As filed with the Securities and Exchange Commission on March 31, 2014.
Registration No. 333-194462
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Paycom Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 7372 | 80-0957485 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
7501 W. Memorial Road
Oklahoma City, Oklahoma 73142
(405) 722-6900
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Craig E. Boelte
Chief Financial Officer
Paycom Software, Inc.
7501 W. Memorial Road
Oklahoma City, Oklahoma 73142
(405) 722-6900
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Greg R. Samuel, Esq. Ryan R. Cox, Esq. Haynes & Boone, LLP 2323 Victory Avenue, Suite 700 Dallas, TX 75219 (214) 651-5000 Fax: (214) 200-0577 |
Christian O. Nagler, Esq. Kirkland & Ellis LLP 601 Lexington Avenue New York, NY 10022 (212) 446-4800 Fax: (212) 446-4900 |
Barbara L. Becker, Esq. Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, NY 10166 (212) 351-4000 Fax: (212) 351-6202 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.
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, check the following box: ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
|
||||||||
Title of each class of securities to be registered |
Amount
to
be
|
Proposed
Maximum Offering Price Per Share |
Proposed Maximum Aggregate Offering Price (1)(2) |
Amount of
Registration Fee (3) |
||||
Common Stock, $0.01 par value per share |
7,641,750 |
$20.00 |
$152,835,000 | $19,686 | ||||
|
||||||||
|
(1) | Estimated pursuant to Rule 457(a) of the Securities Act of 1933, as amended. |
(2) | Includes additional shares subject to the underwriters option. |
(3) | The registrant previously paid $12,880 of the registration fee in connection with a prior filing of this registration statement. |
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.
The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated March 31, 2014
Preliminary Prospectus
6,645,000 Shares
Paycom Software, Inc.
Common Stock
This is the initial public offering of Paycom Software, Inc. We are offering 4,606,882 shares of our common stock and the selling stockholders are offering 2,038,118 shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. Currently, no public market exists for the shares. The estimated initial public offering price is between $18.00 and $20.00 per share.
Our common stock has been approved for listing on the New York Stock Exchange, or the NYSE, under the symbol PAYC.
We are an emerging growth company as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.
Investing in our common stock involves risks. See Risk Factors beginning on page 12.
Per share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discounts and commissions |
$ | $ | ||||||
Proceeds, before expenses, to us |
$ | $ | ||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ |
To the extent that the underwriters sell more than 6,645,000 shares of common stock, the underwriters have the option to purchase up to an additional 996,750 shares of common stock from the selling stockholders at the initial public offering price less underwriting discounts and commissions.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares on or about , 2014.
Barclays | J.P. Morgan |
Pacific Crest Securities | Stifel | Canaccord Genuity |
Prospectus dated , 2014
1 | ||||
12 | ||||
29 | ||||
30 | ||||
31 | ||||
32 | ||||
33 | ||||
34 | ||||
35 | ||||
37 | ||||
U NAUDITED P RO F ORMA C ONDENSED C ONSOLIDATED F INANCIAL I NFORMATION |
39 | |||
M ANAGEMENT S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS |
47 | |||
66 | ||||
80 | ||||
86 | ||||
100 | ||||
105 | ||||
107 | ||||
112 | ||||
M ATERIAL U.S. F EDERAL I NCOME AND E STATE T AX C ONSIDERATIONS FOR N ON -U.S. H OLDERS |
114 | |||
117 | ||||
124 | ||||
124 | ||||
124 | ||||
F-1 |
You should rely only on the information contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholders and the underwriters (and any of our or their affiliates) have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus we have prepared. We, the selling stockholders and the underwriters (and any of our or their affiliates), take no responsibility for and can provide no assurance as to the reliability of any other information that others may give you. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Until , 2014 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in our initial public offering, 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.
For investors outside the United States: We, the selling stockholders and the underwriters (and any of our or their affiliates), have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.
i
This summary highlights selected information contained elsewhere in this prospectus, but it does not contain all of the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully before making an investment in our common stock, including Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. For more information, see Special Note Regarding Forward-Looking Statements.
Unless we state otherwise or the context otherwise requires, the terms Paycom, we, us, our and the Company refer, prior to the Reorganization discussed in the section entitled The Reorganization, to Paycom Payroll Holdings, LLC, or Holdings, and its consolidated subsidiaries and, after the Reorganization, to Paycom Software, Inc., or Software, a recently formed Delaware corporation, and its consolidated subsidiaries, including Holdings. Software is a recently formed company that did not engage in any business or other activities prior to the Reorganization, except in connection with its formation. Accordingly, all financial and other information herein relating to periods prior to the Reorganization is that of, or derived from, Holdings. See The Reorganization.
Overview
We are a leading provider of a comprehensive, cloud-based human capital management, or HCM, software solution delivered as Software-as-a-Service, or SaaS. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources, or HR, management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.
Organizations need sophisticated, flexible and intuitive applications that can quickly adapt to their evolving HCM requirements, streamline their HR processes and systems and enable them to control costs. We believe that the HCM needs of most organizations are currently served either by legacy providers offering outdated on-premise products or multiple providers that partner together in an attempt to replicate a comprehensive product. These approaches often result in large up-front capital requirements, extended delivery times, high costs, low scalability and challenges with system integration. According to the International Data Corporation, or IDC, the U.S. markets for payroll services and HCM applications will collectively total approximately $22.5 billion in 2014, and we believe there is a substantial opportunity for our solution to address these HCM needs.
Because our solution was developed in-house and is based on a single platform, there is no need to integrate, update or access multiple databases, which are common issues with competitor offerings that use multiple third-party systems in order to link together their HCM offerings. Additionally, our solution maintains data integrity for accurate, actionable and real-time analytics and business intelligence and helps clients minimize the risk of compliance errors due to inaccurate or missing information. We deliver feature-rich applications while maintaining excellence in information security and quality management standards as evidenced by our International Organization for Standardization, or ISO, certifications. As a part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading, personalized service.
The key benefits of our differentiated solution as compared to competing products are:
| Comprehensive HCM solution; |
1
| Core system of record enabling data analytics maintained on a single database; |
| Personalized support provided by trained personnel; |
| Software-as-a-Service delivery model; |
| Cloud-based architecture; and |
| Scalability to grow with our clients. |
We sell our solution directly through our internally trained, client-focused and highly skilled sales force based in offices across the United States. We have over 10,000 clients, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We believe that as a result of our focus on client retention, we enjoy high client satisfaction as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. We believe our revenue retention rate understates our client loyalty because this rate also includes former clients that were acquired or otherwise ceased operations.
Since our founding in Oklahoma City in 1998, we have focused on providing an innovative SaaS HCM solution. As of December 31, 2013, we had 840 employees across the United States. For the years ended December 31, 2013, 2012 and 2011, our revenues were $107.6 million, $76.8 million, and $57.2 million, respectively, representing year-over-year growth in revenues of 40% and 34%, respectively. We currently derive most of our revenues from our payroll and tax management applications, which we refer to as payroll processing. We realized net income of $7.7 million, $4.2 million and $1.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Industry Background
Large Market Opportunity for HCM Technologies
According to IDC, the U.S. market for HCM applications is comprised of software that automates business processes covering the entire span of an employees relationship with his or her employer. IDC estimates that this market, excluding payroll services, will total $5.8 billion in 2014. According to IDC, the U.S. market for payroll services will be an estimated $16.2 billion in 2014. IDC estimates that the international market for HCM applications (excluding the United States) will be $4.1 billion in 2014.
Economic and Technological Trends Are Driving Demand for HCM Solutions
Organizations operating in todays global economy are continually under pressure to reduce operating costs in order to maintain or improve their competitive positions. As a result, businesses are increasingly making the strategic decision to leverage HCM technologies in order to improve the effectiveness and efficiency of their internal HR and accounting functions and capture opportunities for cost savings. According to IBISWorld, companies often outsource administrative services, such as time and labor management, after initially outsourcing payroll. We believe that businesses increasingly view data concerning their human capital as a critical strategic resource that can result in more informed decision-making.
Organizations are also managing internal costs and administrative burdens by transitioning technological assets from on-premise to the cloud. The rise of cloud computing has supported the SaaS delivery model. According to IDC, the global SaaS market is projected to grow from $23 billion in 2011 to $67 billion in 2016, at a compounded annual growth rate, or CAGR, of 24%.
Incumbent HCM Products Struggle To Meet the Needs of Businesses
We believe that a majority of businesses and organizations in the United States are using multiple HCM systems from more than one vendor, thereby impeding their ability to share data across these systems. Several
2
incumbent payroll and HCM vendors offer product sets that are comprised of separate systems that require integration. In certain cases, this disparate product offering across several vendors is the result of several acquisitions which often leads to a loosely coupled product set that is marked by significant architectural differences and weak data integration. We believe that this type of offering increases the risk of user or system error and reduces overall effectiveness. Finally, we believe that vendors who pursue market segmentation strategies based on organization size or industry create difficulties for clients who grow, either in size or industry scope, beyond the confines of those vendors offerings. A scalable HCM solution based on a core system of record allows for an organization to grow in size and scope without transitioning to a new user interface or back-end database.
The Paycom Solution
We offer an end-to-end SaaS HCM solution that provides our clients and their employees with immediate access to accurate and secure information and analytics 24 hours a day, seven days a week from any location. We believe that our solution delivers the following benefits:
| Comprehensive HCM Solution. Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications streamline client processes and provide clients and their employees with the ability to directly access and manage administrative processes, including applications that identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA. |
| Core System of Record. Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs and eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases. In addition, our core system of record helps clients minimize the risk of compliance errors due to inaccurate or missing information that results from maintaining multiple databases. |
| Data Analytics. Our solution allows clients to analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided through our client dashboard. This functionality helps our clients operate with a more complete and accurate picture of their organization as our solutions embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from any location. |
| Personalized Support Provided by Trained Personnel. Our applications are supported by one-on-one personal assistance from trained specialists. We strive to provide our clients with high levels of service and support to ensure their continued use of our solution for all of their HCM needs. We have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. |
| Software-as-a-Service Delivery Model. Our SaaS delivery model allows clients with a geographically dispersed and mobile workforce to operate more efficiently, and allows these clients to implement, access and use our client-oriented Internet solution on demand and remotely through standard web browsers, smart phones, tablets and other web-enabled devices. |
| Secure Cloud-Based Architecture. Our cloud-based architecture allows our solution to be implemented remotely with minimal client interaction, allowing our clients to make a smaller investment in hardware, personnel, implementation time and consulting. |
| Scalability to Grow with our Clients. Our solution is highly scalable. We have served a diversified client base ranging in size from one to more than 8,000 employees. Our clients are able to use the same solution while their businesses grow by deploying applications as-needed in real-time. |
3
Our Strategy for Growth
Our strategy is to continue to establish our solution as the HCM industry standard. To accomplish this, we intend to:
| Increase Our Presence in Existing Markets . Although we have clients in all 50 states, we believe a significant opportunity exists to expand our presence within markets where we currently have a sales office. We have a sales office in 24 of the 50 largest Metropolitan Statistical Areas, or MSAs, in the United States based on 2010 U.S. census data, only one of which is served by multiple sales teams. We believe that the 50 largest MSAs in the United States could collectively support at least 100 additional sales teams. Each sales office is typically staffed with one sales team, with each team comprised of approximately seven to nine sales professionals. We plan to increase our presence in our existing markets by adding sales offices and increasing the number of our sales teams to further penetrate and effectively capture these markets. |
| Expand Into Additional Markets. We plan to continue expanding our sales capability by opening sales offices in certain metropolitan areas where we currently have no sales teams. We have identified 50 untapped metropolitan areas where we can potentially open a new sales office staffed with at least one sales team. Since September 2012, we have opened sales offices in Baltimore, Detroit, Indianapolis, Minneapolis, New York, Philadelphia, San Francisco, Seattle and Silicon Valley. We intend to open six to eight additional offices over the next two years, as well as potentially expand over the longer term into international markets. |
| Enlarge our Existing Client Relationships. We believe a significant growth opportunity exists in selling additional applications to our current clients. During the year ended December 31, 2013, all of our clients, including our new clients, on average utilized 5.2 of our 18 then available applications. During that same period, however, new clients on average utilized 6.2 applications. We believe that there is a significant opportunity to sell additional applications to our existing clients. As we extend and strengthen the functionality of our solution, we will continue to invest in initiatives to increase the adoption of our solution and maintain our high levels of client satisfaction. |
| Target Larger Clients. We believe larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client, with limited incremental cost to us. To further capitalize on this opportunity, we intend to target larger businesses opportunistically. |
| Maintain Our Leadership in Innovation by Strengthening and Extending our Solution. We intend to continue to use our in-house development efforts, which are heavily based upon proactive research and client input, to extend the functionality and range of our solution in the future. |
Selected Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section Risk Factors immediately following this prospectus summary. Some of these risks include:
| Our business depends substantially on our clients continued use of our applications, their purchases of additional applications from us and our ability to add new clients. |
| The market in which we participate is highly competitive, and if we do not compete effectively, our business, operating results or financial condition could be adversely affected. |
| We have historically derived a majority of our revenue from payroll processing and our efforts to increase the use of our other HCM applications may not be successful and may reduce our revenue growth rate. |
4
| If our security measures are breached or unauthorized access to data of our clients or their employees is otherwise obtained, our solution may not be perceived as being secure, clients may reduce, limit or stop using our solution and we may incur significant liabilities. |
| If the SaaS market develops more slowly than we expect or declines, our growth may slow or stall, and our business could be adversely affected. |
| If we are not able to develop enhancements or new applications, keep pace with technological developments or respond to future disruptive technologies, our business could be adversely affected. |
| Our business and operations are experiencing rapid growth and organizational change and if we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of satisfaction or adequately address competitive challenges. |
| Our financial results may fluctuate due to many factors, some of which may be beyond our control. |
Our Principal Stockholders
Following the completion of this offering, Welsh, Carson, Anderson & Stowe X, L.P., or WCAS X, WCAS Capital Partners IV, L.P., or WCAS Capital IV, and WCAS Management Corporation, together with WCAS X and WCAS Capital IV, the WCAS Funds, which are affiliates of Welsh, Carson, Anderson & Stowe, L.P., or Welsh, Carson, Anderson & Stowe, will own approximately 57.8% of our outstanding common stock, or 55.8% if the underwriters exercise in full their option to purchase additional shares. In addition, following the completion of this offering, the WCAS Funds and the other parties to the Amended and Restated Stockholders Agreement, or the Stockholders Agreement, will own approximately 81.7% of our outstanding shares of common stock, or 79.7% of our outstanding shares of common stock if the underwriters exercise in full their option to purchase additional shares. As a result of this ownership and the provisions of the Stockholders Agreement, the WCAS Funds will have control over votes on fundamental and significant corporate matters and transactions.
So long as the parties to the Stockholders Agreement own a majority of our outstanding shares of common stock, we will be a controlled company under the NYSE Listed Company Manual. Under these standards, a company of which more than 50% of the voting power for the election of directors is held by another company or group is a controlled company that is not required to comply with certain corporate governance requirements. We intend to rely on certain exemptions following the offering, and may rely on any of these exemptions for so long as we are a controlled company. See Risk FactorsRisks Related to This Offering and Ownership of Our Common Stock and Certain Relationships and Related Party TransactionsStockholders Agreement.
Welsh, Carson, Anderson & Stowe is a leading U.S. private equity investor focused on information/business services and healthcare. Welsh, Carson, Anderson & Stowe has raised and managed $20 billion in capital and has a current portfolio of over 30 companies.
Corporate Information
We were founded in 1998. Software is a Delaware corporation that was formed in October 2013 to undertake this offering. Our principal executive offices are located at 7501 W. Memorial Road, Oklahoma City, Oklahoma 73142 and our telephone number is (405) 722-6900. Our website is www.paycom.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus.
Paycom, the Paycom logo and other trademarks or service marks of Paycom appearing in this prospectus are the property of Paycom. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders.
5
The Reorganization
Software is a newly formed Delaware corporation. In anticipation of this offering, we consummated the Reorganization (as defined herein), effective as of January 1, 2014. For additional information concerning the Reorganization, see The Reorganization.
The following diagram depicts our corporate structure immediately after the completion of this offering. We will directly or indirectly hold 100% of the ownership interests in each of our subsidiaries:
6
THE OFFERING
Common stock offered by us |
4,606,882 shares |
Common stock offered by the selling stockholders |
2,038,118 shares |
Option to purchase additional shares of common stock |
The selling stockholders have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 996,750 shares of common stock. |
Shares outstanding after the offering |
50,333,739 shares |
Use of proceeds |
We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $78.0 million, assuming an initial public offering price of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for (i) the repayment of a 10% Senior Note due 2022 issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million, (ii) the repayment of a 14% Note due 2017 issued by WCAS Paycom Holdings, Inc., or WCAS Holdings, that we assumed in connection with the Reorganization in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement) and (iii) general corporate purposes, including additions to working capital and capital expenditures. See Use of Proceeds. |
We will not receive any proceeds from the sale of shares offered by the selling stockholders, who include a director and entities affiliated with members of our board of directors. |
Dividend policy |
We do not currently plan to pay a regular dividend on our common stock following this offering. See Dividend Policy. |
Risk factors |
See Risk Factors beginning on page 12 and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. |
Directed Share Program |
At our request, the underwriters have reserved for sale at the initial public offering price up to 5% of the shares offered hereby for our officers, directors, employees, clients, suppliers, vendors and friends and relatives of our employees. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Chad Richison, our president, chief executive officer and director, Craig E. Boelte, our chief financial officer, William X. Kerber III, our chief information officer, and |
7
Frederick C. Peters II, our director, on behalf of themselves and certain of their affiliates, have indicated an interest in purchasing an aggregate of up to approximately $1.3 million in shares of our common stock in this offering pursuant to the Directed Share Program. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the others offered hereby. Any participants will be prohibited from selling, pledging or assigning any shares sold to them pursuant to this program for a period of 180 days after the date of this prospectus. The Directed Share Program will be arranged through our lead underwriter, Barclays Capital Inc. |
NYSE trading symbol |
PAYC |
In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon:
| exclude 8,081,447 shares of restricted common stock that are subject to time-based or performance-based vesting conditions, including 217,378 shares of restricted stock that vest upon the sale of our common stock in the initial public offering; |
| exclude 3,269,434 shares of our common stock reserved for future issuance under the Paycom Software, Inc. 2014 Long-Term Incentive Plan, or the 2014 Plan, that we adopted in connection with the Reorganization; and |
| do not reflect any exercise by the underwriters of their option to purchase 996,750 additional shares of our common stock from the selling stockholders. |
8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes our consolidated financial data as of the dates and for the periods indicated. We have derived the summary consolidated statements of income data for the years ended December 31, 2013, 2012 and 2011 and the summary consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results for any future period. We have derived the summary unaudited pro forma condensed consolidated financial data for the years ended December 31, 2013, 2012 and 2011 from the unaudited pro forma condensed consolidated financial statements set forth under Unaudited Pro Forma Condensed Consolidated Financial Information.
The summary consolidated financial data set forth below should be read together with Capitalization, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations, Unaudited Pro Forma Condensed Consolidated Financial Information and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus. The following tables summarize our consolidated and pro forma results:
Pro forma (4) | ||||||||||||||||||||||||
Year Ended
December 31, |
Year Ended
December 31, |
|||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
(in thousands, except per unit and share data) | ||||||||||||||||||||||||
Consolidated statement of income data: |
||||||||||||||||||||||||
Revenues |
$ | 107,601 | $ | 76,810 | $ | 57,206 | $ | 107,601 | $ | 76,810 | $ | 57,206 | ||||||||||||
Expenses (1) |
||||||||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||
Operating expenses |
19,070 | 14,895 | 12,287 | 19,070 | 14,895 | 12,287 | ||||||||||||||||||
Depreciation |
1,821 | 1,431 | 987 | 1,821 | 1,431 | 987 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total cost of revenues |
20,891 | 16,326 | 13,274 | 20,891 | 16,326 | 13,274 | ||||||||||||||||||
Administrative expenses: |
||||||||||||||||||||||||
Sales and marketing |
42,681 | 29,255 | 22,244 | 42,681 | 29,255 | 22,244 | ||||||||||||||||||
Research and development |
2,146 | 1,632 | 1,225 | 2,146 | 1,632 | 1,225 | ||||||||||||||||||
General and administrative |
28,884 | 19,450 | 14,707 | 29,191 | 19,452 | 14,714 | ||||||||||||||||||
Depreciation and amortization |
3,682 | 4,092 | 4,300 | 3,682 | 4,092 | 4,300 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total administrative expenses |
77,393 | 54,429 | 42,476 | 77,700 | 54,431 | 42,483 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
9,317 | 6,055 | 1,456 | 9,010 | 6,053 | 1,449 | ||||||||||||||||||
Interest expense |
(2,805 | ) | (2,171 | ) | (134 | ) | (683 | ) | (774 | ) | (134 | ) | ||||||||||||
Other income, net |
1,199 | 354 | 108 | 553 | 36 | 108 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
7,711 | 4,238 | 1,430 | 8,880 | 5,315 | 1,423 | ||||||||||||||||||
Provision for income taxes |
| | | 3,462 | 2,068 | 573 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
7,711 | $ | 4,238 | $ | 1,430 | 5,418 | $ | 3,247 | $ | 850 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less: Distribution to Series C Preferred Unitholder |
|
(6,467
|
)
|
(4,806 | ) | | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) available to Series A Preferred Unitholders and common unit holders |
1,244 | $ | (568 | ) | $ | 1,430 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) per Series A Preferred Unit and common unit/share (2) |
||||||||||||||||||||||||
Basic |
$ | 1.30 | $ | (0.60 | ) | $ | 1.53 | $ | 0.11 | $ | 0.06 | $ | 0.02 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted |
$ | 1.22 | $ | (0.57 | ) | $ | 1.49 | $ | 0.10 | $ | 0.06 | $ | 0.02 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted average units/shares outstanding (2) |
||||||||||||||||||||||||
Basic |
955,983 | 948,181 | 935,750 | 51,107,379 | 51,107,379 | 51,107,379 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted |
1,018,305 | 1,004,436 | 960,611 | 51,792,542 | 51,792,542 | 51,792,542 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other financial data: |
||||||||||||||||||||||||
EBITDA (3) |
$ | 16,019 | $ | 11,932 | $ | 6,851 | $ | 15,066 | $ | 11,612 | $ | 6,844 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Adjusted EBITDA (3) |
$ | 19,700 | $ | 12,751 | $ | 7,016 | $ | 18,747 | $ | 12,431 | $ | 7,009 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
9
As of December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) |
||||||||
Consolidated balance sheet data: |
||||||||
Cash and cash equivalents |
$ | 13,273 | $ | 13,435 | ||||
Restricted cash |
369 | 368 | ||||||
Working capital (deficit) (5) |
(7,933 | ) | 5,096 | |||||
Property, plant and equipment, net |
38,671 | 25,139 | ||||||
Deferred revenue |
12,572 | 8,393 | ||||||
Long-term debt, including current portion |
21,090 | 14,110 | ||||||
Long-term debt due to related party |
14,682 | 14,440 | ||||||
Members capital |
63,645 | 63,542 | ||||||
Common stock |
| | ||||||
Accumulated deficit |
(13,385 | ) | (8,871 | ) | ||||
Total members equity |
50,260 | 54,671 |
(1) | Incentive-based compensation expense included in the consolidated statements of income data above was as follows: |
Year Ended
December 31, |
||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Cost of revenues (operating expenses) |
$ | 222 | $ | 87 | $ | 36 | ||||||
Sales and marketing |
114 | 83 | 57 | |||||||||
Research and development |
345 | 100 | 25 | |||||||||
General and administrative |
253 | 233 | 47 | |||||||||
|
|
|
|
|
|
|||||||
$ | 934 | $ | 503 | $ | 165 | |||||||
|
|
|
|
|
|
(2) | Net income (loss) per Series A Preferred Unit and common unit and weighted average units outstanding represent the earnings per unit reported in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 that are included elsewhere in this prospectus. Pro forma net income per share of common stock and the weighted average shares of common stock outstanding reflect the estimated number of shares of common stock we expect to have outstanding upon the completion of this offering as discussed in Note (4) below. |
(3) | We use earnings before interest, tax, depreciation and amortization, or EBITDA, and Adjusted EBITDA as supplemental measures to review and assess our performance. We define EBITDA as net income, plus interest expense and depreciation and amortization and Adjusted EBITDA as net income, plus interest expense, depreciation and amortization, incentive-based compensation expense and certain transaction expenses that are not core to the Companys operations. EBITDA and Adjusted EBITDA are metrics that we believe are useful to investors in evaluating our operating performance and facilitating comparison with other peer companies, many of which use similar non-GAAP financial measures to supplement results under accounting principles generally accepted in the United States of America, or U.S. GAAP. |
EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. EBITDA and Adjusted EBITDA have limitations as analytical tools, and when assessing our operating performance, you should not consider EBITDA or Adjusted EBITDA in isolation, or as a substitute for net income or other consolidated statements of income data prepared in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA may not be comparable to similar titled measures of other companies and other companies may not calculate such measures in the same manner as we do.
