receivable and other assets, partially offset by depreciation and amortization and an increase in accrued liabilities. Net cash used in investing activities was $4.7 million, $3.3 million and $1.4 million for fiscal 1997, 1996 and 1995, respectively. The increases in net cash used in investing activities during these periods resulted primarily from capital expenditures for equipment, furniture and fixtures to support the Company's increased personnel. In addition, the Company capitalized software development costs of $1.4 million, $645,000 and $137,000 in fiscal 1997, 1996 and 1995, respectively. The Company expects to make additional capital expenditures for furniture, equipment and fixtures in connection with the move of its corporate headquarters and the recent establishment of an additional processing center, both planned to occur in late 1997. In addition, the Company anticipates that it will continue to expend funds for software development in the future. Net cash provided by financing activities was $9.8 million, $6.7 million and $2.6 million for the fiscal years ended 1997, 1996 and 1995, respectively. Net cash provided by financing activities for fiscal 1997 related primarily to $9.9 million of net proceeds from the issuance of preferred stock in March 1997. Net cash provided by financing activities for fiscal 1996 related primarily to borrowings under the Company's credit facilities and the issuance of $4.0 million of subordinated debt in October and December 1995. Financing activities provided cash for fiscal 1995 primarily from the issuance of equity securities and borrowings under credit agreements. The Company believes that the net proceeds from this offering, together with existing cash balances and anticipated cash flows from operations, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. The Company may also utilize cash to acquire or invest in complementary businesses or to obtain the right to use complementary technologies, although the Company does not have any pending plans to do so. The Company may sell additional equity or debt securities or obtain additional credit facilities. 25 27 BUSINESS The following Business section contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW ProBusiness is a leading provider of employee administrative services for large employers, typically with over 250 employees. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. As of June 30, 1997, the Company provided services to approximately 1,100 clients and provided payroll processing services to 425 clients with an aggregate of approximately 380,000 active employees and an average of approximately 900 employees. For the quarter ended June 30, 1997, the Company processed 2.9 million checks for the Company's payroll clients. The Company differentiates itself from its competitors through its proprietary technology, high quality, responsive and professional client service and focus on the needs of large employers. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team of specialists led by a personal account manager who proactively manages each client's account and marshals the resources of the team to meet the client's specific needs. ProBusiness maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company believes that its low client-to-account manager ratio and its focus on client service are key factors in enabling the Company to achieve a high payroll client retention rate, which was approximately 92% for fiscal year 1997. INDUSTRY BACKGROUND Many large businesses have found that outsourcing non-core functions reduces costs, improves service, quality and efficiency, allows personnel to focus on core competencies and enhances productivity through access to advanced technologies. As a result, the demand for outsourcing employee administrative services has grown significantly and is expected to continue to grow over the next several years. According to a third-party industry study, it is estimated that third-party payroll and payroll tax services alone generated approximately $3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in revenue in 2000. Payroll processing and benefits administration lend themselves to outsourcing because both are complex and costly for employers to conduct internally. Payroll processing involves tracking employee data, calculating payroll data and producing paychecks and direct deposits, remitting and filing payroll taxes and generating management reports. Benefits administration consists of many human resources functions, such as the enrollment and processing of flexible benefits plans and the administration and management of COBRA programs. In recent years, payroll processing and benefits administration have increased in complexity due to continual changes in regulations and increasingly sophisticated employee benefit plans. For example, large employers must have the ability to calculate taxes for multiple federal, state and local government agencies, collect garnishments based on different state laws and make numerous agency filings. In addition, payroll and benefits administration systems must keep pace with rapidly evolving business operations as companies increase in size, expand geographically or add new operations. Finally, these systems must be flexible and scalable to integrate with increasingly advanced computer systems as companies adopt new technologies. 26 28 Despite the complexities of payroll processing and the advantages provided by outsourcing, most large employers continue to process payroll in-house because they believe their unique business needs require the control and integration of an in-house system. These in-house payroll systems generally run on expensive mainframe or minicomputer systems and require customization and significant ongoing technical support. In addition, such systems typically are operated and maintained by large payroll departments, which are supported by dedicated programmers, systems analysts and production personnel. As their payroll needs change, employers that process their payroll in-house must continue to make significant investments in personnel, hardware and software to maintain and upgrade their payroll systems. Large employers that have outsourced their payroll processing needs have looked primarily to traditional payroll service providers, which process payroll data received from clients utilizing mainframe computers located at multiple regional data centers. This approach utilizes two systems, the client's and the service provider's, which have different hardware, operating systems, software applications and data configurations. Maintaining and synchronizing two separate systems makes it difficult for these service providers to update code, add features and functionality and provide clients with customization and integration with their other systems. In addition, the complexities presented by operating two separate systems often impede the timely identification and resolution of client payroll processing problems. Many large employers that choose to outsource their employee administration functions require a payroll provider that offers a high level of flexibility and client service. In addition, these employers prefer to have a single service provider of comprehensive and integrated services for their payroll and other employee administrative needs. Given the inherent limitations of the technology used by traditional payroll processing providers, such providers are unable to deliver a highly responsive and flexible solution. As a result, the Company believes a significant opportunity exists for service providers that can furnish large employers with high quality client service and a payroll system that offers the cost-effective benefits of outsourcing, while providing the same level of control, customization and integration as an in-house system. THE PROBUSINESS SOLUTION The Company's solution provides large employers with the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, system control, customization and integration of an in-house system. The Company combines its PC-based technology and personalized client service to provide a broad range of service offerings, including payroll processing, payroll tax filing, human resources software and benefits administration. Technology. The Company's proprietary PC-based technology for its payroll services provides a platform for delivering high levels of service together with the flexibility and control of an in-house system. The Company creates a mirrored version of each client's system, which allows the Company's account managers to access client information using the same data, programs and screens as the client uses on its PC network. This enables the Company to quickly and easily identify client problems or modify application programs in response to client requests. The client maintains control by having direct access to all calculation programs and all historical and transactional data, which also provides the client with flexibility to respond quickly to employee and third-party inquiries, to fully analyze payroll data and to generate management reports. The Company's system architecture is designed to distribute payroll processing tasks to multiple low cost, high performance PCs, which enables the Company to scale its system continually to handle increasing transaction volumes. The Company's PC-based application software supports the development of customized solutions for each client that can be easily upgraded and integrated with a client's other systems. In addition, multiple networked PCs facilitate exception processing and rapid response that large employers require. 27 29 Client Service. The Company delivers high quality, responsive and professional service by establishing a business partnership with each client. The Company assigns each client a personal account manager, who proactively manages the account and marshals the resources of a strategic team of specialists to meet the client's specific needs. The Company maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company supports each client with functional and regulatory expertise in payroll, payroll tax and employee benefits, as well as specialists in pay data interfaces, general ledger interfaces, paid-time-off, report writing and systems integration. The Company uses its systems integration expertise to facilitate the integration of its payroll processing system with the client's existing hardware and software. To support and provide high quality service, the Company focuses on hiring experienced accounting and technical professionals from the payroll, accounting, human resources and financial services industries. The Company promotes its client service culture by instilling a sense of ownership in each employee through incentive compensation and recognition of achievements based on providing high quality service to clients. Cost Effectiveness. The Company believes that it provides its clients with a more cost-effective payroll solution than most other third-party providers. During the implementation process, the Company reengineers the client's payroll processes and designs a payroll system that integrates with the client's other systems. Once implementation is completed, integration between payroll and other systems is improved, eliminating manual tasks and allowing a client to redeploy specialized personnel to other functions within the organization. STRATEGY The Company's objective is to be the premier provider of employee administrative services for large employers. The Company's strategy is to continue providing clients with high levels of personal service and developing a comprehensive and fully integrated suite of employee administrative services. The Company also intends to expand its client base and provide additional services to its existing clients. The Company's ongoing strategy includes the following key factors: - PROVIDE PREMIER SERVICE. The Company is committed to providing high levels of personal service and proactive account management, including maintaining a low client-to-account manager ratio. The Company believes that its ability to consistently deliver high quality service is a competitive advantage in the large employer market and is a key factor in enabling the Company to achieve a high payroll client retention rate, which was approximately 92% for fiscal year 1997. - EXPAND CLIENT BASE. The Company intends to continue adding to its client base by expanding its direct sales force and locating sales representatives in major metropolitan areas throughout the United States, as well as increasing its penetration in existing markets and pursuing strategic alliances and acquisitions. - PROVIDE A COMPREHENSIVE AND INTEGRATED SOLUTION. The Company intends to continue investing substantial resources to further develop a comprehensive and fully integrated suite of employee administrative services and extend the functionality of its existing proprietary technology. The Company's goal is to create a single data processing system that it can use as a platform to offer a full range of services to clients, thereby strengthening client relationships and improving efficiencies for both the Company and its clients. - INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that there is a significant opportunity for it to cross-market its services to its existing client base, as few of its current clients use all of the Company's services. In addition, the Company intends to leverage its relationships with existing clients to market new services and features. - PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. The Company intends to pursue acquisitions and alliances to increase the range of services and service features it offers, add industry and technical expertise, and acquire complementary technology. For example, during fiscal 1996, the Company introduced its human resources software and during fiscal 1997, its 28 30 benefits administration services through the acquisitions of Dimension Solutions and BeneSphere, respectively. - ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES. The Company seeks to continue providing its clients with a high level of service by hiring professionals who are experienced in their fields. Service personnel are recruited from payroll, accounting, human resources and financial services industries, and many have professional experience as accounting managers or hold Certified Public Accountant or Certified Payroll Professional accreditations. The Company's employees receive incentive compensation and recognition of achievements based on providing high quality service to clients. The Company's strategy involves substantial risks and uncertainties. There can be no assurance that the Company will be successful in implementing its strategy or that its strategy, even if implemented, will lead to successful achievement of the Company's objectives. If the Company is unable to implement its strategy effectively, the Company's business, financial condition and results of operations will be materially adversely affected. See "Risk Factors." SERVICE OFFERINGS The Company provides a broad range of employee administrative services, including payroll processing, payroll tax filing, benefits administration and human resources software. The Company intends to expand its service offerings through future acquisitions and to develop enhancements to its existing services internally. Payroll Processing. The Company processes time and attendance data to calculate and produce employee paychecks, direct deposits and reports for its clients. The Company delivers the paychecks and reports to clients within 24 to 48 hours of the Company's receipt of the data electronically submitted from the client. The Company's system is highly configurable to meet the specialized needs of each client yet maintains the ability to provide high volume processing. The system integrates easily with the client's general ledger, human resources and time and attendance systems. In addition, the Company offers many sophisticated features, including the automatic enrollment and tracking of paid time off, proration of compensation for new hires and integrated garnishment processing. Payroll Tax Filing. The Company collects contributed employer and employee tax funds from clients, deposits such funds with tax authorities when due, files all tax returns and reconciles the client's account. The Company will also represent the client before tax authorities in any dispute or inquiry. The Company introduced its payroll tax service in January 1996 to existing payroll clients and to corporations who process their payroll in-house. Benefits Administration. In January 1997, the Company introduced its benefits administration services through the acquisition of BeneSphere. Such services include flexible benefits enrollment and processing, COBRA administration, consolidated billing and eligibility tracking and premium payment services. Employees can enroll in and choose their flexible spending benefits through traditional paper-based forms or through World Wide Web-accessible enrollment sites using the Company's recently introduced Enrollnet(TM) service. Human Resources Software. In May 1996, the Company introduced its human resources software through the acquisition of Dimension Solutions. The Company's human resources software tracks and reports general employee information, including compensation, benefits, skills, performance, training, job titles and medical history. For clients that also use the Company's payroll service, the human resources data can be transferred to the payroll services system, thus eliminating the need for duplicate data entry. CLIENT SERVICE The Company believes that its focus and dedication to providing high levels of client service is a competitive advantage in the large employer market. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll system and process and implementing a cost-effective solution. The Company maintains an 29 31 ongoing relationship with each client using a strategic team that includes a sales representative, a sales analyst, an implementation manager, an account manager and numerous functional, regulatory and technical support specialists. Sales. The Company believes that client service begins with the sales process. A sales representative and a sales analyst work together to assess a potential client's payroll processing needs. Based on this assessment, the sales team then identifies opportunities to reengineer the prospective client's payroll processes and to design a payroll solution that integrates effectively with its other systems. The payroll sales cycle typically ranges from three to nine months or longer. Implementation. Upon engagement by a client, the Company assigns a team of technical support specialists, headed by an implementation manager who leads the transition from the client's former payroll system to the Company's system. The implementation manager works with the client, the sales analyst and technical support specialists to integrate the Company's payroll system with the client's other systems and to customize the system to improve the client's payroll processes. The Company uses its systems integration expertise to facilitate the integration of its payroll processing system with the client's existing hardware and software. The implementation process generally takes three to six months or longer, depending on the complexity of the client's payroll processes and systems and the size of the client. Account Management. An account manager is assigned to each client during the implementation process and serves as the client's day-to-day contact at the Company. The account manager coordinates the efforts of the Company's functional, regulatory and technical support specialists as necessary. The account manager visits each client regularly and establishes an annual business plan with the client that details scheduled payroll events such as open enrollment periods for employee benefits plans or software system changes. This annual business plan allows the Company to provide clients with uninterrupted payroll services during these periods. Account managers use the Company's proprietary CallLog system to record and track all client calls, record client feedback and help ensure that the client's needs are addressed promptly and thoroughly. The Company maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. Support Specialists. The Company supports each client with functional and regulatory specialists in payroll, payroll tax and employee benefits, as well as pay data interfaces, general ledger interfaces, paid-time-off, report writing and system integration. Each of these specialists is available to speak directly with clients as needed, meet with clients onsite or support clients indirectly through the account manager. The Company is committed to continually monitoring the quality of its service through client feedback mechanisms. The Company obtains valuable insights into the needs of its clients through its partnership with each client and from client responses to surveys, which are conducted semi-annually. The Company uses this information to develop new technologies, identify new service offerings, optimize the services provided to existing clients and improve the level of service provided to clients. The Company also uses client feedback as a basis for incentive compensation and recognition of achievements. TECHNOLOGY The Company's proprietary PC-based technology for its payroll services provides a platform for delivering high levels of service together with the flexibility and control of an in-house system. The Company creates a mirrored version of each client's system, which allows the Company's account managers to access client information using the same data, programs and screens as the client uses on its PC network. This enables the Company to quickly and easily identify client problems or modify application programs in response to client requests. The client maintains control by having direct access to all calculation programs and all historical and transactional data, which also provides the client with flexibility to respond quickly to employee and third-party inquiries, to fully analyze payroll data and to generate management reports. 30 32 The Company's system architecture is designed to distribute payroll processing tasks to multiple low cost, high performance PCs, which enables the Company to scale its system continually to handle increasing transaction volumes. The Company's PC-based application software supports the development of customized solutions for each client that can be easily upgraded and integrated with a client's other systems. In addition, multiple networked PCs facilitate exception processing and rapid response that large employers require. CLIENTS The Company targets large companies, typically with over 250 employees, with complex and changing business needs in diverse industries. As of June 30, 1997, the Company provided services to approximately 1,100 clients. Of these clients, 425 were payroll processing clients, with an aggregate of approximately 380,000 active employees and an average of approximately 900 employees. For the quarter ended June 30, 1997, the Company processed 2.9 million payroll checks for the Company's payroll clients. Although the Company is extending its national presence, most of the Company's revenue historically has been derived from clients located in the western United States. For fiscal 1997, no client accounted for more than 4% of the Company's revenue. The Company's agreements with its clients generally do not have significant penalties for cancellation. Set forth below is a representative list of the Company's clients as of July 31, 1997, each of which has over 1,000 employees and from which the Company expects revenue of at least $25,000 in fiscal 1998. TECHNOLOGY 3Com Corporation Advanced Micro Devices, Inc. Airtouch Communications, Inc. Ascend Communications Inc. AST Research, Inc. Atmel Corporation Bay Networks Inc. Cadence Design Systems Inc. Cisco Systems Inc. Dell Computer Corporation Fujitsu, Ltd. Hitachi America Ltd Informix Corporation Integrated Device Technology, Inc. Intuit Inc. KLA Instruments Corporation LSI Logic Corporation Netscape Communications Corp. Novell, Inc. Pacific Scientific Company Quantum Corporation Read-Rite Corporation Siemens Business Communication Systems, Inc. Silicon Graphics, Inc. Silicon Systems, Inc. Solectron Corporation Storage Technology Corporation Sybase, Inc. TCI Cablevision VeriFone, Inc. RETAIL Childrens Discovery Centers of America, Inc. Coach Leatherwear Co., Inc. Dollar General Corporation Esprit de Corp. Michaels Stores, Inc. Natural Wonders, Inc. St. John Knits Inc. Sunglass Hut International, Inc. Williams-Sonoma, Inc. SERVICES/PUBLISHING California Casualty Group CCH Incorporated Clubcorp International First Allmerica Life Insurance Koll Management Services, Inc. North American Title Insurance Company U.S. Computer Services Ziff Davis Publishing Company FOOD PRODUCTS AND SERVICES Bon Appetit Management Company Fleming Companies, Inc. Fresh Choice, Inc. Kellogg USA Inc. OreIda Foods Inc. Pacific Coast Producers Specialty Restaurants Corp. OTHER Abbott Laboratories Allergan, Inc. The Gillette Company Pharmacia & Upjohn, Inc. Raychem Corporation Toyota Motor Corporation Watkins-Johnson Company 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/intranet technology. The information discussed above in "Research and Development" contains forward-looking statements that involve risks and uncertainties. Actual events could differ materially from those anticipated in these forward-looking statements, as a result of certain factors including those discussed in the paragraph below. The technologies in which the Company has invested to date are rapidly evolving and have short life cycles, which requires the Company to anticipate and rapidly adapt to technological changes. In addition, the Company's industry is characterized by increasingly sophisticated and varied needs of clients, frequent new service and feature introductions and emerging industry standards. The Company's future success will depend, in part, on its ability to develop advanced technologies, enhance its existing services with new features, add new services that address the changing needs of its clients, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. If the Company is unable to develop and introduce new services and new features of existing services in a timely or cost-effective manner, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, application software used by the Company may contain defects or failures when introduced or when new versions or enhancements are released. The Company has in the past discovered software defects in certain of its applications, in some cases, only after its systems have been used by clients. There can be no assurance that future defects will not be discovered in existing or new applications or releases. Any such occurrence could have a material adverse effect upon the Company's business, financial condition and results of operations. PROPRIETARY RIGHTS The Company's success is dependent in part upon its proprietary software technology. The Company has no patents, patent applications or registered copyrights. The Company relies on a combination of contract, copyright and trade secret laws to establish and protect its proprietary technology. The Company distributes its services under software license agreements that grant clients licenses to use the Company's services and contain various provisions protecting the Company's ownership and the confidentiality of the underlying technology. The Company generally enters into confidentiality and/or license agreements with its employees and existing and potential clients, and limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation or independent third-party development of the Company's technology. There can be no assurance that the Company's services and technology do not infringe any existing patents, copyrights or other proprietary rights of others, or that third parties will not assert infringement claims in the future. If any such claims are asserted and upheld, the costs of defense could be substantial and any resulting liability to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of June 30, 1997, the Company had 377 full-time employees. The Company believes that its relations with its employees are good. 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, implementation and production office in Irvine, California, where it leases approximately 14,000 square feet under a lease which terminates May 2002. The Company is in the process of establishing back-up facilities at its Irvine location. BeneSphere's processing operations are located in Bellevue, Washington, where BeneSphere leases approximately 6,587 square feet under a lease that will terminate on June 1, 2003. 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 August 14, 1997.