The following table reconciles net income to EBITDA and Adjusted EBITDA and pro forma net income to pro forma EBITDA and pro forma Adjusted EBITDA:
Pro forma (4) | ||||||||||||||||||||||||
Year Ended
December 31, |
Year Ended
December 31, |
|||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Consolidated statements of income data: |
(in thousands) | |||||||||||||||||||||||
Net income |
$ | 7,711 | $ | 4,238 | $ | 1,430 | $ | 5,418 | $ | 3,247 | $ | 850 | ||||||||||||
Interest expense |
2,805 | 2,171 | 134 | 683 | 774 | 134 | ||||||||||||||||||
Taxes |
| | | 3,462 | 2,068 | 573 | ||||||||||||||||||
Depreciation and amortization |
5,503 | 5,523 | 5,287 | 5,503 | 5,523 | 5,287 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
EBITDA |
16,019 | 11,932 | 6,851 | 15,066 | 11,612 | 6,844 | ||||||||||||||||||
Incentive-based compensation expense (a) |
934 | 503 | 165 | 934 | 503 | 165 | ||||||||||||||||||
Transaction expenses (b) |
2,747 | 316 | | 2,747 | 316 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Adjusted EBITDA |
$ | 19,700 | $ | 12,751 | $ | 7,016 | $ | 18,747 | $ | 12,431 | $ | 7,009 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
10
(a) | Represents incentive-based compensation expense reflected in Note (1) above. Pro forma incentive-based compensation expense is the same as that reported under the historical periods as there are no pro forma adjustments to incentive-based compensation expense recorded in our consolidated statements of income for the years ended December 31, 2013, 2012 and 2011. |
(b) | Represents one-time transaction expenses associated with the April 2012 Corporate Reorganization (as defined herein) and indirect incremental legal and accounting costs and expenses included in general and administrative expenses in the anticipation of and planning for this offering. |
(4) | The pro forma data reflects: (i) the Reorganization, and (ii) the effect of a portion of the net offering proceeds which will be used to repay the 10% Senior Note due 2022 issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million and the 14% Note due 2017 issued by WCAS Holdings that we assumed in connection with the Reorganization in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement). Any additional net offering proceeds have been excluded for the purposes of the pro forma financial information. |
(5) | Working capital (deficit) is defined as current assets, excluding restricted cash, less current liabilities, excluding current portion of deferred revenue. |
11
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making a decision to invest in our common stock. Our business, operating results or financial condition could be adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment. Before deciding whether to invest in our common stock, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes.
Risks Related to Our Business and Industry
Our business depends substantially on our clients continued use of our applications, their purchases of additional applications from us and our ability to add new clients. Any decline in our clients continued use of our applications or purchases of additional applications could adversely affect our business, operating results or financial condition.
In order for us to maintain or improve our operating results, it is important that our current clients continue to use our applications and purchase additional applications from us, and that we add additional clients. Our clients have no obligation to continue to use our applications, and may choose not to continue to use our applications at the same or higher level of service, if at all. In the past, some of our clients have elected not to continue to use our applications. Moreover, our clients generally have the right to cancel their agreements with us for any or no reason by providing 30 days prior written notice.
Our client retention rates may fluctuate as a result of a number of factors, including the level of client satisfaction with our applications, pricing, the prices of competing products or services, mergers and acquisitions affecting our client base, reduced hiring by our clients or reductions in our clients spending levels. If our clients do not continue to use our applications, renew on less favorable terms, fail to purchase additional applications, or if we fail to add new clients, our revenue may decline, and our business, operating results or financial condition could be adversely affected.
The market in which we participate is highly competitive, and if we do not compete effectively, our business, operating results or financial condition could be adversely affected.
The market for HCM software is highly competitive, rapidly evolving and fragmented. We expect competition to intensify in the future with the introduction of new technologies and market entrants. Many of our current and potential competitors are larger and have greater brand name recognition, longer operating histories, more established relationships in the industry and significantly greater financial, technical and marketing resources than we do. As a result, some of these competitors may be able to:
| adapt more rapidly to new or emerging technologies and changes in client requirements; |
| develop superior products or services, gain greater market acceptance and expand their product and service offerings more efficiently or rapidly; |
| bundle products and services that we may not offer or in a manner that provides our competitors with a price advantage; |
| take advantage of acquisition and other opportunities for expansion more readily; |
| maintain a lower cost basis; |
| adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their products and services; and |
| devote greater resources to the research and development of their products and services. |
12
Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. Similarly, some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels and our billing terms, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our solution to achieve or maintain widespread market acceptance, any of which could adversely affect our business, operating results or financial condition.
We compete with firms that provide HCM solutions by various means. Many providers continue to deliver legacy enterprise software, but as demand for greater flexibility and access to information grows, we believe there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers. Our competitors offer HCM solutions that overlap with one, several or all categories of applications offered by our solution. Our talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc. Our payroll applications, including payroll processing, compete primarily with Automatic Data Processing, Inc., or ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc. Our HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc. Our time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc. All of our larger competitors compete with us across multiple application categories. In addition, our HCM solution continues to face competition from in-house payroll and HR systems and departments as well as HR systems and software sold by third-party vendors.
Competition in the HCM solutions market is primarily based on service responsiveness, product quality and reputation, breadth of service and product offering and price. Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to larger client bases and major distribution agreements with consultants, software vendors and distributors. In addition, some competitors may offer software that addresses one or a limited number of HCM functions at a lower price point or with greater depth than our solution. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. Further, some potential clients, particularly large enterprises, may elect to develop their own internal solutions. If we are unable to compete effectively, our business, operating results or financial condition could be adversely affected.
We have historically derived a majority of our revenue from payroll processing and our efforts to increase the use of our other HCM applications may not be successful and may reduce our revenue growth rate.
To date we have derived a majority of our revenue from payroll processing. For the years ended December 31, 2013, 2012 and 2011, payroll processing represented approximately 58%, 60% and 68% of our total revenues, respectively. Compared to payroll processing, our participation in other HCM applications markets is relatively new, and it is uncertain whether our revenue from other HCM applications will continue to grow. The relatively limited extent to which our other HCM applications have been adopted by our clients, and the uncertainty regarding the adoption of any new applications beyond our existing applications, may make it difficult to evaluate our business because the potential market for such applications remains uncertain. Our HCM solution may not achieve and sustain the high level of market acceptance that is critical for the success of our business. The failure to increase the use of our HCM applications and any new applications developed by us may reduce our revenue growth rate, which could adversely affect our business, operating results or financial condition.
If our security measures are breached, or unauthorized access to data of our clients or their employees is otherwise obtained, our solution may not be perceived as being secure, clients may reduce the use of or stop using our solution and we may incur significant liabilities.
Our solution involves the collection, storage and transmission of clients and their employees confidential and proprietary information, including personal or identifying information, as well as financial and payroll data. Unauthorized access or security breaches could result in the loss of information, litigation, indemnity obligations
13
and other liability. While we have security measures in place to protect client and employee information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and someone obtains unauthorized access to our clients data, our reputation could be damaged, our business may suffer and we could incur significant liability. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently, we may not be able to anticipate these techniques and implement adequate preventative measures. Cyber liability insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert managements attention.
Any actual or perceived breach of our security could damage our reputation, cause existing clients to discontinue the use of our solution, prevent us from attracting new clients, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our business, operating results or financial condition.
If the SaaS market develops more slowly than we expect or declines, our growth may slow or stall, and our business could be adversely affected.
The SaaS market is not as mature as the market for on-premise enterprise software, and it is uncertain whether SaaS will achieve and sustain high levels of demand and market acceptance. Our success will depend not only on strong demand for HCM services in general, but also to a substantial extent on the widespread adoption of SaaS. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to SaaS. It is difficult to predict client adoption rates and demand for our solution, the future growth rate and size of the SaaS market or the entry of competitive products. The expansion of the SaaS market depends on a number of factors, including the cost, performance and perceived value associated with SaaS, as well as the ability of SaaS providers to address security and privacy concerns. If other SaaS providers experience security incidents, loss of client data, disruptions in delivery or other problems, the market for SaaS applications as a whole, including our solution, may be negatively affected. If SaaS does not achieve widespread adoption, or there is a reduction in demand for SaaS caused by a lack of client acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, our growth may slow or stall, and our business could be adversely affected.
Any interruption or failure of our data centers could impair our ability to effectively provide our solution and adversely affect our business.
We serve all of our clients from our two data centers located in Oklahoma and Texas. These locations are vulnerable to damage or interruption from severe weather, tornados, terrorist attacks, earthquakes, floods, fires, power loss, telecommunications failures, computer viruses or cyber-attacks. They are also subject to break-ins, sabotage, intentional acts of vandalism and other misconduct. Our solution depends on the continuing operation of our data centers and any damage to or failure of our data centers could result in interruptions in our services. Any interruption in our service could damage our reputation, cause our clients to terminate their use of our solution and prevent us from gaining new or additional business from current clients, which could have an adverse effect on our business, operating results or financial condition.
Any significant disruption in our SaaS network infrastructure could harm our reputation and expose us to significant costs.
Our SaaS network infrastructure is a critical part of our business operations. Our clients access our solution through standard web browsers, smart phones, tablets and other web-enabled devises, and depend on us for fast and reliable access to our solution. In the future, we may experience disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:
| human error; |
14
| security breaches; |
| telecommunications failures or outages from third-party providers; |
| computer viruses or cyber-attacks; |
| acts of terrorism, sabotage or other intentional acts of vandalism; |
| unforeseen interruption or damages experienced in moving hardware to a new location; |
| tornados, fires, earthquakes, floods and other natural disasters; and |
| power loss. |
If our SaaS network infrastructure or our clients ability to access to our solution is interrupted, client and employee data from recent transactions may be permanently lost and we could be exposed to significant claims by clients, particularly if the access interruption is associated with problems in the timely delivery of funds due to employees. Any significant instances of system downtime could negatively affect our reputation and ability to retain clients and sell our solution, which would adversely impact our revenue.
We have also experienced significant growth in the number of clients, transactions and client and employee data that our network infrastructure supports. We seek to maintain sufficient excess capacity in our network infrastructure to meet the needs of all of our clients and their employees and to facilitate the rapid provision of new client deployments and the expansion of existing client deployments. Any changes in the service levels at our data centers or any errors, defects, disruptions or other performance problems with our network infrastructure could adversely affect our reputation and may result in lengthy interruptions in the availability of our solution. Any interruptions in the availability of our solution might reduce our revenues, cause us to issue refunds to clients or adversely affect our retention of existing clients.
If our solution fails to perform properly, our reputation could be adversely affected and our market share could decline.
Our solution is inherently complex and may in the future contain, or develop, undetected defects or errors. Any defects in our applications could adversely affect our reputation, impair our ability to sell our applications in the future and result in significant costs to us. The costs incurred in correcting any application defects may be substantial and could adversely affect our business, operating results or financial condition. Any defects in functionality or that cause interruptions in the availability of our applications could result in:
| loss or delayed market acceptance and sales of our applications; |
| termination of service agreements or loss of clients; |
| credits or refunds to clients; |
| breach of contract, breach of warranty or indemnification claims against us, which may result in litigation; |
| diversion of development and service resources; and |
| injury to our reputation. |
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our clients regard as significant. Furthermore, the availability or performance of our solution could be adversely affected by a number of factors, including the failure of our network system or solution or security breaches. We may be liable to our clients for damages they may incur resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our solution, our reputation could be adversely affected and we could lose clients.
15
Our clients might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our solution. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert managements attention.
If we do not effectively expand and train our sales force and our support teams, we may be unable to add new clients and retain existing clients.
We need to continue to expand our sales force and support team members in order to grow our client base and increase our revenues. Identifying and recruiting qualified personnel and training them in the use of our solution requires significant time, expense and attention and it can take a substantial amount of time before our sales representatives and support team members are fully-trained and productive. We may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we currently, or intend in the future to do business, and our recent hires and planned hires may not achieve desired productivity levels in a reasonable period of time or become as productive as we expect. If these expansion efforts are unsuccessful or do not generate a corresponding increase in revenues, our business, operating results or financial condition could be adversely affected.
If we are not able to develop enhancements and new applications, keep pace with technological developments or respond to future disruptive technologies, we might not remain competitive and our business could be adversely affected.
Our future success will depend on our ability to adapt and innovate. To attract new clients and increase revenue from existing clients, we need to enhance, add new features and improve our existing applications and introduce new applications. The success of any enhancements or new features and applications depends on several factors, including timely completion, introduction and market acceptance. We may expend significant time and resources developing and pursuing sales of a particular application that may not result in revenues in the anticipated time frame or at all, or may not result in revenue growth sufficient to offset increased expenses. If we are unable to successfully develop enhancements, new features or new applications to meet client needs, our business and operating results could be adversely affected.
In addition, because our applications are designed to operate on a variety of network, hardware and software platforms using Internet tools and protocols, we will need to continuously modify and enhance our applications to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our current and future applications may become less marketable and less competitive or even obsolete.
Our success is subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver HCM solutions at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
The market for our solution among large companies may be limited if these companies demand customized features and functions that we do not offer.
Prospective clients, especially larger companies, may require customized features and functions unique to their business processes that we do not offer. In order to ensure we meet these requirements, we may devote a significant amount of support and services resources to larger prospective clients, increasing the cost and time required to complete sales with no guarantee that these clients will continue to use our solution. We may not be successful in implementing any customized features or functions. If prospective clients require customized features or functions that we do not offer, or that would be difficult for them to deploy themselves, then the market for our solution will be more limited and our business could be adversely affected.
16
Our business and operations are experiencing rapid growth and organizational change. If we fail to manage such growth and change effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.
We have experienced, and may continue to experience, rapid growth in our headcount and operations, which has placed, and may continue to place, significant demands on our management, operational and financial resources. For example, our headcount has grown from 523 employees as of December 31, 2011 to 840 employees as of December 31, 2013 and we have expanded from 18 offices as of December 31, 2011 to 24 offices as of December 31, 2013. We have also experienced significant growth in the number of clients, transactions and client and employee data that our infrastructure supports. Finally, our organizational structure and recording systems and procedures are becoming more complex as we improve our operational, financial and management controls. Our success will depend in part on our ability to manage this growth and organizational change effectively. To manage the expected growth of our headcount and operations, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Our ability to add additional offices may be constrained by the willingness and availability of qualified personnel to help staff and manage any new offices. The failure to effectively manage growth could result in difficulties or delays in obtaining clients, selling additional applications to our clients, declines in quality or client satisfaction of our applications, increases in costs, and difficulties in introducing new applications or other operational difficulties, any of which could adversely affect our ability to retain and attract clients or sell additional applications to our existing clients.
Our business, operating results or financial condition could be adversely affected if our clients are not satisfied with our deployment or technical support services.
Our business depends on our ability to satisfy our clients, both with respect to our applications and the technical support provided to help clients use the applications that address the needs of their businesses. We use our in-house deployment personnel to implement and configure our solution and provide support to our clients. If a client is not satisfied with the quality of our solution or the applications delivered or the support provided, we could be required to incur additional costs to address the situation, the profitability of our solution might be negatively affected, and the clients dissatisfaction with our deployment service could damage our ability to sell additional applications to that client. In addition, our sales process is highly dependent on the reputation of our solution and applications and on positive recommendations from our existing clients. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation, our ability to sell our applications to existing and prospective clients, and our business, operating results or financial condition.
If we fail to retain key employees and recruit qualified technical and sales personnel, our business could be adversely affected.
We believe that our success depends on the continued services of our senior management and other key employees, including Chad Richison, Craig E. Boelte, Jeffrey D. York and William X. Kerber III. In addition, because our future success is dependent on our ability to continue to enhance and introduce new applications, we are heavily dependent on our ability to attract and retain qualified software developers and IT personnel with the requisite education, background and industry experience. To continue to execute our growth strategy, we must also attract and retain qualified sales, marketing and operational personnel capable of supporting a larger and more diverse client base. The loss of the services of a significant number of our developers or sales professionals could be disruptive to our development efforts or business relationships. In addition, if any of our key employees joins a competitor or decides to otherwise compete with us, we may experience a material disruption of our operations and development plans, which may cause us to lose clients or increase operating expenses or divert managements attention to recruit replacements for the departed key employees.
17
Our financial results may fluctuate due to many factors, some of which may be beyond our control.
Our results of operations, including the levels of our revenues, costs of revenues, administrative expenses, operating income, cash flow and deferred revenue, may vary significantly in the future and the results of any one period should not be relied upon as an indication of future performance. Our financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in our financial results may negatively impact the value of our common stock. Factors that may cause our financial results to fluctuate from period to period include, without limitation:
| our ability to attract new clients or sell additional applications to our existing clients; |
| the number of new clients and their employees, as compared to the number of existing clients and their employees in a particular period; |
| the mix of clients between small, mid-sized and large organizations; |
| the extent to which we retain existing clients and the expansion or contraction of our relationship with them; |
| the mix of applications sold during a period; |
| changes in our pricing policies or those of our competitors; |
| seasonal factors affecting payroll processing, demand for our applications or potential clients purchasing decisions; |
| the amount and timing of operating expenses, including those related to the maintenance and expansion of our business, operations and infrastructure; |
| the timing and success of new applications introduced by us and the timing of expenses related to the development of new applications and technologies; |
| the timing and success of current and new competitive products and services by our competitors; |
| economic conditions affecting our clients, including their ability to outsource HCM solutions and hire employees; |
| other changes in the competitive dynamics of our industry, including consolidation among competitors or clients; |
| our ability to manage our existing business and future growth, including expenses related to our data centers and the expansion of such data centers and the addition of new offices; |
| the effects and expenses of acquisition of third-party technologies or businesses and any potential future charges for impairment of goodwill resulting from those acquisitions; |
| network outages or security breaches; and |
| general economic, industry and market conditions. |
Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.
We have historically experienced seasonality in our revenues because a significant portion of our recurring revenues relate to the annual processing of payroll forms such as Form W-2 and Form 1099. Because these forms are typically processed in the first quarter of the year, first quarter revenues are generally higher than subsequent quarters. We expect this seasonality to continue in the future, which may cause fluctuations in certain of our operating results and financial metrics, and thus make such results and metrics difficult to predict.
18
If we fail to adequately protect our proprietary rights, our competitive advantage could be impaired and we may lose valuable assets, generate reduced revenue or incur costly litigation to protect our rights.
Our success is dependent in part upon our intellectual property. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and to protect our intellectual property rights. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our applications and use information that we regard as proprietary to create products or services that compete with ours.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to protect and enforce our intellectual property rights and to protect our trade secrets and such litigation could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. We may not be able to secure, protect and enforce our intellectual property rights or control access to, and the distribution of, our solution and proprietary information.
We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable intellectual property development activity in our industry, and we expect that software developers will increasingly be subject to infringement claims as the number of applications and competitors grows and the functionality of applications in different industry segments overlaps. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property in technology areas relating to our solution or applications. From time to time, third parties have asserted and may in the future assert that we are infringing on their intellectual property rights, and we may be found to be infringing upon such rights. A claim of infringement may also be made relating to technology that we acquire or license from third parties. However, we may be unaware of the intellectual property rights of others that may cover, or may be alleged to cover, some or all of our solution or applications.
For example, on July 29, 2013, Dr. Lakshmi Arunachalam filed a complaint against us in the U.S. District Court for the District of Delaware alleging that Paycom Payroll, LLC, or Payroll, infringes on at least one claim of U.S. Patent No. 8,244,833 assigned to her. In her complaint, Dr. Arunachalam seeks a permanent injunction, damages and attorneys fees.
The outcome of the foregoing litigation matter is inherently unpredictable, and therefore as a result of this litigation matter or any future claim of infringement, a claim could (i) cause us to enter into an unfavorable royalty or license agreement, pay ongoing royalties or require that we comply with other unfavorable terms, (ii) require us to discontinue the sale of our solution or applications, (iii) require us to indemnify our clients or third-party service providers or (iv) require us to expend additional development resources to redesign our solution or applications. Any of these outcomes could harm our business. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time consuming and divert the attention of our management and key personnel from our business and operations.
We employ third-party licensed software for use in our applications, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels, which could adversely affect our business.
Our applications incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in
19
the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our applications with new third-party software may require significant work and substantial investment of our time and resources. Also, to the extent that our applications depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our applications, delay new application introductions, result in a failure of our applications and harm our reputation.
The use of open source software in our applications may expose us to additional risks and harm our intellectual property rights.
Some of our applications use software covered by open source licenses. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate such software into their products or applications. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional development resources to change our applications. In addition, if we were to combine our applications with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our applications. If we inappropriately use open source software, we may be required to redesign our applications, discontinue the sale of our applications or take other remedial actions.
The failure to develop our brand cost-effectively could have an adverse effect on our business.
We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving the widespread acceptance of our solution and is an important element in attracting new clients and retaining existing clients. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful applications at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new clients or retain our existing clients to the extent necessary to realize a sufficient return on our brand-building efforts, which could have an adverse effect on our business.
We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We have funded our operations since inception through equity financings and cash generated by operations. In the future, we may require additional capital to support our growth and respond to operational challenges, including the need to develop new features and applications or enhance our existing applications, improve our infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our growth and respond to challenges could be significantly limited.
20
We may acquire other businesses, applications or technologies, which could divert our managements attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.
In the future, we may seek to acquire or invest in businesses, applications or technologies that we believe complement or expand our applications, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are ultimately consummated.
We do not have any experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully or to effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:
| the inability to integrate or benefit from acquired applications or services in a profitable manner; |
| unanticipated costs or liabilities associated with the acquisition; |
| the incurrence of acquisition-related costs; |
| difficulty integrating the accounting systems, operations and personnel of the acquired business; |
| difficulty and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
| difficulty converting the clients of the acquired business onto our solution, including disparities in the revenues, licensing, support or services of the acquired company; |
| diversion of managements attention from other business concerns; |
| harm to our existing relationships with clients as a result of the acquisition; |
| the potential loss of key employees; |
| the use of resources that are needed in other parts of our business; and |
| the use of substantial portions of our available cash to consummate the acquisition. |
In addition, a significant portion of the purchase price of any companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations. Acquisitions could also result in issuances of equity securities or the incurrence of debt, which would result in dilution to our stockholders.
Our growth depends in part on the success of our relationships with third parties.
We rely on third-party financial and accounting processing systems, as well as various financial institutions, to perform financial services in connection with our applications, such as providing automated clearing house, or ACH, and wire transfers as part of our payroll and expense reimbursement services and to provide technology and content support, manufacture time clocks and process background checks. We anticipate that we will continue to depend on various third-party relationships in order to grow our business, provide technology and content support, manufacture time clocks and process background checks. Identifying, negotiating and documenting relationships with these third parties and integrating third-party content and technology requires significant time and resources. Our agreements with third parties are typically non-exclusive and do not prohibit them from working with our competitors. In addition, these third parties may not perform as expected under our agreements, and we may have disagreements or disputes with such third parties, which could negatively affect
21
our brand and reputation. A global economic slowdown could also adversely affect the businesses of our third party providers, particularly those financial institutions that process transactions through the ACH network, and it is possible that they may not be able to devote the resources we expect to our relationship.
If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our business, operating results or financial condition could be adversely affected. Even if we are successful, these relationships may not result in improved operating results.
Adverse economic conditions could adversely affect our business, operating results or financial condition.
Our business depends on the overall demand for HCM applications and on the economic health of our current and prospective clients. If economic conditions in the United States remain uncertain or deteriorate, clients may cease their operations or delay or reduce their HCM spending or the number of their employees. This could result in reductions in sales of our applications, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, there has been reduced government spending in the United States during 2013. This might reduce demand for our applications from organizations that receive funding from the U.S. government and could negatively affect the U.S. economy, which could further reduce demand for our applications. Any of these events could adversely affect our business, operating results or financial condition. In addition, HCM spending levels may not increase following any recovery.
If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings.
We are required to test goodwill for impairment at least annually or earlier if events or changes in circumstances indicate the carrying value may not be recoverable. As of December 31, 2013, we had recorded a total of $51.9 million of goodwill and $6.7 million of other intangible assets. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates made in connection with the impairment testing of goodwill or intangible assets, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or other intangible assets. Any such material charges may have a negatively impact our operating results.
Because our long term success depends, in part, on our ability to expand the sales of our solution to customers located outside of the United States, our business will be subject to risks associated with international operations.
An element of our growth strategy is to expand our operations and client base. To date, we have not engaged in any operations outside of the United States. If we decide to expand our operations into international markets, it will require significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our lack of experience with international operations, we cannot assure you that our international expansion efforts will be successful.
Risks Related to Legislation or Regulation
Privacy concerns and laws or other domestic regulations may reduce the effectiveness of our applications.
Our applications require the storage and transmission of the proprietary and confidential information of our clients and their employees, including personal or identifying information, as well as their financial and payroll data. Personal privacy has become a significant issue in the United States. The regulatory framework for privacy issues is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Family Medical Leave Act of 1993, the Patient Protection and Affordable Care Act and state breach notification laws.
22
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solution. As such, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solution, which could have an adverse effect on our business, operating results or financial condition. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business, operating results or financial condition.
Furthermore, privacy concerns may cause our clients employees to resist providing the personal data necessary to allow our clients or their employees to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries. All of these legislative and regulatory initiatives may adversely affect the ability of our clients to process, handle, store, use and transmit demographic and personal information from their employees, which could reduce demand for our applications.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a negative impact on our business.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business. Federal, state and foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based applications such as ours.
In addition, the use of the Internet as a means of conducting business could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet has been adversely affected by viruses, worms and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering and in each year thereafter. Our auditors will also need to attest to the effectiveness of our internal control over financial reporting in the future to the extent we are no longer an emerging growth company, as defined by the Jumpstart Our Business Startups Act, or the JOBS Act, and are not a smaller reporting company.
If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting to comply with this obligation, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public
23
accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports we could become subject to investigations by the NYSE, the Securities and Exchange Commission, or the SEC, or other regulatory authorities and the market price of our common stock could be negatively affected.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act, as well as rules and regulations subsequently implemented by the SEC and the NYSE, including the establishment and maintenance of effective disclosure controls and procedures and internal control over financial reporting and changes in corporate governance practices.
We expect that complying with these rules and regulations will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly. In addition, our management team will have to adapt to the requirements of being a public company. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase to the extent we are no longer an emerging growth company, as defined by the JOBS Act, and are not a smaller reporting company. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs, which could adversely affect our operating results.
The increased costs associated with operating as a public company may decrease our net income or result in a net loss and may require us to reduce costs in other areas of our business or increase the prices of our solution. Additionally, if these requirements divert managements attention from other business concerns, they could have an adverse effect on our business, operating results or financial condition.
As a public company, we also expect that it may be more difficult or more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Pursuant to Section 102 of the JOBS Act, we have reduced executive compensation disclosure and have omitted a Compensation Discussion and Analysis from this prospectus.
For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, the frequency of the nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and the auditor attestation requirements of Section 404 of the
24
Sarbanes-Oxley Act. Investors may find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30th, (ii) the end of the fiscal year in which we have total annual gross revenues of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period and (iv) the end of the fiscal year following the five year anniversary of the date of this prospectus.
Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our clients, which could increase the costs of our solution and applications and could adversely affect our business, operating results or financial condition.
The application of federal, state and local tax laws to services provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services and applications provided over the Internet. These enactments could adversely affect our sales activity, due to the inherent cost increase the taxes would represent and ultimately could adversely affect our business, operating results or financial condition.
In addition, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us (possibly with retroactive effect), which could require us or our clients to pay additional tax amounts, as well as require us or our clients to pay fines or penalties and interest for past amounts. If we are unsuccessful in collecting such taxes from our clients, we could be held liable for such costs, thereby adversely affecting our business, operating results or financial condition.
Risks Related to this Offering and Ownership of our Common Stock
There has been no prior public market for our common stock, the price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
There has been no public market for our common stock prior to this initial public offering. The initial public offering price for our common stock was determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of our initial public offering or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
| our operating performance and the performance of other similar companies; |
| the overall performance of the equity markets; |
| announcements by us or our competitors of new applications or enhancements, acquisitions, applications, services, strategic alliances, commercial relationships, joint ventures or capital commitments; |
| disruptions in our services due to hardware, software or network problems; |
| recruitment or departure of key personnel; |
| publication of unfavorable research reports about us or our industry or withdrawal of research coverage by securities analysts; |
25
| trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock; |
| the size of our public float; |
| the economy as a whole, market conditions in our industry and the industries of our clients; and |
| economic, legal and regulatory factors unrelated to our performance. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class actions following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business, operating results or financial condition.
Substantial blocks of our total outstanding shares may be sold into the market when the lock-up period ends. If there are substantial sales of shares of our common stock, the price of our common stock could decline.
The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. Upon the completion of this offering, we expect to have 50,333,739 shares of our common stock outstanding. All of the shares of common stock sold in this offering will be eligible for sale in the public market, unless they are held by our affiliates. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various restricted stock award agreements.
After our initial public offering, certain of our stockholders will be subject to lock-up agreements with the underwriters or us that restrict their ability to sell shares of common stock until 181 days after the date of this prospectus. After the lock-up agreements expire, an additional 43,611,701 shares of common stock will be eligible for sale in the public market, subject in many cases to the limitations of either Rule 144 or Rule 701 under the Securities Act. Upon completion of this offering, stockholders owning an aggregate of up to 38,728,664 shares of common stock will be entitled, under a registration rights agreement, to require us to register shares of our common stock owned by them for public sale in the United States. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing lock-up agreements.
Barclays Capital Inc. and J.P. Morgan Securities LLC, on behalf of the underwriters, may in their discretion permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements. The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market, the availability of shares for sale or the perception in the market that the holders of a large number of shares intend to sell their shares. In addition, the sale of these shares by stockholders could impair our ability to raise capital through the sale of additional stock.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers
26
us downgrades our stock or publishes incorrect or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our common stock price or trading volume to decline.
Our principal stockholders will hold a controlling interest after this offering and may make business decisions with which you disagree and which may adversely affect the value of your investment.
After this offering, the parties to the Stockholders Agreement, which includes Chad Richison, Shannon Rowe, William X. Kerber, III, Jeffrey D. York, Robert J. Levenson and the Estate of Richard Aiello and certain of their affiliates or related entities, and the WCAS Funds, or collectively, the Stockholders Agreement Parties, will beneficially own or control, directly or indirectly, 41,111,514 shares of our common stock in the aggregate, or approximately 81.7% of our outstanding shares, or, if the underwriters option to purchase additional shares is exercised in full, 40,114,764 shares of common stock in the aggregate equal to approximately 79.7% of our outstanding shares. As a result of this ownership and the provisions of the Stockholders Agreement, the WCAS Funds will have the ability to control matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.
Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a longer period, they may be more interested in selling our company to an acquiror than other investors or may want us to pursue strategies that deviate from the interests of other stockholders.
We will be deemed a controlled company and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.
After this offering, the Stockholders Agreement Parties will continue to own common stock representing a majority of our outstanding shares of common stock. So long as such persons collectively own a majority of our outstanding shares of common stock, we will be a controlled company within the meaning of corporate governance standards of the NYSE. Under those standards, a company of which more than 50% of the voting power for the election of directors is held by another company or group is a controlled company and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that there be a nominating and corporate governance committee composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities, (3) the requirement that there be a compensation committee composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities and (4) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees. We intend to rely on certain of these exemptions following the offering, and may rely on any of these exemptions for so long as we are a controlled company. As a result, we will not have a majority of independent directors on our board of directors, and our compensation committee will not consist entirely of independent directors. If we are no longer eligible to rely on the controlled company exception, we intend to comply with all applicable corporate governance requirements, but we will be able to rely on phase-in periods for certain of these requirements in accordance with the NYSEs rules. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all NYSE corporate governance requirements.
27
As a new investor, you will incur immediate and substantial dilution as a result of this offering.
The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $18.57 per share, based on an assumed initial public offering price of $19.00 per share, which is the midpoint of the price range set forth on the cover page of the prospectus, and new investors from our sale of shares of our common stock in this offering will own approximately 9.2% of our outstanding common stock. This dilution is due in large part to earlier investors having generally paid substantially less than the initial public offering price when they purchased their shares. In addition, the vesting of restricted stock will, and future equity issuances may, result in further dilution to investors.
The issuance of additional stock in connection with acquisitions, our stock incentive plans, warrants or otherwise will dilute all other stockholdings.
After this offering, our certificate of incorporation will authorize us to issue up to one hundred million shares of common stock and up to ten million shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these shares that are not already outstanding without any action or approval by our stockholders. We intend to continue to evaluate strategic acquisitions in the future. We may pay for such acquisitions, partly or in full, through the issuance of additional equity securities.
Any issuance of shares in connection with our acquisitions, the exercise of stock options or warrants, the award of shares of restricted stock or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.
We have broad discretion in the use of a portion of the net proceeds from our initial public offering and may not use them effectively.
We cannot specify with any certainty the particular uses of a portion of the net proceeds that we will receive from our initial public offering. We will have broad discretion in the application of these proceeds, including working capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these proceeds effectively could adversely affect our business, operating results or financial condition. Pending their use, we may invest these proceeds in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our certificate of incorporation, bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. For information regarding these and other provisions, see Description of Capital Stock.
Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could affect the price that some investors are willing to pay for our common stock.
28
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures, assumptions and other statements contained in this prospectus that are not historical facts. When used in this document, words such as anticipate, believe, estimate, expect, intend, may, plan and project and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.
These forward-looking statements include, but are not limited to, statements concerning our business and strategy, possible or assumed future results of operations, cash flows, capital resources and liquidity, trends, opportunities and risks affecting our business, industry and financial results, future expansion or growth plans and potential for future growth, technology, market opportunities and acceptance by new clients of our solution, and the amount, nature and timing of capital expenditures.
These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.
All forward-looking statements speak only at the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. We do not undertake any obligation to update or revise any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.
29
MARKET, INDUSTRY AND OTHER DATA
This prospectus includes industry data and forecasts that we have prepared based, in part, upon data and forecasts obtained from industry publications, surveys and forecasts and internal studies. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable.
Although certain of the companies that compete in our markets are publicly held as of the date of this prospectus, others are not. Accordingly, only limited public information is available with respect to our relative market strength or competitive position. Unless we state otherwise, our statements about our relative market strength and competitive position in this prospectus are based on our managements beliefs, internal studies and our managements knowledge of industry trends. Although we believe that such information is reliable, we have not had this information verified by any independent sources.
30
Software is a newly formed Delaware corporation that was an indirect wholly-owned subsidiary of Holdings prior to the Reorganization. In anticipation of this offering, Software consummated the Reorganization, as of January 1, 2014, pursuant to which (i) the owners of WCAS Holdings and WCAS CP IV Blocker, Inc., or CP IV Blocker, which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker, which collectively own all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software.
Immediately after these contributions, a wholly-owned subsidiary of Software merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings ownership interest in Software was cancelled. Outstanding common units, Series B Preferred Units and WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, 45,708,573 shares of common stock and 8,121,101 restricted shares of common stock of Software.
Following these transactions, all outstanding Series C Preferred Units were eliminated in an intercompany transaction between Holdings and WCAS Holdings, and we assumed the 14% Note due 2017 issued by WCAS Holdings, or the 2017 Note. Following the Reorganization, Software became a holding company with its principal asset being the units of Holdings. We refer to these transactions collectively as the Reorganization. Unless otherwise indicated, or the context otherwise requires, all information in this prospectus is presented giving effect to the Reorganization. For additional information concerning the conversion rates in the Reorganization, see Unaudited Pro Forma Condensed Consolidated Financial Information, Note 1. Basis of Presentation, which description is incorporated by reference herein.
The following diagram depicts our corporate structure immediately after the completion of this offering. We will directly or indirectly hold 100% of the ownership interests in each of our subsidiaries:
31
We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $78.0 million, assuming an initial public offering price of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share would increase or decrease, as applicable, the net proceeds to us from our initial public offering by $4.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds we receive from this offering for (i) the repayment of a 10% Senior Note due 2022, or the 2022 Note, issued by us to an affiliate of Welsh, Carson, Anderson & Stowe, (ii) the repayment of the 2017 Note, assumed in the Reorganization and (iii) general corporate purposes, including additions to working capital and capital expenditures. We intend to use the following amounts of the net proceeds for the above uses:
Amount
(in millions) |
||||
Use of Net Proceeds |
||||
Contribution agreement payments (1) |
$ | 0.1 | ||
Repayment of the 2022 Note (2) |
18.8 | |||
Repayment of the 2017 Note (3) |
46.1 | |||
General corporate purposes |
13.0 | |||
|
|
|||
Total net proceeds |
$ | 78.0 | ||
|
|
(1) | We are required to direct a portion of any repayment of the 2017 Note to the Estate of Richard Aiello and Mr. Levenson and certain of their affiliated or related entities pursuant to the terms of a Contribution Agreement entered into in connection with the Reorganization. See Certain Relationships and Related Party Transactions Contribution Agreement. |
(2) | As of December 31, 2013, we had $18.8 million outstanding under the 2022 Note. The 2022 Note accrues interest at 10% per annum and matures on April 3, 2022. |
(3) | As of December 31, 2013, we had Series C Preferred Units outstanding. In connection with the Reorganization, we eliminated the Series C Preferred Units as an intercompany transaction, and assumed the 2017 Note. The 2017 Note accrues interest at 14% per annum and matures on April 3, 2017. Any amounts paid to the Estate of Richard Aiello and Mr. Levenson and certain of their affiliated or related entities as described in Note (1) above will be deemed to have been paid to WCAS X and WCAS Management Corporation, and will reduce the amounts required to be paid under the 2017 Note. |
Pending other uses, we intend to invest the proceeds in interest-bearing, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, or we may hold the proceeds as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from our initial public offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.
We will not receive any proceeds from the sale of shares offered by the selling stockholders, who include a director and certain entities affiliated with members of our board of directors.
32
We do not currently plan to pay a regular dividend on our common stock following this offering. The declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. Our Consolidated, Amended and Restated Loan Agreement, or the 2011 Consolidated Loan, and Loan Agreement, or the 2013 Consolidated Loan, with Kirkpatrick Bank each prohibit the payment of dividends while an event of default exists under the Consolidated Loan or the Construction Loan, respectively, and any future debt agreements that we may enter into the future may prohibit the payment of dividends.
We are a holding company that has no material assets other than our indirect ownership of all of the outstanding units of Holdings. In the event that we decide to pay dividends in the future, we intend to cause Holdings to make distributions to us in an amount sufficient to cover cash dividends, if any, declared by us. Any financing arrangements that we enter into in the future may include restrictive covenants that limit our or our subsidiaries ability to pay dividends.
In April 2011 and September 2011, we paid cash distributions of $432,000 and $1,300, respectively, to our common unit holders for the payment of taxes. In April 2012 and October 2012, we paid cash distributions of $120,000 and $2,000, respectively, to our common unit holders for the payment of taxes. We also paid a cash distribution of $18,807,000 to our common unit holders in April 2012 as part of the April 2012 Corporate Reorganization (as defined herein). In April 2013 and December 2013, we paid cash distributions of $1,766,000 and $4,000,000, respectively, to our common unit holders and Series A Preferred unit holders for the payment of taxes.
33
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2013 as follows:
| on an actual basis; |
| on a pro forma basis, giving effect to the Reorganization; and |
| on a pro forma as further adjusted basis, giving effect to (i) the issuance and sale by us of shares of common stock in this offering, assuming an initial public offering price of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus and (ii) the application of the net proceeds as described in Use of Proceeds. |
You should read this table in conjunction with the sections entitled The Reorganization, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations, Description of Capital Stock and our consolidated financial statements and related notes as of December 31, 2013, 2012 and 2011 included elsewhere in this prospectus.
As of
December 31, 2013 |
||||||||||||
Actual |
Pro forma as
adjusted for the Reorganization |
Pro forma as
further adjusted (1) |
||||||||||
(in thousands, except share and per share data) | ||||||||||||
Cash and cash equivalents |
$ | 13,273 | $ | 13,364 | $ | 26,336 | ||||||
|
|
|
|
|
|
|||||||
Current portion of long-term debt |
9,545 | 9,545 | 9,545 | |||||||||
Long-term debt, less current portion |
11,545 | 11,545 | 11,545 | |||||||||
Long-term debt to related party |
14,682 | 60,875 | | |||||||||
Members equity / stockholders equity |
||||||||||||
Common stock, $0.01 par value, no shares authorized, no shares issued and outstanding, actual; 100,000,000 shares authorized, 45,708,573 shares issued and outstanding, pro forma as adjusted for the Reorganization; 100,000,000 shares authorized, 50,315,455 shares issued and outstanding, pro forma as further adjusted |
| 17,452 | 17,498 | |||||||||
Additional paid in capital |
| (12,340 | ) | 75,145 | ||||||||
Members capital |
63,645 | | | |||||||||
Accumulated deficit |
(13,385 | ) | (37 | ) | (3,055 | ) | ||||||
|
|
|
|
|
|
|||||||
Total members equity / stockholders equity |
50,260 | 5,075 | 89,588 | |||||||||
|
|
|
|
|
|
|||||||
Total capitalization |
$ | 86,032 | $ | 87,040 | $ | 110,678 | ||||||
|
|
|
|
|
|
(1) | A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our as adjusted cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization by approximately $4.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expense payable by us. |
34
If you invest in our common stock, you will experience immediate and substantial dilution in the pro forma as adjusted net tangible book value of your shares. Dilution in pro forma as adjusted net tangible book value represents the difference between the public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering.
Our pro forma net tangible book value as of December 31, 2013 was $(53.5) million, or $(1.17) per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the Reorganization.
After giving effect to our sale in our initial public offering of 4,606,882 shares of common stock at an assumed initial public offering price of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been approximately $21.5 million, or $0.43 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.60 per share to our existing stockholders and an immediate dilution of $18.57 per share to investors purchasing shares in our initial public offering.