NAME AGE POSITION - ------------------------------ --- -------------------------------------------------------- Thomas H. Sinton.............. 49 Chairman of the Board, President, Chief Executive Officer, Director Jeffrey M. Bizzack............ 37 Senior Vice President, Sales Mitchell W. Everton........... 40 Senior Vice President, Tax & Operations Leslie A. Johnson............. 48 Senior Vice President, Client Services Steven E. Klei................ 37 Senior Vice President, Finance, Chief Financial Officer and Secretary Robert E. Schneider........... 39 Senior Vice President, Research & Development William T. Clifford(2)........ 51 Director David C. Hodgson(1)........... 40 Director Ronald W. Readmond(1)(2)...... 54 Director Thomas P. Roddy(2)............ 62 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Mr. Sinton, founder of the Company, has served as a Director of the Company since the Company's incorporation in October 1984, and from March 1993 to present, Mr. Sinton has served as the President and Chief Executive Officer of the Company. Since December 1996 and for a period between September 1989 and February 1993, Mr. Sinton served as Chairman of the Board. Mr. Sinton holds a B.A. degree in English Literature, magna cum laude, from Harvard University, an M.S. degree in Food Science from the University of California at Davis and an M.B.A. degree from Stanford University. Mr. Sinton received a Fulbright Fellowship to study at the University of Vienna in Vienna, Austria. Mr. Bizzack has served as Senior Vice President, Sales of the Company since July 1993. From October 1992 to July 1993, Mr. Bizzack served as Vice President, Sales of the Company. From October 1988 to October 1992, Mr. Bizzack served as a District Sales Manager of the Company. Mr. Bizzack attended Saint Mary's College. Mr. Everton has served as Senior Vice President, Tax & Operations of the Company since August 1995, and from July 1993 to July 1995, he served as Executive Vice President, Operations of the Company. From July 1992 to July 1993, Mr. Everton served as Vice President, Operations of the Company. From June 1986 to July 1992, Mr. Everton held various management positions with Systems Tax Service, a payroll tax filing company that was acquired by Ceridian Corporation in 1993. Mr. Everton holds a B.A. degree in Business Economics from the University of California, Santa Barbara and an M.B.A. degree from the University of California, Berkeley. Ms. Johnson has served as Senior Vice President, Client Services of the Company since August 1997 and served as Vice President, Client Services of the Company from September 1993 to August 1997. From May 1992 to September 1993, Ms. Johnson was Director, National Accounts for Automatic Data Processing. From January 1976 until her division was acquired by Automatic Data Processing in May 1992, Ms. Johnson held several positions at BankAmerica Corporation, most recently as Vice President, Northern California National Accounts. Ms. Johnson holds a B.A. degree in Communications from the University of Colorado. 35 37 Mr. Klei has served as Senior Vice President, Finance of the Company since August 1997, as Chief Financial Officer of the Company since July 1995 and as Secretary of the Company since August 1996. Mr. Klei served as Vice President, Finance from July 1995 to August 1997. From April 1993 to July 1995, Mr. Klei was Corporate Controller for Esprit de Corp, an apparel company. From December 1990 to April 1993, Mr. Klei provided consulting services to financially troubled companies based on his experience at New Home Interiors ("New Home"), a regional operator of showrooms for home products and services. In such capacity, Mr. Klei joined Rainbow Records ("Rainbow"), a retailer of records and videos, as a consultant in December 1990 at which time Rainbow was contemplating a liquidation. Mr. Klei presided over the orderly liquidation of Rainbow as Chief Financial Officer from April 1991 to February 1992. Subsequently, Rainbow entered into involuntary bankruptcy and received final approval from the bankruptcy court in the Northern District of California in Oakland. Mr. Klei joined Comfort Zone, a retailer of bedroom furnishings in February 1992 as a consultant and subsequently served as Vice President and Chief Financial Officer until April 1993. From May 1988 to December 1990, Mr. Klei was a minority owner and served as Chief Financial Officer of New Home. In connection with his position at New Home, Mr. Klei personally guaranteed certain obligations of New Home, which became due upon New Home's liquidation in 1991. As a result of such obligations, in September 1993, Mr. Klei applied for and was granted a full discharge of all debts under Chapter 7 of the federal Bankruptcy Code. Mr. Klei holds a B.S. degree in Accounting from Central Michigan University and is a Certified Public Accountant. Mr. Schneider has served as Senior Vice President, Research & Development of the Company since August 1997 and served as Vice President, Research & Development of the Company from November 1996 to August 1997. From April 1995 to July 1996, Mr. Schneider served as Senior Vice President of Product Development at Premenos Technology Corporation, an electronic commerce software company. From February 1989 to March 1995, Mr. Schneider held several positions at Sybase Inc., most recently as Vice President and Business Unit Manager of the Server Products Group. Mr. Schneider holds a B.S. degree in Computer Science from the University of San Francisco. Mr. Clifford has served as a Director of the Company since August 1997. Mr. Clifford has been the President of Gartner Group Research and the Chief Operating Officer of Gartner Group, Inc. since April 1995 and Executive Vice President, Operations of Gartner Group, Inc. since October 1993. From December 1988 to October 1993 Mr. Clifford held various positions at Automatic Data Processing, Inc., including President of National Accounts and Corporate Vice President, Information Services. Mr. Clifford holds a B.A. degree in Economics from the University of Connecticut. Mr. Hodgson has served as a Director of the Company since March 1997. Mr. Hodgson is a Managing Member of General Atlantic Partners LLC ("GAP LLC") and has been with GAP LLC since 1982. Mr. Hodgson is also a director of Baan Company, N.V., a publicly-traded software company, Walker Interactive, a publicly-traded software company, and several other privately-held software companies, in which GAP LLC or one of its affiliates is an investor. Mr. Hodgson holds an A.B. degree in Mathematics from Dartmouth College and an M.B.A. degree from Stanford University. Mr. Readmond has served as a Director of the Company since February 1997. Since January 1997, Mr. Readmond has been an advisor of Barbour Griffith & Rogers, a lobbying firm, and Chairman of International Equity Partners, L.P., a private equity and project development company. From August 1989 to December 1996, Mr. Readmond held various positions at Charles Schwab & Co. Inc., most recently serving as Vice Chairman. Mr. Readmond holds a B.A. degree in Economics from Western Maryland College. Mr. Roddy has served as a Director of the Company since 1992. Since 1988, Mr. Roddy has served as President and Chief Executive Officer of Lafayette Investments Inc., an investment banking and investment advisory company. Mr. Roddy holds a B.S. degree in Biochemistry from Villanova University. Mr. Hodgson was nominated and elected as a Director of the Company pursuant to an agreement entered into between the Company, General Atlantic and Thomas H. Sinton and his affiliates, in 36 38 connection with the sale of Preferred Stock by the Company to General Atlantic. Under such agreement, General Atlantic and Mr. Sinton and his affiliates agreed to vote their shares to elect one director to the Board of Directors designated by General Atlantic until the third annual meeting of stockholders after this offering. The Board of Directors presently consists of five members who hold office until the annual meeting of stockholders or until a successor is duly elected and qualified. Effective upon the Company's reincorporation into Delaware, the Board of Directors will be divided into three classes. One class of directors will be elected annually and its members will hold office for a three-year term or until their successors are duly elected and qualified, or until their earlier removal or resignation. The number of directors will initially be five and may be changed by a resolution of the Board of Directors. Executive officers are elected by the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. The Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee oversees actions taken by the Company's independent auditors, recommends the engagement of auditors and reviews the results and scope of the audit and other services provided by the Company's independent auditors, reviews and evaluates the Company's control functions and reviews the Company's investment policy. The Compensation Committee was established in November 1996 and will make recommendations to the Board of Directors concerning salaries and incentive compensation for employees and consultants of the Company. The Compensation Committee will also administer the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan. Prior to November 1996, the Board of Directors made recommendations regarding compensation for employees and consultants of the Company. See "-- Stock Plans." DIRECTOR COMPENSATION Members of the Company's Board of Directors do not receive compensation for their services as directors. Certain directors have been granted options to purchase Common Stock in the past, and options may be granted to Directors of the Company in the future. Mr. Clifford, Mr. Hodgson, Mr. Roddy and Mr. Readmond have received options to purchase 15,000, 15,000, 62,500, and 15,000 shares, respectively, of the Company's Common Stock, at exercise prices ranging from $0.19 to $9.00 per share. 37 39 EXECUTIVE COMPENSATION The following table sets forth the compensation paid to (i) the Chief Executive Officer and (ii) the Company's four other most highly compensated executive officers (collectively with the Chief Executive Officer, the "Named Executive Officers") for services rendered in all capacities to the Company during the fiscal year ended June 30, 1997. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------ ------------------------ NO. OF SECURITIES NAME AND PRINCIPAL POSITION SALARY COMMISSIONS UNDERLYING OPTIONS - --------------------------------------------- -------- ----------- ------------------ Thomas H. Sinton............................. $150,000 $ 0 0 President and Chief Executive Officer Jeffrey M. Bizzack........................... 131,250 52,000 0 Senior Vice President, Sales Mitchell W. Everton.......................... 131,250 0 0 Senior Vice President, Tax & Operations Leslie A. Johnson............................ 131,250 0 13,000 Senior Vice President, Client Services Steven E. Klei............................... 127,100 0 0 Senior Vice President, Finance and Chief Financial Officer
The following table sets forth information regarding stock options granted during the fiscal year ended June 30, 1997 to each of the Named Executive Officers. OPTION GRANTS IN FISCAL 1997
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------------------------------------ VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK PRICE SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION UNDERLYING GRANTED TO PRICE TERM($)(4) OPTIONS EMPLOYEES IN PER EXPIRATION ------------------------ NAME GRANTED(#)(1) FISCAL 1997(%)(2) SHARE($)(3) DATE 5% 10% - -------------------- ------------- ----------------- ----------- ---------- ---------- ---------- Thomas H. Sinton.... -- -- -- -- -- -- Jeffrey M. Bizzack........... -- -- -- -- -- -- Mitchell W. Everton........... -- -- -- -- -- -- Leslie A. Johnson... 13,000 2.0% 4.75 9/24/2006 171,182 309,155 Steven E. Klei...... -- -- -- -- -- --
- --------------- (1) These options were granted under either the Company's Executive Stock Option Plan. The options granted are immediately exercisable, but are subject to repurchase in the event the optionee's employment with the Company ceases for any reason. The options generally vest over four years, as to 25% of the shares one year from the grant date and as to 1/48th of the shares in each successive month thereafter, with full vesting occurring on the fourth anniversary date. The options have a term of ten years, subject to earlier termination in certain situations related to termination of employment. See "Stock Plans." (2) Based on a total of 662,670 options granted to all employees, consultants and directors during fiscal 1997. (3) Represents the fair market value of the underlying Common Stock as determined by the Board of Directors on the date of grant. 38 40 (4) The potential realizable value is calculated based on the term of the option at the time of grant (ten years) and the assumed initial public offering price of $11.00. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent the Company's prediction of its stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the initial public offering price appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. The following table sets forth for each of the Named Executive Officers the shares acquired and the value realized on each exercise of stock options during the year ended June 30, 1997 and the number and value of securities underlying unexercised options held by the Named Executive Officers at June 30, 1997: FISCAL YEAR AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS ON VALUE --------------------------- AT FISCAL YEAR END($)(1) EXERCISE REALIZED EXERCISABLE UNEXERCISABLE --------------------------- NAME (#) ($) (#) (#) EXERCISABLE UNEXERCISABLE - ------------------------ -------- -------- ----------- ------------- ----------- ------------- Thomas H. Sinton........ -- -- -- -- -- -- Jeffrey M. Bizzack...... -- -- -- -- -- -- Mitchell W. Everton..... -- -- 22,625 27,128 189,032 226,654 Leslie A. Johnson....... -- -- -- 13,000 -- 52,000 Steven E. Klei.......... 7,000 60,235 2,167 20,833 18,105 174,060
- --------------- (1) The amount set forth represents the difference between the estimated fair market value of $8.75 per share of Common Stock on June 30, 1997, as determined by the Company's Board of Directors, multiplied by the applicable number of options. STOCK PLANS 1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees, directors and consultants of nonstatutory stock options. As of June 30, 1997, options to purchase an aggregate of 775,023 shares of Common Stock were outstanding under the 1989 Plan. In February 1997, the Board of Directors of the Company increased the shares available for future grants under the 1989 Plan by 1,375,766, for a total of 1,293,615 shares available for future grants under the 1989 Plan. Options granted under the 1989 Plan before the effective date of the 1996 Plan described below will remain outstanding in accordance with their terms, but no further options will be granted under the 1989 Plan after this offering. 1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the Board of Directors in February 1996 under the name "Executive Stock Option Plan." The 1996 Plan provides for the granting to employees (including officers and employee directors) of incentive stock options and for the granting to employees, directors and consultants of nonstatutory stock options. In November 1996 and February 1997, the Board of Directors of the Company approved, effective upon the offering and subject to stockholder approval, an amendment and restatement of the 1996 Plan to (i) rename the Executive Stock Option Plan as the "1996 Stock Option Plan" and (ii) authorize an increase in the number of shares reserved for issuance under the plan of any unused or canceled shares under the 1989 Plan plus annual increases equal to the lesser of (a) 250,000 shares, (b) two percent (2%) of the number of outstanding shares of Common Stock on such date or (c) a 39 41 lesser amount determined by the Board. As of June 30, 1997, options to purchase an aggregate of 100,753 shares of Common Stock were outstanding under the 1996 Plan and 1,331,195 (including the number of shares available for future grants under the 1989 Plan) shares remained available for future grants under the 1996 Plan. The 1996 Plan is administered by the Board of Directors or a committee appointed by the Board (the "Administrator") and has a term of ten years. Subject to the provisions of the 1996 Plan, the Administrator has the authority to determine the individuals to whom stock options are to be granted, the number of shares to be covered by each option, the exercise price, the fair market value of the Common Stock, the type of option, the term of the option, the restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions. Incentive stock options granted under the 1996 Plan must have an exercise price of (i) at least 110% of fair market value of the Common Stock on the date of grant if granted to an employee who owns stock representing more than 10% of the voting power of all classes of stock of the Company, any parent or any subsidiary or (ii) at least 100% of fair market value of the Common Stock on the date of grant if granted to any other employee. In the case of a nonstatutory stock option, the per share exercise price is determined by the Administrator. No participant may be granted in any fiscal year of the Company an option to purchase more than 125,000 shares, and over the remaining term of the 1996 Plan such participant may not be granted options to purchase more than 250,000 additional shares. Payments by optionholders upon exercise of an option may be made (as determined by the Administrator) in cash or such other form of payment as permitted under the 1996 Plan, including without limitation, by promissory note or by surrender of certain shares of Common Stock. In addition, an optionee may pay the exercise price by means of a so-called "cashless exercise." In the event of a proposed merger of the Company with or into another corporation, outstanding options may be assumed or equivalent options may be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that such successor corporation does not agree to assume options or substitute equivalent options, optionees will have the right to exercise their options as to all shares subject to such options, including shares as to which options would not otherwise be exercisable. 1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in November 1996, subject to stockholder approval. The Company has reserved a total of 500,000 shares of Common Stock for issuance under the Purchase Plan, with the number of shares to be increased annually on each anniversary date of the adoption of the Purchase Plan by a number of shares equal to the lesser of (i) 150,000 shares, (ii) one and one-half percent (1.5%) of the outstanding number of shares on such date or (iii) a lesser number determined by the Board. The Purchase Plan, which is intended to qualify under Section 423 of the Code, permits eligible employees of the Company to purchase Common Stock through payroll deductions of up to 10% of their base straight time gross earnings and commissions, including payments for overtime, shift premiums, incentive compensation, incentive payments, bonuses or other payments. An eligible employee's right to purchase stock under the Purchase Plan may not accrue at a rate that exceeds $25,000 worth of stock in any calendar year. The price of Common Stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the Common Stock on the first day of an offering period or last day of the applicable purchase period. Employees may end their participation in the Purchase Plan at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the plan. The Purchase Plan will be implemented by an initial offering period of up to 24 months commencing on the first trading day on or after the effective date of the offering and ending on the last trading day on or before October 31, 1999. Subsequent offering periods will last 24 months and will commence on the first trading day on or after November 1 and May 1 of each year during which the Purchase Plan is in effect, and will terminate on the last trading day in the periods ending 24 months later. Each 24-month offering period will consist of four purchase periods of approximately six months duration. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the 40 42 Board. Employees are eligible to participate if they are customarily employed by the Company or any designated subsidiary for at least 20 hours per week and for more than five months in any calendar year. 401(K) PLAN The Company maintains a 401(k) retirement savings plan (the "401(k) Plan"). The 401(k) Plan provides that each participant may contribute up to 18% of his or her pre-tax gross compensation (up to a statutorily prescribed annual limit of $9,500 in 1997). The percentage elected by certain highly compensated participants may be required to be lower. All amounts contributed by employee participants and earnings on these contributions are fully vested at all times. Employee participants may elect to invest their contributions in various established funds. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Amended and Restated Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which a director derives an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its employees and agents to the fullest extent permitted by law. The Company intends to enter into agreements to indemnify its directors and officers, in addition to the indemnification provided for in the Company's Amended and Restated Certificate of Incorporation and Bylaws. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee was formed in November 1996 and is composed of Messrs. Hodgson and Readmond. No interlocking relationship exists between any member of the Company's Board of Directors and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. 41 43 CERTAIN TRANSACTIONS Between May 1994 and September 1995, Thomas H. Sinton, a director and officer of the Company, and his immediate family loaned an aggregate of $1,040,000 to the Company at an interest rate of 10.0% per annum. The Company has paid all such loans in full. On December 5, 1996, the Company loaned $544,000 under a full recourse note agreement at an interest rate of 6.31% per year to Robert E. Schneider, an officer of the Company, to permit Mr. Schneider to exercise options to purchase Common Stock of the Company. All principal and interest is due December 5, 2000. As of June 30, 1997, Mr. Schneider had not paid any amount on the note. On January 31, 1997, the Company loaned $250,000 under a full recourse note agreement at an interest rate of 6.1% per year to Jeffrey M. Bizzack, an officer of the Company, to permit Mr. Bizzack to purchase a residence. Accrued interest must be paid on a monthly basis beginning two years from the date of the note. All principal and accrued but unpaid interest is due January 31, 2001 unless Mr. Bizzack's employment with the Company terminates, in which case, the note may become due earlier. As of June 30, 1997, Mr. Bizzack had not paid any amount on the note. Information with respect to compensation to directors and executive officers is set forth under "Management -- Directors Compensation" and "-- Executive Compensation." 42 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock, as of August 14, 1997 (assuming the automatic conversion of all outstanding shares of Preferred Stock into shares of Common Stock effective upon the completion of this offering), and as adjusted to reflect the sale of the shares of Common Stock offered hereby by (a) each person or entity known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (b) each director of the Company, (c) each of the Named Executive Officers, and (d) all directors and executive officers of the Company as a group. Unless otherwise noted in the footnotes to the table, (i) the Company believes that the persons named in the table have sole voting and investment power with respect to all shares of Common Stock indicated as being beneficially owned by them and (ii) officers and directors can be contacted at the principal offices of the Company.
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 34.9% 28.0 General Atlantic Partners, LLC(4)............................ 1,149,466 14.1 11.3 Jeffrey M. Bizzack(5)........................................ 125,400 1.5 1.2 Mitchell W. Everton (6)...................................... 76,492 * * Leslie A. Johnson(7)......................................... 62,000 * * Steven E. Klei(8)............................................ 56,001 * * William T. Clifford.......................................... -- * * David C. Hodgson(4).......................................... 1,149,466 14.1 11.3 Ronald W. Readmond(9)........................................ 2,012 * * Thomas P. Roddy(10).......................................... 209,821 2.6 2.1 All directors and executive officers as a group (10 persons)(11)............................................... 4,596,260 56.2 45.2
- --------------- * Represents beneficial ownership of less than one percent. (1) Based on 8,147,843 shares of Common Stock outstanding prior to the offering and 10,147,843 outstanding upon completion of the offering. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days of August 14, 1997 upon the exercise of warrants or vested options. Calculations of percentage of beneficial ownership assume the exercise by only the respective named stockholder of all options and warrants for the purchase of Common Stock held by such stockholder which are exercisable within 60 days of August 14, 1997. (2) Includes shares held by the Silas D. Sinton Trust Estate, the Silas Jack Sinton Family Trust and as a custodian for minor children. (3) The address of Mr. Sinton is c/o ProBusiness, Inc., 5934 Gibraltar Dr., Pleasanton, CA 94588. (4) Includes 978,368 shares held by General Atlantic Partners 39, L.P. ("GAP 39") and 171,098 shares held by GAP Coinvestment Partners, L.P. ("GAP Coinvestment"). The general partner of GAP 39 is GAP LLC. The managing members of GAP LLC are Steven A. Denning, Stephen P. Reynolds, David C. Hodgson, J. Michael Cline, William O. Grabe and William E. Ford. The same managing members of GAP LLC are the general partners of GAP Coinvestment. Mr. Hodgson is a director of the Company. Mr. Hodgson disclaims beneficial ownership of shares owned by GAP 39 and GAP Coinvestment, except to the extent of his pecuniary interests therein. The address for GAP 39, GAP Coinvestment, GAP LLC and Mr. Hodgson is c/o General Atlantic Service Corporation, Three Pickwick Plaza, Greenwich, CT 06830. (5) Includes 21,000 shares subject to the Company's repurchase rights. (6) Includes 26,045 shares issuable upon exercise of vested options. (7) Includes 8,542 shares subject to the Company's repurchase rights. (8) Includes 4,667 shares issuable upon exercise of vested options and 18,958 shares subject to the Company's repurchase rights. (9) Includes 2,012 shares issuable upon exercise of warrants. (10) Includes 26,230 shares held by the Lafayette Investments Inc. of which Mr. Roddy is President and Chief Executive Officer and 18,400 shares held by the Lafayette Investments Inc. 401(k) Plan and Trust. (11) Includes 30,712 shares issuable upon exercise of vested options, 2,012 shares issuable upon exercise of warrants and 48,500 shares subject to the Company's repurchase rights. 43 45 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, par value $0.001 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.001 per share ("Preferred Stock"). COMMON STOCK As of June 30, 1997, there were 8,147,301 shares of Common Stock (including Preferred Stock that will be converted and the issuance of Common Stock upon the net exercise of warrants upon the closing of this offering) outstanding held of record by 278 stockholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors, and as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefore. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK The Board of Directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, without any further vote or action by stockholders. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. WARRANTS In connection with a loan agreement, which terminated in April 1996, between Silicon Valley Bank ("SVB") and the Company, the Company issued SVB a warrant to purchase 9,446 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through January 13, 2000. In connection with an equipment lease, the Company issued LINC Capital Management ("LINC") a warrant to purchase 10,000 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through July 31, 2001. In connection with a loan agreement, the Company issued Coast Business Credit ("Coast") a warrant to purchase 9,500 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable at any time through April 30, 2001. In connection with an amendment to the loan agreement between Coast and the Company to extend the line of credit, the Company issued a warrant to Coast to purchase an additional 9,500 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share, exercisable through October 25, 2001. In connection with a built-to- suit lease, the Company issued Britannia Hacienda V Limited Partnership ("Britannia Hacienda") and its partners warrants to purchase an aggregate of 22,500 shares of Series E Preferred Stock at an exercise price of $7.94 per share, exercisable from the date that part of the construction to be performed under the lease is substantially complete until the earlier of either five years from the date 44 46 of the consummation of a public offering or November 14, 2004. The warrants to purchase Series E Preferred Stock shall represent the right to purchase shares of Common Stock upon completion of this offering, at a conversion rate of two shares of Common Stock for each share of Series E Preferred Stock. In connection with its acquisition of BeneSphere, the Company issued warrants to purchase an aggregate of 50,000 shares of Common Stock to two former shareholders of BeneSphere at an exercise price of $9.00 per share, exercisable at any time through January 7, 2002. After June 30, 1997, the Company issued a warrant to purchase an aggregate of 20,000 shares of Common Stock at a purchase price of $9.00 per share. REGISTRATION RIGHTS OF CERTAIN HOLDERS Upon completion of this offering, the holders (or their permitted transferees) of approximately 6,349,026 shares of Common Stock and 121,892 shares issuable upon exercise of warrants (collectively the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities act of 1933, as amended (the "Securities Act"). If the Company proposes to register its Common Stock, subject to certain exceptions, under the Securities Act, the Holders are entitled to notice of the registration and are entitled to include, at the Company's expense, such shares therein, provided that the managing underwriter has the right to limit a certain number of such shares included in the registration. These rights do not apply to this offering. In addition, certain of the Holders may require the Company at its expense on no more than two occasions to file a registration statement under the Securities Act with respect to their shares of Common Stock. Such rights may not be exercised until 180 days after the completion of this offering. In addition, General Atlantic may request the Company to file a registration statement under the Securities Act with respect to 1,149,466 shares of Common Stock on one occasion as long as certain conditions are met. If the Holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. Moreover, if the Company were to include in a Company initiated registration shares held by the Holders pursuant to exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise additional capital. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Amended and Restated Certificate of Incorporation (the "Charter") provides for the division of the Board of Directors into three classes with staggered three-year terms. See "Management -- Executive Officers and Directors." Under the Charter, any vacancy on the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. The Charter also provides that after the completion of this offering, any action required or permitted to be taken by the stockholders of the Company at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. The Charter further provides that special meetings of the stockholders may only be called by the Chairman of the Board of Directors, the Chief Executive 45 47 Officer, the President of the Company, the Board of Directors or the holders of shares entitled to cast not less than forty percent (40%) of the votes at that meeting. Under the Bylaws, in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with certain requirements regarding advance notice to the Company. The foregoing provisions could have the effect of delaying until the next stockholders meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Company's Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. The Charter requires the affirmative vote of the holders of at least 66 2/3% of the shares of capital stock of the Company issued and outstanding and entitled to vote to amend or repeal any of the foregoing Charter provisions. The 66 2/3% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series Preferred Stock that might be outstanding at the time any such amendments are submitted to stockholders. The Bylaws also may be amended or repealed by a majority vote of the Board of Directors subject to any limitations set forth in the Bylaws. TRANSFER AGENT AND REGISTRAR Norwest Financial Services, Inc. has been appointed as the transfer agent and registrar for the Company's Common Stock. 46 48 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 10,147,301 shares of Common Stock, based upon the number of shares outstanding as of June 30, 1997. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" ("Affiliates") of the Company, as that term is defined in Rule 144 under the Securities Act as amended on April 29, 1997. The remaining 8,147,301 shares of Common Stock held by existing stockholders (the "Restricted Shares") are "restricted securities," as that term is defined in Rule 144 under the Securities Act. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) 2,000 Restricted Shares will be eligible for immediate sale on the date of this Prospectus; (ii) 1,000 Restricted Shares will be eligible for sale 90 days after the date of this Prospectus; and (iii) 8,144,301 Restricted Shares will be eligible for sale upon expiration of the lock-up agreements, 180 days after the date of this Prospectus. In addition, certain of the Restricted Shares are subject to the Company's repurchase right. As of June 30, 1997, options to purchase 875,776 shares of Common Stock were outstanding, of which options to purchase 186,301 shares were then exercisable. The Company intends to file a Form S-8 registration statement immediately after the date of this Prospectus of this offering under the Securities Act to register 2,206,971 shares of Common Stock reserved for issuance under the Company's 1989 Plan and 1996 Plan and 500,000 shares of Common Stock reserved for issuance under the Company's Purchase Plan thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing. In addition, as of June 30, 1997, warrants to purchase 171,892 shares of Common Stock were outstanding, all of which will be eligible for sale 180 days after the date of this Prospectus. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year but less than two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then-outstanding shares of the Common Stock (approximately 101,473 shares immediately after the offering) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. In general, under Rule 701 under the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchases shares from the Company in connection with a compensatory stock or option plan or other written agreement related to compensation is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with certain restrictions contained in Rule 144. Prior to this offering, there has been no public market for the Common Stock of the Company and no predictions can be made as to the effect, if any, that market sales of shares of Common Stock prevailing from time to time may have on the market price of the Common Stock. Nevertheless, sales of significant numbers of shares of the Common Stock in the public market may adversely affect the market price of the Common Stock offered hereby and could impair the Company's future ability to raise capital through an offering of its equity securities. 47 49 UNDERWRITING The Underwriters named below, acting through their representatives, Robertson, Stephens & Company LLC and William Blair & Company, L.L.C. (the "Representatives"), have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase the numbers of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
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 48 50 than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and warrants and the Company's issuance of options and stock under the existing stock option and stock purchase plans. See "Shares Eligible for Future Sale." The Representatives have advised the Company that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. Certain persons participating in this offering may engage in transactions, including syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock on the Nasdaq National Market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 49 51 LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. As of June 30, 1997, certain members and investment partnerships of Wilson Sonsini Goodrich & Rosati, P.C., beneficially owned an aggregate of 12,881 shares of the Company's Common Stock. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Cooley Godward LLP, San Francisco, California. EXPERTS The financial statements of (i) ProBusiness Services, Inc. as of June 30, 1996 and 1997 and for each of the three years in the period ended June 30, 1997 (ii) BeneSphere Administrators, Inc. as of June 30, 1996 and for the year then ended and (iii) Dimension Solutions, Inc. as of April 30, 1996 and for the year then ended appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS Effective June 1996, the Company engaged Ernst & Young LLP as its principal independent auditors to replace Coopers & Lybrand LLP ("Coopers & Lybrand"), who were dismissed as auditors of the Company effective January 1996. The decision to change independent auditors was approved by the Company's Audit Committee and Board of Directors. In connection with audits of the two fiscal years ended June 30, 1995, and in the subsequent interim period, there were no disagreements with Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Coopers & Lybrand, would have caused them to make reference to the matter in their report. The reports of Coopers & Lybrand on the financial statements of the Company for the past two years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 under the Securities Act, with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. A copy of the Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. 50 52 INDEX TO FINANCIAL STATEMENTS
PAGE ----- PROBUSINESS SERVICES, INC. Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit)............................. F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-8 BENESPHERE ADMINISTRATORS, INC. Report of Independent Auditors........................................................ F-23 Balance Sheets........................................................................ F-24 Statements of Operations.............................................................. F-25 Statements of Shareholders' Deficit................................................... F-26 Statements of Cash Flows.............................................................. F-27 Notes to Financial Statements......................................................... F-28 DIMENSION SOLUTIONS, INC. Report of Independent Auditors........................................................ F-32 Balance Sheet......................................................................... F-33 Statement of Operations............................................................... F-34 Statement of Shareholders' Deficit.................................................... F-35 Statement of Cash Flows............................................................... F-36 Notes to Financial Statements......................................................... F-37 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Introduction.......................................................................... F-39 Consolidated Statement of Operations for the year ended June 30, 1997................. F-40 Notes to Consolidated Financial Statements............................................ F-41
F-1 53 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders ProBusiness Services, Inc. We have audited the accompanying consolidated balance sheets of ProBusiness Services, Inc. as of June 30, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ProBusiness Services, Inc. at June 30, 1996 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Walnut Creek, California August 1, 1997, except for Note 11, as to which the date is August 11, 1997 F-2 54 PROBUSINESS SERVICES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
UNAUDITED PRO FORMA STOCKHOLDERS' JUNE 30, EQUITY --------------------- JUNE 30, 1996 1997 1997 -------- -------- ------------- ASSETS Current assets: Cash and cash equivalents....................................... $ 4,041 $ 5,047 Accounts receivable, net of allowance of none and $365,000 at June 30, 1996 and 1997....................................... 1,354 2,969 Prepaid expenses................................................ 327 643 ------- -------- 5,722 8,659 Payroll tax funds invested...................................... 106,339 177,626 ------- -------- Total current assets.............................................. 112,061 186,285 Equipment, furniture and fixtures, net............................ 3,992 7,623 Other assets...................................................... 1,175 6,527 ------- -------- Total assets............................................ $117,228 $200,435 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 623 $ 788 Accrued liabilities............................................. 1,458 5,285 Deferred revenue................................................ 224 1,279 Notes payable to stockholder.................................... 284 -- Current portion of capital lease obligations.................... 111 773 ------- -------- 2,700 8,125 Payroll tax funds collected but unremitted...................... 106,339 177,626 ------- -------- Total current liabilities............................... 109,039 185,751 Note payable to stockholder, non-current.......................... 250 250 Long-term debt, less current portion.............................. 7,822 8,667 Capital lease obligations, less current portion................... 253 1,898 Commitments Stockholders' equity (deficit): Preferred stock, $.01 par value; authorized: 6,000,000 shares; issued outstanding: 2,653,301 shares at June 30, 1996 and 3,228,034 shares at June 30, 1997 (aggregate liquidation preference: $12,078 at June 30, 1996 and $22,078 at June 30, 1997); pro forma: $.001 par value; authorized: 5,000,000 shares; no shares issued and outstanding..................... 27 33 $ -- Common stock, $.01 par value; authorized: 20,000,000 shares; issued and outstanding: 1,214,984 shares at June 30, 1996 and 1,530,277 shares at June 30, 1997; pro forma: $.001 par value; authorized: 60,000,000 shares; issued and outstanding: 7,986,345 shares............................................. 12 15 8 Additional paid-in capital...................................... 12,532 23,861 23,901 Accumulated deficit............................................. (12,707) (18,952) (18,952) Notes receivable from stockholders.............................. -- (1,088) (1,088) ------- -------- -------- Total stockholders' equity (deficit).................... (136) 3,869 $ 3,869 ------- -------- ======== Total liabilities and stockholders' equity (deficit).... $117,228 $200,435 ======= ========
See accompanying notes. F-3 55 PROBUSINESS SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED JUNE 30, ------------------------------ 1995 1996 1997 ------ ------- ------- Revenue.................................................................. $7,095 $13,863 $27,374 Operating expenses: Cost of providing services............................................. 2,703 6,435 13,659 General and administrative expenses.................................... 1,304 2,054 4,282 Research and development expenses...................................... 1,038 1,257 2,841 Client acquisition costs............................................... 2,943 5,388 11,706 Acquisition of in-process technology................................... -- 711 -- ------ ------- ------- Total operating expenses............................................ 7,988 15,845 32,488 ------ ------- ------- Loss from operations..................................................... (893) (1,982) (5,114) Interest expense......................................................... (86) (473) (1,190) Other income............................................................. -- 69 59 ------ ------- ------- Net loss................................................................. $ (979) $(2,386) $(6,245) ====== ======= ======= Pro forma net loss per share (Note 1).................................... $ (0.74) ======= Shares used in computing pro forma net loss per share (Note 1)............................................ 8,451 =======
See accompanying notes. F-4 56 PROBUSINESS SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts)
PREFERRED STOCK COMMON STOCK ------------------------------- ------------------------------- NOTES TOTAL ADDITIONAL ADDITIONAL RECEIVABLE STOCKHOLDERS' PAID-IN PAID-IN ACCUMULATED FROM EQUITY SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS (DEFICIT) --------- ------ ---------- --------- ------ ---------- ----------- --------------- ------------- Balances, June 30, 1993.... 2,163,189 $ 22 $ 8,675 700 $ -- $ -- $ (7,865) $ -- $ 832 Issuance of Series D preferred stock at $5.94 per share, net of issuance costs..... 236,996 2 1,347 -- -- -- -- -- 1,349 Exercise of stock options... -- -- -- 2,920 -- 1 -- -- 1 Net loss.... -- -- -- -- -- -- (1,477) -- (1,477) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1994.... 2,400,185 24 10,022 3,620 -- 1 (9,342) -- 705 Issuance of Series E preferred stock at $7.94 per share, net of issuance costs..... 213,116 3 1,635 -- -- -- -- -- 1,638 Exercise of stock options... -- -- -- 9,808 -- 2 -- -- 2 Net loss.... -- -- -- -- -- -- (979) -- (979) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1995.... 2,613,301 27 11,657 13,428 -- 3 (10,321) -- 1,366 Issuance of Series E preferred stock at $7.94 per share, net of issuance costs..... 40,000 -- 317 -- -- -- -- -- 317 Exercise of stock options... -- -- -- 1,201,556 12 355 -- -- 367 Issuance of preferred stock warrants... -- -- 200 -- -- -- -- -- 200 Net loss.... -- -- -- -- -- -- (2,386) -- (2,386) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1996.... 2,653,301 27 12,174 1,214,984 12 358 (12,707) -- (136) Issuance of Series F preferred stock at $17.40 per share, net of issuance of costs..... 574,733 6 9,845 -- -- -- -- -- 9,851 Exercise of stock options... -- -- -- 315,293 3 1,163 -- (1,088) 78 Issuance of preferred stock warrants... -- -- 321 -- -- -- -- -- 321 Net loss.... -- -- -- -- -- -- (6,245) -- (6,245) --------- --- ------- --------- --- ---- -------- ----- ------- Balances, June 30, 1997.... 3,228,034 $ 33 $ 22,340 1,530,277 $ 15 $1,521 $ (18,952) $(1,088) $ 3,869 ========= === ======= ========= === ==== ======== ===== =======
See accompanying notes. F-5 57 PROBUSINESS SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED JUNE 30, --------------------------- 1995 1996 1997 ------- ------- ------- OPERATING ACTIVITIES Net loss.................................................................... $ (979) $(2,386) $(6,245) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................. 517 1,146 2,574 Acquisition of in-process technology...................................... -- 711 -- Changes in operating assets and liabilities: Accounts receivable, net............................................... (210) (521) (1,495) Prepaid expenses....................................................... (77) (214) (254) Other assets........................................................... (22) 201 (1,289) Accounts payable....................................................... (1) 360 137 Accrued liabilities.................................................... 273 650 2,291 Deferred revenue....................................................... 55 (149) 174 ------- ------- ------- Net cash used in operating activities....................................... (444) (202) (4,107) INVESTING ACTIVITIES Acquisition of Benesphere Administrators, Inc., net of cash acquired........ -- -- (245) Purchases of equipment, furniture and fixtures.............................. (1,281) (2,685) (2,775) Capitalization of software development costs................................ (137) (645) (1,409) Notes receivable from stockholders.......................................... -- -- (295) Other....................................................................... -- 3 -- ------- ------- ------- Net cash used in investing activities....................................... (1,418) (3,327) (4,724) FINANCING ACTIVITIES Net decrease in restricted cash............................................. (41) -- -- Borrowings under line of credit agreements.................................. 1,402 5,934 24,727 Repayments of borrowings under line of credit agreements.................... (157) (3,478) (23,831) Proceeds from note payable.................................................. -- 4,000 -- Repayments under note payable............................................... (75) -- (534) Proceeds from notes payable to stockholders................................. 500 250 275 Repayments under notes payable to stockholders.............................. (566) (227) (275) Principal payments on capital lease obligations............................. (103) (128) (454) Proceeds from issuance of preferred stock................................... 1,638 -- 9,851 Proceeds from issuance of common stock...................................... 2 367 78 ------- ------- ------- Net cash provided by financing activities................................... 2,600 6,718 9,837 ------- ------- ------- Net increase in cash and cash equivalents................................... 738 3,189 1,006 Cash and cash equivalents, beginning of year................................ 114 852 4,041 ------- ------- ------- Cash and cash equivalents, end of year...................................... $ 852 $ 4,041 $ 5,047 ======= ======= =======
See accompanying notes. F-6 58
YEAR ENDED JUNE 30, 1995 1996 1997 ------- ------- ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................................. $ 136 $ 377 $ 1,507 ======= ======= ======= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of equipment, furniture and fixtures under capital leases........ $ 126 $ 210 $ 2,644 ======= ======= ======= Issuance of warrants in connection with debt.............................. $ -- $ 200 $ 161 ======= ======= ======= Notes receivable from stockholders issued in connection with stock option exercise............................................................... $ -- $ -- $ 1,088 ======= ======= ======= ACQUISITION OF DIMENSION SOLUTIONS, INC.: Issuance of Series E preferred stock...................................... $ -- $ 317 $ -- Liabilities assumed....................................................... -- 947 -- ------- ------- ------- $ -- $ 1,264 $ -- ======= ======= ======= Acquisition of BeneSphere Administrators, Inc.: Issuance of warrants...................................................... $ -- $ -- $ 160 Net liabilities assumed................................................... -- -- 2,445 Note payable to BeneSphere Administrators, Inc. .......................... -- -- 250 ------- ------- ------- $ -- $ -- $ 2,855 ======= ======= =======
See accompanying notes. F-7 59 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS ProBusiness Services, Inc. provides employee administrative services for large employers. The Company's primary service offerings are payroll processing, payroll tax filing, human resources software and benefits administration, including the enrollment and processing of flexible benefit plans and COBRA programs. On May 23, 1996, the Company acquired substantially all of the business and assets of Dimension Solutions, Inc. ("Dimension Solutions"), a California corporation, for $1,264,000. The transaction was recorded under the purchase method of accounting, and the results of operations of Dimension Solutions have been included in the consolidated financial statements of the Company beginning May 24, 1996 (Note 10). On January 1, 1997, the Company acquired all of the outstanding stock of BeneSphere Administrators, Inc. ("BeneSphere"), a Washington Corporation, for $3,105,000, plus contingent payments, should certain financial conditions be met, of up to $4,500,000. The transaction was recorded under the purchase method of accounting, and the results of operations of BeneSphere have been included in the consolidated financial statements of the Company beginning January 2, 1997 (Note 10). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the period. Such complex estimates include provisions for doubtful accounts and penalties and interest relating to payroll tax processing and estimates regarding the recoverability of capitalized software. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents have a carrying amount which approximates fair value. The Company's cash, cash equivalents and payroll tax funds invested are held primarily with two financial institutions. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The Company adopted SFAS No. 121 in fiscal year 1997, and such adoption has not had a material impact. EQUIPMENT, FURNITURE AND FIXTURES Equipment, furniture and fixtures are stated at cost, net of accumulated depreciation and amortization. Depreciation of equipment, furniture and fixtures is computed using the straight-line method over the estimated F-8 60 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) useful lives of the assets which range from three to seven years. Leasehold improvements and assets under capital leases are amortized over the shorter of the life of the asset or the term of the lease. PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES In connection with its payroll processing and payroll tax filing services, the Company collects funds from clients for payment of payroll taxes, holds such funds with a financial institution which are segregated from the Company's other accounts until payment is due, remits the funds to the appropriate taxing authority and files federal, state and local tax returns. For such services, the Company derives its payroll tax filing revenue from fees charged and from interest income it receives on tax filing deposits temporarily held pending remittance on behalf of its clients to taxing authorities. These collected but unremitted funds and the related liability to clients for such funds are included in the accompanying consolidated balance sheets as current assets and current liabilities. The amount of funds held under these arrangements with customers may vary significantly during the year. The Company invests collected but unremitted funds in various financial instruments which consisted of overnight U.S. government direct and agency obligations repurchase agreements ($101,824,000) and cash and cash equivalents ($4,515,000) at June 30, 1996, and of overnight U.S. government direct and agency obligations repurchase agreements ($40,965,000), commercial paper rated A-1 and/or P-1 and money market funds with underlying credit quality of AA or better ($134,520,000) and cash and cash equivalents ($2,141,000) at June 30, 1997. The Company's investments are subject to interest rate fluctuations. As a result, the Company's results of operations may be impacted by interest rate fluctuations. Due to the types of financial instruments in which the Company invests, money market funds, overnight repurchase agreements and cash and cash equivalents, the carrying amount of such investments approximates fair value. The Company's payroll tax fund investments are held primarily with one financial institution. Interest income earned on collected but unremitted funds, which is classified as revenue, amounted to approximately none, $1,896,000 and $5,925,000, for fiscal years 1995, 1996 and 1997 respectively. The Company's payroll tax service is subject to various risks resulting from errors and omissions in filing client tax returns and paying tax liabilities owed to tax authorities on behalf of clients. The Company's clients calculate and transfer to the Company contributed employer and employee tax funds. The Company processes the data received from the client and remits the funds along with a tax return to the appropriate tax authorities when due. Tracking, processing and paying such tax liabilities is complex. Errors and omissions have occurred in the past and may occur in the future in connection with such service. The Company is subject to large cash penalties imposed by tax authorities for late filings or underpayment of taxes. To date, such penalties have not been significant. However, there can be no assurance that any liabilities associated with such penalties will not have a material adverse effect on the Company's business, financial condition or results of operations. At June 30, 1997, the Company had accrued $586,000 for potential tax penalties. There can be no assurance that the Company's reserves or insurance for such penalties will be adequate. In addition, failure by the Company to make timely or accurate tax return filings and pay tax liabilities when due on behalf of clients may damage the Company's reputation and adversely affect its relationships with existing clients and its ability to gain new clients. The Company's payroll tax service is also dependent upon government regulations, which are subject to continuous changes. Failure by the Company to implement these changes into its services and technology in a timely manner would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, since a significant portion of the Company's revenue is derived from interest earned from investing payroll tax funds, changes in policies relating to withholding federal or state income taxes or reduction in the time allowed for taxpayers to remit payment for taxes owed to government authorities would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has access to confidential information and to client funds. As a result, the Company is subject to potential claims by its clients for the actions of the Company's employees arising from damages to the client's business or otherwise. There can be no assurance that the Company's fidelity bond and errors and omissions F-9 61 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) insurance will be adequate to cover any such claims. Such claims could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's operations are dependent on its ability to protect its computer systems against damage from a major catastrophe (such as an earthquake or other natural disaster), fire, power loss, security breach, telecommunications failure or similar event. The Company currently conducts substantially all of its payroll and payroll tax processing and production at the Company's headquarters in Pleasanton, California. No assurance can be given that the precautions that the Company has taken to protect itself from or minimize the impact of such events will be adequate. Any damage to the Company's data centers, failure of telecommunications links or breach of the security of the Company's computer systems could result in an interruption of the Company's operations or other loss which may not be covered by the Company's insurance. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. REVENUE RECOGNITION Revenue from payroll processing and payroll tax filing services under client contracts is recognized as the services are performed. Interest income earned on unremitted payroll tax funds invested is recognized as earned. The Company's sales are primarily to customers in the western United States. Credit evaluations are performed as necessary and the Company does not require collateral from customers. SOFTWARE DEVELOPMENT COSTS The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company capitalizes software development costs incurred after establishing technological feasibility of the product prior to the general release of the service using the product. Costs incurred in connection with the enhancement of the Company's existing products or after the general release of the service using the product are expensed in the current period and included in the research and development costs within the statement of operations. The Company amortizes the capitalized software development costs using the greater of the straight-line basis over the estimated product life, which is generally a 36 month period, or the ratio of current revenue to the total of current revenue and anticipated future revenue over the life of the related product. Such amortization is included in cost of providing services within the statement of operations. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the "disclosure only" alternative described in Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS No. 128"), which is required to be adopted on December 31, 1997. At that time the Company will be required to change the method currently used to compute earnings (loss) per share and to restate earnings (loss) per share for all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of common stock equivalents will be excluded. The Company has determined that the impact of SFAS No. 128 will not be significant to the calculation of primary or fully diluted earnings loss per share. F-10 62 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET LOSS AND PRO FORMA NET LOSS PER SHARE Except as noted below, net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that, pursuant to applicable Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares (stock options, warrants and preferred stock) issued during the period commencing 12 months prior to the initial filing of a proposed public offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method for stock options and warrants and the as if-converted method for preferred stock at the estimated initial public offering price). Per share information calculated on this basis is as follows (in thousands except per share amounts):
YEAR ENDED JUNE 30, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Net loss per share.............................................. $ (0.32) $ (0.76) $ (1.94) ====== ====== ====== Shares used in calculating net loss per share................... 3,019 3,141 3,224 ====== ====== ======
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, ------------------- 1996 1997 ------- ------- Equipment and leasehold improvements...................................... $ 5,145 $ 9,403 Furniture and fixtures.................................................... 1,060 1,973 Construction in progress.................................................. -- 578 ------- ------- 6,205 11,954 Less accumulated depreciation and amortization............................ (2,213) (4,331) ------- ------- $ 3,992 $ 7,623 ======= =======
Equipment, furniture and fixtures include amounts for assets acquired under capital leases, principally production, office and computer equipment, of $644,000 and $3,515,000 at June 30, 1996 and 1997, respectively. Accumulated amortization of these assets was $313,000 and $854,000 at June 30, 1996 and 1997, respectively. F-11 63 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LONG-TERM DEBT The carrying amounts of the Company's long-term debt instruments approximate their fair value. The fair value of the Company's debt instruments are estimated using discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Long-term debt consists of the following (in thousands):
JUNE 30, ------------------- 1996 1997 ------- ------- Borrowings under line of credit agreements................................ $ 3,984 $ 4,758 Subordinated notes payable................................................ 3,838 3,909 ------- ------- 7,822 8,667 Less current portion...................................................... -- -- ------- ------- $ 7,822 $ 8,667 ======= =======