The following table illustrates this per share dilution:
Assumed initial offering price per share |
$ | 19.00 | ||||||
Pro forma net tangible book value per share as of December 31, 2013 |
$ | (1.17 | ) | |||||
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in our initial public offering |
$ | 1.60 | ||||||
|
|
|||||||
Pro forma as adjusted net tangible book value per share after our initial public offering |
$ | 0.43 | ||||||
|
|
|||||||
Dilution in pro forma as adjusted net tangible book value per share to investors in this offering |
$ | 18.57 | ||||||
|
|
A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma net tangible book value per share after our initial public offering by $0.08, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The following table summarizes on a pro forma as adjusted basis as of December 31, 2013, after giving effect to the Reorganization, the differences between the number of shares of our common stock purchased from us, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in our initial public offering at the assumed initial public offering price of the common stock of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration |
Average Price
Per Share |
||||||||||||||||||
Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders |
45,708,573 | 90.8 | % | 5,112,000 | 5.5 | % | $ | 0.11 | ||||||||||||
New investors |
4,606,882 | 9.2 | % | 87,530,758 | 94.5 | % | $ | 19.00 | ||||||||||||
Total |
50,315,455 | 100.0 | % | 92,642,758 | 100 | % |
35
A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors by $4.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option in full, our existing stockholders would own 90.8% and our new investors would own 9.2% of the total number of shares of our common stock outstanding after our initial public offering.
The number of common shares shown above to be outstanding after this offering is based on 50,315,455 shares of our common stock outstanding as of December 31, 2013 after giving effect to the Reorganization and excludes the following:
| 8,121,101 shares of restricted common stock that are subject to time-based or performance-based vesting conditions, which includes 217,378 shares of restricted stock that vest upon the sale of our common stock in the initial public offering; |
| 3,229,780 shares of our common stock reserved for future issuance under the 2014 Plan that we adopted in connection with the Reorganization; and |
| any exercise by the underwriters of their option to purchase 996,750 additional shares of our common stock from the selling stockholders. |
36
SELECTED CONSOLIDATED FINANCIAL DATA
We have derived the consolidated statements of income data for the years ended December 31, 2013, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statements of income data for the years ended December 31, 2010 and 2009 and the audited consolidated balance sheet data as of December 31, 2011, 2010 and 2009 from our audited consolidated financial statements not included in this prospectus. Historical results are not necessarily indicative of results for any future period.
Our selected consolidated financial data set forth below should be read together with Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes thereto, which are included elsewhere in this prospectus.
Year Ended
December 31, |
||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Recurring |
$ | 105,560 | $ | 75,420 | $ | 56,382 | $ | 40,585 | $ | 29,260 | ||||||||||
Implementation and other |
2,041 | 1,390 | 824 | 716 | 618 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
107,601 | 76,810 | 57,206 | 41,301 | 29,878 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Operating expenses |
19,070 | 14,895 | 12,287 | 8,927 | 5,880 | |||||||||||||||
Depreciation |
1,821 | 1,431 | 987 | 675 | 457 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total cost of revenues |
20,891 | 16,326 | 13,274 | 9,602 | 6,337 | |||||||||||||||
Administrative expenses: |
||||||||||||||||||||
Sales and marketing |
42,681 | 29,255 | 22,244 | 15,743 | 11,212 | |||||||||||||||
Research and development |
2,146 | 1,632 | 1,225 | 977 | 665 | |||||||||||||||
General and administrative |
28,884 | 19,450 | 14,707 | 11,040 | 8,327 | |||||||||||||||
Depreciation and amortization |
3,682 | 4,092 | 4,300 | 4,091 | 4,074 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total administrative expenses |
77,393 | 54,429 | 42,476 | 31,851 | 24,278 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income (loss) |
9,317 | 6,055 | 1,456 | (152 | ) | (737 | ) | |||||||||||||
Interest expense |
(2,805 | ) | (2,171 | ) | (134 | ) | | (5 | ) | |||||||||||
Other income, net |
1,199 | 354 | 108 | 129 | 281 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | 7,711 | $ | 4,238 | $ | 1,430 | $ | (23 | ) | $ | (461 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Less: Distribution to Series C Preferred Unitholder |
(6,467 | ) | (4,806 | ) | | | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) available to Series A Preferred Unitholders and common unitholders |
$ | 1,244 | $ | (568 | ) | $ | 1,430 | $ | (23 | ) | $ | (461 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) per Series A Preferred Unit and common unit |
||||||||||||||||||||
Basic |
$ | 1.30 | $ | (0.60 | ) | $ | 1.53 | $ | (0.02 | ) | $ | (0.49 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Diluted (1) |
$ | 1.22 | $ | (0.57 | ) | $ | 1.49 | $ | (0.02 | ) | $ | (0.49 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average units outstanding |
||||||||||||||||||||
Basic |
955,983 | 948,181 | 935,750 | 950,000 | 950,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Diluted (1) |
1,018,305 | 1,004,436 | 960,611 | 950,000 | 950,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
37
As of December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) |
||||||||||||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 13,273 | $ | 13,435 | $ | 7,252 | $ | 6,106 | $ | 5,609 | ||||||||||
Restricted cash |
369 | 368 | 251 | | | |||||||||||||||
Working capital (deficit) (2) |
(7,933 | ) | 5,096 | 3,647 | 3,126 | 3,343 | ||||||||||||||
Property, plant and equipment, net |
38,671 | 25,139 | 22,305 | 9,492 | 2,445 | |||||||||||||||
Total assets |
571,567 | 425,857 | 347,575 | 249,153 | 226,449 | |||||||||||||||
Deferred revenue |
12,572 | 8,393 | 5,614 | 3,430 | 2,203 | |||||||||||||||
Long-term debt |
21,090 | 14,110 | 12,761 | 3,149 | | |||||||||||||||
Long-term debt to related party |
14,682 | 14,440 | | | | |||||||||||||||
Members capital |
63,645 | 63,542 | 79,373 | 80,208 | 80,075 | |||||||||||||||
Accumulated deficit |
(13,385 | ) | (8,871 | ) | (8,143 | ) | (8,130 | ) | (7,137 | ) | ||||||||||
Total members equity |
50,260 | 54,671 | 71,230 | 72,078 | 72,938 |
(1) | Diluted impact of incentive units have not been included to determine the diluted net loss per Series A Preferred Unit and common unit for the years ended December 31, 2010 and 2009 as we reported a net loss for those reporting periods. |
(2) | Working capital (deficit) is defined as current assets, excluding restricted cash, less current liabilities, excluding current portion of deferred revenue. |
38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial information presents our unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of income based upon our historical financial statements, after giving effect to the Reorganization and the initial public offering described in the accompanying notes. The following unaudited pro forma condensed consolidated financial information was prepared using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information and on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal and recurring items, that we consider necessary for a fair presentation of our financial position and results of operations for the unaudited periods. The unaudited pro forma condensed consolidated financial information was prepared in accordance with Article 11 of Regulation S-X.
The unaudited pro forma condensed consolidated balance sheet as of December 31, 2013 reflects the Reorganization and the initial public offering as if they occurred on December 31, 2013. The unaudited pro forma condensed consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 reflect the Reorganization and the initial public offering as if they occurred January 1, 2011, the beginning of the earliest period presented.
The unaudited pro forma condensed consolidated financial information assumes that the shares of common stock to be sold in this offering are sold at $19.00 per share of common stock, which is the midpoint of the price range indicated on the front cover of this prospectus.
The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Reorganization and initial public offering had been completed as of the dates set forth above, nor is it indicative of our future results or financial position of our company. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the sections of this prospectus entitled Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations, and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus.
39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2013
(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)
Historical |
Pro forma
adjustments for the Reorganization |
Pro forma as
adjusted for the Reorganization |
Pro forma
adjustments for the initial public offering |
Pro forma as
adjusted for the Reorganization and initial public offering |
||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 13,273 | $ | 90 | (2c | ) | $ | 13,364 | $ | | $ | 13,364 | ||||||||||||||||
1 | (2d | ) | ||||||||||||||||||||||||||
Deferred tax asset |
| 3,622 | (2c | ) | 3,622 | | 3,622 | |||||||||||||||||||||
Other current assets before funds held for clients |
4,785 | | 4,785 | | 4,785 | |||||||||||||||||||||||
Funds held for clients |
455,779 | | 455,779 | | 455,779 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total current assets |
473,837 | 3,713 | 477,550 | | 477,550 | |||||||||||||||||||||||
Deferred tax asset |
| 45 | (2a | ) | 70 | | 70 | |||||||||||||||||||||
25 | (2d | ) | ||||||||||||||||||||||||||
Goodwill |
51,889 | | 51,889 | | 51,889 | |||||||||||||||||||||||
Other long-term assets |
45,841 | | 45,841 | | 45,841 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total assets |
$ | 571,567 | $ | 3,783 | $ | 575,350 | $ | | $ | 575,350 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Liabilities and Members Equity / Stockholders Equity |
||||||||||||||||||||||||||||
Income tax payable |
$ | | $ | 20 | (2d | ) | $ | 20 | $ | | $ | 20 | ||||||||||||||||
Other current liabilities before client funds obligations |
27,204 | | 27,204 | | 27,204 | |||||||||||||||||||||||
Client fund obligation |
455,779 | | 455,779 | | 455,779 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total current liabilities |
482,983 | 20 | 483,003 | | 483,003 | |||||||||||||||||||||||
Deferred tax liabilities |
| 2,755 | (2c | ) | 2,755 | | 2,755 | |||||||||||||||||||||
Long-term debt to related party |
14,682 | 46,193 | (2e | ) | 60,875 | (60,875 | ) | (2f | ) | | ||||||||||||||||||
Derivative liability |
1,107 | | 1,107 | (1,107 | ) | (2f | ) | | ||||||||||||||||||||
Other long-term liabilities |
22,535 | | 22,535 | | 22,535 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total long-term liabilities |
38,324 | 48,948 | 87,272 | (61,982 | ) | 25,290 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Members equity / Stockholders equity |
||||||||||||||||||||||||||||
Members capital |
63,645 | (17,452 | ) | (2b | ) | | | | ||||||||||||||||||||
(46,193 | ) | (2e | ) | |||||||||||||||||||||||||
Preferred stock, no shares authorized, no shares issued and outstanding, actual; 10,000,000 authorized, no shares issued and outstanding on a pro forma basis |
| | | | | |||||||||||||||||||||||
Common stock, no shares authorized, no shares issued and outstanding, actual; 100,000,000 shares authorized, 50,315,455 shares issued and outstanding on a pro forma basis |
| 17,452 | (2b | ) | 17,452 | 33 | (2f | ) | 17,485 | |||||||||||||||||||
Additional paid in capital |
| 1,039 | (2c | ) | (12,340 | ) | 64,967 | (2f | ) | 52,627 | ||||||||||||||||||
6 | (2d | ) | ||||||||||||||||||||||||||
(13,385 | ) | (2g | ) | |||||||||||||||||||||||||
Accumulated deficit |
(13,385 | ) | 46 | (2a | ) | (37 | ) | (3,018 | ) | (2f | ) | (3,055 | ) | |||||||||||||||
(83 | ) | (2c | ) | |||||||||||||||||||||||||
13,385 | (2g | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total members equity / stockholders equity |
50,260 | (45,185 | ) | 5,075 | 61,982 | 67,057 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total liabilities and members equity / stockholders equity |
$ | 571,567 | $ | 3,783 | $ | 575,350 | $ | | $ | 575,350 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2013
(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)
Historical |
Pro forma
adjustments for the Reorganization |
Pro Forma as
adjusted for the Reorganization |
Pro forma
adjustments for the initial public offering |
Pro forma as
adjusted for the Reorganization and initial public offering |
||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||
Recurring |
$ | 105,560 | $ | | 105,560 | $ | | $ | 105,560 | |||||||||||||||||
Implementation and other |
2,041 | | 2,041 | | 2,041 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total revenues |
107,601 | | 107,601 | | 107,601 | |||||||||||||||||||||
Cost of revenues |
||||||||||||||||||||||||||
Operating expenses |
19,070 | | 19,070 | | 19,070 | |||||||||||||||||||||
Depreciation |
1,821 | | 1,821 | | 1,821 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total cost of revenues |
20,891 | | 20,891 | | 20,891 | |||||||||||||||||||||
Administrative expenses |
||||||||||||||||||||||||||
Sales and marketing |
42,681 | | 42,681 | | 42,681 | |||||||||||||||||||||
Research and development |
2,146 | | 2,146 | | 2,146 | |||||||||||||||||||||
General and administrative |
28,884 | 307 | (3a | ) | 29,191 | | 29,191 | |||||||||||||||||||
Depreciation and amortization |
3,682 | | 3,682 | | 3,682 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total administrative expenses |
77,393 | 307 | 77,700 | | 77,700 | |||||||||||||||||||||
Total operating expenses |
98,284 | 307 | 98,591 | | 98,591 | |||||||||||||||||||||
Operating income (loss) |
9,317 | (307 | ) | 9,010 | | 9,010 | ||||||||||||||||||||
Interest expense |
(2,805 | ) | (6,467 | ) | (3c | ) | (9,272 | ) | 2,122 | (3d) | (683 | ) | ||||||||||||||
6,467 | (3c) | |||||||||||||||||||||||||
Other income (expense), net |
1,199 | 14 | (3a | ) | 1,213 | (660 | ) | (3e) | 553 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Income before income taxes |
7,711 | (6,760 | ) | 951 | 7,929 | 8,880 | ||||||||||||||||||||
Provision for income taxes |
| 3,007 | (3b | ) | 370 | 3,092 | (3f) | 3,462 | ||||||||||||||||||
(2,637 | ) | (3f | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income (loss) |
$ | 7,711 | $ | (7,130 | ) | $ | 581 | $ | 4,837 | $ | 5,418 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Less: Distribution to Series C Preferred Unitholder |
(6,467 | ) | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
Net income available to Series A Preferred Unitholders and common unitholders |
$ | 1,244 | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
Net income per Series A Preferred Units and common unit |
||||||||||||||||||||||||||
Basic |
$ | 1.30 | ||||||||||||||||||||||||
Diluted |
$ | 1.22 | ||||||||||||||||||||||||
Weighted average units outstanding |
||||||||||||||||||||||||||
Basic |
955,983 | |||||||||||||||||||||||||
Diluted |
1,018,305 | |||||||||||||||||||||||||
Pro forma net income per share |
||||||||||||||||||||||||||
Basic |
(3g | ) | $ | 0.01 |
(3h) |
$ | 0.11 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Diluted |
(3g | ) | $ | 0.01 |
(3h) |
$ | 0.10 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||||||||
Basic |
(3g | ) | 47,686,326 |
(3h) |
51,107,379 | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
Diluted |
(3g | ) | 48,371,489 |
(3h) |
51,792,542 | |||||||||||||||||||||
|
|
|
|
41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2012
(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)
Historical |
Pro forma
adjustments for the Reorganization |
Pro Forma as
adjusted for the Reorganization |
Pro forma
adjustments for the initial public offering |
Pro forma as
adjusted for the Reorganization and initial public offering |
||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Recurring |
$ | 75,420 | $ | | 75,420 | $ | | $ | 75,420 | |||||||||||||||||||
Implementation and other |
1,390 | | 1,390 | | 1,390 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total revenues |
76,810 | | 76,810 | | 76,810 | |||||||||||||||||||||||
Cost of revenues |
| |||||||||||||||||||||||||||
Operating expenses |
14,895 | | 14,895 | | 14,895 | |||||||||||||||||||||||
Depreciation |
1,431 | | 1,431 | | 1,431 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total cost of revenues |
16,326 | | 16,326 | | 16,326 | |||||||||||||||||||||||
Administrative expenses |
| |||||||||||||||||||||||||||
Sales and marketing |
29,255 | | 29,255 | | 29,255 | |||||||||||||||||||||||
Research and development |
1,632 | | 1,632 | | 1,632 | |||||||||||||||||||||||
General and administrative |
19,450 | 2 | (3a | ) | 19,452 | | 19,452 | |||||||||||||||||||||
Depreciation and amortization |
4,092 | | 4,092 | | 4,092 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total administrative expenses |
54,429 | 2 | 54,431 | | 54,431 | |||||||||||||||||||||||
Total operating expenses |
70,755 | 2 | 70,757 | | 70,757 | |||||||||||||||||||||||
Operating income (loss) |
6,055 | (2 | ) | 6,053 | | 6,053 | ||||||||||||||||||||||
Interest expense |
(2,171 | ) | (6,467 | ) | (3c | ) | (8,638 | ) | 1,397 | (3d | ) | (774 | ) | |||||||||||||||
6,467 | (3c | ) | ||||||||||||||||||||||||||
Other income (expense), net |
354 | 15 | (3a | ) | 369 | (333 | ) | (3e | ) | 36 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Income before income taxes |
4,238 | (6,454 | ) | (2,216 | ) | 7,531 | 5,315 | |||||||||||||||||||||
Provision for income taxes |
| 1,653 | (3b | ) | (869 | ) | 2,937 | (3f | ) | 2,068 | ||||||||||||||||||
(2,522 | ) | (3f | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) |
$ | 4,238 | $ | (5,585 | ) | $ | (1,347 | ) | $ | 4,594 | $ | 3,247 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Less: Distribution to Series C Preferred unitholders |
(4,806 | ) | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Net loss available to Series A Preferred unitholders and common unitholders |
$ | (568 | ) | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Net loss per Series A Preferred Unit and common unit |
||||||||||||||||||||||||||||
Basic |
$ | (0.60 | ) | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Diluted |
$ | (0.57 | ) | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Weighted average units outstanding |
||||||||||||||||||||||||||||
Basic |
948,181 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Diluted |
1,004,436 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Pro forma net loss per share |
||||||||||||||||||||||||||||
Basic |
(3g | ) | $ | (0.03 | ) | (3h | ) | $ | 0.06 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
(3g | ) | $ | (0.03 | ) | (3h | ) | $ | 0.06 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||||||||||
Basic |
(3g | ) | 47,686,326 | (3h | ) | 51,107,379 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
(3g | ) | 47,686,326 | (3h | ) | 51,792,542 | ||||||||||||||||||||||
|
|
|
|
42
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2011
(IN THOUSANDS, EXCEPT PER UNIT AND SHARE AMOUNTS)
Historical |
Pro forma
adjustments for the Reorganization |
Pro Forma as
adjusted for the Reorganization |
Pro forma
adjustments for the initial public offering |
Pro forma as
adjusted for the Reorganization and initial public offering |
||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Recurring |
$ | 56,382 | $ | | 56,382 | $ | | $ | 56,382 | |||||||||||||||||||
Implementation and other |
824 | | 824 | | 824 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total revenues |
57,206 | | 57,206 | | 57,206 | |||||||||||||||||||||||
Cost of revenues |
| |||||||||||||||||||||||||||
Operating expenses |
12,287 | | 12,287 | | 12,287 | |||||||||||||||||||||||
Depreciation |
987 | | 987 | | 987 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total cost of revenues |
13,274 | | 13,274 | | 13,274 | |||||||||||||||||||||||
Administrative expenses |
||||||||||||||||||||||||||||
Sales and marketing |
22,244 | | 22,244 | | 22,244 | |||||||||||||||||||||||
Research and development |
1,225 | | 1,225 | | 1,225 | |||||||||||||||||||||||
General and administrative |
14,707 | 7 | (3a | ) | 14,714 | | 14,714 | |||||||||||||||||||||
Depreciation and amortization |
4,300 | | 4,300 | | 4,300 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total administrative expenses |
42,476 | 7 | 42,483 | | 42,483 | |||||||||||||||||||||||
Total operating expenses |
55,750 | 7 | 55,757 | | 55,757 | |||||||||||||||||||||||
Operating income (loss) |
1,456 | (7 | ) | 1,449 | | 1,449 | ||||||||||||||||||||||
Interest expense |
(134 | ) | (6,467 | ) | (3c | ) | (6,601 | ) | 6,467 | (3c | ) | (134 | ) | |||||||||||||||
Other income (expense), net |
108 | | 108 | | 108 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Income before income taxes |
1,430 | (6,474 | ) | (5,044 | ) | 6,467 | 1,423 | |||||||||||||||||||||
Provision for income taxes |
| 558 | (3b | ) | (1,949 | ) | 2,522 | (3f | ) | 573 | ||||||||||||||||||
(2,522 | ) | (3f | ) | |||||||||||||||||||||||||
15 | (3a | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) |
$ | 1,430 | $ | (4,525 | ) | $ | (3,095 | ) | $ | 3,945 | $ | 850 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income per Series A Preferred Unit and common unit |
||||||||||||||||||||||||||||
Basic |
$ | 1.53 | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Diluted |
$ | 1.49 | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Weighted average units outstanding |
||||||||||||||||||||||||||||
Basic |
935,750 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Diluted |
960,611 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Pro forma net loss per share |
||||||||||||||||||||||||||||
Basic |
(3g | ) | $ | (0.06 | ) | (3h | ) | $ | 0.02 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
(3g | ) | $ | (0.06 | ) | (3h | ) | $ | 0.02 | |||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||||||||||
Basic |
(3g | ) | 47,686,326 | (3h | ) | 51,107,379 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Diluted |
(3g | ) | 47,686,326 | (3h | ) | 51,792,542 | ||||||||||||||||||||||
|
|
|
|
43
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1. | Basis of Presentation |
The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the Reorganization and this offering, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on the future results.
Our historical results are derived from our audited consolidated statements of income of Holdings for the years ended December 31, 2013, 2012 and 2011 and audited consolidated balance sheet of Holdings as of December 31, 2013 under U.S. GAAP.
Description of the Transaction
In anticipation of this offering, Software consummated the Reorganization as of January 1, 2014, pursuant to which (i) the owners of WCAS Holdings and CP IV Blocker, which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker, which collectively own all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software. Immediately after these contributions, a wholly-owned subsidiary of Software merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings ownership in Software was cancelled. This resulted in Software controlling, directly or indirectly, Holdings, including Payroll, WCAS Holdings and CP IV Blocker. Outstanding common units, Series B Preferred Units, and incentive units of Holdings were converted into 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software at the following conversion rates:
| Outstanding common units, Series B Preferred Units, WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, the number of shares of common stock determined by a ratio of common units, Series B Preferred Units and Series A Preferred Units to shares of common stock of approximately 1:47, resulting in issuance of 44,560,053 shares of common stock. |
| Vested incentive units were converted to shares of common stock and restricted stock at various conversion ratios, which ranged from approximately 1:0.2 to 1:24. Unvested incentive units were converted to shares of restricted stock at various conversion ratios, which ranged from 1:24 to 1:47. The conversion to shares of common stock versus restricted stock was determined based on the underlying conditions of the pre-conversion incentive units, reflecting any pre-existing vesting conditions. This resulted in the issuance of 1,148,520 and 8,121,101 shares of common stock and restricted stock, respectively. |
The restricted stock was issued subject to various vesting conditions. A portion of the restricted stock is subject to a time-based vesting condition while the remaining portion is subject to performance-based vesting conditions. The performance-based vesting is based on the Companys total enterprise value exceeding certain specified thresholds. For additional information concerning the vesting conditions of the restricted stock, see Executive CompensationNarrative Discussion Regarding Summary Compensation TableEquity Incentive Units and Restricted Stock Awards.
Following these transactions, Series C Preferred Units of Holdings were eliminated as an intercompany transaction between Holdings and WCAS Holdings, and the 2017 Note, which was a 14% related party note issued by WCAS Holdings to its parent, WCAS Fund X L.P., was recorded upon the inclusion of WCAS Holdings. Following the Reorganization, Software became a holding company with its principal asset being the units in Holdings. Software was formed for purposes of this offering and has to date, engaged only in activities in contemplation of this offering. See The Reorganization.
44
WCAS Holdings and CP IV Blocker do not have any independent operations or any significant assets or liabilities and do not comprise a business. The acquisition of WCAS Holdings is deemed to be a reorganization under common control and therefore its underlying assets and liabilities are not required to be re-measured at fair value on the acquisition date. The acquisition of CP IV Blocker is not deemed to be a reorganization under common control and therefore the underlying assets and liabilities are recorded at fair value on their acquisition date.
2. | Notes to unaudited pro forma condensed consolidated balance sheet |
(a) | Reflects adjustments to deferred income tax assets and liabilities as a result of recognizing related deferred tax assets and liabilities assuming that the Reorganization occurred on December 31, 2013. |
(b) | Represents the conversion of common units and Series A Preferred Units to common stock. The amount was estimated given that the Members Capital balance ceased to exist upon the Reorganization. |
(c) | Reflects the inclusion of WCAS Holdings assets and liabilities accounted for as a transaction under common control. |
(d) | Reflects the inclusion of CP IV Blockers assets and liabilities recorded at fair value as a result of the acquisition. |
(e) | Reflects the assumption of the 2017 Note which replaced the Series C Preferred Units in connection with the Reorganization. |
(f) | Reflects the effect of the net offering proceeds which will be used to repay the 2022 Note issued by us to an affiliate of Welsh, Carson, Anderson & Stowe in the amount of approximately $18.8 million and the 2017 Note issued by between WCAS Holdings in the amount of approximately $46.2 million (including certain payments made pursuant to a contribution agreement). Any additional net offering proceeds have been excluded for purposes of the pro forma financial information. |
The 2022 Note was issued at a discount of $2.4 million and also contained a prepayment feature which was valued at $2.0 million. The prepayment feature was recorded as a derivative liability at inception and is recorded at fair value at December 31, 2013. Upon the settlement of the 2022 Note, the derivative liability would cease to exist and therefore a gain is recognized upon the settlement of the liability.
(g) | Reflects reclassification of historic accumulated deficit to additional paid in capital due to the Reorganization. |
3. | Notes to unaudited pro forma condensed consolidated statements of income |
(a) | Reflects the inclusion of the results of operations from WCAS Holdings assuming that the Reorganization took effect on January 1, 2011 and assuming the acquisition of CP IV Blocker occurred on January 1, 2011 and therefore gave rise to Software controlling these entities. |
(b) | Represents adjustments to income tax expense in connection with the deferred income tax assets and liabilities recognized given the Reorganization, which assumed that Holdings was operating as a C-corporation effective January 1, 2011. The amount was determined using an estimated statutory rate of 39%. |
(c) | Reflects the recording of interest expense upon assuming the 2017 Note which accrues interest at 14% per annum. The 2017 Note replaced the Series C Preferred Units in the Reorganization. The interest expense is removed in the initial public offering adjustment, assuming a portion of the net proceeds from this offering were used to repay the 2017 Note on January 1, 2011. |
(d) | Reflects the removal of the amortization from the 2022 Note issued at discount and the related interest expense as a result of using a portion of the net proceeds from this offering to repay the 2022 Note. |
45
(e) | Reflects the removal of the unrealized gains recognized for the derivative liability relating to the 2022 Note as a result of using a portion of the net proceeds from this offering to repay the 2022 Note. |
(f) | Represents adjustments to income tax expense for the years ended December 31, 2013, 2012 and 2011 as a result of the tax impact on the pro forma adjustments relating to the Reorganization and this offering. The amount was determined using an estimated statutory tax rate of 39%. |
(g) | Pro forma as adjusted for the Reorganization net income per weighted average basic and diluted shares outstanding reflects the conversion of all our common units, Preferred Units and incentive units into 45,708,573 and 8,121,101 of common shares and restricted shares, respectively, assuming those shares were issued January 1, 2011. |
(h) | Pro forma net income as adjusted for the Reorganization and initial public offering per weighted average basic and diluted shares outstanding gives effect to the issuance of 3,421,053 common shares relating to the net offering proceeds (excluding the remaining 1,185,829 common shares issued in that offering, which were deemed for general corporate purposes, including additions to working capital and capital expenditures) which will be used to repay the 2022 Note and 2017 Note, assuming an initial public offering price of $19.00 per share, which is the midpoint of the price range and the conversion of all our common units, Preferred Units and incentive units into 45,708,573 and 8,121,101 of common shares and restricted shares, respectively, assuming all shares were issued January 1, 2011. |
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See Special Note Regarding Forward-Looking Statements for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled Risk Factors.
Overview
We are a leading provider of a comprehensive, cloud-based HCM software solution delivered as SaaS. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and HR management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.
We serve a diverse client base in terms of size and industry. We have over 10,000 clients, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We stored data for more than 1,000,000 persons employed by our clients during the year ended December 31, 2013.
Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives, or CRRs, who sell new applications to existing clients. We have 30 sales teams located in 20 states and plan to open additional sales offices to further expand our presence in the U.S. market. In recent years, we have opened three to four new sales offices in new cities per year and believe that we can increase this annual number to four to six new sales offices in the future.
Our continued growth depends on attracting new clients through geographic expansion, further penetration of our existing markets and the introduction of new applications to our existing client base. We also expect a portion of our growth to generally mirror improvements in the labor market. Our principal marketing programs include telemarketing and email campaigns, search engine marketing methods and national radio advertising.
During the last three years, we have developed several new applications. Our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth over the last three years.
The Reorganization
In anticipation of this offering, we consummated the Reorganization, as of January 1, 2014. Following the Reorganization, Software became a holding company, the principal asset of which is the units in Holdings. The following discussion and analysis of our financial condition and results of operations covers periods prior to the Reorganization and reflects the operations of Holdings and its consolidated subsidiary.
Trends, Opportunities and Challenges
While we currently derive most of our revenues from payroll processing, we expect an increasing percentage of our recurring revenues to come from our additional HCM applications over time. For example, approximately 58%, 60% and 68% of our revenues for the years ended December 31, 2013, 2012 and 2011,
47
respectively, were derived from payroll processing. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. As a result of our evolving revenue mix, coupled with the unique client benefits that our solution provides (e.g., enabling our clients to scale the number of HCM applications that they use on an as-needed basis), we are presented with a variety of opportunities, challenges and risks.
We generate revenues from (i) fixed amounts charged per billing period or (ii) fixed amounts charged per billing period plus a fee per employee or transaction processed. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when they pay their employees, which is either weekly, bi-weekly, semi-monthly or monthly.
We do not have a traditional subscription-based revenue model and do not enter into long-term contractual commitments with our clients. We believe that the traditional subscription model hinders the buying decision by requiring clients to make significant commitments at inception, as well as at the end of each subscription term. By allowing clients to discontinue the use of our solution with 30 days notice, our team of trained specialists must focus on providing the best client service. In contrast, a long-term contract often forces a client to continue using a product that may not entirely fit its needs or, in some cases, incur expensive termination fees. Because of our sales model and personalized service, we have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.
For the year ended December 31, 2013, our gross margin was approximately 81%. We expect changes in our revenue mix to continue to improve gross margins as our current gross margin for our HCM applications is higher than our gross margin for payroll processing. We expect that our total gross margin will gradually improve over time as (i) we add additional clients, (ii) our existing clients deploy additional HCM applications and (iii) we reduce our costs of revenues and administrative expenses as a percentage of total revenues.
Growing our business has also resulted in, and will continue to result in, substantial investment in sales professionals, operating expenses, systems development and programming costs and general and administrative expenses, which has and will continue to increase our expenses. We intend to obtain new clients by (i) continuing to expand our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices and increasing the number of our sales professionals and (ii) opening sales offices in new metropolitan areas. Our ability to increase revenues and improve operating results depend on our ability to add new clients.
As we have organically grown our operations and increased the number of our applications, the average size of our clients has also grown significantly. Based on our total revenues, we have grown at an approximately 38% CAGR since 2009. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees that our clients have will have a positive or negative impact on our results of operations. Our solution requires no adjustment to serve larger clients. We believe larger employers represent a substantial opportunity to increase the number of potential clients and to increase our revenue per client, with limited incremental cost to us. From January 1, 2011 through December 31, 2013, we increased our annualized recurring revenue per average client by 52.7% in part by targeting larger clients and enlarging our existing client relationships.
Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to gain additional share of their HCM spending of our clients, and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel and executive officers.
48
Key Metrics
In addition to the U.S. GAAP metrics that we regularly monitor, we also monitor the following metrics to evaluate our business, measure our performance and identify trends affecting our business:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Key performance indicators: |
||||||||||||
Clients |
10,792 | 9,233 | 7,955 | |||||||||
Clients (based on parent company grouping) |
6,788 | 5,904 | 5,130 | |||||||||
Sales teams |
26 | 23 | 20 | |||||||||
Annualized New Recurring Revenue |
$ | 38,236 | $ | 27,686 | $ | 23,011 | ||||||
Revenue retention rate |
91 | % | 91 | % | 92 | % |
| Clients. When we calculate the number of clients, we treat client accounts with separate taxpayer identification numbers as separate clients, which often separates client accounts that are affiliated with the same parent organization. We track the number of our clients as it provides an accurate gauge of the size of our business. Unless we state otherwise or the context otherwise requires, references to clients throughout this prospectus refer to this metric. |
| Clients (based on parent company group ing ). When we calculate the number of clients based on parent company grouping, we combine client accounts that have identified the same person(s) as their decision-maker regardless of whether the client accounts have separate taxpayer identification numbers, which often combines client accounts that are affiliated with the same parent organization. We track the number of our clients based on parent company grouping as it provides an alternate measure of the size of our business and clients. |
| Sales Teams . We monitor our sales professionals by the number of sales teams and each team is comprised of approximately seven to nine sales professionals. Certain larger metropolitan areas can support more than one sales team. We believe that the number of sales teams is an indicator of revenue for future periods. |
| Annualized New Recurring Revenue . While we do not enter into long-term contractual commitments with our clients, we monitor annualized new recurring revenue as we believe it is an indicator of revenue for future periods. Annualized new recurring revenue is an estimate based on the annualized amount of the first full month of revenue attributable to new clients that were added or existing clients that purchased additional applications during the period presented. Annualized new recurring revenue only includes revenues from these clients who have used our solution for at least one month during the period. Since annualized new recurring revenue is only recorded after a client uses our solution for one month, it includes revenue that has been recognized in historical periods. |
| Revenue Retention Rate . Our average annual revenue retention rate tracks the percentage of revenue that we retain from our existing clients. We monitor this metric because it is an indicator of client satisfaction and revenue for future periods. |
Components of Results of Operations
Sources of Revenues
Revenues are comprised of recurring revenues, and implementation and other revenues. Recurring revenues are recognized in the period services are rendered. Implementation and other revenues includes implementation revenues that are recorded as deferred revenues and recognized over the life of the client which is estimated to be ten years and other revenues which are recognized upon shipment of time clocks. Implementation and other revenue comprised approximately 1.9% of our total revenues for the year ended December 31, 2013. We expect
49
our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. As a percentage of total revenues, we expect our mix of recurring revenues, and implementation and other revenues to remain relatively constant.
Recurring. Recurring revenues include fees for our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for delivery of client payroll checks and reports. These revenues are derived from: (i) fixed amounts charged per processing period or (ii) fixed amounts charged per processing period plus a fee per employee or transaction processed. Because recurring revenues are based in part on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees.
Implementation and Other. Implementation and other revenues are comprised of implementation fees for the deployment of our solution and other revenue from sales of time clocks as part of our time and attendance services. Non-refundable implementation fees which are charged to new clients are generated at inception for a new client and upon the addition of certain incremental applications for existing clients. These fees range from 10% to 30% of the annualized value of the transaction.
Expenses
Cost of Revenues . Cost of revenues consists of expenses related to hosting and supporting our applications, hardware costs, systems support and technology and depreciation of certain owned computer equipment. These costs include employee-related expenses for client support personnel, bank charges for processing ACH transactions, along with delivery charges and paper costs. They also include our cost for clocks held for sale and ongoing technology and support costs related to our systems. Depreciation of owned computer equipment is allocated based upon an estimate of assets used to host and support our applications. We expect our cost of revenues to increase as we continue to invest in new applications and expand our client base, although we expect our overall cost of revenues to gradually decrease as a percentage of total revenues over time.
Administrative Expenses. Administrative expenses consist of sales and marketing, research and development, general and administrative and depreciation and amortization. Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, commissions, bonuses, marketing expenses and other related costs. Research and development expenses consist primarily of employee-related expenses for our development staff, net of capitalized software costs for internally developed software. We expect to grow our research and development efforts as we continue to broaden our payroll and HR solution offerings and extend our technological solutions by investing in the development of new solutions and introducing them to new and existing clients. General and administrative expenses include employee-related expenses for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees and other corporate expenses. Depreciation and amortization expenses include depreciation of owned computer equipment allocated based upon an estimate of assets used to support the selling, general and administrative functions, as well as amortization of intangible assets. We expect our administrative expenses to increase in absolute dollars due to additional costs associated with accounting, compliance, investor relations, and other costs associated with being a public company, although our administrative expenses may fluctuate as a percentage of total revenue.
Interest Expense
Interest expense includes interest on the debt incurred for the construction of our corporate headquarters and related party debt. The increase in interest expense for the year ended December 31, 2013 is primarily due to recognizing a full year of interest expense related to the related party debt entered into in connection with the April 2012 Corporate Reorganization in 2013 as opposed to a partial year expense in 2012. We expect our interest expense to remain consistent until the completion of this offering. We intend to use a portion of the net proceeds received from this offering for the repayment of the 2022 Note, at which point we expect our interest expense to decrease.
50
Other Income, net
Other income, net includes the gain or loss on the sale of fixed assets, interest on funds held for clients that are earned primarily on funds that are collected in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services and change in fair value of the derivative liability relating to the related party debt. We typically invest funds held for clients in money market accounts and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We expect that interest on funds held for clients in other income will increase as we grow our cash and increase our funds held from clients as we introduce new applications, expand our client base and renew and expand relationships with existing clients.
Results of Operations
The following tables set forth selected consolidated statement of income data and such data as a percentage of total revenues for each of the periods indicated:
51
Consolidated Statement of Income Data as a Percentage of Revenues
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Consolidated statement of income data: |
||||||||||||
Revenues: |
||||||||||||
Recurring |
98.1 | % | 98.2 | % | 98.6 | % | ||||||
Implementation and other |
1.9 | 1.8 | 1.4 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
100.0 | 100.0 | 100.0 | |||||||||
Expenses: |
||||||||||||
Cost of revenues: |
||||||||||||
Operating expenses |
17.7 | 19.4 | 21.5 | |||||||||
Depreciation |
1.7 | 1.9 | 1.7 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
19.4 | 21.3 | 23.2 | |||||||||
Administrative expenses: |
||||||||||||
Sales and marketing |
39.7 | 38.1 | 38.9 | |||||||||
Research and development |
2.0 | 2.1 | 2.1 | |||||||||
General and administrative |
26.8 | 25.3 | 25.7 | |||||||||
Depreciation and amortization |
3.4 | 5.3 | 7.5 | |||||||||
|
|
|
|
|
|
|||||||
Total administrative expenses |
71.9 | 70.9 | 74.3 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
8.7 | 7.9 | 2.5 | |||||||||
Interest expense |
(2.6 | ) | (2.8 | ) | (0.2 | ) | ||||||
Other income, net |
1.1 | 0.5 | 0.2 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
7.2 | % | 5.5 | % | 2.5 | % | ||||||
|
|
|
|
|
|
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 and Year Ended December 31, 2012 compared to Year Ended December 31, 2011
Revenues
Year Ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 v 2012 | 2012 v 2011 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Recurring |
$ | 105,560 | $ | 75,420 | $ | 56,382 | 40.0 | % | 33.8 | % | ||||||||||
Implementation and other |
2,041 | 1,390 | 824 | 46.8 | 68.7 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total revenues |
$ | 107,601 | $ | 76,810 | $ | 57,206 | 40.1 | % | 34.3 | % | ||||||||||
|
|
|
|
|
|
Total revenues were $107.6 million for the year ended December 31, 2013, compared to $76.8 million for the year ended December 31, 2012, an increase of $30.8 million, or 40.1%. For the year ended December 31, 2013, our client count increased 16.9% and recurring revenue per average client (based on the average number of clients outstanding during the period) increased 17.7%, as compared to the year ended December 31, 2012. The increase in revenues was due to a combination of factors, including (i) the addition of clients in mature sales offices (those offices that have been open for at least 24 months), (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients.
Total revenues were $76.8 million for the year ended December 31, 2012, compared to $57.2 million for the year ended December 31, 2011, an increase of $19.6 million, or 34.3%. For the year ended December 31, 2012, our client count increased 16.1% and recurring revenue per average client (based on the average number of
52
clients outstanding during the period) increased 14.9%, as compared to the year ended December 31, 2011. The increase in revenues was due to a combination of factors, including (i) the addition of clients in mature sales offices, (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients.
Expenses
Cost of Revenues
Year Ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 v 2012 | 2012 v 2011 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating expenses |
$ | 19,070 | $ | 14,895 | $ | 12,287 | 28.0 | % | 21.2 | % | ||||||||||
Depreciation |
1,821 | 1,431 | 987 | 27.3 | 45.0 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total cost of revenues |
$ | 20,891 | $ | 16,326 | $ | 13,274 | 28.0 | % | 23.0 | % | ||||||||||
|
|
|
|
|
|
Cost of revenues was $20.9 million for the year ended December 31, 2013, compared to $16.3 million for the year ended December 31, 2012, an increase of $4.6 million, or 28.0%. The increase in cost of revenues was due primarily to increases of $2.1 million in employee costs related to additional operating personnel, $565,000 in bank fees related to increased sales, $521,000 in shipping and paper costs, $487,000 in technology expense and $249,000 related to our background check service and clock costs of $157,000, related to increased sales of time clocks. Depreciation expense increased $390,000, primarily due to additional assets purchased.
Cost of revenues was $16.3 million for the year ended December 31, 2012, compared to $13.3 million for the year ended December 31, 2011, an increase of $3.1 million, or 23.0%. The increase in cost of revenues was due primarily to increases of $1.9 million in employee costs related to additional operating personnel, $117,000 in paper costs, $258,000 in bank fees related to increased sales, $179,000 related to our background check service and $125,000 in clock costs, relating to increased sales of time clocks versus leased clocks. Depreciation expense increased $444,000, primarily due to entire year of depreciation on data center assets purchased in connection with the construction of our data center in Oklahoma, which was completed in July 2011.
Administrative Expenses
Year Ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 v 2012 | 2012 v 2011 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Sales and marketing |
$ | 42,681 | $ | 29,255 | $ | 22,244 | 45.9 | % | 31.5 | % | ||||||||||
Research and development |
2,146 | 1,632 | 1,225 | 31.5 | 33.2 | |||||||||||||||
General and administrative |
28,884 | 19,450 | 14,707 | 48.5 | 32.2 | |||||||||||||||
Depreciation and amortization |
3,682 | 4,092 | 4,300 | (10.0 | ) | (4.8 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total administrative expenses |
$ | 77,393 | $ | 54,429 | $ | 42,476 | 42.2 | % | 28.1 | % | ||||||||||
|
|
|
|
|
|
Total administrative expenses were $77.4 million for the year ended December 31, 2013, compared to $54.4 million for the year ended December 31, 2012, an increase of $23.0 million, or 42.2%. Sales and marketing expenses increased primarily due to a $5.5 million increase in employee-related expenses, resulting from a 28.6% increase in the number of personnel, a $4.6 million increase in commission and bonuses, resulting from increased sales and an increase in marketing expense of $1.1 million primarily due to increased radio and print advertising. Research and development expenses increased primarily due to an increase of 55.0% in the number of development personnel, along with bonus expense. General and administrative expenses increased primarily due to a $4.1 million increase in employee-related expenses, resulting from a 52.5% increase in the number of personnel, along with $2.7 million of expenses related to the initial public offering.
53
Total administrative expenses were $54.4 million for the year ended December 31, 2012, compared to $42.5 million for the year ended December 31, 2011, an increase of $12.0 million, or 28.1%. Sales and marketing expenses increased primarily due to a $3.3 million increase in employee-related expenses, resulting from a 8.9% increase in the number of personnel, a $1.6 million increase in commission and bonuses, resulting from increased sales and an increase in marketing expense of $635,000 primarily due to increased radio and print advertising. Research and development expenses increased primarily due to an increase of 29.0% in the number of development personnel, along with bonus expense. General and administrative expenses increased primarily due to a $3.6 million increase in employee-related expenses, resulting from a 19.1% increase in the number of personnel, along with increases in administrative expenses related to travel, communication and transportation.
Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The timing of the capitalized expenditures may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development expenses for the years ended December 31, 2013, 2012 and 2011.