LINE OF CREDIT AGREEMENT The Company has a line of credit agreement (the "Agreement") with a financial institution which provides for borrowings that are limited to the lesser of $10,000,000, of which $1,000,000 is designated as an equipment acquisition loan, or four times the Company's average monthly cash collections, as defined, (decreased by a factor of one month for each 30% decrease in the Company's revenue, measured on a quarterly basis) over the four month period prior to the borrowing date, less $150,000. The amount available for borrowing under the line of credit agreement was approximately $10,000,000 at June 30, 1997. Borrowings outstanding under the Agreement bear interest at the bank's prime rate plus 1% (9.5% at June 30, 1997) and interest is payable monthly. The Company is required to pay a minimum of $30,000 in interest quarterly plus other renewal fees under the Agreement. Borrowings outstanding under the Agreement are collateralized by substantially all of the Company's assets not otherwise encumbered. The financial covenants of the Agreement require the Company to maintain a minimum cash balance. The cash balance requirement at June 30, 1997 was not material. The Agreement expires in April 1998, but is subject to automatic renewal for an additional year at the option of the Company. The Company has classified the $3,984,000 and $4,758,000 of borrowings under the Agreement as non-current liabilities at June 30, 1996 and 1997, respectively, as management expects to maintain adequate cash collections during the next 12 months to support at least such level of borrowings. Equipment acquisition loans bear interest at the bank's prime rate plus 1%. Borrowings are to be repaid over a 36 month period following a six month period of payments for interest only. There were no borrowings under the equipment acquisition loans during fiscal years 1996 or 1997. In connection with line of credit agreements, the Company issued warrants in 1995 and 1996 to purchase 9,446 and 9,500 shares, respectively, of the Company's Series E preferred stock with an exercise price of $7.94 per share which expire in January 2000 through April 2001. The Company deemed the fair value of these warrants to be immaterial at the date of issuance. In October 1996, in connection with an amendment of a line of credit agreement, the Company issued warrants to purchase 9,500 shares of the Company's Series E preferred stock with an exercise price of $7.94 per share which expire in October 2001. The Company deemed the fair value of the warrants to be $36,000. SUBORDINATED NOTES PAYABLE In October 1995 and December 1995, the Company issued $1,100,000 and $2,900,000, respectively of subordinated notes payable to investors ("Subordinated Notes"). The Subordinated Notes and interest accrued thereon are due and payable on demand upon the earlier of three years from the date of the notes or, at the option of the Company or the Subordinated Notes holders, within 30 days after the completion of a public offering of the Company's common stock which triggers the automatic conversion of the Company's outstanding F-12 64 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) preferred stock into common stock. The Subordinated Notes accrue interest at the rate of 8% per annum, and such interest is payable on a quarterly basis. In connection with the issuance of the Subordinated Notes, the Company issued warrants to purchase 125,926 shares of the Company's Series E Preferred Stock at $7.94 per share. The warrants, to the extent not previously exercised, shall expire on the earlier of (i) the date the underlying Subordinated Notes are repaid in full, (ii) immediately prior to the completion of a public offering of the Company's common stock which triggers the automatic conversion of the Company's outstanding preferred stock into common stock, or (iii) any sale, consolidation or merger of the Company in which the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. The Company deemed the fair value of warrants to be $200,000, which amount has been recorded as a reduction of the carrying amount of the Subordinated Notes and is being amortized using the effective interest method over the term of the Subordinated Notes. NOTES PAYABLE TO STOCKHOLDERS Notes payable to stockholder at June 30, 1996 and June 30, 1997, includes notes due to a director and stockholder of the Company. The notes are due on demand and bear interest at the rate of 10%. The amounts due under these notes were $284,000 and none at June 30, 1996 and 1997, respectively. Note payable to stockholder, non-current at June 30, 1996 and June 30, 1997 includes a $250,000 subordinated note payable, which is payable to a stockholder, assumed in the acquisition of Dimension Solutions, Inc. The note is due in fiscal 1999 and bears interest at the prime rate plus 2.5% per annum (Note 10). EQUIPMENT LEASE LINE In July 1996, the Company entered into an equipment lease line agreement under which the Company could have acquired up to $2,000,000 of equipment through June 1997. In connection with the equipment lease line, the Company issued a warrant to purchase 10,000 shares of the Company's Series E Preferred Stock at an exercise price of $7.94 per share. The warrant is exercisable for five years from the date of the final equipment purchase. The Company deemed the fair value of this warrant to be immaterial at the date of issuance. As of June 30, 1997, the Company had used approximately $1,870,000 of the equipment lease line. Amounts outstanding under the agreement are classified as capital lease obligations in the balance sheet and are secured by the related equipment. F-13 65 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LEASE OBLIGATIONS The Company leases its facilities and various equipment under non-cancellable operating leases which expire at various dates through 2002. The Company is also obligated under a number of capital equipment leases expiring at various dates through 2001. The future minimum lease payments under capital and operating leases subsequent to June 30, 1997 are summarized as follows (in thousands):
CAPITAL OPERATING YEAR ENDING JUNE 30, LEASES LEASES ------------------------------------------------------------------------- ------- --------- 1998..................................................................... $1,139 $ 2,588 1999..................................................................... 1,114 2,966 2000..................................................................... 1,127 2,646 2001..................................................................... 16 2,429 2002..................................................................... -- 2,254 ----- ------ Total minimum lease payments............................................. 3,396 $12,883 ====== Less amounts representing interest....................................... 725 ----- Present value of net minimum capital lease obligations................... 2,671 Less current portion..................................................... 773 ----- $1,898 =====
In September 1996, the Company entered into a lease arrangement under which the lessor will build a facility into which the Company will move its corporate headquarters. This operating lease will expire approximately eleven years from completion of the facility and will require the Company to pay a minimum average monthly lease payment of approximately $167,000 over the life of the lease. Such lease payments are not included in the above table as the completion date is not known. As part of the build to suit lease agreement, the Company issued a warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share. The warrant is exercisable for the lesser of eight years from the date of completion or five years from the date of an initial public offering which triggers conversion of Series E Preferred Stock. The Company valued the warrants at $125,000. Rent expense was $407,000, $707,000 and $1.5 million for fiscal years 1995, 1996 and 1997, respectively. 5. INCOME TAXES As of June 30, 1997, the Company had federal and state net operating loss carryforwards of approximately $13,913,000 and $3,850,000, respectively. The Company also had federal and state research and development tax credit carryforwards of approximately $451,000 and $199,000, respectively. The federal net operating loss and credit carryforwards will expire at various dates beginning with the fiscal year ending 1999 through 2012, if not utilized. The state net operating loss carryforwards and credit carryforwards will expire at various dates beginning with the fiscal year ending 1998 through 2012, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. F-14 66 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
JUNE 30, ------------------- 1996 1997 ------- ------- Deferred tax assets: Net operating loss carryforwards................................................ $ 3,279 $ 4,965 Research and development credit carryforwards................................... 397 650 Fixed assets.................................................................... 109 428 Accruals and reserves........................................................... 53 330 ------- ------- Gross deferred tax assets......................................................... 3,838 6,373 Less valuation allowance.......................................................... (3,597) (5,988) ------- ------- Deferred tax assets............................................................... 241 385 Deferred tax liabilities: Capitalized software development costs.......................................... (130) (313) Other........................................................................... (111) (72) ------- ------- Gross deferred tax liabilities.................................................... (241) (385) ------- ------- Net deferred taxes................................................................ $ -- $ -- ======= =======
A valuation allowance has been established and, accordingly, no benefit has been recognized for the Company's net operating losses and other deferred tax assets. The net valuation allowance increased by $2,391,000 during the year ended June 30, 1997. The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of net losses since its inception and expected near-term future losses. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results. 6. STOCKHOLDERS' EQUITY PREFERRED STOCK As of June 30, 1997, the Company has authorized 6,000,000 shares of preferred stock, of which 1,500,000 shares have been designated as Series A, B and C shares, 500,000 shares have been designated as Series D and E shares and 500,000 shares are undesignated. F-15 67 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 F........................................................... 574,733 10,000 --------- ------- Total.................................................. 3,228,034 $22,078 ========= =======
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 1995, 1996 and 1997. Each holder of preferred stock may, at any time, convert such holder's preferred stock to shares of common stock. Holders of preferred stock generally have the same voting rights as holders of common stock. Preferred stock is initially convertible at the ratio of one share of preferred stock to two shares of common stock, subject to adjustment to prevent dilution in the event that the Company issues additional shares. Additionally, conversion is automatic upon the completion of an underwritten public offering of common stock in which the price per share is not less than $3.50 per share with aggregate gross proceeds to the Company of at least $7,000,000. In the event of the liquidation of the Company, holders of Series A, B, C, D and E preferred stock are entitled to receive an amount per share equal to $3.805, $3.804, $4.94, $5.94 and $7.94, respectively, prior and in preference to any distribution of Company assets to holders of common stock, plus all declared and unpaid dividends. In March 1997, the Company issued 574,733 shares of $.01 par value Series F preferred stock to entities affiliated with General Atlantic Partners LLC at $17.40 per share resulting in gross proceeds of approximately $10 million. Holders of Series F preferred stock are entitled to receive non-cumulative dividends in the amount of $.02 per share per annum in preference to holders of the Company's common stock at the discretion of the Board of Directors. In the event dividends are paid on any share of common stock, an additional dividend shall be paid with respect to all outstanding shares of Series F preferred in an amount equal per share of Series F preferred (on an as-if-converted to common stock basis) to the amount paid or set aside for each share of common stock. Each holder of Series F preferred stock, may, at any time, convert such holder's preferred stock to shares of common stock. Holders of Series F preferred stock generally have the same voting rights as holders of common stock. Series F preferred stock is initially convertible at the ratio of one share of preferred stock to two shares of common stock, subject to adjustment to prevent dilution in the event that the Company issues additional shares. Additionally, conversion of Series F preferred stock is automatic upon the completion of an underwritten public offering of common stock in which the price per share is not less than $8.70 per share with aggregate gross proceeds to the Company of at least $10,000,000. In the event of liquidation of the Company, holders of Series F preferred stock are entitled to receive an amount per share equal to $17.40 prior and in preference to any distribution of the Company assets to holders of common stock, plus all declared and unpaid dividends. F-16 68 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK SPLIT In November 1994, the Company's stockholders authorized a two-for-one split of its common stock. All references in the accompanying financial statements to the number of shares of common have been restated to reflect the stock split. PROPOSED PUBLIC OFFERING OF COMMON STOCK On November 15, 1996, the Board of Directors authorized the Company to proceed with an initial public offering of the Company's common stock. If the offering is consummated under the terms presently anticipated, all of the currently outstanding preferred stock will automatically convert into 6,456,068 shares of common stock. Prior to the offering, the Company plans to reincorporate in Delaware and authorize 5,000,000 shares of undesignated preferred stock, increase the number of authorized shares of common stock to 60,000,000 and adopt a par value of $.001 per share for common and preferred shares. In addition, the Company will change its name from ProBusiness, Inc. to ProBusiness Services, Inc. The unaudited pro forma stockholders' equity (deficit) at June 30, 1997 gives effect to the conversion of all outstanding shares of convertible preferred stock into 6,456,068 shares of common stock upon the completion of the Company's initial public offering of shares. NOTES RECEIVABLE In December 1996, the Company advanced $544,000 in the form of a note receivable from a stockholder, who is also an executive officer, in connection with the exercise of options to purchase common stock. The note is due on December 2000, bears interest at 6.31% and is full recourse. In January 1997, the Company advanced $544,000 in the form of a note receivable from a stockholder in connection with the exercise of options to purchase common stock. The note is due on January 2001, bears interest at 6.10% and is full recourse. In January 1997, the Company advanced $250,000 in the form of a note receivable from a stockholder who is also an executive officer. The note is due in January 2001, bears interest at 6.10% and is full recourse. 7. STOCK OPTION AND STOCK PURCHASE PLANS STOCK OPTION PLANS The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees, directors and consultants of nonstatutory stock options. The Company has reserved 2,987,248 shares of common stock for the exercise of stock options under the 1989 Plan. Individuals owning more than 10% of the Company's stock are not eligible to participate in the plan unless the option's price is at least 110% of the fair market value of the common stock at the date of grant. Options issued to employees owning less than 10% of the Company's stock may be granted at prices of at least 100% (85% for nonemployees) of the fair market value of the stock at the grant date. Under the terms of the plan, options generally vest at the rate of 25% on the first anniversary of the vesting commencement date as defined by the option agreement and ratably on a monthly basis for the remaining shares thereafter until fully vested at the end of the fourth year. The options expire at the earlier of ten years from date of grant or six months after termination of employment with the Company and are not transferable. In 1996, the Company established the 1996 Executive Stock Option Plan ("Executive Plan") which provides for stock options to employees and consultants. Under the Executive Plan, the Board of Directors may grant nonstatutory stock options to employees and consultants and incentive stock options to employees only. The Company has reserved 750,000 shares of common stock for exercise of stock options under the 1996 Plan. The grant of incentive stock option to an employee who owns stock representing more than 10% of the voting power of all classes of stock of the Company must be no less than 110% of the fair market value per share on the F-17 69 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) date of grant. Fair market value is determined by the Board of Directors. For all other employees the options must be no less than 100% of the fair market value per share on the date of grant. All nonstatutory stock options granted are at a price that is determined by the Board of Directors. The options generally expire ten years from the date of grant and are exercisable as determined by the Board of Directors. In November 1996, the Board of Directors approved, effective upon the offering and subject to stockholder approval, an amendment and restatement of the Executive Plan to rename 1996 Executive Stock Option Plan to the 1996 Stock Option Plan (the "1996 Plan") and authorized for issuance under the 1996 Plan a total of 750,000 shares plus any unused or cancelled shares under the 1989 Plan, and an annual increase to be added on each anniversary date of the adoption of the 1996 Plan equal to the lesser of (a) 250,000 shares, (b) 2% of the outstanding shares of common stock on such date or (c) a lesser amount determined by the Board. The 1996 Plan provides for grants to employees (including officers and employee directors) of incentive stock options and for the granting to employees, directors and consultants of nonqualified stock options. A summary of the activity under the 1989 and 1996 Plans is set forth below:
WEIGHTED AVERAGE EXERCISE PRICE PER NUMBER EXERCISE SHARE OF SHARES PRICE ------------------ ----------- -------- Outstanding at June 30, 1994.............. 0.190 - 0.395 882,446 0.23 Granted................................. 0.295 - 0.395 164,436 0.39 Exercised............................... 0.190 - 0.395 (9,808) 0.27 Canceled................................ 0.190 - 0.395 (18,178) 0.28 --------------- ---------- ------ Outstanding at June 30, 1995.............. 0.190 - 0.395 1,018,896 0.26 Granted................................. 0.395 - 1.25 1,055,930 0.43 Exercised............................... 0.190 - 0.435 (1,201,556) 0.33 Canceled................................ 0.190 - 0.395 (230,469) 0.33 --------------- ---------- ------ Outstanding at June 30, 1996.............. 0.190 - 4.35 642,801 0.41 Granted................................. 4.75 - 8.75 662,670 7.25 Exercised............................... 0.190 - 7.25 (315,293) 3.59 Canceled................................ 0.247 - 8.75 (114,402) 3.77 --------------- ---------- ------ Outstanding at June 30, 1997.............. $0.190 - $ 8.75 875,776 $ 4.00 =============== ========== ======
As of June 30, 1997, options to purchase 198,422 shares of common stock were vested and exercisable at an average exercise price of $0.43 per share and options to purchase 1,331,195 shares were available for future grant. At June 30, 1997, options to purchase 380,316 shares of Common Stock had been exercised which are subject to repurchase. The weighted-average fair value of options granted during 1996 and 1997 was $0.09 and $1.51 per share, respectively. F-18 70 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable options:
OUTSTANDING ------------------------ EXERCISABLE WEIGHTED ------------------------ AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE NUMBER AVERAGE NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE AND VESTED PRICE - ---------------- ----------- ----------- -------- ----------- -------- $0.19 - $0.297 70,563 5.65 0.261 66,441 $0.258 $0.395 - $1.25 370,093 8.44 0.515 131.460 0.505 $4.75 - $4.75 51,000 9.21 4.75 521 4.75 $7.25 - $8.75 384,120 9.63 7.81 -- -- ----------- -------- 875,776 198,422 =========== ========
STOCK-BASED COMPENSATION As permitted under SFAS 123, the Company has elected to continue to follow APB 25 in accounting for stock-based awards to employees. Under APB 25, the Company has not recognized any compensation expense with respect to such awards, since the exercise price of the stock options awarded are equal to the fair market value of the underlying security on the grant date. Disclosure of information regarding net loss and net loss per share is required by SFAS 123 for the Company's awards granted after June 30, 1995 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using a Black-Scholes option pricing model. Limitations on the effectiveness of the Black-Scholes option valuation model are that it was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and that the model requires the use of highly subjective assumptions including expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The Company has plans which award employees stock options. These plans are discussed in the note above. The fair value of the Company's stock-based awards to employees was estimated using the following weighted-average assumptions:
STOCK OPTIONS ------------------- YEAR ENDED JUNE 30, ------------------- 1996 1997 ----- ----- Expected life (in years).......................................... 3.00 2.00 Expected volatility............................................... 0.001 0.001 Risk free interest rate........................................... 6.18% 6.18% Expected dividend yield........................................... 0.00% 0.00%
F-19 71 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For disclosure purposes, the adjusted estimated fair value of the Company's stock-based awards to employees is amortized over the vesting period for options. The Company's adjusted information follows (in thousands, except for per share information):
YEAR ENDED JUNE 30, --------------------- 1996 1997 ------- ------- Net income (loss), as reported.................................. $(2,386) $(6,245) ======= ======= Net income (loss), as adjusted.................................. $(2,403) $(6,355) ======= ======= Historical net income (loss) per share, as reported............. $ (0.76) $ (1.94) ======= ======= Historical net income (loss) per share, as adjusted............. $ (0.77) $ (1.97) ======= ======= Pro forma net income (loss) per share, as reported.............. $ (0.29) $ (0.74) ======= ======= Pro forma net income (loss) per share, as adjusted.............. $ (0.29) $ (0.75) ======= =======
Because SFAS 123 is applicable only to the Company's stock-based awards granted subsequent to June 30, 1995, its effect will not be fully reflected until approximately fiscal year 1999. 1996 EMPLOYEE STOCK PURCHASE PLAN The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in November 1996, effective upon the offering and subject to stockholder approval. The Company has reserved a total of 500,000 shares of common stock for issuance under the Purchase Plan, with an annual increase to be added on each anniversary date of the adoption of the Purchase Plan equal to the lesser of (a) 150,000 shares, (b) 1.5% of the outstanding shares on such date or (c) a lesser amount determined by the Board. The price of common stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the common stock on the first or last day of each purchase period. The Purchase Plan will be implemented by an initial offering period of approximately 24 months commencing on the first trading day on or after the effective date of the offering and ending on the last trading day on or before October 31, 1999. Subsequent offering periods will last 24 months and will commence on the first trading day on or after November 1 and May 1 of each year during which the Purchase Plan is in effect, and will terminate on the last trading day in the periods ending 24 months later. Each 24-month offering period will consist of 4 purchase periods of approximately 6 months duration. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any designated subsidiary for at least 20 hours per week and for more than 5 months in any calendar year. 8. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the benefit of certain qualified employees. Employees may elect to contribute to the Plan, through payroll deductions of up to 18% of their compensation, subject to certain limitations. The Company, at its discretion, may make additional contributions. The Company did not make any contributions to the Plan in fiscal years 1995, 1996 or 1997. F-20 72 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BALANCE SHEET DETAIL Other assets consist of the following (in thousands):
JUNE 30, ----------------- 1996 1997 ------ ------ Capitalized software development costs, net......................... $ 835 $1,859 Deferred financing costs............................................ -- 1,043 Prepaid lease expense............................................... -- 161 Notes receivable from employees..................................... 83 81 Notes receivable from stockholders.................................. -- 295 Goodwill and other intangible assets................................ 41 2,484 Deposits and other.................................................. 216 604 ------ ------ $1,175 $6,527 ====== ======
Accumulated amortization for capitalized software development costs was approximately $172,000 and $475,000 at June 30, 1996 and 1997, respectively. Accumulated amortization for goodwill and other intangible assets was approximately $8,000 and $80,000 at June 30, 1996 and 1997, respectively. Accrued liabilities consist of the following (in thousands):
JUNE 30, ----------------- 1996 1997 ------ ------ Accrued expenses.................................................... $ 552 3,074 Accrued tax penalties............................................... -- 586 Accrued payroll and related expenses................................ 486 1,361 Accrued acquisition costs........................................... 172 144 Other............................................................... 248 120 ------ ------ $1,458 $5,285 ====== ======
10. BUSINESS ACQUISITIONS On May 23, 1996, the Company acquired substantially all of the business and assets of Dimension Solutions, Inc. The total purchase price of $1,264,000 consisted of the issuance of 40,000 shares of Series E convertible preferred stock with a fair value of $317,000 and the assumption of $947,000 of Dimension Solutions, Inc. liabilities (including acquisition costs). A summary of the purchase price allocation is as follows (in thousands): Current and other assets...................................................... $ 318 In-process technology (charged to operations)................................. 711 Developed software............................................................ 175 Covenant-not-to-compete....................................................... 60 ------ Total purchase price allocation............................................... $1,264 ======
On January 1, 1997, the Company acquired all of the outstanding stock of BeneSphere Administrators, Inc. The purchase price consisted of $500,000 in cash, of which $250,000 was paid upon closing and $250,000 was paid in April 1997, warrants to purchase 50,000 shares of common stock at a price of $9.00 per share with an estimated fair value of $160,000 and are exercisable for five years from the date of grant, the assumption of $2,445,000 of BeneSphere's liabilities (including acquisition costs) plus contingent payments based on BeneSphere's revenues in excess of certain base amounts, as defined in the agreement, over the next two calendar years following the F-21 73 PROBUSINESS SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) acquisition which cannot exceed $4,500,000. The contingent payments are payable in cash in four quarterly payments beginning April 1, 1998 for the calendar year 1997 payment and April 1, 1999 for the calendar year 1998 payment. Interest shall accrue at a rate of 9% per annum on all earned but unpaid balances. Included in the liabilities assumed from BeneSphere was a promissory note for $275,000 issued by BeneSphere on December 31, 1996 to an officer of the Company. The note bears interest at a rate of 9% per annum and was paid in full in April 1997. A summary of the purchase price allocation is as follows (in thousands): Current and other assets...................................................... $ 517 Goodwill...................................................................... 2,278 Customer list................................................................. 310 ------ Total purchase price allocation............................................... $3,105 ======
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 JUNE 30, ---------------------------------------- 1995 1996 1997 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro forma net revenues................................. $ 8,642 $ 17,341 $ 29,030 Pro forma net loss..................................... (1,498) (2,149) (7,738) Pro forma net loss per share........................... $ (0.18) $ (0.26) $ (0.92)
The pro forma results include the historical operations of the Company and the historical operations of the acquired businesses adjusted to reflect certain pro forma adjustments including the amortization of intangible assets, capitalized software development costs and interest expense related to a $250,000 short term note payable, resulting from the acquisitions totaling $254,000 for both the years ended June 30, 1995 and 1996 and $86,000 for the year ended June 30, 1997, respectively. The pro forma results do not include the write off of in-process technology of $711,000 for the year ended June 30, 1996 since it is a non-recurring charge. The pro forma results do not include any adjustments for the Company's proposed initial public offering. 11. SUBSEQUENT EVENTS Warrant After June 30, 1997, the Company issued a warrant to purchase an aggregate of 20,000 shares of its Common Stock at a purchase price of $9.00 per share. Interest Rate Swap In August 1997, the Company entered into an interest rate swap agreement with a financial institution with a fixed interest rate of 5.905% for a two year period. Although the actual notional amounts vary on a monthly basis due to fluctuations in projected investments, the average monthly notional amount of funds subject to the fixed interest rate is $62,288,000. In the event the dollar amount of the Company's invested funds falls below the required monthly notional amount, the Company will have payment obligations, which could have a material adverse effect on the Company's results of operations and financial condition. The interest rate swap agreement also requires the Company to make a $350,000 deposit, which is being held by the financial institution as collateral for obligations under the agreement. F-22 74 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders BeneSphere Administrators, Inc. We have audited the accompanying balance sheet of BeneSphere Administrators, Inc. as of June 30, 1996 and the related statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BeneSphere Administrators, Inc. at June 30, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Seattle, Washington December 20, 1996 F-23 75 BENESPHERE ADMINISTRATORS, INC. BALANCE SHEETS (In thousands, except share amounts)
JUNE 30, DECEMBER 31, 1996 1996 -------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................................. $ 2 $ 5 Accounts receivable, net of allowance of none at June 30, 1996 and December 31, 1996.......................................................... 116 120 Prepaid sales commissions.................................................. 200 155 Prepaids and deposits...................................................... 22 63 ----- ------- Total current assets......................................................... 340 343 Furniture, equipment, and improvements, at cost less accumulated depreciation of $195 and $254 at June 30, 1996 and December 31, 1996, respectively...... 259 330 ----- ------- Total assets....................................................... $ 599 $ 673 ===== ======= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Borrowings under line of credit............................................ $ 111 $ 188 Accounts payable........................................................... 125 243 Accrued liabilities........................................................ 68 507 Customer deposits.......................................................... 724 1,032 Bonus payable to shareholder............................................... -- 275 ----- ------- Total current liabilities.......................................... 1,028 2,245 Commitments and contingencies Shareholders' deficit: Common stock, no par value: 50,000 shares authorized; 20,000 and 27,156 shares issued and outstanding at June 30, 1996 and December 31, 1996, respectively....... 68 332 Accumulated deficit........................................................ (497) (1,904) ----- ------- Total shareholders' deficit........................................ (429) (1,572) ----- ------- Total liabilities and shareholders' deficit........................ $ 599 $ 673 ===== =======