Year Ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 v 2012 | 2012 v 2011 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Capitalized portion of research and development |
$ | 1,238 | $ | 613 | $ | 497 | 102.0 | % | 23.3 | % | ||||||||||
Expensed portion of research and development |
2,146 | 1,632 | 1,225 | 31.5 | 33.2 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total research and development |
$ | 3,384 | $ | 2,245 | $ | 1,722 | 50.7 | % | 30.4 | % | ||||||||||
|
|
|
|
|
|
54
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly condensed consolidated statements of income data for each of the 12 quarters for the three years ended December 31, 2013. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which includes only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with U.S. GAAP. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
Dec 31,
2013 |
Sep 30,
2013 |
Jun 30,
2013 |
Mar 31,
2013 |
Dec 31,
2012 |
Sep 30,
2012 |
Jun 30,
2012 |
Mar 30,
2012 |
Dec 31,
2011 |
Sep 30,
2011 |
Jun 30,
2011 |
Mar 30,
2011 |
|||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated statement of income data: |
||||||||||||||||||||||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||||||||||||||||||
Recurring |
$ | 29,752 | $ | 25,211 | $ | 23,393 | $ | 27,204 | $ | 20,835 | $ | 18,246 | $ | 16,817 | $ | 19,522 | $ | 15,377 | $ | 13,721 | $ | 12,553 | $ | 14,731 | ||||||||||||||||||||||||
Implementation and other |
528 | 620 | 520 | 373 | 472 | 321 | 275 | 322 | 261 | 233 | 157 | 173 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total revenues |
30,280 | 25,831 | 23,913 | 27,577 | 21,307 | 18,567 | 17,092 | 19,844 | 15,638 | 13,954 | 12,710 | 14,904 | ||||||||||||||||||||||||||||||||||||
Expenses |
||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenues |
||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses |
5,437 | 4,846 | 4,353 | 4,434 | 3,965 | 3,747 | 3,366 | 3,817 | 3,412 | 3,089 | 2,856 | 2,930 | ||||||||||||||||||||||||||||||||||||
Depreciation |
501 | 494 | 415 | 411 | 390 | 368 | 341 | 332 | 313 | 261 | 219 | 194 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total cost of revenues |
5,938 | 5,340 | 4,768 | 4,845 | 4,355 | 4,115 | 3,707 | 4,149 | 3,725 | 3,350 | 3,075 | 3,124 | ||||||||||||||||||||||||||||||||||||
Administrative expenses |
||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing |
13,768 | 10,339 | 8,716 | 9,858 | 8,480 | 6,860 | 6,649 | 7,266 | 6,719 | 5,653 | 4,641 | 5,231 | ||||||||||||||||||||||||||||||||||||
Research and development |
829 | 538 | 324 | 455 | 349 | 361 | 542 | 380 | 293 | 390 | 285 | 257 | ||||||||||||||||||||||||||||||||||||
General and administrative |
10,033 | 6,815 | 6,040 | 5,996 | 5,534 | 4,778 | 4,803 | 4,335 | 4,141 | 3,758 | 3,447 | 3,361 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
966 | 959 | 873 | 884 | 841 | 837 | 1,212 | 1,202 | 1,174 | 1,087 | 1,041 | 998 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total administrative expenses |
25,596 | 18,651 | 15,953 | 17,193 | 15,204 | 12,836 | 13,206 | 13,183 | 12,327 | 10,888 | 9,414 | 9,847 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Operating income (loss) |
(1,254 | ) | 1,840 | 3,192 | 5,539 | 1,748 | 1,616 | 179 | 2,512 | (414 | ) | (284 | ) | 221 | 1,933 | |||||||||||||||||||||||||||||||||
Interest expense |
(713 | ) | (699 | ) | (713 | ) | (680 | ) | (702 | ) | (683 | ) | (650 | ) | (136 | ) | (134 | ) | | | | |||||||||||||||||||||||||||
Other (expense) income, net |
1,059 | (133 | ) | (338 | ) | 611 | 19 | 256 | 66 | 13 | 10 | 13 | 57 | 28 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net (loss) income |
$ | (908 | ) | $ | 1,008 | $ | 2,141 | $ | 5,470 | $ | 1,065 | $ | 1,189 | $ | (405 | ) | $ | 2,389 | $ | (538 | ) | $ | (271 | ) | $ | 278 | $ | 1,961 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Revenues Trends
Excluding changes in quarterly revenues due to seasonal factors, our quarterly revenues generally increased sequentially for the periods presented due to a combination of factors, including (i) the addition of clients in mature sales offices, (ii) the addition of new clients in more recently opened sales offices, (iii) the introduction and sale of additional applications to our existing clients and (iv) the growth in the number of employees of our clients. In addition, the annual processing of payroll forms were subject to a one-time price increase in conjunction with increased access and review functionality associated with these forms in 2012, which resulted in an increase of less than 1% of recurring revenues for the years ended December 31, 2013 and 2012.
There are also seasonal factors that affect our revenues. Recurring revenues include revenues relating to the annual processing of payroll forms such as Form W-2 and Form 1099, or Payroll Form Revenues. Because these forms are typically processed in the first quarter of the year, first quarter revenue and margins are generally higher than subsequent quarters. For example, Payroll Form Revenues accounted for 20.2% of total revenues for the three months ended March 31, 2013 and 5.5% of total revenues for the year ended December 31, 2013.
55
Quarterly Expenses Trends
Selling, general and administrative expenses are generally higher in the fourth and first quarters, due to overtime hours related to preparing client rollovers to the new year, and the preparation of annual client filings.
Liquidity and Capital Resources
As of December 31, 2013, our principal sources of liquidity were cash and cash equivalents totaling $13.3 million. Our cash and cash equivalents are comprised primarily of deposit accounts and money market funds.
We have primarily financed our operations from cash flows generated from operations and through the sale of equity securities. Since inception, we have raised $56.0 million of equity capital. We have also incurred debt to finance the expansion of our corporate headquarters that is currently under construction, as well as other previously constructed facilities, and incurred a related party debt as part of our April 2012 Corporate Reorganization. As of December 31, 2013, the outstanding principal amount of our debt was $35.8 million, which consisted of the 2011 Consolidated Loan, the 2013 Consolidated Loan and the 2022 Note, each of which are discussed in more detail below. In connection with the Reorganization, we also assumed the 2017 Note, which is discussed below.
2011 Consolidated Loan. As of December 31, 2013, we had the 2011 Consolidated Loan with an outstanding principal amount of $12.0 million from Kirkpatrick Bank, due December 15, 2018. At March 31, 2014, the outstanding principal amount under the 2011 Consolidated Loan was approximately $11.9 million. Under the 2011 Consolidated Loan, principal and interest are payable monthly based on a 20-year amortization at an annual rate of 5.0%. The 2011 Consolidated Loan is collateralized by a first mortgage covering our corporate headquarters and is secured by a first lien security interest in certain personal property relating to our corporate headquarters.
We are required to comply with certain financial and non-financial covenants under the Consolidated Loan, including maintaining a debt coverage ratio of EBITDA to indebtedness (defined as current maturities of long- term debt, interest expense and distributions) of not less than 1.5 to 1.0. As of December 31, 2013, the debt coverage ratio was 0.66 and we were not in compliance with the covenant. This was due to the short-term land loan outstanding as of December 31, 2012 and the 2013 Consolidated Loan being included in the calculation of the debt service ratio. The short-term land loan was paid in full from an advance from the 2013 Consolidated Loan during the year ended December 31, 2013. We obtained a letter of waiver from the lender that excluded these items from the calculation of the debt service ratio as of December 31, 2013, which remains in effect through January 15, 2015.
Pursuant to the terms of the 2011 Consolidated Loan, we may not, subject to certain exceptions, until amounts under the 2011 Consolidated Loan are repaid: (i) create any mortgages or liens, (ii) make any loans, advances or extensions of credit with any affiliate or enter into any other transaction with any affiliate, (iii) lease any mortgaged property, (iv) make any distributions to members as long as an event of default exists, (v) make any material change its methods of accounting, (vi) enter into any sale and leaseback arrangement, (vii) amend, modify, restate, cancel or terminate our organizational documents, (viii) sell, transfer or convey any mortgaged property or (ix) incur funded outside debt.
An event of default under the 2011 Consolidated Loan includes, among other events, (i) failure to pay principal or interest when due, (ii) breaches of certain covenants, (iii) the failure to meet the required financial covenants and (iv) the institution of a bankruptcy, reorganization, liquidation or receivership.
2013 Consolidated Loan. As of December 31, 2013, we also had the 2013 Consolidated Loan with an outstanding principal amount of $9.1 million and which allows for a maximum principal amount of $14.6 million under the modification agreement for future expansion from Kirkpatrick Bank, due May 1, 2015. At March 31, 2014, the outstanding principal amount under the 2013 Consolidated Loan was approximately $13.5 million.
56
Under the 2013 Consolidated Loan, interest accrues monthly at the Wall Street Journal U.S. Prime rate plus 0.5%, adjusted monthly, subject to a minimum interest rate of 4.0% per annum. Outstanding amounts under the 2013 Consolidated Loan are secured by a first mortgage covering all of the second headquarters building and a first lien security interest in certain personal property relating to our second headquarters building.
We are required to comply with certain financial and non-financial covenants under the 2013 Consolidated Loan, including maintaining a debt coverage ratio of EBITDA to indebtedness (defined as current maturities of long- term debt, interest expense and distributions) of not less than 1.5 to 1.0. As of December 31, 2013, the debt coverage ratio was 0.66 and we were not in compliance with the covenant. This was due to the short-term land loan and the 2013 Consolidated Loan being included in the calculation of the debt service ratio. The short-term land loan was paid in full from an advance from the 2013 Consolidated Loan during the year ended December 31, 2013. We obtained a letter of waiver from the lender that excluded these items from the calculation of the debt service ratio as of December 31, 2013, which remains in effect through January 15, 2015.
Pursuant to the terms of the 2013 Consolidated Loan, we may not, subject to certain exceptions, until amounts under the 2013 Consolidated Loan are repaid: (i) create any mortgages or liens, (ii) make any loans, advances or extensions of credit with any affiliate or enter into any other transaction with any affiliate, (iii) lease any mortgaged property, (iv) make any distributions to members as long as an event of default exists, (v) make any material change its methods of accounting, (vi) enter into any sale and leaseback arrangement, (vii) amend, modify, restate, cancel or terminate our organizational documents, (viii) sell, transfer or convey any mortgaged property or (ix) incur funded outside debt.
An event of default under the 2013 Consolidated Loan includes, among other events, (i) failure to pay principal or interest when due, (ii) breaches of certain covenants, (iii) the failure to meet the required financial covenants and (iv) the institution of a bankruptcy, reorganization, liquidation or receivership.
2022 Note. In connection with the April 2012 Corporate Reorganization, we entered into the 2022 Note with WCAS Capital IV, a related party. As of December 31, 2013, the outstanding principal amount of the 2022 Note was $14.7 million (which included an unamortized discount of $4.1 million). At March 31, 2014, the outstanding principal amount under the 2022 Note was approximately $14.7 million (which included an unamortized discount of $4.1 million). The 2022 Note is due on April 3, 2022 and interest is payable at an annual rate of 10%, payable semiannually in arrears on June 30 and December 31 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the note that is due and payable on any payment date, provided that such amount of accrued interest shall be multiplied by 1.3 and added to the principal amount of the note on such interest payment date (with the result that such interest shall have accrued at an effective rate of 13.0% instead of 10.0% through such payment date). As of December 31, 2013, such option has not been elected and all interest has been paid in cash.
2017 Note. In connection with the Reorganization, we assumed the 2017 Note that was issued by WCAS Holdings payable to WCAS X. As of March 31, 2014, the outstanding principal amount of the 2017 Note was $46.2 million (which excluded accrued interest of $1.6 million). The 2017 Note is due on April 3, 2017 and interest is payable at an annual rate of 14.0%, payable semiannually in arrears on June 30 and December 31 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the note that is due and payable on any payment date, provided that such amount of accrued interest shall be added to the principal amount of the note on such interest payment date (with the accrued but unpaid interest bearing interest at an annual rate of 14.0%). As of March 31, 2014, such option had not been elected and all interest had been paid in cash.
Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenue received but deferred, and our investment in sales and marketing to drive growth. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. We believe our existing cash and cash equivalents and cash provided by this offering will be sufficient to meet our working capital and capital expenditure needs over at least the next
57
12 months. Failure to generate sufficient revenue and related cash flows or to raise additional capital could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.
As part of our payroll and payroll tax filing services, we collect funds for federal, state and local employment taxes from our clients which we remit to the appropriate tax agencies. We invest these funds in short-term certificates of deposit and money market funds from which we earn interest income during the period between their receipt and disbursement. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.
Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services, which may require the use of proceeds from this offering for such additional expansion and expenditures. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business.
Cash Flows
The following table summarizes the consolidated statement of cash flows for the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | % Change | |||||||||||||||||||
2013 | 2012 | 2011 | 2013 v 2012 | 2012 v 2011 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||
Operating activities |
$ | 23,721 | $ | 15,782 | $ | 9,085 | 50.3 | % | 73.7 | % | ||||||||||
Investing activities |
(148,442 | ) | (76,983 | ) | (102,299 | ) | (92.8 | ) | 24.7 | |||||||||||
Financing activities |
124,559 | 67,384 | 94,360 | 84.8 | (28.6 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Change in cash and cash equivalents |
$ | (162 | ) | $ | 6,183 | $ | 1,146 | (102.6 | )% | 439.5 | % | |||||||||
|
|
|
|
|
|
Operating Activities
For the year ended December 31, 2013, cash flows provided by operating activities was $23.7 million. The cash flows provided by operating activities resulted primarily from net income of $7.7 million related to a 40.0% increase in recurring revenues over the comparable period in 2012, as well as depreciation and amortization of $5.5 million and an increase in deferred revenue of $4.2 million related to increased implementation fees.
For the year ended December 31, 2012, cash flows provided by operating activities was $15.8 million. The cash flows provided by operating activities resulted primarily from net income of $4.2 million related to an increase in recurring revenue, as well as depreciation and amortization of $5.5 million and an increase in deferred revenue of $2.8 million related to increased implementation fees.
Investing Activities
For the year ended December 31, 2013, cash used in investing activities was $148.4 million. The cash flows used in investing activities resulted primarily from an increase in funds from clients of $131.5 million related to collection of client taxes and capital expenditures related to investments in real property, software and development and facilities and equipment of $17.2 million.
For the year ended December 31, 2012, cash used in investing activities was $77.0 million. The cash flows used in investing activities resulted primarily from an increase in funds from clients of $71.0 million related to the collection of client taxes and capital expenditures related to investments in real property, software and development and facilities and equipment of $6.0 million.
58
Financing Activities
For the year ended December 31, 2013, cash flows provided by financing activities was $124.6 million. The cash flows provided by financing activities resulted primarily from an increase in client funds obligations of $131.5 million related to the collection of client taxes and advances received from the 2013 Consolidated Loan of $7.0 million, which were partially offset by distributions to members of $12.2 million.
For the year ended December 31, 2012, cash flows provided by financing activities was $67.4 million. The cash flows provided by financing activities resulted primarily from an increase in client funds obligations of $71.0 million related to the collection of client taxes and proceeds from the 2022 Note of $16.4 million, which were partially offset by distributions to members of $23.8 million.
Contractual Obligations
Our principal commitments primarily consist of long-term debt to a related party and other creditors and leases for office space. We disclose our long-term debt to a related party in Note 5 and our commitments and contingencies in Note 11 to our audited consolidated financial statements included elsewhere in this prospectus.
As of December 31, 2013, the future non-cancelable minimum payments under these commitments were as follows:
Payments Due by Period | ||||||||||||||||||||
Total |
Less
than 1 Year |
1-3
Years |
3-5
Years |
More
than 5 Years |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt obligations (1) |
$ | 21,090 | $ | 9,545 | $ | 901 | $ | 10,644 | $ | | ||||||||||
2022 Note |
18,807 | | | | 18,807 | |||||||||||||||
Interest on 2022 Note |
15,515 | 1,881 | 3,761 | 3,761 | 6,112 | |||||||||||||||
Interest on the 2011 Consolidated Loan |
6,304 | 597 | 1,129 | 1,031 | 3,547 | |||||||||||||||
Interest on the 2013 Consolidated Loan (2) |
30 | 30 | ||||||||||||||||||
Operating lease obligations: |
||||||||||||||||||||
Facilities space |
8,304 | 2,222 | 3,859 | 2,170 | 53 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 70,050 | $ | 14,275 | $ | 9,650 | $ | 17,606 | $ | 28,519 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | The amount represents principal amounts of 2011 Consolidated Loan and the 2013 Consolidated Loan at maturity. |
(2) | As we have the option to repay for the principal amount of the 2013 Consolidated Loan prior to the maturity date, the amount represents unpaid interest due on the 2013 Consolidated Loan based on the drawn down amount of $9,127 as of December 31, 2013. Interest is accrued monthly at the Wall Street Journal U.S. Prime Rate plus 0.5%, subject to a minimum interest rate of 4% floor and will be paid first day of each month. The interest amount determined assumed the floor of 4% based on the 2013 interest rate and does not consider for potential future prepayments, draw downs and/or additional interest. |
We have and we may continue to lease additional office space during the year ending December 31, 2014 to support our growth. In addition, many of our existing lease agreements provide us with the option to renew. Our future operating lease obligations include payments due during any renewal period provided for in the lease where the lease imposes a penalty for failure to renew.
Subsequent to December 31, 2013, we signed seven new leases for our sales offices and entered into one amendment to our existing leases thereby resulting in an additional $5.8 million in future commitments of noncancellable operating leases with initial or remaining terms of one year or more.
The 2022 Note as noted above will be paid in full from the net proceeds from this offering. Refer to Use of Proceeds for further details.
59
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed minimum or variable price provisions, and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Off-Balance Sheet Arrangements
Through December 31, 2013, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate sensitivity
We had cash and cash equivalents totaling $13.3 million as of December 31, 2013. We consider all highly liquid debt instruments purchased with a maturity of three months or less and money market mutual funds to be cash equivalents. This amount was invested primarily in deposit accounts and money market funds. The cash and cash equivalents are held for working capital purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.
We do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition with respect to our cash equivalents.
We are also exposed to changes in interest rates relating to our derivative liability. As of December 31, 2013 and December 31, 2012, we had recorded $1.1 million and $1.8 million, respectively, as derivative liability relating to our long-term debt to related party. Changes in interest rate can lead to fluctuations in the fair value of the instrument.
To perform the sensitivity analysis on the derivative liability, we assessed the risk of a change in fair value from the effect of an interest rate change of 100-basis points as of December 31, 2013, which is shown as follows:
Fair Value |
+100 basis
Point Shift |
-100 basis
Point Shift |
||||||||||
(in thousands) | ||||||||||||
Derivative liability |
$ | 1,107 | $ | 1,885 | $ | 270 |
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we continually evaluate our estimates and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results may differ from these estimates made by management under different assumptions and conditions.
Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are described below. Accordingly, these are the policies we believe are
60
the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
Our total revenues are comprised of recurring revenues, and implementation and other revenues. We recognize revenue in accordance with accounting standards for software and service companies when all of the following criteria have been met:
| There is persuasive evidence of an arrangement; |
| The service has been or is being provided to the customer; |
| Collection of the fees is reasonably assured; and |
| The amount of fees to be paid by the customer is fixed or determinable. |
Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications. These services are rendered during each clients payroll period with the agreed-upon fee being charged and collected as part of the clients payroll. Revenues are recognized at time of billing of each clients payroll period. Collectability is reasonably assured as the fees are collected through an Automated Clearing House, or ACH, as part of the clients payroll cycle or through direct wire transfer, which minimizes the default risk. Our implementation and other revenues represent non- refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenue, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements.
For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting.
For the years ended December 31, 2013, 2012 and 2011, we have determined that there is no standalone value associated with the upfront conversion fees as they do not have value to our clients on a standalone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratable over the estimated life of our clients, based on our historical client attrition rate, which we have estimated to be ten years. Revenues from the sale of time clocks are recognized when they are delivered.
Goodwill and Other Intangible Assets
Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2013. For the years ended December 31, 2013, 2012 and 2011, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.
61
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there is no impairment of long-lived assets for the years ended December 31, 2013, 2012 and 2011.
Incentive Units
Given the absence of a public trading market for our common units and in accordance with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation, or the AICPA Practice Guide, our board of directors exercised reasonable judgment and considered numerous factors to determine the best estimate of the fair value of our incentive units, including:
| Valuation analyses performed by unrelated third party specialist (including the application of appropriate valuation techniques and inputs); |
| Characteristics and specific terms of the units as noted in the equity grant agreements; |
| Value of the units as determined by the absence of a liquidation value on the date of grant, the ability to participate in our future profits, growth and appreciation and the lack of an exercise price for the units; |
| Lack of marketability of our common units; |
| Our actual operating and financial performance; |
| Our state of development; |
| Revenue and expense projection; |
| Likelihood of achieving a liquidating event; |
| Market performance of comparable publicly traded companies; and |
| Overall U.S. and global economic and capital market conditions. |
The valuations that we used to determine the fair market value of grants issued during and prior to 2013 were based on information available at the time of, or prior to, the grant as the case may be, and were performed by an unrelated valuation specialist, as defined by the AICPA Practice Guide. All grants issued prior to 2013 were valued during June 2013. All grants that were issued during the year ended December 31, 2013 were valued during the fourth quarter of 2013.
Our simulation model requires various subjective assumptions as inputs, including expected life, volatility, risk-free interest rates, and the expected dividend yield. The assumptions used in the simulation model represent our best estimates, which involve inherent uncertainties and the application of our judgment as follows:
| Risk-free interest rate We base the risk-free interest rate used in the Monte Carlo simulation model on the implied yield available on 5 year U.S. Treasury securities with a remaining term equivalent to that of the respective units as of the valuation date. |
|
Volatility We determine the volatility factor based on the historical volatilities of comparable guideline companies. To determine the comparable guideline companies, we consider cloud-based application providers and select those that are similar to us in nature of services provided. We intend to continue to consistently apply this process using the same or similar public companies until information regarding the volatility of our own pricing becomes available, or unless circumstances |
62
change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation. |
| Expected term The expected term represents the period that our incentive units are expected to be outstanding. We determined the expected term assumption based on the vesting terms and contractual terms of the units. |
| Expected dividend yield We have not paid and do not expect to pay dividends in the future and therefore an expected dividend yield of 0% was applied. The directors of the Company will determine if and when dividends will be declared and paid in the future based on the Companys financial position at the relevant time. |
The following table presents a summary of the grant-date fair values of incentive units granted based on the Monte Carlo simulation model and the related assumptions for the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||
2013 | 2012 | 2011 | ||||
Grant-date fair value |
||||||
2009 Plan |
| $71.78 | $51.16 | |||
2012 Management Incentive Units |
$4.67 - $37.39 | $8.03 - $14.29 | | |||
2012 CEO Incentive Units |
| $6.78 - $9.35 | | |||
Risk-free interest rate |
0.71% - 1.41% | 0.72% | 1.74% | |||
Volatility factor |
50.0% | 60.0% | 60.0% | |||
Expected life (in years) |
5.0 | 5.0 | 5.0 |
In addition to assumptions used in the simulation model, we are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. Our forfeiture estimate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors.