See accompanying notes. F-24 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-25 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-26 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-27 79 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS YEAR ENDED JUNE 30, 1996 (INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE SIX-MONTHS ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED) 1. REPORTING ENTITY BeneSphere Administrators, Inc. is the successor corporation to A-Plus Administrators, Inc. d.b.a. Benefits-Plus Administrators (APA), a Washington Corporation, and Baransky Reppond, Inc. d.b.a. Benefits-Plus Administrators (BRI), a California Corporation. In December 1995, BRI was merged into APA (see Note 3). Subsequent to June 30, 1996, APA's name was changed to BeneSphere Administrators, Inc. (BAI). BAI provides benefits administration services which include flexible benefits enrollment and processing, COBRA administration, and consolidated billing and eligibility tracking and premium payment services for small and medium-sized companies located in the Pacific Northwest and northern California. 2. SIGNIFICANT ACCOUNTING POLICIES UNAUDITED FINANCIAL INFORMATION The financial statements as of December 31, 1996 and for the six-months ended December 31, 1996 and 1995 are unaudited. The unaudited financial statements include all normal recurring adjustments which BAI's management considers necessary for a fair presentation. Operating results for the six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for any future periods. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates include provisions for doubtful accounts and estimates of accrued liabilities to be paid. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents. FURNITURE, EQUIPMENT, AND IMPROVEMENTS Furniture, equipment, and improvements are recorded at cost. Depreciation is computed utilizing accelerated depreciation methods over the estimated useful lives of the assets, which range from five to seven years. CUSTOMER DEPOSITS AND PREPAID SALES COMMISSIONS Customer deposits for set-up and administrative services and related revenues are deferred and amortized ratably on a monthly basis over a period that does not exceed the initial term of the contract. Sales commissions associated with set-up and administrative services are prepaid and recognized ratably on a monthly basis over the same contract period. FINANCIAL INSTRUMENTS BAI's financial instruments consist of cash and cash equivalents, accounts receivable and payable, and short-term borrowings. The fair values of these instruments approximate their recorded values. F-28 80 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) CONCENTRATIONS OF CREDIT RISK BAI's cash balances are maintained in checking accounts with one financial institution and, as such, are subject to federal deposit insurance limitations. Credit evaluations of BAI's customers are performed as necessary, and BAI does not require collateral from its customers. No individual customer or industry comprises a significant concentration of business for BAI. PER SHARE DATA Net loss per common share is computed based on the weighted average number of common shares outstanding during the period. 3. BUSINESS COMBINATIONS APA and BRI were members of a controlled group of corporations. Effective December 31, 1995, BRI was merged into APA through the issuance of 10,000 shares of APA's common stock for all of BRI's outstanding common stock. The merger has been accounted for in a manner similar to pooling of interests and, accordingly, the accompanying financial statements include the accounts of BRI on a historical cost basis and its operations for all periods prior to the merger. Details of the results of operations of the previously separate companies for the six-month period ended December 31, 1995 follow:
REVENUES NET LOSS -------- -------- (IN THOUSANDS) APA.............................................. $335 $(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 substantially all assets of BAI, and are guaranteed by certain shareholders. Interest on the outstanding borrowings is payable monthly. All outstanding principal borrowings are due upon demand or, if no demand is made, on January 31, 1997. The line of credit agreement also provides, among other matters, restrictions on additional financing, mergers, and acquisitions. 5. INCOME TAXES BRI was a C Corporation under the Internal Revenue Code (IRC) and was, therefore, subject to corporate income tax. Amounts related to income taxes payable and temporary differences between the carrying amounts of F-29 81 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) assets and liabilities for financial reporting and income tax purposes prior to and at the date of merger were immaterial. APA, with the consent of its shareholders, elected to be taxed as an S Corporation under the IRC. As a result, BAI, as APA's successor, is generally not subject to corporate income tax, and the shareholders separately report their respective pro rata shares of BAI's income, deductions, losses, and credits on their personal income tax returns. It is BAI's practice to accrue and pay cash distributions to shareholders in amounts sufficient for them to meet their personal income tax obligations resulting from the S Corporation status. Retained earnings (accumulated deficit) are charged at the time the estimated distributions are accrued. 6. RELATED-PARTY TRANSACTIONS BAI is charged and allocated certain administrative and overhead costs incurred and paid by various controlled group members on BAI's behalf. These costs totaled $206,000 for the year ended June 30, 1996, and $62,000 and $177,000 for the six months ended December 31, 1995 and 1996, respectively, and are included in selling, general, and administrative expenses. Effective December 31, 1996, BAI issued 7,156 shares of common stock to an existing shareholder for past services rendered. A value of $264,000 was assigned to the common stock by BAI, which was derived by an independent third party utilizing a discounted cash flows analysis, less a marketability discount. Payroll withholding taxes in the amount of $240,000 have been accrued by BAI at December 31, 1996 and will be paid by BAI on behalf of the shareholder. BAI also agreed to pay a one-time $275,000 cash bonus to the shareholder. Compensation expense in the amount of $779,000 was recorded in selling, general, and administrative expenses for the six months ended December 31, 1996 related to the stock and bonus transactions. 7. 401(k) PLAN BAI participates in a 401(k) plan sponsored by a controlled group member. The plan is available to all employees meeting certain eligibility requirements. Contributions by BAI are based on a matching formula as defined in the plan. Contribution expense related to the plan totaled $4,000 for the year ended June 30, 1996. 8. LEASE COMMITMENTS BAI leases office space under noncancelable operating leases which contain rent escalation clauses and renewal options. In addition to base rent, BAI is required to pay a pro rata portion of the building's monthly taxes and operating costs as additional rent. Future minimum base lease payments under noncancelable operating leases at June 30, 1996 are as follows:
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. F-30 82 BENESPHERE ADMINISTRATORS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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-31 83 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Dimension Solutions, Inc. We have audited the accompanying balance sheet of Dimension Solutions, Inc. as of April 30, 1996 and the related statements of operations, shareholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dimension Solutions, Inc. at April 30, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Walnut Creek, California November 20, 1996 F-32 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-33 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-34 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-35 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-36 88 DIMENSION SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Dimension Solutions, Inc. (the "Company") is a California corporation which sells personal computer-based human resource management software and maintenance support to small to medium sized employers throughout the United States. On May 23, 1996, substantially all of the Company's business and assets were acquired by ProBusiness, Inc. (the "Purchaser" or "ProBusiness"). No adjustments to recorded amounts of assets or liabilities resulting from the acquisition have been included in the accompanying financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reported period. Actual results could differ from these estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is computed using the double declining balance method over the estimated useful lives of the assets which range from three to seven years. REVENUE RECOGNITION AND DEFERRED IMPLEMENTATION COSTS The Company recognizes revenue from the sale of human resource management software when a noncancellable license agreement has been signed, the product has shipped and all significant contractual obligations have been satisfied. The Company's revenue recognition policy is in compliance with the provisions of the American Institute of Certified Public Accountants Statement of Position 91-1, "Software Revenue Recognition." Human resource software maintenance revenue is billed annually, in advance. Customer deposits for software maintenance are deferred and recognized ratably over the term of the maintenance agreement. INCOME TAXES The Company accounts for its income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." PER SHARE DATA Net loss per common share is computed based on the weighted average number of common shares outstanding during the year. 2. NOTES PAYABLE TO SHAREHOLDER On October 15, 1995, the Company received $25,000 in cash in exchange for a note payable to a shareholder which is due on January 31, 1997. Interest is payable monthly at a rate equal to the lesser of the prime rate plus 2 1/2 percent or the maximum allowable rate under California law. The entire principal amount is payable on the due date. F-37 89 DIMENSION SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) During the year ended April 30, 1996, the Company had a balance of $250,000 outstanding under a line of credit agreement. This liability was assumed by a shareholder of the Company. In exchange, the Company signed a note payable with the shareholder for $250,000. Interest on the note is payable by the Company from time to time at a rate equal to the lesser of prime plus 2 1/2 percent or the maximum allowed rate based on California law. The total outstanding principal is due on the earlier of the closing of an initial public offering by ProBusiness or December 31, 1999. 3. LEASE OBLIGATIONS The Company leases its facilities and various equipment under noncancellable operating leases which expire at various dates through September 1999. The future minimum lease payments under operating leases subsequent to April 30, 1996 are summarized as follows:
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-38 90 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The selected unaudited pro forma condensed consolidated financial information for the Company set forth below gives effect to the acquisition of certain assets and liabilities of BeneSphere Administrators, Inc. (BeneSphere). The historical financial information set forth below has been derived from, and is qualified by reference to, the financial statements of the Company and BeneSphere and should be read in conjunction with those financial statements and the notes thereto included elsewhere herein. The selected unaudited pro forma condensed consolidated statement of operations data for the year ended June 30, 1997 set forth below gives effect to the acquisition as if it occurred on July 1, 1996. The selected unaudited pro forma condensed consolidated financial information set forth below reflects certain adjustments, including, among others, adjustments to reflect the amortization of the excess purchase prices and the inclusion of interest expense for debt issued in connection with the acquisition of BeneSphere. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements -- the Company and BeneSphere Administrators, Inc." The selected unaudited pro forma condensed consolidated financial information set forth below does not purport to represent what the consolidated results of operations or financial condition of the Company would actually have been if the BeneSphere acquisition and related transactions had in fact occurred on such date or to project the future consolidated results of operations or financial condition of the Company. F-39 91 SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (In thousands, except per share amounts)
BENESPHERE (1)(2) COMPANY FOR THE SIX PRO FORMA PRO FORMA FOR THE MONTHS ENDED BUSINESS FOR THE YEAR ENDED DECEMBER 31, COMBINATION YEAR ENDED JUNE 30, 1997 1996 COMBINED ADJUSTMENTS JUNE 30, 1997 ------------- ------------- -------- ----------- ------------- Revenue................................. $27,374 $ 1,656 $29,030 -- $29,030 Operating expenses: Cost of providing services............ 13,659 882 14,541 -- 14,541 General and administrative expenses... 4,282 1,362 5,644 75 5,719 Research and development expenses..... 2,841 -- 2,841 -- 2,841 Client acquisition costs.............. 11,706 808 12,514 -- 12,514 ------- ------- ------- ---- ---------- Total operating expenses........... 32,488 3,052 35,540 75 35,615 ------- ------- ------- ---- ---------- Loss from operations.................... (5,114) (1,396) (6,510) (75) (6,585) Interest expense........................ (1,190) (11) (1,201) (11) (1,212) Other income............................ 59 -- 59 -- 59 ------- ------- ------- ---- ---------- Net loss................................ $(6,245) $(1,407) $(7,652) $ (86) $(7,738) ======= ======= ======= ==== ========== Pro forma net loss per common share(3).............................. $ (0.92) ========== Number of shares used to compute pro forma net loss per common share(4).... 8,451 ==========
See accompanying notes. F-40 92 NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Pro forma and offering adjustments for statement of operations for the year ended June 30, 1997 are as follows: (1) Reflects the amortization of the cost over the fair value of net assets acquired for the BeneSphere acquisition as follows:
COST OVER THE FAIR VALUE OF NET AMORTIZATION ASSETS ACQUIRED PERIOD --------------- ------------ (IN THOUSANDS) BeneSphere: Goodwill.............................................. 2,278 20 yrs Customer list......................................... 310 8 yrs
(2) Reflects interest expense of $11,000 for the year ended June 30, 1997 related to a $250,000 short term note payable which represents part of the payment for the purchase of all of the outstanding stock of BeneSphere Administrators, Inc. See Note 10 of the ProBusiness Services, Inc. Consolidated Financial Statements. (3) Pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding. Such pro forma net loss reflects the impact of the adjustments above. (4) Pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding plus common equivalent shares from convertible preferred stock, that will be converted upon the closing of the Company's proposed initial public offering (using the if-converted method), have been included in the computation whether dilutive or anti-dilutive. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued by the Company at proceeds below the assumed public offering price for the twelve-month period prior to the offering have been included in the computation as if they were outstanding for all periods presented (using the treasury stock method at the estimated initial public offering price) whether dilutive or anti-dilutive. See Note 10 of the ProBusiness Services, Inc. Consolidated Financial Statements regarding contingent payments related to the BeneSphere acquisition. F-41 93 APPENDIX -- DESCRIPTION OF GRAPHICS COVER: The Front Cover of the Prospectus includes the ProBusiness logo at the top of the page. Description of LOGO: The ProBusiness logo consists of the word "ProBusiness," all in black letters and all in lower case letters except the "P" and the "B," with a red triangle to the left of a triangular space in the side of the "P." INSIDE FRONT COVER: The Inside Front Cover of the Prospectus includes text stating, "ProBusiness is a leading provider of outsourced payroll processing, payroll tax filing and benefits administration services to large employers." Below the text is an arrow pointing to the ProBusiness logo at the bottom right side of the page. The background photo behind the text depicts ProBusiness service personnel assisting a client. At the bottom of the page is the following: "CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'" GATEFOLD: The Gatefold consists of three horizontal tiers, the top and the middle containing text and photographs and the bottom containing text related to the text and photographs in the middle tier. The top tier consists of captions accompanying the following: the ProBusiness logo, a rectangular collage of photographs and a rectangle containing client logos. In the background of the top tier is a photograph of ProBusiness service personnel assisting a client. The middle tier consists of the words "Business Partnership" at the far left in italics, then three equal-size rectangular photographs and, at the far right, a collage of four overlapping rectangular photographs. The middle tier photographs are connected by downward arrows to corresponding captions, which are in the bottom tier of the gatefold. Description #1: Description of the left section of the upper tier of the gatefold: The ProBusiness logo with text below it stating, "ProBusiness focuses on providing high quality and cost-effective employee administrative services to large employers." Description #2: Description of the center section of the upper tier of the gatefold: A collage of photographs depicting various documents and items related to the services provided by ProBusiness. Description #3: Description of the right section of the upper tier of the gatefold: A rectangle containing the logos of the following eight companies: CCH Incorporated, Sunglass Hut 94 International, Inc., Fujitsu, Ltd., Informix Corporation, Advanced Micro Devices, Inc., 3Com Corporation, AST Research, Inc., and AllAmerica. Caption: "ProBusiness's clients include many large employers in diverse industries." This caption appears below the rectangle containing the clients' logos in Description #3. Description #4: Description of the left section of the middle tier of the gatefold: "Business Partnership." Caption: "ProBusiness differentiates itself from its competitors by establishing a business partnership with each client. The Company develops relationships with each client by assessing payroll processing needs, reengineering and designing payroll systems and processes and implementing a cost-effective solution. The Company maintains an ongoing relationship by providing proactive account management and technical support." This caption appears below the text described in Description #4. Description #5: Description of the left center section of the middle tier of the gatefold: A rectangular photograph of an account manager of ProBusiness assisting a client. Caption: "Client Service - Delivering high quality, responsive and professional client service is a key competitive advantage of the Company. Each client works with a personal account manager who serves as the client's day-to-day contact and is responsible for meeting the client's needs. The Company believes that its low client-to-account manager ratio is a key factor in enabling the Company to achieve a high payroll client retention rate." This caption appears below the photograph in Description #5. Description #6: Description of the center section of the middle tier of the gatefold: A rectangular photograph of two employees of the Company using personal computers in the Company's production facility. Caption: "Technology - ProBusiness's PC-based, distributed architecture is reliable, flexible and scalable. This technology enables the Company to provide high levels of client service and customized solutions for each client that can be easily upgraded and integrated with the client's other systems." This caption appears below the photograph in Description #6. Description #7: Description of the right center section of the middle tier of the gatefold: A rectangular photograph of a ProBusiness specialist diagramming a client's payroll system on a white board. Caption: "Expertise - ProBusiness delivers technical expertise through specialists in design, process, implementation and systems integration. The Company delivers functional and regulatory expertise in payroll, payroll tax and employee benefits." This caption appears below the photograph in Description #7. 95 Description #8: Description of the right section of the middle tier of the gatefold: Rectangular photographs of documents and a computer screen, all of which relate to the service offerings provided by ProBusiness. Caption: "Comprehensive Solutions - ProBusiness provides employers with a broad range of employee administrative services: payroll processing; payroll tax filing, human resources software and employee benefits administration, including flexible benefits enrollment and processing and COBRA administration." This caption appears below the photograph in Description 8. BACK COVER: The Back Cover of the Prospectus includes the ProBusiness logo in the center of the page. 96 LOGO 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale and distribution of Common Stock being registered. All amounts are estimates except the registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- Registration fee................................................. $ 8,364 NASD filing fee.................................................. 3,260 Printing expenses................................................ 300,000 Legal fees and expenses.......................................... 400,000 Accounting fees and expenses..................................... 800,000 Blue sky fees and expenses....................................... 5,000 Transfer agent and registrar fees and expenses................... 15,000 Nasdaq National Market application and listing fees.............. 43,394 Miscellaneous.................................................... 9,982 ---------- Total.................................................. $1,585,000 ==========
- --------------- * 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 98 (b) In October 1994, the Company issued an additional 15,648 shares of Series E Preferred Stock to 4 purchasers at $7.94 per share for an aggregate purchase price of $124,245. (c) In January 1995, the Company issued a warrant to purchase 9,446 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Silicon Valley Bank in connection with a line of credit. (d) In October 1995, the Company issued warrants to purchase 34,630 shares of Series E Preferred Stock of the Company at an exercise price of $7.94 per share to 9 stockholders under a loan agreement whereby the Company issued promissory notes to such stockholders with an aggregate principal amount of $1,100,000. (e) In December 1995, the Company issued warrants to purchase 91,296 shares of Series E Preferred Stock of the Company at an exercise price of $7.94 per share to 37 stockholders under a loan agreement whereby the Company issued promissory notes to such stockholders with an aggregate principal amount of $2,900,000. (f) In April 1996, the Company issued a warrant to purchase 9,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Coast Business Credit ("Coast") in connection with a line of credit. (g) In May 1996, in connection with its acquisition of Dimension Solutions, Inc. ("Dimension Solutions") the Company issued 40,000 shares of Series E Preferred Stock to Dimension Solutions. (h) In July 1996, the Company issued a warrant to purchase 10,000 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to LINC Capital Management in connection with an equipment lease. (i) In October 1996, the Company issued a warrant to purchase 9,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Coast in connection with an amendment to the line of credit. (j) In November 1996, the Company issued a warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise price of $7.94 per share to Britannia Hacienda V Limited Partnership and its partners in connection with a facilities lease. (k) In January 1997, the Company issued warrants to purchase an aggregate of 50,000 shares of its Common Stock at an exercise price of $9.00 per share to two of the former shareholders of BeneSphere in connection with the Company's acquisition of BeneSphere. (l) In March 1997, the Company issued 574,733 shares of Series F Preferred Stock to two purchasers at $17.40 per share for an aggregate purchase price of $10,000,354. (m) After June 30, 1997, the Company issued a warrant to purchase 20,000 shares of its Common Stock at an exercise price of $9.00 per share. (n) Since 1989 and through June 30, 1997, the Company has granted stock options to purchase 2,862,422 shares of the Company's Common Stock at a weighted average exercise price of $2.07 per share to employees, consultants and directors pursuant to its 1996 Stock Option Plan, or predecessor plans. Of these options, 451,962 have been canceled without being exercised, 1,534,684 have been exercised and 875,776 remain outstanding. The sales and issuances of securities described in paragraphs (a) through (m) were deemed to be exempt from registration under the Securities Act by virtue of Rule 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The sales and issuances of securities described in paragraph (n) were deemed to be exempt from registration from the Securities Act by virtue of either Rule 701 of the Securities Act as they were offered and sold pursuant to written compensatory benefit plans as provided by Rule 701 or Rule 4(2) of the Securities Act as transaction by an issuer not involving a public offering. II-2 99 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. 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.
II-3 100
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 Nos. 1 and 2, thereto. 10.18* Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and Registrant, assigned to Registrant on February 29, 1996. 10.19* Promissory Note, dated December 31, 1996 between BeneSphere Administrators, Inc. and Alison Elder. 10.20* Series F Stock Purchase Agreement dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P. 10.21* Stockholders Agreement dated March 12, 1997 between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein). 10.22 Standard Office Lease -- Gross, dated March 27, 1997 between Registrant and Westwood Holdings, Inc. 10.23 ISDA Master Agreement dated June 10, 1997 between Registrant and First Union National Bank. 11.0* Statement regarding computation of Registrant's per share earnings. 16.1* Letter re Change in Certifying Accountant. 21.0* List of Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1). 24.1 Powers of attorney (See page II-6) 27.1* Financial Data Schedule.
- --------------- * Previously filed. II-4 101 (B) FINANCIAL STATEMENT SCHEDULES SCHEDULE II VALUATION ALLOWANCE SCHEDULE ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 102 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, State of California, on this 14 day of August, 1997. PROBUSINESS SERVICES, INC. By: /s/ Thomas H. Sinton ------------------------------------ Thomas H. Sinton President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas H. Sinton and Steven E. Klei, and each of them singly, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission or any regulatory authority granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------------ --------------------------------- ---------------- /s/ Thomas H. Sinton President, Chief Executive August 14, 1997 - ------------------------------------------ Officer and Director (Principal Thomas H. Sinton Executive Officer * Senior Vice President, Finance, August 14, 1997 - ------------------------------------------ Chief Financial Officer and Steven E. Klei Secretary (Principal Financial and Accounting Officer /s/ William T. Clifford Director August 14, 1997 - ------------------------------------------ William T. Clifford * Director August 14, 1997 - ------------------------------------------ David C. Hodgson * Director August 14, 1997 - ------------------------------------------ Ronald W. Readmond * Director August 14, 1997 - ------------------------------------------ Thomas P. Roddy *By: /s/ Thomas H. Sinton - ------------------------------------------ Power of Attorney
103 SCHEDULE II PROBUSINESS, INC. (DOLLARS IN THOUSANDS) VALUATION ALLOWANCE
YEAR ENDED JUNE 30 ---------------------------- DEFERRED TAX ASSETS 1995 1996 1997 ------ ------ ------ Balance at beginning of year..................................... $2,529 $2,988 $3,597 Additions........................................................ 459 609 2,308 Reductions....................................................... -- -- -- Balance at end of year........................................... $2,988 $3,597 5,905
YEAR ENDED JUNE 30 ---------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS 1995 1996 1997 ------ ------ ------ Balance at beginning of year..................................... $ -- $ -- $ -- Additions........................................................ -- -- 365 Reductions....................................................... -- -- $ -- Balance at end of year........................................... $ -- $ -- $ 365
S-1 104 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. 10.4* Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23, 1996, between Registrant and Hacienda Park Associates.
105
EXHIBIT NUMBER DESCRIPTION - -------- --------------------------------------------------------------------------------- 10.5* Built-to-Suit Lease, dated September 27, 1996, between Registrant and Britannia Hacienda V Limited Partnership. 10.6* Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc. and the Trustees under the Will and of the Estate of James Campbell, Deceased and related Guaranty of Lease. 10.7* 1996 Stock Option Plan and related Form of Stock Option Agreement. 10.8 1996 Employee Stock Purchase Plan. 10.9* Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight L. Jackson. 10.10* Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC Capital Management and related Equipment Schedule. 10.11* Form of Indemnification Agreement between Registrant and executive officers and directors. 10.12* Loan Agreement, dated October 20, 1995, between Registrant and certain investors and First Amendment to Loan Agreement, dated December 12, 1995, between Registrant and certain investors. 10.13* Loan and Security Agreement, dated April 30, 1996, between Registrant and Coast Business Credit, Amendment Number One, dated October 25, 1996, and Amendment Number Two, dated January 6, 1997. 10.14* Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider. 10.15* Promissory Note, dated January 7, 1997, between Registrant and Alison Elder. 10.16* Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack. 10.17* Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November 7, 1994, and Amendments No. 1 and 2 thereto. 10.18* Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and Registrant, assigned to Registrant on February 29, 1996. 10.19* Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and Alison Elder. 10.20* Series F Preferred Stock Purchase Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P. 10.21* Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein). 10.22 Standard Office Lease -- Gross, dated March 27, 1997 between Registrant and Westwood Holdings, Inc. 10.23 ISDA Master Agreement dated June 10, 1997 between Registrant and First Union National Bank 11.0* Statement regarding computation of Registrant's per share earnings. 16.1* Letter re Change in Certifying Accountant. 21.0* List of Subsidiaries. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2* Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1). 24.1 Powers of attorney (See page II-6). 27.1* Financial Data Schedule.
- --------------- * Previously filed. EX-4.1 2 SPECIMEN COMMON STOCK CERTIFICATE OF REGISTRANT 1 EXHIBIT 4.1 COMMON STOCK COMMON STOCK [PROBUSINESS LOGO] PRBZ PROBUSINESS SERVICES, INC. PAR VALUE $.001 SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT OF RESTRICTIONS ON SHARES CUSIP 742674 10 4 INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER SHARE OF PROBUSINESS SERVICES, INC. transferable on the bank of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [PROBUSINESS SERVICES, INC. SEAL] /s/ Steven Klei /s/ Thomas H.Sinton VICE PRESIDENT, CHIEF FINANCIAL OFFICER PRESIDENT AND AND SECRETARY CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: NORWEST BANK MINNESOTA, N.A. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE - ------------------------------------------------------ AMERICAN BANK NOTE COMPANY APRIL 4, 1997 dw 3604 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 049068fc (562) 989-2333 (FAX) (562) 426-7450 270-19X proof [initialed] REV 2 ------------ - ------------------------------------------------------- 2 A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon request and without charge at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .......... Custodian ............. TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of survivorship and not as tenants under Uniform Gifts to Minors in common Act ............................... (State) UNIF TRF MIN ACT -- ........... Custodian (until age ....) (Cust) ........... under Uniform Transfers (Minor) to Minors Act ........................ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ___________________ hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________________ X __________________________________________________________ X __________________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By ________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17 AG-16. - --------------------------------------------------- AMERICAN BANK NOTE COMPANY APRIL 4, 1997 dw 3504 ATLANTIC AVENUE 049068bk SUITE 12 LONG BEACH, CA 90807 (562) 959-2333 (FAX) (562) 426-7450 proof [initialed] REV 1 --------- - --------------------------------------------------- EX-10.8 3 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, and shall include payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation; provided, however, that pursuant to Section 20 the Board may modify the definition of "Compensation" before any Offering Period without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period for which the modification shall have effect. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. 2 (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and shall end on the last Trading Day on or before October 31, 1999. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first -2- 3 Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. -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 ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, -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-10.22 4 STANDARD OFFICE LEASE - GROSS DATED MARCH 27, 1997 1 Exhibit 10.22 STANDARD OFFICE LEASE--GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [AIR LOGO] 1. BASIC LEASE PROVISIONS ("Basic Lease Provisions") 1.1 PARTIES: This Lease, dated, for reference purposes only, March 27, 1997 is made by and between Westwood Holdings, Inc. (herein called "Lessor") and PROBUSINESS Services, Inc. doing business under the name of _____________________________________________ (herein called "Lessee"). 1.2 PREMISES: Suite Number(s) 140, 1st floor, consisting of 14,414 rentable feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 BUILDING: Commonly described as being located at 2355 Main Street Center in the City of Irvine, County of Orange, State of California, as more particularly described in Exhibit A hereto, and as defined in paragraph 2. 1.4 USE: General Office, subject to paragraph 6. 1.5 TERM: 5 Years commencing May 15, 1997 ("Commencement Date") and ending May 15, 2002, as defined in paragraph 3. 1.6 BASE RENT: $20,468.00 per month, payable on the 1st day of each month per paragraph 4.1. 1.7 BASE RENT INCREASE: On NA the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 RENT PAID UPON EXECUTION: $20,468.00 for ______________________ 1.9 SECURITY DEPOSIT: $-0- due upon execution 1.10 LESSEE 'S SHARE OF OPERATING EXPENSE INCREASE: 18.04% as defined in paragraph 4.2. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas and the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Area as hereinafter specified. 2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by lessor from time to time, Lessee shall be entitled to rent and use 56 parking spaces in the Office Building Project at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. 2.2.1. If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and change the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space will be $-0- per month. 2.2.3 The lessee shall be entitled to ten reserved spaces located in a mutually agreeable location. Such spaces are included in the 56 spaces allocated to the lessee. 2.3 COMMON AREAS-DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 COMMON AREAS-RULES AND REGULATIONS. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 COMMON AREAS-CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available. (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. TERM. 3.1 TERM. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's Initials: ________ ________ (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 1 of 10 PAGES 2 option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 POSSESSION TENDERED-DEFINED. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease. Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United states to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of the amount by which all Operating Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year, such excess being hereinafter referred to as the "Operating Expense Increase," in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Base Year" is defined as the calendar year in which the Lease term commences. (c) "Comparison Year" is defined as each calendar year during the term of this Lease subsequent to the Base Year; provided, however, Lessee shall have no obligation to pay a share of the Operating Expense Increase applicable to the first twelve (12) months of the Lease Term (other than such as are mandated by a governmental authority, as to which government mandated expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the first twelve (12) months). Lessee's Share of the Operating Expense Increase for the first and last Comparison Years of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Lessee is responsible for a share of such increase. (d) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion, for: (i) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project including but no limited to, the following: (aa) The Common Areas, including their surfaces, coverings, decorative items, carpets, drapes and window coverings, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping bumpers, irrigation systems, Common Area lighting facilities, building exteriors and roofs, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of, lessees or occupants of the Office Building Project, including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools, used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants); (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (e) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(d)(viii), in which case their cost shall be included as above provided. (f) Operating Expenses shall not include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (g) Lessee's Share of Operating Expense Increase shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time in advance of Lessee's Share of the Operating Expense Increase for any Comparison Year, and the same shall be payable monthly or quarterly, as Lessor shall designate, during each Comparison Year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each Comparison Year a reasonably detailed statement showing Lessee's Share of the actual Operating Expense Increase incurred during such year. If Lessee's payments under this paragraph 4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expense Increase next falling due. If Lessee's payment under this paragraph during said Comparison Year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Lessee is responsible as to Operating Expense Increases, notwithstanding that the Lease term may have terminated before the end of such Comparison Year. 4.3 RENT INCREASE. Initials: ________ ________ (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 2 of 10 PAGES 3 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor or Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on the Premises and in good operating condition. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, on, or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy. Initials: _______ ________ (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 3 OF 10 PAGES 4 any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien of claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorney's fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility installations (whether or not such Utility installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility installations. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an insurance Services Office standard form with Broad Form General Liability Endorsement (GL04), or equivalent, in an amount of not less than $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy, or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 PROPERTY INSURANCE--LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 PROPERTY INSURANCE--LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor, shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission by Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case of action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid for such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified in paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. (c)1984 American Industrial FULL SERVICE--GROSS Initials: _____ Real Estate Association PAGE 4 OF 10 PAGES 5 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not is an Insured Loss, which falls into the classifications of either (i) Premise Building Total Destruction, or (iii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which an option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise said option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT: LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operating from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage sufficient by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or if the Building under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and the execution of plans and specifications required. 9.6 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvement placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general special, ordinary or extraordinary and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a taxable service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the improvements of property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessors work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement of any bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. Hours of service shall be from 7:00 AM to 6:00 PM weekdays and 9:00 AM to 12:00 NOON Saturdays. (C) 1984 American Industrial Real Estate Association Initials:__________ __________ FULL SERVICE -- GROSS PAGE 5 OF 10 PAGES 6 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage or interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver of estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's full consent null and void. 12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee with three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. Initials: _________ FULL SERVICE - GROSS _________ PAGE 6 OF 10 PAGES (C) 1984 American Industrial Real Estate Association 7 (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. (Section)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate, and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, the Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) The brokers involved in this transaction are None ----------------------- as "listing broker" and Voit Commercial Brokerage as "cooperating --------------------------------------- broker" licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ 4% of Gross Rents , for brokerage services rendered by a broker(s) ------------------------------ to Lessor in this transaction. *See Below (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date *(A) 50% upon execution of the lease (B) 50% upon occupancy Initials:__________ (Copyright) 1984 American Industrial Real Estate Association __________ FULL SERVICE--GROSS PAGE 7 OF 10 PAGES 8 to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers than the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such parties at such addresses as lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach to Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. SUBORDINATION. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. (C) 1984 American Industrial Real Estate Association Initials:__________ __________ FULL SERVICE -- GROSS PAGE 8 OF 10 PAGES 9 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the first month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. SECURITY MEASURES--LESSOR'S RESERVATIONS. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings, the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building of the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. Initials: ________ ________ FULL SERVICES-GROSS PAGE 9 of 10 PAGES (C) 1984 American Industrial Real Estate Association 10 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C and incorporated herein by this reference. 49. ATTACHMENTS. Attached hereto are the following documents which constitute a part of this Lease: EXHIBIT A EXHIBIT B EXHIBIT C EXHIBIT D LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY THE EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Westwood Holdings, Inc. PROBUSINESS Services, Inc. - ----------------------------------- ------------------------------------- By ________________________________ By __________________________________ Its _______________________ Its ___________________________ By ________________________________ By __________________________________ Its _______________________ Its ___________________________ Executed at Executed at Pleasanton, CA 94588 ------------------------ -------------------------- on on 3-28-87 -------------------------------- ---------------------------------- Address Address 5934 Gibraltar Drive --------------------------- ----------------------------- FULL SERVICE - GROSS PAGE 10 OF 10 PAGES (C) 1984 American Industrial Real Estate Association For these forms write or call the American Real Estate Association, 350 South Figueroa Street, Suite 275, Los Angeles, CA 90071, (213) 687-8777. (C) 1984 - By American Industrial Real Estate Association. All rights reserved. No part of these words may be reproduced in any form without permission in writing. 11 STANDARD OFFICE LEASE FLOOR PLAN [LOGO] EXHIBIT A Initials: ____ FULL SERVICE--GROSS ____ (C)1984 American Industrial Real Estate Association 12 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE [LOGO] Dated: March 27, 1997 By and Between Westwood Holdings, Inc. and PROBUSINESS Services, Inc. GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property, the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the building on Saturdays, Sundays and legal holidays, and on other days between the hours of 6 P.M. and 7 A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of healing or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent off- site location(s), and to reasonably allocate them between compact and standard sizes spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws, and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended to or shall be created hereby. Initials: ____ FULL SERVICE--GROSS ____ EXHIBIT B PAGE 1 OF 1 PAGES (C)1984 American Industrial Real Estate Association 13 EXHIBIT "C" WORK LETTER AGREEMENT Dated: March 27, 1997 By and between: Westwood Holdings, Inc., a Nevada Corporation ("Lessor") and PROBUSINESS Services, Inc. ("Lessee"): 1. Landlord hereby agrees, at its expense, to cause Landlord's contractor to perform at the Premises in Landlord's standard manner and using Landlord's standard materials (unless otherwise specified below) the work as depicted on, and in accordance with, that certain "Space Plan" dated 3-28-87 prepared by APTI Design and attached to this lease as Exhibit "A" and hereby made a part hereof (hereinafter referred to as the "Landlord's Work"); however, all non-standard cabling and wiring, furniture, built-ins, appliances and equipment, including, without limitation, duplication machines, microwave ovens, refrigerators, coffee machines and all similar machines, shall be excluded from the Landlord's Work. All Working Drawings (as defined in Paragraph 4(b) below) shall be included in the Landlord's Work and shall be prepared by space designers, engineers chosen by Landlord. Notwithstanding any other provision of this Lease, all construction to the Premises, including the Landlord's Work, shall be performed by contractor selected by Landlord. All costs of any work in excess of the Landlord's Work shall be the sole and exclusive obligation of the Tenant under Paragraph 4 below. Electrical detail to be provided separately. 2. Tenant acknowledges and agrees that other than the Landlord's Work, no additional work shall be required with respect to the Premises or the Project as a result of this Lease, that it has been able to fully inspect the Premises to its satisfaction as of the date hereof, that but for the Landlord's Work it is fully satisfied with the physical condition thereof and that, subject only to the due completion of the Landlord's Work, it hereby accepts possession of the Premises as of the Commencement Date of the Term in its then current "as is" condition; provided, however, that the foregoing shall not affect Landlord's express obligations under this Lease, if any, to maintain and repair the Premises. 3. Tenant shall advise Landlord of all selections or designations to be made by Tenant hereunder within five (5) business days after its execution of this Lease. Such selections and designations shall be subject to the approval or disapproval of Landlord, which approval shall not be unreasonably withheld. 4. Tenant acknowledges and agrees that the Commencement Date shall not occur and, accordingly, possession of the Premises shall not be made available to it under Sections 2 and 6 of this Lease until Landlord's contractor shall have substantially completed Landlord's Work. Notwithstanding such provisions of this Lease to the contrary: (a) In the event Tenant requests any material or installation other than as provided within the Landlord's Work, any modification or delay therein or any other work in addition thereto, all of which shall be subject to Landlords's reasonable approval (collectively, "Tenant's Overstandard Work") or otherwise directly or indirectly causes any delay in the performance of any of the Landlord's Work which delay prevents Landlord from substantially completing the Landlord's Work prior to May 15, 1997, then Tenant shall pay all costs and expenses occasioned by such delays, including, without limitation, all costs and expenses attributable to increases in labor or materials, and the Rent Commencement Date shall be revised to occur on the Estimated Commencement Date set forth in the Basic Lease Provisions. (b) Tenant shall fully cooperate with and assist Landlord, and shall devote such time as may be necessary in connection therewith, to complete and obtain written approval by Tenant of all architectural, mechanical, electrical and structural engineering drawings, plans and specifications required in connection with the final layout and plans for the Landlord's Work (the "Working Drawings") and written approval by all appropriate governmental authorities of the Working Drawings (as so approved, the "Approved Plans") as soon as practicable after the Execution Date. Without limiting the generality of Paragraph 4(a) above, Tenant acknowledges and agrees that all work shown on the Working Drawings or the Approved Plans which does not expressly qualify as Landlord's Work under Paragraph I above shall constitute Tenant's Overstandard Work. Landlord shall use commercially reasonable efforts to substantially complete the Landlord's Work at the expiration of twelve (12) weeks after Landlord's receipt of the Approved Plans. (c) Within five (5) business days after its receipt of notice from Landlord under Section 2.2 of the Lease regarding substantial completion of the Landlord's Work, Tenant shall conduct a walk-through inspection of the Premises under the supervision of Landlord's contractor and deliver to Landlord a written punch list of all aspects of the Landlord's Work which are either defective or incomplete. Tenant's failure to include items of the Landlord's Work in a timely punch list shall be conclusively deemed to be Tenant's acceptance thereof. At Landlord's option upon its receipt of such a punch list, subject to Tenant's reasonable approval, either (a) Tenant shall not be granted possession of the Premises (and the Commencement Date shall not occur) until Landlord shall give Tenant a revised notice under Section 2.2 of the Lease, in which event Tenant's walk-through inspection applicable thereto shall be limited only to those items shown on the most recent punch list, or (b) provided no such punch list item materially interferes with Tenant's occupancy of the Premises, Tenant shall be granted possession of the Premises and Landlord shall use commercially reasonable efforts to repair or complete all items of the Landlord's Work duly set forth in Tenant's punch list as soon as practicable thereafter. 5. All Tenant's Overstandard Work which Landlord agrees to allow under Paragraph 4 above shall be performed by Landlord's contractor at its cost, plus fifteen percent (15%) thereof as a fee. Such "cost" shall include, without limitation, all of such contractor's so-called "General Conditions" (e.g., trash clean-up and hauling, job lighting and power, insurance, safety protection, security and hoists) in whole or in part apportionable to the Tenant's Overstandard Work. The aggregate cost of all Tenant's Overstandard Work shall be payable fifty percent (50%) upon Tenant's and Landlord's execution of the agreement wherein Landlord agrees to perform such Tenant's Overstandard Work and the balance in substantially equal progress payments promptly after Landlord's billing Tenant therefor. Such payments shall be collectible as additional rental obligation of Tenant pursuant to this Lease and, accordingly, upon any default by Tenant in the payment thereof, Landlord shall have, in addition to all other remedies available to it under this Lease, at law or in equity, the same rights as in the event of Tenant's default in payment of Rent. Initials: ------- ------- 14 6. Tenant agrees that neither it nor any of its agents, employees or contractors shall enter the Premises for any purpose prior to the date possession thereof is made available to it under Section 6 of this Lease, except as Landlord may in its reasonable discretion approve otherwise in advance. Based on the Space Plan and the current apparent condition of the Premises, Landlord anticipates that it will be able to permit such entry by a qualified electrical wiring contractor and equipment vendors of Tenant during the final two (2) weeks prior to substantial completion of the Landlord's Work. In connection with any such entry (whether or not in violation of this Paragraph 6), Tenant agrees to (a) fully cooperate with Landlord's representatives and not delay in any way or otherwise interfere with the performance of any work in progress or to be performed by Landlord or Landlord's contractor, and (b) observe and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease other than Tenant's covenants for the payment of Rent; provided, however, that in the event any such entry is made in violation of this Paragraph 6 or Tenant commences to conduct any business in or from the Premises prior to the commencement of the Term, then both the Commencement Date and the Rent Commencement Date shall be revised to occur as of such date of entry or of the commencement of such business activities, whichever is earlier. 7. If Tenant request to perform any alteration, addition or improvement with respect to the premises at any time (the "Work"), and Landlord consents to such request, the following terms and conditions shall apply to all such Work: (a) All costs and expenses in connection with or arising out of the performance of the Work shall be borne by Tenant and all payments therefor shall be made by Tenant promptly as they become due. At not time shall Tenant do or permit anything to be done whereby any part of the Project may be subjected to any mechanic's or other lien or encumbrance arising out of the Work. Tenant shall notify Landlord in writing not less than ten (10) days prior to the commencement of Work in order to afford Landlord an opportunity to post and record appropriate notices of nonresponsibility with reference to the Work. Prior to the commencement of any Work and from time to time whenever requested by Landlord, Tenant will deliver to landlord waivers of mechanic's liens duly executed by all contractors, laborers or material persons concerned with such Work. At any time so requested by Landlord, Tenant will, at Tenant's expense, provide and furnish to Landlord either (1) a surety company bond, (2) a court order discharging lien, or (3) such other form of protection satisfactory to Landlord against any lien or encumbrance which may be filed. (b) All materials and processes used in the performance of the Work shall conform to the standards and Rules and Regulations of the Project and Tenant hereby assures Landlord that each of Tenant's contractors will be entirely familiar with such requirements prior to commencement of any Work. No Work shall proceed without the submission of detailed plans and specifications for such Work for approval by Landlord. Once Tenant has commenced the Work, Tenant will promptly, diligently and continuously pursue the same to successful completion in full compliance with the approved plans and specifications. (c) Tenant shall perform all Work in a safe and lawful manner using only contractors approved by Landlord. All Work shall be done with union labor in accordance with the Southern California Labor Agreement. Tenant shall at its sole expense comply with all applicable laws, regulations and requirements of all governmental bodies exercising authority over the Project or the Work and timely obtain all required licenses or permits. Copies of all permits, licenses and filed documents shall be provided to Landlord for Landlord's approval. Any Work not acceptable to the Department of Building and Safety or not reasonably satisfactory to Landlord shall be promptly replaced at Tenant's expense. Notwithstanding any failure by Landlord to object to any such Work, Landlord shall have no responsibility therefor. Tenant shall notify Landlord in writing not less than ten (10) days prior to the commencement of any Work as to name, telephone and responsible party for each contractor and subcontractor who is about to commence such Work. (d) Tenant hereby indemnifies and agrees to defend and hold Landlord harmless for and against any and all suits, claims, actions, losses, costs or expenses (including claims for Workers' Compensation) of any nature whatsoever together with attorneys' fees for counsel of Landlord's choice, arising out of or in connection with the Work of Tenant or the performance of the Work by Tenant (including, without limitation, claims for breach of warranty, personal injury or property damage). Landlord shall have the right, in Landlord's sole and exclusive discretion, to settle, compromise or otherwise dispose of any such suit, claim or action. (e) No Work shall proceed without Workers' Compensation, public liability and property damage insurance, all in amounts and with companies and on forms satisfactory to Landlord and, if Landlord shall so request, naming Landlord as an additional insured. Not less than thirty (30) days before commencing the Work, certificates of such insurance shall be furnished to Landlord or, if requested, be given to Landlord before termination or cancellation. In addition, no work shall proceed without Tenant's contractor providing payment and performance bonds satisfactory to Landlord. (f) Landlord shall have no responsibility for the Work and Tenant, will remedy at Tenant's own expense and be responsible for all defects in all such Work that may appear during or after the completion thereof whether the same shall affect the Premises in particular or any part of the Project in general. Tenant shall reimburse Landlord for any extra expense incurred by Landlord by reason of faulty work done by Tenant or Tenant's contractor, by reason of delays caused by such Work or by reason of inadequate cleanup. (g) If the performance of the Work shall require Landlord to provide additional services or facilities (including, without limitation, extra elevator service, hoisting, cleanup or other cleaning services, trash removal, field supervision or ordering of materials), tenant shall pay Landlord its actual costs thereof, together with a fee for Landlord's supervision and overhead equal to either (1) fifteen percent (15%) of such costs if Landlord or Landlord's contractor is performing any portion of the work or acting as the sole general contractor with respect thereto, or (11) five percent (5%) if otherwise. If Tenant employe landlord at Tenant's expense to perform any portion of the Work and thereafter elects to itself (through a subcontractor selected by Tenant but approved by Landlord) perform any component of such portion (including, without limitation, finishes or overstandard items), then Tenant shall pay Landlord ten percent (10%) of such subcontractor's total bill as and for Landlord's supervision and overhead. (h) All of Tenant's contractors, subcontractors, employees, servants and agents shall work in harmony and not interfere with any labor employed by Landlord or Landlord's contractors or by any other tenant or its contractors. (i) All work performed by Tenant or Tenant's contractors shall be scheduled through Landlord and shall be performed during normal business hours. Any work to be performed at other times or in adjacent tenants' areas shall be pursued only after obtaining Landlord's express written permission and shall be done only if an agent or employee of Landlord is present. Tenant shall reimburse Landlord for the expense of any such employee or agent. (j) All core drilling, concrete cutting, demolition of partitions or removal of rubbish relating to or resulting from the Work shall be done between the hours of 7:00 p.m. and 6:00 a.m. (k) If any shutdown of plumbing, electrical or air conditioning equipment becomes necessary, Tenant shall notify Landlord and Landlord will determine when such shutdown may be made. Any such shutdown shall be done only if any agent or employee of Landlord is present. Tenant shall reimburse Landlord for the expense of any such employee or agent. Initials: _________ _________ 15 (l) Any noise complaints by tenants of adjacent areas are to be remedied immediately or all operations in connection with such Work are to cease until such noise is abated. (m) Tenant or Tenant's contractors shall in no event be allowed to install any plumbing, mechanical or electrical wiring or fixture, or acoustical or integrated ceiling unless prior written approval is obtained from Landlord. In addition, all data processing and other special electrical equipment shall be installed only under the supervision of Landlord or Landlord's electrical contractor. (n) Notwithstanding Paragraph 7(m) above, Tenant agrees to be entirely responsible for the maintenance of any electrical or plumbing Work, lighting fixture, partition, door, hardware or any other item installed by Tenant. such maintenance shall be performed only by a contractor approved in writing in advance by Landlord. Tenant shall not be deemed to have installed, for purposes of this Paragraph 7(n), any part of the Landlord's Work. (o) Any hardware, light fixture or heating, ventilation or air conditioning installation in the Premises which Tenant permanently removes shall be stored by Tenant where directed by Landlord. No