We granted the following Management Incentive Units, or the Management Incentive Units, between October 1, 2012 and the date of this prospectus (in thousands, except per unit amounts):
Grant Date |
Number of
incentive units granted |
Fair value
per unit (1)(2) |
||||||
November 19, 2012 |
200 | $ | 11.16 | |||||
January 7, 2013 |
610 | $ | 7.92 | |||||
January 17, 2013 |
3,000 | $ | 8.08 | |||||
March 28, 2013 |
700 | $ | 14.04 | |||||
April 17, 2013 |
3,000 | $ | 14.13 | |||||
October 14, 2013 |
18,493 | $ | 16.46 | |||||
December 3, 2013 |
150 | $ | 17.08 |
(1) | Because our Management Incentive Units do not have an exercise price, the intrinsic value of the unit equals the fair value. |
(2) | Represents the weighted average fair value per unit, incorporating both time-based and market-based vesting conditions. |
There were no other equity instruments granted during the period from October 1, 2012 to the date of this prospectus. During 2012, Management Incentive Units were issued with a strike price that was based on a $400.0 million company enterprise value. During 2013, Management Incentive Units were issued with a strike price that was based on a $400.0 million and $550.0 million company enterprise value. We also issued incentive units to our chief executive officer, or the CEO Incentive Units, with a strike price that was based on a $550.0 million company enterprise value during 2012. These strike prices are a vesting condition, by which the underlying incentive units did not vest unless the value of our company met or exceeded the specified level. Our incentive units did not have an exercise price.
63
We believe that there is no single event that caused the change in the fair value of our incentive units between the grant dates, but rather a combination of factors described below for the significant difference noted in between certain grants as follow:
| Increase in value between the value at the grant date and the value at the initial public offering is a result of improved operating results; and |
| Increase in the probability assumption of an initial public offering scenario as we approach the estimated initial date. |
We believe that it is reasonable to expect that the completion of an initial public offering will increase the value of our shares of common stock (subsequent to the Reorganization) because they will have increased liquidity and marketability and believe that the estimates and factors noted above are a reasonable description of the value that market participants would place on the underlying common stock as of each valuation date.
In connection with the Reorganization, the incentive units we issued as part of the 2009 Incentive Units Plan, or the 2009 Incentive Units, were converted into shares of restricted stock. Upon the sale of common stock in the initial public offering, approximately 217,378 shares of restricted common stock that were granted to replace the 2009 Incentive Units will automatically vest. Total unrecognized compensation cost relating to 2009 Incentive Units was approximately $30,585 as of December 31, 2013.
In connection with the Reorganization, our incentive units were converted into shares of common stock and/or restricted stock of Software. Vested incentive units were converted to shares of common stock and restricted stock at various conversion ratios, which ranged from approximately 1:0.2 to 1:24. Unvested incentive units were converted to shares of restricted stock at various conversion ratios, which ranged from 1:24 to 1:47. The conversion to shares of common stock versus restricted stock was determined based on the underlying conditions of the pre-conversion incentive units, reflecting any pre-existing vesting conditions. This resulted in issuance of 1,148,520 and 8,121,101 shares of common stock and restricted stock, respectively. The shares of restricted stock were subject to either time-based or performance-based vesting conditions. Although there were modifications to the terms and conditions of the existing incentive units plans upon conversion, no additional compensation cost was recorded as the incremental value associated with the modifications was deemed insignificant.
Shares of restricted stock that were issued in connection with the Reorganization that were subject to time-based vesting conditions retained substantially the same time-based vesting conditions as the respective tranche of incentive units from which they were converted. For additional information concerning these vesting conditions, see Executive CompensationNarrative Discussion Regarding Summary Compensation TableEquity Incentive Units and Restricted Stock Awards. The following table shows the vesting periods for the outstanding shares of restricted stock subject to time-based vesting conditions that were issued in connection with the Reorganization:
Year Ending December 31, |
Number of Shares of
Restricted Stock to Vest |
|||
2014 |
707,168 | (1) | ||
2015 |
653,964 | |||
2016 |
581,131 | |||
2017 |
580,987 | |||
2018 |
102,963 | |||
2019 |
81 | |||
Total |
2,626,294 |
(1) | Includes 477,320 shares of restricted stock that are scheduled to vest on April 3, 2014. |
Shares of restricted stock that were issued in connection with the Reorganization that were subject to performance-based vesting conditions will vest one-half upon the Company reaching a total enterprise value of $1.4 billion and one-half upon the Company reaching a total enterprise value of $1.8 billion, provided that the
64
person is employed by us on that date. For additional information concerning these vesting conditions, see Executive CompensationNarrative Discussion Regarding Summary Compensation TableEquity Incentive Units and Restricted Stock Awards. The following table shows the outstanding shares of restricted stock subject to the applicable performance-based vesting conditions that were issued in connection with the Reorganization:
Total Enterprise Value |
Number of Shares
of Restricted Stock to Vest |
|||
$1,400,000,000 |
2,727,642 | |||
$1,800,000,000 |
2,727,511 |
Derivative Instruments
In April 2012, we entered into the 2022 Note with WCAS Capital IV, a related party. The note contains certain prepayment features related to mandatory redemption upon a liquidation event. As of December 31, 2012, we have identified the prepayment feature of the note as a derivative instrument which is required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. Refer to Note 7 of our audited consolidated financial statements as of and for the years ended December 31, 2013 and 2012 for further discussion. The following are the significant inputs used to value the derivative instrument as of December 31, 2013 and 2012:
2013 | 2012 | |||
Probability of exit |
90% | 90% | ||
Remaining term |
0.8 year - 8.3 years | 3.3 years - 9.3 years | ||
Yield Volatility |
21.4% - 31.1% | 20.4% - 28.5% | ||
Credit Spread |
8.90% | 11.94% | ||
Risk-free rate |
0.13% - 2.45% | 0.36% - 1.78% |
There were no derivative instruments outstanding as of December 31, 2011.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board, or FASB, issued authoritative guidance which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income, or AOCI. The update requires that an entity present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The amendment is effective for fiscal years and interim periods beginning on after December 15, 2012. We adopted this new guidance for the year ended December 31, 2013, which did not have a material impact on our disclosure in the consolidated financial statements.
In February 2013, the FASB issued authoritative guidance, which added new disclosure requirements to measure obligations resulting from joint and several liability arrangement for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date and disclose the arrangements and the total outstanding amount of obligation for all joint parties. These disclosures are in addition to existing related party disclosure requirements. The amendment is effective for fiscal years and interim periods beginning after December 15, 2013 and we do not expect the adoption of such guidance to affect our consolidated financial statements.
65
Overview
We are a leading provider of a comprehensive, cloud-based HCM software solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and HR management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.
Organizations need sophisticated, flexible and intuitive applications that can quickly adapt to their evolving HCM requirements, streamline their HR processes and systems and enable them to control costs. We believe that the HCM needs of most organizations are currently served either by legacy providers offering outdated on-premise products or multiple providers that partner together in an attempt to replicate a comprehensive product. These approaches often result in large up-front capital requirements, extended delivery times, high costs, low scalability and challenges with system integration.
Because our solution was developed in-house and is based on a single platform, there is no need to integrate, update or access multiple databases, which are common issues with competitor offerings that use multiple third-party systems in order to link together their HCM offerings. Additionally, our solution maintains data integrity for accurate, actionable and real-time analytics and business intelligence and helps clients minimize the risk of compliance errors due to inaccurate or missing information. We deliver feature-rich applications while maintaining excellence in information security and quality management standards as evidenced by our ISO certifications. As part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading personalized service.
The key benefits of our differentiated solution as compared to competing products:
| Comprehensive HCM solution. Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications help clients identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA. Our solution also has the advantage of being built in-house by our highly trained and skilled team of software developers; |
| Core system of record enabling data analytics maintained on a single database. Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs by eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases that have to be merged or synchronized. This core system of record allows our clients the ability to access and analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided on our client dashboard; |
| Personalized support provided by trained personnel. Our solution is supported by one-on-one personal assistance from trained specialists. Services specialists are assigned to specific clients and are trained across all of our applications, ensuring they provide comprehensive, expert-level service; |
| Software-as-a-Service delivery model. Our SaaS delivery model allows clients with a geographically dispersed workforce to operate more efficiently and allows these clients to access and use our client-oriented Internet solution on demand and remotely through a standard web browser, smart phones, tablets and other web-enabled devices, which lowers the total cost of ownership as compared to on-premise products; |
66
| Cloud-based architecture. Our cloud-based architecture allows our solution to be implemented remotely and software enhancements and newly developed applications to be deployed without client disruption and involvement, which requires smaller investments in hardware, personnel, implementation time and consulting; and |
| Scalability to grow with our clients . Our solution offers improved scalability as our clients are able to use the same solution as their businesses grow by deploying applications as-needed in real-time, which allows clients to align HCM spending with evolving HCM needs as compared to traditional HCM products that require clients to migrate to new software as they grow, but retain fixed costs even if the client shrinks in size. |
We sell our solution directly through our internally trained, client-focused and highly skilled sales force based in offices across the United States. As a part of our client retention effort, a specialist within a dedicated team is assigned to each client to provide industry-leading, personalized service. We have over 10,000 clients, or over 6,000 clients based on parent company grouping, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We believe that as a result of our focus on client retention, we enjoy high client satisfaction as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. We believe our revenue retention rate understates our client loyalty because this rate also includes former clients that were acquired or otherwise ceased operations.
We were founded in 1998. Software is a Delaware corporation that was formed in October 2013 to undertake this offering. Since our founding, we have focused on providing an innovative SaaS HCM solution. As of December 31, 2013, we had 840 employees across the United States. For the years ended December 31, 2013, 2012 and 2011, our revenues were $107.6 million $76.8 million and $57.2 million, respectively, representing year-over-year growth in revenues of 40% and 34%, respectively. We currently derive most of our revenues from payroll processing. We are able to determine revenues from payroll processing because all of our clients are required to utilize our payroll application in order to access our other applications. We do not separately track our revenues across our other applications because we often sell applications in various groupings and configurations for a single price. We realized net income of $7.7 million, $4.2 million and $1.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Industry Background
Large Market Opportunity for HCM Technologies
According to IDC, the U.S. market for HCM applications is comprised of software that automates business processes covering the entire span of an employees relationship with his or her employer. IDC estimates that this market, excluding payroll services, will total $5.8 billion in 2014. These applications include maintenance of HR records, recruiting applications, performance management, time and labor management tracking, compliance, compensation management and other HR functions. According to IDC, the U.S. market for payroll services will be an estimated $16.2 billion in 2014. The payroll services market includes transactional activities associated with paying employees, maintaining accounting records and administrating payroll taxes while payroll accounting applications offer the functionality to effectively track these various payments and transfers.
IDC estimates that the international market for HCM applications (excluding the United States) will be $4.1 billion in 2014.
Economic and Technological Trends Are Driving Demand for HCM Solutions
Organizations operating in todays global economy are continually under pressure to reduce operating costs in order to maintain or improve their competitive positions. One tactic used by organizations is to utilize information technology, or IT, provided by external resources in order to automate internal processes, reduce internal administrative burdens and more effectively manage capital expenditures and labor costs. As a result, businesses are increasingly making the strategic decision to leverage HCM technologies in order to improve the
67
effectiveness and efficiency of their internal HR and accounting functions and capture opportunities for cost savings. According to IBISWorld, companies often outsource administrative services, such as time and labor management, after initially outsourcing payroll.
Organizations are also managing internal costs and administrative burdens by transitioning technological assets from on-premise to the cloud. By shifting HR systems to the cloud, businesses seek to avoid the difficulties associated with maintaining software and security updates, and storage needs as well as other maintenance issues. The rise of cloud computing has supported the SaaS delivery model. According to IDC, the global SaaS market is projected to grow from $23 billion in 2011 to $67 billion in 2016, at a CAGR of 24%.
We believe that businesses increasingly view data concerning their human capital as a critical strategic resource that can result in more informed decision-making concerning employee recruitment, retention and compensation. This revolution in data analytics and its extension to HR functions has increased the number of employees within an organization that can benefit from, and who regularly interface with, information technologies. As a result, organizations seek intuitive technologies that do not require extensive training or advanced technological credentials to be effectively utilized. The user experience of business applications is changing to emulate the consumer experience as HR buyers increasingly seek applications that are intuitive and available anywhere on any web-enabled device.
Incumbent HCM Products Struggle To Meet the Needs of Businesses
We believe that a majority of businesses and organizations in the United States are using multiple HCM systems from more than one vendor, thereby impeding their ability to share data across these systems. Several incumbent payroll and HCM vendors offer product sets that are comprised of separate systems that require integration. In certain cases, this disparate product offering across several vendors is the result of several acquisitions which often leads to a loosely coupled product set that is marked by significant architectural differences and weak data integration. We believe that this type of offering increases the risk of user or system error and reduces overall effectiveness.
A comprehensive HCM solution leverages the same data, process and workflow management, security model, reporting and analytics tools, and user portals to provide a uniform user experience. We believe that significant analytical power remains trapped within the data that organizations are accessing across multiple applications and databases but are unable to analyze in a unified context.
We believe that vendors who pursue market segmentation strategies based on organization size or industry create difficulties for clients who grow, either in size or industry scope, beyond the confines of those vendors offerings. A scalable HCM solution based on a core system of record allows for an organization to grow in size and scope without transitioning to a new user interface or back-end database.
The Paycom Solution
We offer an end-to-end SaaS HCM solution that provides our clients and their employees with immediate access to accurate and secure information and analytics 24 hours a day, seven days a week from any location. We believe that our solution delivers the following benefits:
Comprehensive HCM Solution
Our solution offers functionality that manages the entire employment life cycle for employers and employees, from recruitment to retirement. Our user-friendly applications streamline client processes and provide clients and their employees with the ability to directly access and manage administrative processes, including applications that identify candidates, onboard employees, manage time and labor, administer payroll deductions and benefits, manage performance, offboard employees and administer post-termination health benefits such as COBRA. The widespread employee usage of our applications helps further integrate our solution into the
68
administrative processes of our clients. Our solution also has the advantage of being built in-house by our highly trained and skilled team of software developers, thereby minimizing data integrity issues across applications.
Core System of Record
Our solution is based on a core system of record that contains payroll and HR information in one convenient database, thereby reducing costs and eliminating the need for multiple software products and vendors and the maintenance of employee data in numerous databases. This core system of record enables our clients to input employee data one time and enjoy seamless functionality across our applications. When a revision is made to the file of an employee, all appropriate personnel have access to the change in real time. In addition, our core system of record helps clients minimize the risk of compliance errors due to inaccurate or missing information that results from maintaining multiple databases. Through accurate tracking and management of employee payroll and other HR data, such information can be compiled for comprehensive and consistent reporting for our clients.
Data Analytics
Our solution allows clients to analyze accurate employee information to make business decisions based upon actionable, real-time, point-and-click analytics provided through our client dashboard. This functionality helps our clients operate with a more complete and accurate picture of their organization as our solutions embedded analytics capture the content and context of everyday business events, facilitating fast and informed decision-making from any location. The employees of our clients also benefit from our analytics platform as they are able to model in real-time the impact of their HCM decisions on their compensation, benefits and rewards.
Personalized Support Provided by Trained Personnel
Our applications are supported by one-on-one personal assistance from trained specialists. Services specialists are assigned to specific clients and are trained across all of our applications, ensuring they provide comprehensive, expert-level service. Our client service is ISO 9001:2008 certified on the basis of its quality and consistency. We strive to provide our clients with high levels of service and support to ensure their continued use of our solution for all of their HCM needs. We have maintained high client satisfaction, as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.
Software-as-a-Service Delivery Model
Our SaaS delivery model allows clients with a geographically dispersed and mobile workforce to operate more efficiently, and allows these clients to implement, access and use our client-oriented Internet solution on demand and remotely through standard web browsers, smart phones, tablets and other web-enabled devices. Our SaaS solution reduces the time, risk, headcount and costs associated with installing and maintaining applications for on-premise products within the information technology infrastructure of our clients.
Secure Cloud-Based Architecture
Our cloud-based architecture allows our solution to be implemented remotely with minimal client interaction. Updates such as software enhancements and newly developed applications can be deployed without client interaction, disruption or involvement, allowing our clients to make a smaller investment in hardware, personnel, implementation time and consulting. Additionally, we own and maintain all of the infrastructure technology to host our solutions and to maximize system availability for clients. Our focus and investment in technology and data security has been recognized with ISO/IEC 27001:2005 certified security standards that provide our clients with a best-in-class level of data security.
Scalability to Grow with our Clients
Our solution is highly scalable. We have served a diversified client base ranging in size from one to more than 8,000 employees. We calculate the number of employees using clients based on parent company grouping.
69
Our clients are able to use the same solution while their businesses grow by deploying applications as-needed in real-time. Pricing is determined by employee headcount and the number of applications utilized, enabling our clients to align HCM spending with their evolving HCM needs as compared to traditional HCM products that require clients to migrate to new software as they grow but retain fixed costs even if the client shrinks in size.
Our Strategy for Growth
Our strategy is to continue to establish our solution as the HCM industry standard. To accomplish this, we intend to:
Increase Our Presence in Existing Markets
Although we have clients in all 50 states, we believe a significant opportunity exists to expand our presence within markets where we currently have a sales office. We have a sales office in 24 of the 50 largest MSAs in the United States based on 2010 U.S. census data, only one of which is served by multiple sales teams. We believe that the 50 largest MSAs in the United States could collectively support at least 100 additional sales teams. Each sales office is typically staffed with one sales team, with each team comprised of approximately seven to nine sales professionals. We plan to increase our presence in existing markets by adding sales offices and increasing the number of our sales teams to further penetrate and effectively capture these markets.
Expand Into Additional Markets
We plan to continue expanding our sales capability by opening sales offices in certain metropolitan areas where we currently have no sales teams. We have identified 50 untapped metropolitan areas where we could potentially open a new sales office staffed with at least one sales team. Since September 2012, we have opened sales offices in Baltimore, Detroit, Indianapolis, Minneapolis, New York, Philadelphia, San Francisco, Seattle and Silicon Valley. We intend to open six to eight additional offices over the next two years, as well as potentially expand over the longer term into international markets.
Enlarge our Existing Client Relationships
We dedicate our resources to helping our clients facilitate their goals, whether through helping them execute better hiring decisions, manage compensation more effectively or simply operate more efficiently. We believe a significant growth opportunity exists in selling additional applications to our current clients. Many clients have subsequently deployed additional applications as they recognize the benefits of our comprehensive solution. During the year ended December 31, 2013, all of our clients, including our new clients, on average utilized 5.2 of our 18 then available applications. During that same period, however, new clients on average utilized 6.2 applications. We believe that there is a significant opportunity to sell additional applications to our existing clients. As we extend and strengthen the functionality of our solution, we will continue to invest in initiatives to increase the adoption of our solution and maintain our high levels of client satisfaction.
Target Larger Clients
As we have organically grown our operations and increased the number of our applications, the average size of our clients has also grown significantly. Based on our total revenues, we have grown at an approximately 38% CAGR since 2009. Our solution requires no adjustment to serve larger clients. We believe larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client, with limited incremental cost to us. From January 1, 2011 through December 31, 2013, we increased our annualized recurring revenue per average client by 52.7%, in part by targeting larger clients and enlarging our existing client relationships. To further capitalize on this opportunity, we intend to target larger businesses opportunistically where our current sales model is effective.
70
Maintain Our Leadership in Innovation by Strengthening and Extending our Solution
Our ability to develop and deploy new applications and updates rapidly and cost-effectively has been integral to the results that we have achieved to date. We intend to continue extending the functionality and range of our solution in the future, and recently launched a new application. Our development efforts are performed exclusively in-house and are heavily based upon proactive research and client input. In the near-term, we intend to focus our investments on further developing applications within our higher margin HR and talent management applications. Over the long term, we intend to increase our investment in the development of new applications that are responsive to the needs of our clients, which are garnered through ongoing client interaction and collaboration.
Our Applications
Our HCM solution offers a full suite of applications that generally fall within the following categories: talent acquisition, time and labor management, payroll, talent management and HR management.
Talent Acquisition
|
Applicant Tracking. Our applicant tracking application simplifies the recruiting processes needed to hire the most qualified employees. By using our all-in-one system, our clients can move candidates from the application process through new employee on-boarding without re-keying data. | |
|
Employment Background Checks. Our employment background check application helps to ensure that prospective new hires are qualified candidates. We provide clients with the tools for authorizing background checks, creating pre-adverse and adverse action letters and securely storing results as required by the Fair Credit Reporting Act. | |
|
On-Boarding/Off-Boarding . Our on-boarding/off-boarding application streamlines the hiring and termination processes for employees of our clients by creating online checklists of tasks to be assigned to an employee or group of employees. | |
|
E-Verify ® . Our E-Verify ® application automates employment verification and reduces our clients exposure to audits and penalties that could result from I-9 violations. | |
|
Tax Credit Services. Our tax credit services application helps employers process and calculate the available federal tax credits associated with hiring employees who meet various qualifications. |
Time and Labor Management
|
Time and Attendance . Our time and attendance application allows our clients to accurately and efficiently manage when, where and how employees report their hours worked. Clients can apply customized rules, use batch editing and use timecard management tools to manage complex time and attendance needs. Our web time clocks feature allows employees to clock in and out online, which automatically updates the payroll application when approved, eliminating the need to manually calculate timesheets and rekey information into payroll systems. We also offer several different types of hardware terminals that are ideal for single or multi-clock environments. | |
|
Scheduling. The scheduling application helps managers with employee scheduling. This applications automated functionality provides for a seamless workflow with the payroll and time and attendance applications. Cloud-based convenience also provides employees and managers access to their schedules at any time. |
71
|
Time-Off Requests . Our time-off requests application automates and standardizes the time off request procedure and helps employers remain effectively staffed. Managers can view an online time-off calendar to easily monitor and approve or deny time-off requests. Our employee self-service tool allows employees to view the time-off they have available, submit requests and view blackout dates, the status of requests and any manager comments. | |
|
Labor Allocation. Our labor allocation application simplifies the process of setting up and tracking employee hours based on the job the employee is working. | |
|
Labor Management Reports . Our labor management report application helps clients get up-to-the-minute reports on the information they need to better manage their labor force, such as overtime and labor distribution. |
Payroll
|
Payroll and Tax Management. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Our payroll application is automatically updated with changes in employee information and offers other time saving functionality such as batch editing and effective dating. The application can be accessed at any time to make changes, run payroll and generate custom reports. We also help our clients by handling their payroll taxes and deposits, regulatory correspondence, amendments, and penalty and interest disputes. | |
|
Paycom Pay. Our Paycom Pay application eliminates the tedious job of check reconciliation by issuing checks to our clients employees that clear from a Paycom bank account, which helps clients eliminate potential liability and simplifies the reconciliation process. | |
|
Expense Management. This application eliminates the manual, paper-based processes associated with employee expense reimbursement and allows employers to control and monitor expenses by setting clearly-defined rules and parameters for reimbursement for employees. Employees can upload receipts when submitting their expenses and access an expense dashboard where they can view the status of their submitted expenses. | |
|
Garnishment Management . This application allows us to handle communications with garnishment payees and agencies and to calculate and track garnishment payments. |
Talent Management
|
Employee Self-Service. Our employee self-service application improves employee engagement by empowering our clients employees to self-manage certain transactions, obtain quick answers to frequent payroll and HR questions, access their pay history and view performance goals and reviews and total compensation reports to review their compensation and benefits package. Benefits information and paid time off accruals also give employees the ability to make informed decisions regarding their benefit selections and time-off requests. | |
|
Compensation Budgeting . With compensation and performance information in one system, our compensation budgeting tool provides clients with valuable workforce insight to help manage and formulate salary budgets and help establish merit-based compensation increases. |
72
|
Performance Management . This application allows for standardized positions across a company with set pay grades and performance goals. It also helps streamline the performance review process with online facilitation of the review process. | |
|
Executive Dashboard. Our executive dashboard offers powerful workforce insight for executives to access information on demand in a variety of report formats. Because we offer an all-in-one solution in a single database, the comprehensive report data provides the workforce intelligence needed to drive human capital decisions at an executive level. |
HR Management
|
Document Management. Our document management application manages employee files, including the ability to have employees digitally sign and view company documents. We securely store client records to meet retention requirements and protect documents from unauthorized access and other disasters that can threaten businesses. | |
|
Government and Compliance. Our government and compliance application helps clients reduce exposure to violations, audits and penalties with respect to the employment laws impacting their business, such as the Family Medical Leave Act, Equal Employment Opportunity Commission and other state and federal regulations. A single database keeps our clients employee data consistent and enhances reporting capabilities by providing better accuracy and real-time insight. | |
|
Benefits Administration . Our benefits administration application allows clients to customize benefit plan setup, deduction amounts, enrollment dates and new-hire waiting periods. Employers are provided census and reconciliation reports to ensure they do not overpay for benefits and can update deduction amounts for all employees or groups of employees at once. This application also provides employees with online enrollment and helps educate them and drive informed enrollment decisions for greater employee satisfaction. | |
|
COBRA Administration . Our COBRA administration application protects employers from COBRA violations and their associated fines and penalties by automatically initiating compliance measures with the entry of qualifying events into the application. This application also tracks important dates, collects and remits premiums and reports on all COBRA activity. | |
|
Personnel Action Forms . This application helps our clients reduce the amount of time and paperwork required with employee changes such as pay rate, position and title changes by allowing managers to complete and approve online personnel action forms. |
Our Clients
We serve a diverse client base in terms of size and industry. We have over 10,000 clients, or over 6,000 clients based on parent company groupings, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We stored data for more than 1,000,000 persons employed by our clients during the year ended December 31, 2013.