such removal may be made unless shown on the plans and specifications approved by Landlord. Tenant agrees, at Tenant's expense, to reinstall any or all such installations at the expiration of the Term should Landlord so require. Tenant shall not be deemed to have removed, for purposes of this Paragraph 7(o), any item removed as part of the Landlord's Work. (p) Landlord expressly reserves the right upon notice to Tenant in the event of a breach of any of the terms or conditions hereof, to require Tenant to immediately cease all Work to the extent directed by Landlord in such notice. (q) Nothing herein contained shall be construed as (1) constituting Tenant as Landlord's agent for any purpose whatsoever, or (2) a waiver by Landlord of any of the terms or provisions of the Lease. Any default by Tenant with respect to any portion of this Exhibit "C" shall, at Landlord's option, be deemed a breach of the Lease as to which Landlord shall have all the rights and remedies available in the case of a breach of the Lease. [END OF EXHIBIT "C"] Initials: ------- ------- 16 EXHIBIT "D" OPTION TO EXTEND Dated: March 27, 1997 By and between: Westwood Holdings, Inc., a Nevada Corporation ("Lessor") and PROBUSINESS Services, Inc. ("Lessee") OPTION TO EXTEND: Landlord hereby grants to Tenant the option (the "Option") to extent the Term, which would otherwise terminate on the Expiration Date set forth in the Basic Lease Provisions (the "Initial Term"), to also include the immediately subsequent five (5) years (the "Option Term"), but only in strict accordance with the terms and conditions set forth below: (a) The Option must be exercised, if at all, by written notice received by Landlord not less than six (6) and not more than nine (9) months prior to the Expiration Date of the Initial Term. All of the terms and conditions of the Lease applicable as of such Expiration Date shall continue to apply during the Option Term, except that the Rent during the Option Term shall be the greater of 95% of the Prevailing Market Rental as of the date of the Landlord's Notice (both as defined below), or (ii) the Rent in effect immediately prior to the Expiration Date of the Initial Term. (b) The "Prevailing Market Rental" shall mean and include the effective calculation of all rental and other monetary payments, together with escalations at the rate of 3% per annum, which the landlord of a project comparable to and in the vicinity of the Project could obtain from an unrelated third party desiring to lease premises therein comparable to the Premises for a term comparable to the Option Term, taking into account the age of the Project, the size, location and floor level of the Premises, the quality of construction of the Project and the Premises, the service provided under the terms of the Lease, the rental then being obtained for new leases of space comparable to the Premises in the locality of the Project; provided, however, that Prevailing Market Rental shall be stated net of any free rent concessions included in such market rental and no allowance of credit for the construction of tenant improvements (or reduction in rental as a result of the absence of such allowance or credits) shall be taken into account in determining Prevailing Market Rental. (c) In the event Tenant exercises the Option, Landlord shall use commercially reasonable efforts to notify Tenant of its opinion of the Prevailing Market Rental at lease one hundred twenty-five (125) days prior to the Expiration Date of the Initial Term (the "Landlord's Notice"). At any time within thirty (30) days following its receipt of the Landlord's Notice, Tenant may dispute the Prevailing Market Rental set forth in the Landlord's Notice by delivering written notice to the Landlord to that effect and setting forth Tenant's opinion of the Prevailing Rental (the "Tenant's Notice"). Failure to timely give the Tenant's Notice shall be conclusively deemed to be Tenant's acceptance of the Prevailing Market Rental set forth in the Landlord's Notice. (d) At any time within thirty (30) days following its receipt of the Tenant's Notice, Landlord shall have the option to either (1) accept the Prevailing Market Rental set forth in the Tenant's Notice, (2) in the event the Prevailing Market Rental set forth in the Landlord's Notice exceeds one hundred ten percent (110%) of the Prevailing Market Rental set forth in the Tenant's Notice, terminate the Option and Tenant's exercise thereof, in which event the Lease shall terminate on the Expiration Date of the Initial Term, or (3) submit the dispute to arbitration in accordance with Section 2(e) below. Landlord's failure to notify Tenant of its election under clause (1) or (2) above shall be conclusively deemed to be Landlord's election to submit the determination of Prevailing Market Rental to arbitration under clause (3) above. (e) Any arbitration under this Section 2 shall be conducted in the City of Irvine in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes, modified as follows, and any judgment or award rendered therein shall be final and binding upon the parties and may be entered in any court of competent jurisdiction: (1) At any time concurrently with or after Landlord's election under Section 2(d)(3) above, Landlord shall appoint a qualified real estate appraiser familiar with the prevailing market rentals of first-class industrial and research and development parks in Orange County who is a member of the National Institute of Real Estate Appraisers (a "Qualified Appraiser") to act as an arbitrator hereunder. Within ten (10) days after such appointment by Landlord, Tenant may by written notice to Landlord appoint another Qualified Appraiser to also act as an arbitrator hereunder. Tenant's failure to so appoint a second arbitrator shall be conclusively deemed to be Tenant's appointment of the arbitrator appointed by Landlord. (The date of such notice by Tenant or, if none is given, the last date such notice could have been given shall be hereinafter referred to as the "Selection Date"). In the event Landlord has made, or been deemed to have made, an election under Section 2(d)(3) above but failed to appoint the first arbitrator within twenty (20) business days thereafter, Tenant may, by written notice to Landlord at any time after such twentieth business day and before Landlord makes such appointment, so appoint such first arbitrator; whereupon Landlord shall have all of the foregoing rights with respect to appointing a second arbitrator. (2) Within ten (10) business days after the Selection Date, the appointed arbitrators shall meet to determine (or the sole arbitrator shall alone determine) the Prevailing Market Rental. In the event two (2) arbitrators are appointed under clause (e)(1) above who are unable to agree upon a determination of the Prevailing Market Rental within thirty (30) days after the Selection Date, they shall appoint a Qualified Appraiser to act as an additional arbitrator hereunder. In the event no such appointment is made within thirty-five (35) days after the Selection Date, Landlord and Tenant shall jointly appoint a Qualified Appraiser as such third arbitrator of, if they cannot agree thereon, either party may petition the then Chief Judge of the United States District Court having jurisdiction over the City of Irvine to appoint a Qualified Appraiser as such third arbitrator. (3) Within ten (10) business days after the appointment of the third arbitrator, the appointed arbitrators shall meet to determine the Prevailing Market Rental. In the event all three (3) appraisers do not agree on the Prevailing Market Rental, the average of the determinations of the two (2) appraisers which are closest in value shall be the Prevailing Market Rental. (4) The arbitrators shall render their determination in writing with counterpart copies to each party. Such determination shall be certified by each arbitrator as his opinion of the Prevailing Market Rental or, where such determination was arrived at through averaging under clause (e)(3) above, each arbitrator's individual determination shall be set forth and certified by him. In no event shall any arbitrator modify any provision of the Lease in arriving at his determination. Initials:__________ __________ 17 (5) In the event of any failure, refusal or inability of an arbitrator to act, a successor shall be appointed in the same manner provided above for such arbitrator's appointment. Each party shall bear all costs and expenses of the arbitrator appointed (or deemed appointed) by it and both shall equally share all costs and expenses of the third arbitrator, if any. All attorneys' fees and expenses of witnesses shall be paid by the party engaging such attorney or calling such witness. (6) Each arbitrator shall have the right to consult experts and competent authorities regarding factual information or evidence pertaining to a determination of the Prevailing Market Rental; provided, however, that any such consultation shall be made in the presence of Landlord, Tenant and all other appointed arbitrators with full right on each of their part to cross-examine. (f) In the event the determination of the Prevailing Market Rental has been submitted to arbitration but such arbitration has not been concluded prior to the commencement of the Option Term, Tenant shall pay to Landlord the amount determined under Section 2(a)(1) above based on the Prevailing Market Rental set forth in the Landlord's Notice as Rent and Additional Rent for the Option Term. In the event the Prevailing Market Rental determined by arbitration results in any Rent or Additional Rent different from such amount, Tenant shall immediately pay to Landlord any increase therein and Landlord shall credit any reduction therein against the next Monthly Installments due from Tenant to Landlord under the Lease. (g) The Option shall not be assignable separate and apart from the Lease, but only as a part of an assignment in accordance with the terms and provisions of Section 16 thereof. (h) Upon the occurrence of any of the following events, Landlord shall have the option, exercisable at any time prior to the commencement of the Option Term, to terminate all of the provisions of this Exhibit D whereupon no prior or subsequent exercises of the Option shall be of any force or effect: (1) Tenant's failure to timely exercise the Option in strict accordance with section (a) above. (2) The existence at the time Tenant exercises the Option or at the commencement of the Option Term of any monetary or material non-monetary default on the part of Tenant under the Lease or of any state of facts which with the passage of time or the giving of notice, or both, would constitute such a default. (3) Tenant's eighth (8th) monetary or material non-monetary default under the Lease prior to the commencement of the Option Term, notwithstanding that all such defaults may subsequently be cured. [END OF EXHIBIT D] EX-10.23 5 ISDN MASTER AGREEMENT DATED JUNE 10, 1997 1 EXHIBIT 10.23 (LOCAL CURRENCY - SINGLE JURISDICTION) [ISDA LOGO] International Swap Dealers Association, Inc. MASTER AGREEMENT dated as of June 10, 1997 FIRST UNION NATIONAL BANK and PROBUSINESS, INC. have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows:- 1. INTERPRETATION (a) DEFINITIONS. The terms defined in Section 12 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) GENERAL CONDITIONS. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. 2 (b) CHANGE OF ACCOUNT. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) NETTING. If on any date amounts would otherwise be payable:- (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of branches or offices through which the parties make and receive payments or deliveries. (d) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. REPRESENTATIONS Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that:- (a) BASIC REPRESENTATIONS. (i) STATUS. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) POWERS. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; 2 3 (iv) CONSENTS. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) OBLIGATIONS BINDING. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. 4. AGREEMENTS Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party:- (a) FURNISH SPECIFIED INFORMATION. It will deliver to the other party any forms, documents or certificates specified in the Schedule or any Confirmation by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) MAINTAIN AUTHORISATIONS. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) COMPLY WITH LAWS. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement of any Credit Support Document to which it is a party. 5. EVENTS OF DEFAULT AND TERMINATION EVENTS (a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:- (i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(d) or to give notice of a Termination Event) to be complied with or performed 3 4 by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) CREDIT SUPPORT DEFAULT. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) MISREPRESENTATION. A representation made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; (v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) BANKRUPTCY. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:- (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its 4 5 winding-up of liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:- (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) TERMINATION EVENTS. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (ii) below or an Additional Termination Event if the event is specified pursuant to (iii) below:- (i) ILLEGALITY. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party):- (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or 5 6 (iii) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. EARLY TERMINATION (a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT. (i) NOTICE. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(1) occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iii) RIGHT TO TERMINATE. IF:- (1) an agreement under Section 6(b)(ii) has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality other than that referred to in Section 6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs, either party in the case of an Illegality, any Affected Party in the case of an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) EFFECT OF DESIGNATION. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. 6 7 (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(d) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) CALCULATIONS. (i) STATEMENT. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) PAYMENT DATE. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment), from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) EVENTS OF DEFAULT. If the Early Termination Date results from an Event of Default:- (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party over (B) the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative 7 8 number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) TERMINATION EVENTS. If the Early Termination Date results from a Termination Event:- (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties:- (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Unpaid Amounts owing to X less (II) the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. TRANSFER Neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:- (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8 9 8. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) AMENDMENTS. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) COUNTERPARTS AND CONFIRMATIONS. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) HEADINGS. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 9. EXPENSES A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 10. NOTICES (a) EFFECTIVENESS. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicted:- (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; 9 10 (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) CHANGE OF ADDRESSES. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 11. GOVERNING LAW AND JURISDICTION (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) JURISDICTION. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably:- (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) WAIVER OF IMMUNITIES. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 12. DEFINITIONS As used in this Agreement:- "ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b). "AFFECTED PARTY" has the meaning specified in Section 5(b). 10 11 "AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event consisting of an Illegality, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "AFFILIATE" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "APPLICABLE RATE" means:- (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "CONSENT" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b). "CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as such in this Agreement. "CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule. "DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "DEFAULTING PARTY" has the meaning specified in Section 6(a). "EARLY TERMINATION DATE" means the date determined in accordance with Section 6(a) or 6(b)(iii). "EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "ILLEGALITY" has the meaning specified in Section 5(b). "LAW" includes any treaty, law, rule or regulation and "lawful" and "unlawful" will be construed accordingly. "LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. "LOSS" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain 11 12 resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 9. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "MARKET QUOTATION" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "NON-DEFAULTING PARTY" has the meaning specified in Section 6(a). "POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "SET-OFF" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under 12 13 this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination Date, the sum of:- (a) the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "SPECIFIED ENTITY" has the meaning specified in the Schedule. "SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "TERMINATION EVENT" means an Illegality or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined 13 14 by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. FIRST UNION NATIONAL BANK PROBUSINESS, INC. - ----------------------------------- ---------------------------------------- (Name of Party) (Name of Party) By: /s/ DELENE M. TRAVELLA By: /s/ THOMAS H. SINTON -------------------------------- ------------------------------------- Name: Delene M. Travella Name: Thomas H. Sinton Title: Vice President Title: President Date: 8/7/97 Date: 8/5/97 14 15 SCHEDULE to the MASTER AGREEMENT dated as of June 10, 1997 between FIRST UNION NATIONAL BANK ("Party A") and PROBUSINESS, INC. ("Party B") I. TERMINATION PROVISIONS (a) "SPECIFIED ENTITY" for purposes of Section 5(a)(v) means each party's Affiliates. (b) "SPECIFIED TRANSACTION" has its meaning as defined in Section 12, provided that "Default under Specified Transaction" excludes Force Majeure as defined below. (c) "CROSS DEFAULT" applies to both parties, but excludes Force Majeure. "Force Majeure" means nonpayment resulting solely from a wire transfer or operational problem or error (so long as sufficient funds are available), or from the general unavailability of the relevant currency due to exchange controls or other similar governmental action, but only if payment is made within three Business Days after the problem has been corrected, the error has been discovered or the currency becomes available. With respect to Party B, "Cross Default" is amended by inserting at the end of Section 5(a)(vi): "or (3) any default, event of default or other similar condition or event (however described) under any Financial Agreement." "SPECIFIED INDEBTEDNESS" means any obligation (whether present, future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money or relating to the payment or delivery of funds, securities or other property (including, without limitation, collateral). "THRESHOLD AMOUNT" means, with respect Party A, an amount (including its equivalent in another currency) equal to the higher of $ 10,000,000 or 2% of its stockholders' equity as reflected on its most recent financial statements or call reports, and with respect to Party B, any amount of Specified Indebtedness. (d) "CREDIT EVENT UPON MERGER" applies to both parties. (e) "AUTOMATIC EARLY TERMINATION" does not apply to either party. (f) PAYMENTS ON EARLY TERMINATION. "Market Quotation" and the "Second Method" apply, subject to the following: (i) "Market Quotation" for any Terminated Transaction that is, or is subject to, any unexercised option shall be determined by taking into account the economic equivalent of the option. (ii) The Non-defaulting Party may, upon the occurrence of an Early Termination Date, offset payments due by it under this Agreement (or under any Specified Transaction) against, and apply such payments to the satisfaction of, any obligations owing by the Defaulting Party (including any Office of the Defaulting Party) to the Non-defaulting Party or any of the Non-defaulting Party's Affiliates (including any Office of the Non-defaulting Party or its Affiliates) whether matured or unmatured, and it is a condition precedent to the Non-defaulting Party's obligation to make any such payments that such obligations of the Defaulting Party have been paid in full or satisfied by offset as contemplated hereunder. For this purpose, the Non-defaulting Party may convert any such payments or obligations into the currency of the other at a rate of exchange (including premiums and costs of exchange) at which it could purchase the relevant currency acting in good faith. II. DOCUMENTS (a) DELIVERY OF DOCUMENTS. When it delivers this Agreement, Party B shall also deliver to Party A the Closing Documents in form and substance reasonably satisfactory to Party A. For each Transaction, Party B shall deliver, promptly upon request, a duly executed incumbency certificate for the person(s) executing the Confirmation for Party B for that Transaction. (b) "CLOSING DOCUMENTS" means: (i) an opinion of counsel covering Party B's Basic Representations under Section 3(a)(i), or in lieu thereof, Party B's Authorizing Documents for this Agreement and the Transactions and a duly executed incumbency certificate for the person(s) executing this Agreement for Party B; (ii) a duly executed and delivered credit support annex in the form of Exhibit A hereto, which shall be a Credit Support Document hereunder, together with an opinion of counsel for that Credit Support Document covering like matters as those covered by Party B's Basic Representations under Section 3(a)(i), or in lieu of that opinion, Authorizing Documents for that Credit Support Document and a duly executed incumbency certificate for the person(s) executing that Credit Support Document. (c) "AUTHORIZING DOCUMENTS" of a party or its Credit Support Provider means a certified copy of the board of directors' resolutions of that party or Credit Support Provider (or for a partnership, a copy of its partnership 1 16 agreement and a certified copy of the resolutions of the partnership or of each general partner). III. MISCELLANEOUS (a) ADDRESSES FOR NOTICES. TO PARTY A: TO PARTY B: FIRST UNION NATIONAL BANK PROBUSINESS, INC. 301 South College 5934 Gibraltar Drive Charlotte, NC 28288-0601 Pleasenton, CA 94588 Attention: Joseph Nenichka Attention: Vice President, Capital Markets Support ---------------------- Fax: (704) 383-9139 Fax: ------------------- Phone: (704) 383-0590 Phone: ----------------- (b) "CALCULATION AGENT" means Party A. (c) "CREDIT SUPPORT DOCUMENT" means each document which by its terms secures, guarantees or otherwise supports Party B's obligations hereunder from time to time, whether or not this Agreement, any Transaction, or any type of Transaction entered into hereunder is specifically referenced or described in any such document. "CREDIT SUPPORT DEFAULT" is amended by adding at the end of Section 5(a)(iii)(1): ", any default, event of default or other similar condition or event (however described) exists under any Credit Support Document, any action is taken to realize upon any collateral provided to secure such party's obligations hereunder or under any Transaction, or the other party fails at any time to have a valid and perfected first priority security interest; to the extent required, in any such collateral;" (d) "CREDIT SUPPORT PROVIDER" means each party to a Credit Support Document that provides or is obligated to provide security, a guaranty or other credit support for Party B's obligations hereunder. (e) "AFFILIATE" has its meaning as defined in Section 12, except for Party A under Section 5(a)(v), "Affiliate" means First Union Corporation. (f) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law (and not the law of conflicts) of the State of New York. (g) WAIVER OF JURY TRIAL. To the extent permitted by applicable law, each party irrevocably waives any and all right to trial by jury in any legal proceeding in connection with this Agreement, any Credit Support Document to which it is a party, or any Transaction. (h) NETTING OF PAYMENTS. If payments are due by each party on the same day under two or more Transactions, then Section 2(c)(ii) will not apply to those payments if a party gives notice to the relevant Office(s) of the other party on or before the second New York Business Day before that payment date stating that those payments will be netted or, if given by the Calculation Agent, stating the net amount due. (i) RECORDED CONVERSATIONS. Each party may electronically record all telephone conversations between them in connection with this Agreement or any Transaction, and any such recordings may be submitted in evidence in any proceeding to establish any matters pertinent to this Agreement or any Transaction. (j) ADDITIONAL REPRESENTATIONS. Section 3 is amended by adding the following Sections 3(e) and 3(f): "(e) for any Relevant Agreement: (i) it acts as principal and not as agent, (ii) it acknowledges that the other party acts only arm's length and is not its agent, broker, advisor or fiduciary in any respect, and any agency, brokerage, advisory or fiduciary services that the other party (or any of its affiliates) may otherwise provide to the party (or to any of its affiliates) excludes the Relevant Agreement, (iii) it is relying solely upon its own evaluation of the Relevant Agreement (including the present and future results, consequences, risks, and benefits thereof, whether financial, accounting, tax, legal, or otherwise) and upon advice from its own professional advisors, (iv) it understands the Relevant Agreement and those risks, has determined they are appropriate for it, and willingly assumes those risks, and (v) it has not relied and will not be relying upon any evaluation or advice (including any recommendation, opinion, or representation) from the other party, its affiliates or the representatives or advisors of the other party or its affiliates (except representations expressly made in the Relevant Agreement or an opinion of counsel required thereunder). "Relevant Agreement" means this Agreement, each Transaction, each Confirmation, any Credit Support Document, and any agreement (including any amendment, modification, transfer or early termination) between the parties relating thereto or to any Transaction. (f) it is an "eligible swap participant" within the meaning of 17 C.F.R. Section 35.1." 2 17 IV. ISDA DEFINITIONS (a) INCORPORATION. This Agreement and each Transaction are subject to the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) and will be governed by the provisions of the ISDA Definitions, without regard to any amendments to the ISDA Definitions subsequent to the date hereof. The provisions of the ISDA Definitions are incorporated by reference in, and shall be deemed to be part of, this document and each Confirmation. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of this document and the ISDA Definitions, this document will prevail. V. ADDITIONAL TERMS (a) COVENANTS OF FINANCIAL AGREEMENTS. (i) Party B shall provide Party A at all times hereunder with the same covenant protection as Party A requires of Party B under Financial Agreements. Therefore, in addition to the Cross Default provisions of this Agreement, and notwithstanding the satisfaction of any obligation or promise to pay money to Party A under any Financial Agreement, or the termination or cancellation of any Financial Agreement, Party B hereby agrees to perform, comply with and observe for the benefit of Party A hereunder all affirmative and negative covenants contained in each Financial Agreement applicable to Party B (excluding any obligation or promise to pay money under any Financial Agreement, any exchange obligations of Party B to Party A under any Financial Agreement, or to deliver collateral security to Party A under any Financial Agreement) at any time Party B has any obligation (whether absolute or contingent) under this Agreement. (ii) For purposes hereof: (A) the affirmative and negative covenants of each Financial Agreement applicable to Party B (together with related definitions and ancillary provisions, but in any event excluding any obligation or promise to pay money under any Financial Agreement, any exchange obligations of Party B to Party A under any Financial Agreement, or to deliver collateral security to Party A under any Financial Agreement) are incorporated (and upon execution of any future Financial Agreement, shall automatically be incorporated) by reference herein (mutatis mutandis); (B) if other lenders or creditors are parties to any Financial Agreement, then with respect to the affirmative and negative covenants contained therein, references therein to the lenders or creditors shall be deemed references to Party A; and (C) for any such covenant applying only when any loan, other extension of credit, obligation or commitment under the Financial Agreement is outstanding, that covenant shall be deemed to apply hereunder at any time Party B has any obligation (whether absolute or contingent) under this Agreement. (b) "FINANCIAL AGREEMENT" means each existing or future agreement or instrument relating to any loan or extension of credit from Party A to Party B (whether or not anyone else is a party thereto), as the same exists when executed and without regard to any termination or cancellation thereof, as the same may be amended or modified and in effect from time to time. IN WITNESS WHEREOF, the parties have executed this Schedule by their duly authorized signatories as of the date hereof. FIRST UNION NATIONAL BANK By: /s/ Delene Travella -------------------------------- Title: Vice President ------------------------------ PROBUSINESS, INC. By: /s/ Thomas H. Sinton -------------------------------- Title: President ----------------------------- 3 18 CREDIT SUPPORT ANNEX dated as of June 10, 1997 ("Annex") to the MASTER AGREEMENT dated as of June 10, 1997 ("Agreement") between FIRST UNION NATIONAL BANK ("Secured Party") and PROBUSINESS, INC. ("Pledgor") This Annex supplements and forms part of the Schedule to the Agreement and is a Credit Support Document under the Agreement with respect to Pledgor. Section references herein are to Sections of this Annex unless another document is specified: Time is New York City time unless otherwise indicated. Subject to the terms and conditions of this Annex, the parties agree as follows: 1. SECURITY INTEREST As security for Pledgor's Obligations, Pledgor pledges to Secured Party, and grants to Secured Party a continuing security interest in and lien on and control over, the Collateral. Pledgor agrees to take, and agrees that Secured Party may take, such action as Secured Party may reasonably request to perfect Secured Party's security interest in the Collateral. 2. TRANSFERS & RETURNS (a) INITIAL PLEDGE. Pledgor agrees to transfer to Secured Party on demand Collateral with a Support Value at least equal to $350,000 ("Initial Pledge Amount"). In addition, if the terms of any Transaction require that the Initial Pledge Amount be increased, Pledgor agrees to transfer to Secured Party on demand Collateral with a Support Value at least equal to the amount by which the Initial Pledge Amount has increased. (b) ADDITIONAL PLEDGES. If, on any Business Day, the Pledge Amount exceeds the Support Value of Collateral held by Secured Party by at least $200,000, then Pledgor shall, on demand, transfer Collateral to Secured Party so that Secured Party holds (after giving effect to that transfer) Collateral with a Support Value at lease equal to the Pledge Amount. "Pledge Amount" means the sum of (i) the Performance Amount plus (ii) the Initial Pledge Amount (as the same may be increased from time to time). Any request for Additional Pledges will be accompanied by a statement setting forth the calculation used in determining the additional pledge. (c) RETURNS. On each Return Valuation Date, Secured Party shall upon request received no later than 11:00 a.m. on that date make the requisite computation of the Performance Amount and notify Pledgor thereof by telephone (confirmed in writing), and if Secured Party holds Collateral with a Support Value at least equal to the Pledge Amount on that Return Valuation Date, then Secured Party shall, on demand, return to Pledgor all other Collateral that is in excess of the Pledge Amount, provided that the Collateral to be returned is separable from the Collateral required to be maintained and has a Support Value at least equal to $200,000. (d) SAME DAY RETURNS. Notwithstanding any other provision hereof, for any day on which Secured Party is required to return any Collateral to Pledgor and Pledgor is required to make any payment under the Agreement (including this Annex) to Secured Party, Secured Party may withhold that Collateral or any part thereof until the Business Day after Pledgor has made the corresponding payment. (e) FINAL RETURNS. Upon the occurrence of a Support Termination Date, Secured Party shall, upon demand, return to Pledgor all outstanding Collateral held by Secured Party. 3. DEMANDS & DELIVERY (a) Any demand for the transfer or return of Collateral shall be made on a Business Day and may be made orally by telephone (confirmed in writing) as specified in Section 15. Any required transfer of Collateral and any required return of Collateral shall be due by 4:00 p.m. on the Business Day on which the demand is made if that demand is made at or before 11:00 a.m. on that Business Day, and otherwise by 4:00 p.m. on the following Business Day. 1 19 (b) Collateral shall be transferred or returned as follows: (i) for instruments or securities transferable by book-entry, by appropriate book entries made on the records of the bank, clearing corporation, securities intermediary or other depository specified by the party making the demand therefor; (ii) for certificated instruments or securities not transferable by book-entry, by delivery in appropriate physical form (accompanied by such documents of transfer or assignment as Secured Party may reasonably request, duly executed in blank if requested) to one or more accounts at a bank, clearing corporation or other depository specified by the party making the demand therefor; (iii) Cash shall be transferred or returned as follows: (A) for Cash to be held by Secured Party in its own name and not in a Cash Deposit ("Independent Cash"), by wire transfer of immediately available funds into one or more bank accounts specified by Secured Party for any transfer of Independent Cash to Secured Party or specified by Pledgor for any return of Independent Cash by Secured Party; and (B) for Cash to be held as a Cash Deposit, by execution and delivery by Pledgor of a collateral assignment in the form of Exhibit A hereto for the Cash Deposit or by wire transfer of immediately available funds into one or more Cash Deposit accounts subject to an existing collateral assignment, or for the return of any Cash held in a Cash Deposit hereunder, balances in a Cash Deposit shall be returned as follows: (1) if all balances therein are required to be returned, by execution and delivery by Secured Party of a written release of the collateral assignment of the Cash Deposit; and (2) otherwise, by debiting the Cash Deposit by the amount required to be returned and crediting that amount to another account of Pledgor specified by it. For any Cash Deposit consisting of a time deposit or certificate of deposit, Secured Party shall have no obligation to return or release that Cash Deposit or balances therein unless either all balances therein are required to be returned or released, or if less than all balances therein are required to be returned or released, Pledgor has transferred substitute Collateral to Secured Party to cover the a remaining difference. (c) Secured Party shall have the right to acquire and return to Pledgor exactly the same form (in all relevant respects) and quantity of Collateral required to be returned by Secured Party in lieu of returning the actual Collateral transferred by Pledgor to Secured Party. 4. INTEREST & EARLY WITHDRAWALS (a) Cash held in Pledgor's Cash Deposits shall earn whatever interest is payable thereon. For Independent Cash held by Secured Party, interest shall be payable thereon by Secured Party on the first Business Day of each month (computed on a 360-day year basis for the actual number of days held) at a rate per annum equal to the Federal Funds Rate minus .25% per annum. "Federal Funds Rate" means the daily average of the Federal Funds (Effective) rates in effect for each day that the Independent Cash is being held by Secured Party, as published in N.Y. Federal Reserve Statistical Release H.15(519) for that day (or if not published for a day, as published for the next preceding Business Day). (b) Pledgor shall be responsible for any early withdrawal penalties applicable to any Cash Deposits, including without limitation any such early withdrawal penalties that would apply in the event that the balances in those Cash Deposits are withdrawn or applied to satisfy any of the Obligations. 5. SUBSTITUTIONS For any Collateral, Pledgor may transfer to Secured Party substitute Collateral of equal or greater Support Value than the Collateral being replaced, and upon demand by Pledgor after that transfer occurs, Secured Party shall return that portion of the Collateral being replaced. 6. CUSTODY 2 20 (a) Except for Independent Cash and except as otherwise provided herein, Collateral shall be held by Secured Party or by one or more of its Custodians in one or more accounts or depositories identifying the property therein as collateral (each, a "Collateral Account"), which shall be properly segregated and identified as belonging to Pledgor. Pledgor shall have no control over any Collateral Account or any Collateral therein. (b) Except as the context otherwise requires, a transfer to Secured Party's Custodian is deemed to be a transfer to Secured Party, any Collateral held by Secured Party's Custodian is deemed to be Collateral held by Secured Party, and any obligation of Secured Party to return any Collateral is deemed to include an obligation of Secured Party to cause the Collateral to be returned, respectively. (c) Any Collateral may be registered in the name of Secured Party or its Custodian or deposited in securities accounts controlled by Secured Party or its Custodian, and the issuer of or obligor on any of the Collateral may be notified to make Distributions thereon directly to Secured Party or its Custodian. Secured Party and each Custodian is authorized to receive, but is under no obligation to collect, any Distributions. 7. DISPOSITIONS (a) Notwithstanding the foregoing and subject to Secured Party's obligation to return substitute Collateral in exactly the same form (in all relevant respects) and quantity required to be returned hereunder, Secured Party shall have the right at any time (free of any claim or fight on the part of Pledgor, including any right or equity of redemption) to sell, repledge, hypothecate, assign, invest, use, commingle or otherwise dispose of any Collateral other than Cash Deposits (each, a "Disposition") provided that no Event of Default exists with respect to Secured Party. (b) Each Disposition shall be for the account and risk of Secured Party, and notwithstanding any Disposition, Secured Party shall (i) remain liable to account to Pledgor for the Collateral disposed of and all Distributions that would have been made but for that Disposition, (ii) be deemed, for that purpose, to hold that Collateral and to receive each such Distribution as and when that Distribution would have been received but for that Disposition, and (iii) be obligated to return any such Collateral or Distribution in accordance with the terms of this Annex. Pledgor may continue substituting Collateral in accordance with this Annex as though no such Disposition had been made. 8. REPRESENTATIONS & COVENANTS (a) Pledgor continuously represents that: (i) it has the power under the laws of the jurisdiction of its organization or incorporation, and is duly authorized, to grant the security interest in Collateral herein granted by it, (ii) upon the transfer of any Collateral, and at all times the Collateral is being held hereunder (except as otherwise provided herein), it will have title to and will be the sole owner of that Collateral, free and clear of any pledge, security interest, lien, charge, hypothecation, encumbrance, right of offset, counterclaim, option to purchase or other similar restriction, claim or right ("Encumbrance") except those granted or applying hereunder or contemplated hereby, and Secured Party will have a valid and perfected security interest in the Collateral, which is legally enforceable except as enforcement may be limited by insolvency, bankruptcy, reorganization or other laws relating to the enforcement of creditors' rights generally or by general principles of equity, and (iii) it has not entered into any agreement or understanding that purports to prohibit or restrict Pledgor from selling, assigning or otherwise disposing of, or creating, granting or permitting to exist any Encumbrance on or in respect of, the Collateral or any of its property or assets that would include the Collateral. (b) Pledgor shall not at any time sell, assign or otherwise dispose of, or create, grant or otherwise permit to exist any Encumbrance on or over, any Collateral held by Secured Party, and Pledgor shall not at any time enter into any agreement or undertaking that purports to prohibit or restrict Pledgor from selling, assigning or otherwise disposing of, or creating, granting or permitting to exist any Encumbrance on or in respect of, such Collateral or any of its property or assets that would include any such Collateral. Pledgor shall defend, and indemnify Secured Party for defending, the Collateral and Secured Party's rights and interests thereto and therein against the claims and demands of any person or entity not a party to this Annex. 3 21 9. DEFAULT (a) The following rights and obligations are subject to the condition precedent that no Default Condition exists with respect to Pledgor: (i) each right of Pledgor to substitute Collateral under Section 5(a), and (ii) each obligation of Secured Party to return any Collateral under Section 2(c) or to pay any interest on any Independent Cash under Section 4(a). (b) For purposes of Section 5(a)(iii)(1) of the Agreement, an Event of Default shall exist with respect to the relevant party if: (i) Pledgor fails to transfer in full any Collateral required to be transferred hereunder on the date when due, and that failure continues for one Business Day after Secured Party notifies it of that failure. (ii) Secured Party fails to return any of the Collateral as required hereunder and that failure continues for one Business Day after Pledgor notifies it of that failure; (iii) Pledgor fails to perform any obligation under Section 8(b); or (iv) a party fails to perform any other obligation under this Annex and that failure continues for 30 days after the other party notifies it of that failure. 10. REMEDIES. (a) Upon the occurrence of a Liquidation Event and to the extent permitted by applicable law, Secured Party shall have the right at any time, without demand, advertisement or notice of any kind (except that which applicable law requires and cannot be waived), to take any one or more of the following actions with respect to all or any part of the Collateral: (i) exercise the rights and remedies of a secured party, or of a creditor, as provided by law; (ii) exercise the rights and remedies to which Secured Party is entitled under the terms of the Collateral or as provided by law with respect thereto; (iii) appropriate all right, title and interest in and to the Collateral (of whatever form); (iv) offset the Cash Equivalent of any payments due and owing by Pledgor under the Agreement against any Collateral consisting of Cash (or Cash Deposits) or the Cash Equivalent of any other Collateral; (v) liquidate the Collateral (other than Cash or Cash Deposits) through one or more public or private sales or other dispositions at such prices and on such terms as Secured Party may deem reasonable (free of any liability on the part of Secured Party for any loss arising in connection with any such sale or disposition and free of any claim or right on the part of Pledgor, including any right or equity of redemption), with Secured Party having the right to purchase the Collateral; and (vi) apply the proceeds of the Collateral to Pledgor's Obligations (or the Cash Equivalent thereof) in such order as Secured Party may elect. If Secured Party elects to give any notice before taking any such action, one Business Day's prior written notice shall be deemed reasonable. (b) If the proceeds of the Collateral applied hereunder fail to satisfy all of Pledgor's remaining Obligations, Pledgor shall continue to remain liable for the deficiency, together with any additional amounts payable thereon or with respect thereto in accordance with the terms of the Agreement. If all obligations of Pledgor are satisfied and no amounts are or thereafter may become payable by Pledgor under the Agreement, Secured Party shall, upon demand, return all remaining proceeds, if any, to Pledgor. (c) Secured Party shall have no obligation to return, and for purposes of this Annex it shall not be deemed to hold, any Collateral upon which it has exercised its rights pursuant to Section 10(a), and shall have no obligation or liability to Pledgor with respect to that Collateral other than to account to Pledgor for the remaining proceeds thereof, if any, as herein provided. 11. STANDARD OF CARE Beyond the exercise of commercially reasonable care to assure the safe custody of Collateral, and subject only to the duty to account for and return the Collateral received as provided in this Annex, neither Secured Party nor a Custodian shall have any duty or liability for any Collateral or to preserve or exercise rights, powers or privileges in respect thereof. 4 22 12. COSTS AND EXPENSES Pledgor agrees to pay and indemnify Secured Party upon demand for (i) all reasonable costs, expenses, taxes, assessments and other charges which may be levied, assessed or imposed against or with respect to the Collateral, or for transferring or returning the Collateral, or for holding or perfecting a security interest in, the Collateral, and (ii) all costs and expenses incurred by or on behalf of Secured Party in connection with enforcing, exercising, or protecting Secured Party's rights under or in connection with this Annex (including, without limitation, broker's fees, sales or other commissions, and reasonable attorney's fees and expenses, incurred in connection with liquidating the Collateral). 13. ENFORCEABILITY The illegality, invalidity or unenforceability of any provision of this Annex shall not impair the legality, validity or enforceability of any other provision of this Annex. 14. POWER OF ATTORNEY Secured Party is hereby appointed as Pledgor's attorney-in-fact, with full power of substitution, for the purpose of taking such action and executing such agreements, instruments and documents with respect to the Collateral, in the name of Pledgor, as Secured Party may deem necessary or desirable for Secured Party to exercise Secured Party's rights and remedies hereunder, or to enforce Pledgor's obligations hereunder, with respect to that Collateral, or to perfect Secured Party's security interest granted hereunder in the Collateral, which appointment is coupled with an interest and is irrevocable. 15. NOTICES AND COMMUNICATIONS REGARDING COLLATERAL Any notice under this Annex may be given in any manner provided in the notices Section of the Agreement to the address or number provided below. To Secured Party: To Pledgor: FIRST UNION NATIONAL BANK PROBUSINESS, INC. c/o First Union National Bank of 5934 Gibraltar Drive North Carolina Pleasenton, CA 94588 301 South College Street Charlotte, NC 28288-0601 Attention: Sarah Teves Attention: ---------------------------- Fax No.: (704) 383-9139 Fax No.: ------------------------------ Tel. No.: (704) 383-1184 Tel. No.: ----------------------------- 16. DEFINITIONS (a) Capitalized terms used and not otherwise defined in this Annex are defined elsewhere in the Agreement. (b) The following terms used in this Annex are defined in the Sections indicated: Collateral Account Section 6(a); Disposition Section 7(a); Encumbrance Section 8(a); Independent Cash Section 3(b)(ii)(A); Initial Pledge Amount Section 2(a); Pledge Amount Section 2(b). (c) As used herein, the following terms have the following meanings: "Business Day" means a day which is a New York Banking Day. "Cash" means the lawful currency of the United States of America in depositary account form. "Cash Deposit" means any deposit account(s) of Pledgor held at, or deposit instrument(s) or certificate(s) of deposit issued by, either Secured Party or any bank affiliated with Secured Party. "Cash Equivalent" means for any amount denominated in Cash, the amount of that Cash, and if denominated in another currency, the U.S. dollar equivalent thereof determined by Secured Party in good faith using a recognized foreign exchange dealer's spot rate for purchasing that currency with U.S. dollars for two-day settlement. 5 23 "Collateral" means (i) each of the following items, and (ii) the Security: Valuation % Collateral 100% Cash 100% Cash Deposits 100% Negotiable debt obligations issued by the U.S. Treasury Department ("Treasurys") having an original maturity at issuance of not more than one year ("Treasury Bills"). 100% Treasurys having an original maturity at issuance of more than one year but not more than 10 years ("Treasury Notes"). 100% Treasurys having an original maturity at issuance of more than 10 years ("Treasury Bonds"). "Custodian" means any agent holding any Collateral on behalf of Secured Party selected by Secured Party, including, without limitation, any Affiliate of Secured Party. "Default Condition" means that an Event of Default or Potential Event of Default exists with respect to Pledgor, or an Early Termination Event or Liquidation Event has occurred with respect to Pledgor. "Distribution" with respect to any Collateral means any payment or distribution of, on or in respect of the Collateral (including, without limitation, any interest payable by Secured Party or Custodian on the Collateral), and any right or property of any kind as part of, in addition to, or in exchange for, the Collateral. "Early Termination Event" means the occurrence of an Early Termination Date in respect of all Transactions in effect immediately prior to the designation or occurrence of in Early Termination Date, which shall be deemed to occur with respect to Pledgor if it results from an Event of Default with respect to Pledgor. "Liquidation Event" means that either of the following events occurs: (a) the occurrence of an Early Termination Event and the failure by Pledgor to make, when due, any payment of the Termination Amount required to be made by it; or (b) an Event of Default under Section 5(a)(i) of the Agreement exists with respect to Pledgor. "Market Value" means, as of any date of determination, the estimated fair market value thereof, as determined in good faith and in a commercially reasonable manner by Secured Party. Market Value shall exclude accrued interest. "Obligations" means all obligations, whether absolute or contingent, now or hereafter becoming due or owing by Pledgor to Secured Party under or in connection with the Agreement (including, without limitation, this Annex) or any Transaction governed by the Agreement, whether or not evidenced by a Confirmation, including, without limitation, any transfer or termination of any such Transaction. "Performance Amount" means an amount equal to the Cash Equivalent of the estimated Termination Amount that would be payable by Pledgor under Section 6(e)(i) of the Agreement, assuming (i) an Early Termination Date were to occur as of that date for an Event of Default with respect to Pledgor, and (ii) Unpaid Amounts were to include all unpaid amounts that have become due and payable under any provision of the Agreement, all as determined in good faith and in a commercially reasonable manner by Secured Party. "Return Valuation Date" means the first Business Day of each month. "Security" means (a) any Distributions on or in respect of the Collateral, (b) any proceeds of the Collateral or Distributions, and (c) any rights, powers, privileges, claims, accounts, instruments or documents with respect to the Collateral, Distributions or proceeds. "Support Termination Date" means any Business Day on which (i) all Transactions have matured or been terminated, (ii) no amounts are or thereafter may become payable by Pledgor under the 6 24 Agreement, and (iii) no other obligation of Pledgor secured by the Collateral has become due and remains unsatisfied. "Support Value" means, as of any date of determination, an amount equal to (1) the valuation percentage specified for the relevant Collateral in the definition thereof, times (2) the Market Value of that Collateral. "Termination Amount" means an amount payable by a party under Section 6(e)(i) of the Agreement in respect of an Early Termination Event. IN WITNESS WHEREOF the parties have executed this Annex as of the date hereof. FIRST UNION NATIONAL BANK PROBUSINESS, INC. By: /s/ Delene Travella By: /s/ Thomas H. Sinton ----------------------------------- --------------------------------- Title: Vice President Title: President 7 25 EXHIBIT A to the CREDIT SUPPORT ANNEX dated as of _____________, 19 __ ASSIGNMENT OF SAVINGS ACCOUNTS/SAVINGS INSTRUMENTS ____________________________, 19__ For value received, PROBUSINESS, INC. ("Assignor") assigns all right, title and interest to FIRST UNION NATIONAL BANK, its successors and assigns, (the "Secured Party"), in the savings account(s), savings instrument(s) and/or certificate(s) of deposit (each, a "Savings Account") identified below. Account or Certificate No.(s): maintained in or ---------------------- issued by (the "Depository"). --------------------------------- The Assignment is given as security for the Assignor's Obligations as defined in that certain Credit Support Annex dated as of June 10, 1997 (the "Annex") to the Master Agreement dated as of June 10, 1997 between Assignor and Secured Party. This Assignment supplements and forms part of the Annex. This Assignment shall be a continuing one and shall remain effective until the Support Termination Date (as defined in the "Annex"). This Assignment shall also continue during subsequent renewals and replacements of any certificate of deposit or other Savings Account hereby assigned. It further shall secure any other obligations and/or liabilities of the Assignor to Secured Party (except for any obligation in which the security is a principal dwelling or household goods) due or to become due, whether now existing or hereafter arising, and howsoever evidenced or acquired, whether direct, indirect, absolute or contingent, and whether individual, several, or joint and several obligations or liabilities of the Assignor. The Assignor hereby irrevocably authorizes and empowers Secured Party, at any time in its own name or in the name of the Assignor, to demand, apply for withdrawal, withdraw, receive and give acquittance for any and all monies and claims for monies hereby assigned and to exercise any and all rights and privileges and receive all benefits of each Savings Account and to execute any and all instruments required therefor. The Depository is hereby expressly authorized and directed, on demand of Secured Party, to pay to Secured Party moneys hereby assigned. Assignor will not withdraw any monies hereby assigned from any Savings Account. This Assignment includes all monies deposited now or in the future and all interest earned in each Savings Account. The exercise of any right, option, privilege, or power given herein to Secured Party shall be at the option of Secured Party. The Assignor agrees that all or any part of the funds of each Savings Account may be applied to the payment of any and all of Assignor's Obligations as defined in the Annex and to the payment of any other obligations of Assignor to Secured Party, if such other obligations are in default, or upon maturity. The Assignor authorizes Secured Party to withdraw any principal or interest and to apply it in Secured Party's sole discretion to Assignor's Obligations as defined in the Annex or any other of Assignor's obligations. Any partial withdrawal of principal or interest shall not release this assignment. The Assignor warrants and represents that each Savings Account is owned solely by Assignor and is free and clear of all liens and encumbrances, and that Assignor has full power, right and authority to execute and deliver this assignment. If any Savings Account is represented by a passbook, certificate or other document evidencing ownership, such paper writing has been delivered and is herewith assigned and pledged to Secured Party by Assignor. PROBUSINESS, INC. By: /s/ Thomas H. Sinton -------------------------- Title: President ----------------------- 8 26 SWAP TRANSACTION [LOGO] CONFIRMATION Date: August 6, 1997 To: PROBUSINESS, INC. ("Counterparty") Address: 5934 Gibralter Ave. Pleasanton, CA 94588 Fax: (510) 734-0139 Attention: Mitch Everton From: FIRST UNION NATIONAL BANK ("First Union") Ref. No. 56350/71291 Dear Mr. Everton: This confirms the terms of the Transaction described below between Counterparty and First Union. This Transaction is subject to the 1991 ISDA Definitions published by the International Swaps and Derivatives Association, Inc. ("ISDA Definitions"), which are incorporated herein by reference. Fixed Amounts and Floating Amounts for each applicable Payment Date hereunder will be calculated in accordance with the ISDA Definitions, and if any Fixed Amount and Floating Amount are for the same Payment Date hereunder, then those amounts shall not be payable and instead the Fixed Rate Payer shall pay the positive difference, if any, between the Fixed Amount and the Floating Amount, and the Floating Rate Payer shall pay the positive difference, if any, between the Floating Amount and the Fixed Amount. Transaction Type: Interest Rate Swap - ---------------- Currency for Payments: U.S. Dollars - --------------------- Notional Amount: See Attachment I - --------------- Term: - ---- Trade Date: August 6, 1997 Effective Date: August 6, 1997 Termination Date: August 2, 1999, subject to the Modified Following Business Day Convention Fixed Amounts: - ------------- Fixed Rate Payer: First Union Payment Dates: Monthly on the 1st day of each month commencing September 1, 1997, through and including the Termination Date. Business Day Convention: Modified Following Business Day: New York Fixed Rate: 5.905% Fixed Rate Day Count Fraction: Actual/365 Floating Amounts: - ---------------- Floating Rate Payer: Counterparty Payment Dates: Monthly on the 1st day of each month commencing September 1, 1997, through and including the Termination Date. Business Day Convention: Modified Following Business Day: New York Floating Rate Option: USD-CP-H.15 Designated Maturity: 1 Month Spread: None Floating Rate Date Count Fraction: Actual/360 Reset Dates: Each New York Business Day in each Calculation Period, Method of Averaging: Unweighted Average Compounding: Inapplicable Rounding convention: 5 decimal places per the ISDA Definitions
27 Calculation Agent: First Union - ----------------- Payments to First Union: First Union Charlotte - ----------------------- Capital Markets Attention: Derivatives Desk Fed. ABA No. 053000219 Ref. No. 56350/71291 First Union Contacts: Settlements and/or Rate Resets: - -------------------- Tel: (800) 249-3865 Fax: (704) 383-9139 Documentation and/or Collateral: Tel: (704) 383-5678 Fax: (704) 383-9139 Please quote transaction reference number. First Union Address: One First Union Center - ------------------- 301 South College Street DC-4 Charlotte, NC 28288-0601 Payments to Counterparty: Please forward payment instructions to First - ------------------------ Union in Charlotte, NC. Payments will not be made to Counterparty without its written instructions. Documentation - ------------- This Confirmation is a binding and complete contract between the parties, provided that if at any time there exists a master agreement (however described) between the parties governing this Transaction ("Master Agreement"), this Confirmation supplements, forms part of and will be governed by the Master Agreement. Unless otherwise provided in the Master Agreement, this Confirmation is governed by the law (and not the law of conflicts) of the State of New York. Please confirm that the foregoing correctly sets forth the terms of our agreement by executing a copy of this Confirmation and returning it to us. Very truly yours, FIRST UNION NATIONAL BANK By: /s/ PETER J. LANCOS --------------------------------- Name: Peter J. Lancos Title: Vice President By: /s/ DELENE M. TRAVELLA --------------------------------- Name: Delene M. Travella Title: Vice President Accepted and confirmed as of the date first above written: PROBUSINESS, INC. By: /s/ MITCH EVERTON ---------------------------- Name: Mitch Everton Title: EVP - Operations 2 28 ATTACHMENT 1 - AMORTIZATION SCHEDULE FOR 56350/71291 (Dated subject to Modified Following Business Day Convention)
DATE NOTIONAL OUTSTANDING NOTIONAL REDUCTION ---- -------------------- ----------------- 06 Aug 97 44,100,000.00 0.00 02 Sep 97 48,600,000.00 (4,500,000.00) 01 Oct 97 48,150,000.00 450,000.00 03 Nov 97 45,900,000.00 2,250,000.00 01 Dec 97 46,350,000.00 (450,000.00) 02 Jan 98 63,450,000.00 (17,100,000.00) 02 Feb 98 87,300,000.00 (23,850,000.00) 02 Mar 98 91,800,000.00 (4,500,000.00) 01 Apr 98 100,800,000.00 (9,000,000.00) 01 May 98 58,950,000.00 41,850,000.00 01 Jun 98 53,550,000.00 5,400,000.00 01 Jul 98 58,500,000.00 (4,950,000.00) 03 Aug 98 44,100,000.00 14,400,000.00 01 Sep 98 48,600,000.00 (4,500,000.00) 01 Oct 98 48,150,000.00 450,000.00 02 Nov 98 45,900,000.00 2,250,000.00 01 Dec 98 46,350,000.00 (450,000.00) 04 Jan 99 63,450,000.00 (17,100,000.00) 01 Feb 99 87,300,000.00 (23,850,000.00) 01 Mar 99 91,800,000.00 (4,500,000.00) 01 Apr 99 100,800,000.00 (9,000,000.00) 03 May 99 58,950,000.00 41,850,000.00 01 Jun 99 53,550,000.00 5,400,000.00 01 Jul 99 58,500,000.00 (4,950,000.00) 02 Aug 1999 0.00 58,500,000.00
29 AMENDMENT dated as of June 13, 1997 1. Reference is hereby made to that certain Credit Support Annex dated as of June 10, 1997 ("Annex") to the Schedule ("Schedule") to the Master Agreement dated as of June 10, 1997 ("Master Agreement") between FIRST UNION NATIONAL BANK ("First Union") and PROBUSINESS, INC. ("Counterparty"). First Union and Counterparty hereby amend Section 16(c) of the Annex as follows: (a) The definition of "Cash" is hereby amended in its entirety to read as follows: ""Cash" means the lawful currency of the United States of America in depositary account form which is transferred to the Secured Party as Independent Cash under this Annex or which is held in a Cash Deposit under this Annex." (b) The definition of "Cash Deposit" is hereby amended in its entirety to read as follows: ""Cash Deposit" means any deposit account(s) of Pledgor held at, or deposit instrument(s) or certificate(s) of deposit issued by, either Secured Party or any bank affiliated with Secured Party, which are subject to a collateral assignment executed and delivered pursuant to this Annex." 2. The parties hereby ratify and confirm the Master Agreement, the Schedule and the Annex as amended. IN WITNESS WHEREOF, the parties have executed this amendment as of the date hereof. PROBUSINESS, INC. By: /s/ Steven Klei ---------------------- Name: Steven Klei Title: SVP/CFO FIRST UNION NATIONAL BANK By: /s/ Delene M. Travella ---------------------- Name: Delene M. Travella Title: Vice President EX-23.1 6 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference of our firm under the captions "Selected Financial Data" and "Experts" and to use of our reports with respect to the consolidated financial statements of ProBusiness Services, Inc., dated August 1, 1997, except for Note 11, as to which the date is August 11, 1997, Dimension Solutions, Inc., dated November 20, 1996 and BeneSphere Administrators, Inc., dated December 20, 1996 in the Registration Statement (Form S-1) and related Prospectus of ProBusiness, Inc. for the registration of 2,300,000 shares of its common stock. Our audits also include the financial statement schedule of ProBusiness Services, Inc. listed in Item 16(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP --------------------------- Walnut Creek, California August 11, 1997 -----END PRIVACY-ENHANCED MESSAGE-----