Based on parent company grouping, companies with fewer than 50 employees comprised approximately 10% of total revenues for the year ended December 31, 2013. Revenues for clients based on parent company grouping, with 50-2,000 employees and more than 2,000 employees represented approximately 86% and 4%, respectively, of total revenues for the year ended December 31, 2013. Many of our clients that are small to mid-sized companies can typically make the decision to adopt our solution more quickly than larger companies,
73
which we believe results in a shorter sales cycle, which more closely corresponds to our target sales cycle of 30 to 90 days. As a result of the nature and size of our clientele, we maintain a diversified client base and very low client concentration. We believe, however, larger employers represent a substantial opportunity to increase the number of clients and to increase our revenue per client with limited incremental cost.
Competition
The market for HCM solutions is rapidly evolving, highly competitive and subject to changing technology, shifting client needs and frequent introduction of new products and services. Our competitors range from small, regional firms to large, well-established international firms with multiple product offerings.
We compete with firms that provide HCM solutions by various means. Many providers continue to deliver legacy enterprise software, but as demand for greater flexibility and access to information grows, we believe there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers. Our competitors offer HCM solutions that overlap with one, several or all categories of applications offered by our solution. Our talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc. Our payroll applications, including payroll processing, compete primarily with ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc. Our HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc. Our time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc. Our larger competitors compete with us across multiple segments. In addition, our HCM solution continues to face competition from in-house payroll and HR systems and departments as well as HR systems and software sold by third-party vendors.
Competition in the HCM solutions market is primarily based on service responsiveness, product quality and reputation, breadth of service and product offering and price. The importance of these factors depends on the size of the business. Price tends to be the most important factor of competition for smaller businesses with fewer employees while the scope of features and customization is more important to larger businesses. We believe that our SaaS delivery model allows us to be most competitive in the HCM solutions market across this spectrum.
Sales and Marketing
We sell our solution exclusively through our sales force that included 218 sales professionals as of December 31, 2013, substantially all of whom have a four-year college degree. Our sales force is comprised of inside sales and field sales personnel who are organized geographically and CRRs, who sell additional applications to existing clients. We have 30 sales teams located in 20 states and plan to open additional sales offices to further expand our presence in the U.S. market. As of December 31, 2013, 23% of our sales force had achieved executive sales representative status by generating in excess of $300,000 of annualized new recurring revenue.
We provide our sales force with an intensive four-week training course that includes at least one week of training at our headquarters in Oklahoma City. Our unique training program includes instruction in accounting, business metrics, product features and tax matters relevant to our target market. Our training continues for our sales force through weekly in-office strategy sessions and leadership development training. Executive sales representatives are also required to attend in-person quarterly conferences to share best practices and receive legal and business updates.
When a new client processes with us for an entire month, our sales representative receives a commission based upon annualized new recurring revenue. This commission is only paid once per new customer. Executive sales representatives receive a higher commission rate and base salary based upon both current year and life-to-date realized sales, respectively.
74
We generate client leads, accelerate sales opportunities and build brand awareness through our marketing programs that target finance and HR executives, technology professionals and senior business leaders of companies that perform HCM functions in-house or outsource these functions to one of our competitors. Our principal marketing programs include:
| Direct mail campaigns, email campaigns, personalized URLs, industry-specific print advertising and tradeshow exhibiting; |
| Search engine marketing methods that include site optimization and pay-per-click searches; and |
| National radio advertising on Sirius/XM Radio and specifically on the Fox News, Fox Talk, Bloomberg and MSNBC stations. |
Our 30 CRRs are focused on expanding the number of applications our clients purchase from us by introducing them to additional applications. Our CRRs call upon select clients periodically and are paid a non-recurring commission on any additional sales they generate.
Technology, Operations and Security
Technology
Our multi-tenant architecture enables us to deliver our solution across our client base with a single instance of our solution, while securely partitioning access to our clients respective application data. Because a single version of our solution is developed, supported and deployed across all of our clients, updates are delivered to all of our clients at the same time, making it easier to scale our solution as the number of our clients and their employees expands.
We maintain diverse load-balanced Internet lines serviced by multiple networks to provide our clients continuous access to our solution and their stored data. We back up our client data at regular intervals utilizing live replication, snapshots and cold archive methods of backup and manually monitor backup success and failure regularly. Our server cluster and database servers have redundant hot swappable disks to ensure continuous service in the event of a disk failure.
Operations
We physically host our solution for our clients in two secure data center facilities located in Oklahoma and Texas. All of our critical systems are fully redundant and backed-up in real-time to these facilities. Physical security includes ID-oriented access control, alarm systems and manned 24 hour a day camera monitoring by our security guards. Server facilities also have environmental monitoring and extensive environmental controls such as heat and fire protection, moisture, temperature, and humidity sensors, backup power supply and exterior reinforced concrete walls.
Security
We maintain a formal and comprehensive security program designed to ensure the confidentiality, integrity and availability of our clients data. During the regular course of business, we receive client data through our online system that we in turn process, record and store following ISO/IEC 270001:2005 certified controls and procedures. All communications with our servers that might contain sensitive information are encrypted before they leave the network and our servers are configured to only allow high-grade encryption algorithms.
We strictly regulate and limit all access to servers and networks at each of our facilities. Local network access is restricted by our authenticated server, using access control lists and remote network access is restricted by a firewall, which provides no accessible route from external networks to systems within our local network. We also employ network and host intrusion detection and prevention sensors throughout our infrastructure, systems that monitor and alert on insecure installations of third-party applications, a full system for managing
75
and installing patches for those applications and highly restricted access to the Internet for anyone who has access to client data. We retain a third-party penetration testing company to conduct penetration tests and periodic audits to identify and remediate any issues.
Our applications are secured using multiple libraries and secure coding practices. We engage in regular penetration testing performed by both our information security department as well as by a third party testing company. Our network infrastructure is secured and monitored using a number of best practices and tools at multiple layers of the physical and logical network. This security is also continually monitored by our information security department.
Software Development
As of December 31, 2013, we had 30 employees dedicated to our application development process. This team works closely with our clients to improve and enhance our application offerings and develop new applications. Our application development process consists of a focused innovation and development timeframe in order to deliver well-developed applications and enhancements desired by our clients. A key element of our development process is the one-on-one personal interaction between clients and our client relations representatives, through which our clients suggest new applications and features.
We develop our solution from the ground up with our internal development and engineering teams. Our development and engineering teams and our employees conceive of new applications and enhancements, review requests, schedule development in order of priority and subsequently develop the applications or enhancements. Our new applications and enhancements are independently reviewed by the quality assurance team, in accordance with our software development process, before being fully implemented. Any enhancements to our applications are released on a monthly scheduled release date to coordinate the communication and release to our clients.
Capitalized development expenses, which include compensation for employees directly associated with development projects, were $1,221,000, $585,000 and $497,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
Client Service
We are committed to providing industry-leading, client-centered service. For this reason, we assign each client a specialist within a dedicated team. This one-to-one service is a key part of our client service model and helps to ensure that we are delivering an industry-leading solution and maintaining high client satisfaction. The primary elements of our client service model include the following:
Streamlined Setup and Onboarding
After a client elects to deploy our solution, that client goes through our onboarding process with assistance from a team of new client setup specialists and the sales professional responsible for obtaining the clients business. This team works closely with the client until the client is capable of managing our solution independently, in which case it is transferred to our dedicated services specialists.
Dedicated Service Specialists
After completing the onboarding process, each client is assigned to a specialist within a dedicated team that provides primary support for the remainder of the clients time with the Company. Clients can then contact their dedicated services specialist or a team member if any issues or questions arise. These specialists provide personalized service with actual knowledge of the clients business needs. When appropriate, client questions can be elevated to the specialists with the appropriate application, regulatory or tax expertise. In addition, our CRRs proactively contact our clients to ensure satisfaction with our solution and introduce additional applications.
76
Expert Level Service
Our client specialists are trained across all of our applications to ensure that they can provide comprehensive, expert-level service. Our client service is ISO 9001:2008 certified on the basis of its quality consistency and helps support a high client retention rate.
Regulatory and Certifications
We are subject to varying degrees of regulations in each of the jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions. These regulations and laws cover, among others, information disclosure.
Personal privacy has become a significant issue in the United States and in other countries. The regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations affecting or regarding the collection, use and disclosure of personal information. In the United States, these include, among others, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Family Medical Leave Act of 1993, the Patient Protection and Affordable Care Act and state breach notification laws.
We voluntarily obtain third party security examinations relating to security and data privacy in accordance with Statement on Standards for Attestation Engagements, or SSAE, No. 16, Reporting on Controls at a Service Organization. Our SSAE examination is conducted every six months by an independent third party auditor, and addresses, among other areas, our physical and environmental safeguards for production data centers, data availability and integrity procedures, change management procedures and logical security procedures.
In February 2011, we obtained a certification based on ISO/IEC 27001:2005 criteria, a security standard for Information Security Management Systems published by ISO covering our production, quality assurance and implementation environments. This independent assessment of our conformity to the ISO 27001 standard includes assessing security risks, designing and implementing comprehensive security controls and adopting an information security management process to meet security needs on an ongoing basis. The certification is valid for three years, with surveillance audits taking place annually.
In April 2011, we obtained a certification based on ISO/IEC 9001:2008 criteria, a standard for the implementation of quality management processes published by ISO, covering our activities required to create and deliver our solution. This independent assessment of our conformity to the ISO 9001 standard includes assessing the design and implementation of quality objectives to meet delivery standards on an ongoing basis. The certification is valid for three years, with surveillance audits taking place annually.
Intellectual Property
We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our intellectual property rights. We also have a number of registered and unregistered trademarks and will continue to evaluate the registration of additional trademarks as appropriate. We do not have any patents or patent applications pending.
Seasonality
Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms such as Form W-2 and Form 1099. Because these forms are typically processed in the first quarter of the year, first quarter revenue and margins are generally higher than in subsequent quarters. We believe this seasonality is driven by several factors, most notably the number of our clients that use our payroll application, as compared to the other applications that we offer. As our clients use additional applications in the future, we believe that the seasonality in revenues will diminish.
77
Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business activities, including the legal proceeding described below. Defending such proceedings is costly and can impose a significant burden on management and employees; we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.
On July 29, 2013, Dr. Lakshmi Arunachalam filed a complaint against us in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 8,244,833, which is entitled Real-Time Web Transaction Systems to Access On-Line Services Over the Web from Web Applications. According to the patent, it provides a method and apparatus for providing real-time, two-way transactional capabilities on the Web. It is alleged that Payrolls web services perform a series of steps that violate at least claim ten of the patent-in-suit. The steps purportedly include: (1) activate an OSI application layer on-line service network on the Web, wherein said on-line network is an on-line payroll processing service network on the Web; (2) display a Web application on a Web page, wherein the Web application is a payroll processing services Web application; (3) execute said Web application on a Web server comprising memory and a processor; (4) display a list of services accessible for performing real-time Web transactions from said payroll processing services Web application on the Web page; (5) perform real-time Web transactions from the Web application; (6) manage the connection between the Web application displayed on a multi-media device and a back office of a payroll processing service provider; (7) control the flow of one or more real-time Web transactions from the payroll processing Web application; and (8) complete a payroll processing Web transaction in real-time relating to a selected payroll processing service. At the early stage of this litigation, Dr. Arunachalam has not yet submitted infringement contentions so it cannot be determined why she believes her patent covers the products or services offered by us.
The complaint seeks a permanent injunction, damages, and attorneys fees should we be found to infringe. Dr. Arunachalam has asserted similar claims in Delaware for the alleged infringement of the same patent against other payroll processing companies. Dr. Arunachalam has also accused various other entities of infringing related U.S. patents. On October 4, 2013, we filed an answer, affirmative defenses and counterclaims to the complaint. We denied all claims made against us by Dr. Arunachalam in her complaint, asserted various defenses and counterclaims for non-infringement and challenged the validity and enforceability of U.S. Patent No. 8,244,833. Dr. Arunachalam filed a reply to our counterclaim on October 28, 2013 and denied non-infringement and invalidity. We believe that this litigation is without merit and intend to vigorously defend ourselves in this matter. Although we cannot predict the outcome of this litigation, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of this litigation could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Employees
Our ability to recruit and retain qualified employees is critical to our continued success. We invest heavily in our training and leadership development programs to encourage the development and promotion of our employees. As of December 31, 2013, we employed approximately 840 people. None of our employees were covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Facilities
Our corporate headquarters is located in Oklahoma City, Oklahoma and includes a 90,000 square foot processing center. We have begun construction on a second building to enlarge our corporate campus by an additional 80,000 square feet and we have a 2,271 square foot disaster recovery site located in Oklahoma City. We own over 30 acres in Oklahoma City upon which our facilities are located. We also own and operate a 1,500 square foot fully redundant data center located at our corporate headquarters in Oklahoma and lease a 300 square foot fully redundant data center in Texas.
78
We also lease offices in Arizona, California, Colorado, District of Columbia, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Texas and Washington. We believe that these facilities are suitable for our current operations and upon the expiration of the terms of the leases we believe we could renew these leases or find suitable space elsewhere on acceptable terms.
79
Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of March 31, 2014:
Name |
Age |
Position(s) |
||||
Chad Richison |
43 | President, Chief Executive Officer and Director | ||||
Craig E. Boelte |
50 | Chief Financial Officer | ||||
Jeffrey D. York |
46 | Chief Sales Officer | ||||
William X. Kerber III |
38 | Chief Information Officer | ||||
Robert J. Levenson (1) |
72 | Director | ||||
Robert Minicucci (1)(2)(3) |
61 | Chairman of the Board | ||||
Conner Mulvee |
31 | Director | ||||
Frederick C. Peters II (1) |
64 | Director | ||||
Sanjay Swani (2)(3) |
47 | Director |
(1) | Member of the Audit Committee. |
(2) | Member of the Compensation Committee. |
(3) | Member of the Nominating and Governance Committee. |
Chad Richison has served as President and Chief Executive Officer since he founded Paycom in 1998. Mr. Richison has also served as a Director since 1998. He began his career in sales with ADP, and then moved to Payroll 1 prior to founding Paycom. Mr. Richison received his B.A. in Mass CommunicationsJournalism from the University of Central Oklahoma. Mr. Richison was selected to serve on our board of directors because of the leadership skills, strategic guidance and experience he brings as our President and Chief Executive Officer and operational expertise from his prior experience in the industry.
Craig E. Boelte has served as our Chief Financial Officer since February 2006. Before joining Paycom, Mr. Boelte owned an accounting practice serving over 600 clients including Paycom. Prior to that, Mr. Boelte spent nine years at Deloitte & Touche where he served as Senior Tax Manager. Mr. Boelte has over 26 years of experience in the workforce management and HR industry. Mr. Boelte is a member of the Oklahoma Society of CPAs and the American Institute of CPAs. Mr. Boelte received his B.S. in Business Administration and Masters in Science in Accounting from Oklahoma State University.
Jeffrey D. York has served as our Chief Sales Officer since 2007. Mr. York opened our Dallas location in 2002 prior to joining our corporate executive team. Before joining Paycom, Mr. York was employed by ADP from 1990 to 2002 where he held a variety of sales management positions including Vice President of Sales for the Major Accounts Division. Mr. York earned his MBA from Baylor University and his Bachelors of Business Administration from Texas Tech University.
William X. Kerber III has served as our Chief Information Officer since July 2007. Mr. Kerber joined us in 1999 while completing his B.S. in computer science. Mr. Kerber is a founding team member has over 17 years of software development and network design experience. Prior to serving as Chief Information Officer, Mr. Kerber served as a lead software developer and network architect. He attended the Oklahoma School of Science and Math (OSSM) and graduated from the University of Oklahomas Engineering/Computer Science program where he is currently a member of its board of advisors.
Robert J. Levenson has served as a member of our board of directors since July 2007. Mr. Levenson is a founder and Managing Member of LENOX Capital Group, LLC, a private venture capital investment company formed in 2000 which focuses primarily on early stage software technology and service company investments. From 1981 through 1990, Mr. Levenson held executive management positions with ADP, including Group
80
PresidentEmployer Services, member of the Corporate Executive Committee and its Board of Directors. In late 1990, Mr. Levenson was named Chief Operating Officer, a member of Office of the President and was elected to the Board of Directors of Medco Containment Services, Inc., which was acquired by Merck & Co., Inc., or Merck, and later spun out to Merck shareholders. From 1992 until 2003, Mr. Levenson served on the Board of Directors of First Data Corporation, or FDC, and from 1993 until his retirement in 2000, he served as Executive Vice President of FDC. Thereafter, he served as a consultant to FDC and some of its joint venture affiliates until 2006. Mr. Levenson has served on boards of directors of public and private companies as well as civic and philanthropic organizations. These include: ADP, FDC, Medco, Central Data Systems, Inc., Comnet, Inc., Polyvision, Broadway & Seymour, Superior TeleCom Inc., Vestcom International, Emisphere Technologies, Inc., Ceridian Corp, and Elite Pharmaceuticals, Inc. He graduated from Kent State University with a B.S. in Business Administration. Mr. Levenson also serves or has served on boards of several private companies. Mr. Levenson was selected to serve on our board of directors because of his industry expertise and experience as a member of the board of directors of other companies.
Robert Minicucci has served as a member of our board of directors since July 2007. He was elected Chairman of the Board in December 2013. Mr. Minicucci joined Welsh, Carson, Anderson & Stowe in August 1993. He has served as a General Partner of Welsh, Carson, Anderson & Stowe and focused on the information/business services industry during his entire tenure with the firm. He continues to serve as a General Partner for certain funds affiliated with Welsh, Carson, Anderson & Stowe. Prior to joining Welsh, Carson, Anderson & Stowe, Mr. Minicucci served as Senior Vice President and Chief Financial Officer of First Data Corporation. Before joining First Data Corporation, he served as Senior Vice President and Treasurer of the American Express Company. He also spent 12 years at Lehman Brothers where he was a Managing Director. Mr. Minicucci currently serves on the board of directors of the following public companies, Alliance Data Systems, Inc. and Amdocs Limited, and previously served on the board of directors of Retalix, Ltd. Over the course of his career Mr. Minicucci has served on the board of directors for 15 publicly and privately held companies. Mr. Minicucci received a B.A. from Amherst College in 1975 and received an M.B.A. from Harvard Business School in 1979. Mr. Minicucci was selected to serve on our board of directors because of his financial and investment expertise and his industry experience with other software technology companies.
Conner Mulvee has served as a member of our board of directors since February 2014. Mr. Mulvee has served as a Vice President at Welsh, Carson, Anderson & Stowe since January 2011. Prior to that, Mr. Mulvee served as an Associate at Welsh, Carson, Anderson & Stowe from August 2008 until January 2011. He focuses on investments in the information/business services and healthcare industries. Prior to joining Welsh, Carson, Anderson & Stowe, he spent two years in the investment banking division of Lehman Brothers. He earned an undergraduate degree from Amherst College in 2005. Mr. Mulvee was selected to serve on our board of directors because of his financial and investment expertise.
Frederick C. Peters II has served as a member of our board of directors since February 2014. He currently serves as the Chairman, President and Chief Executive Officer of Bryn Mawr Bank Corporation, or BMTC, a publicly traded company, and its principal subsidiary, The Bryn Mawr Trust Company. BMTC has approximately $2.1 billion of banking assets and $7.3 billion of wealth assets under management and administration and is listed on the Nasdaq Stock Market. Prior to joining BMTC in 2001, Mr. Peters started two community banks: National Bank of the Main Line in 1985 and First Main Line Bank in 1995. Mr. Peters began his banking career at Philadelphia National Bank in 1976 and held lending and executive positions at Hamilton Bank and Industrial Valley Bank prior to starting his first community bank. Mr. Peters has served on numerous non-profit boards including Main Line Health where he served first as Chairman of the Audit Committee and later as Chairman of the Finance Committee. He currently serves on the board of directors of the National Association of Corporate Directors Philadelphia Chapter and The Bryn Mawr Film Institute. In addition, Mr. Peters has been on the Board of Directors of the Federal Reserve Bank of Philadelphia since 2009 and is currently the Chairman of that banks Audit Committee. Mr. Peters graduated from Amherst College with a B.S. in Political Science. Mr. Peters was selected to serve on our board of directors because of his financial and investment expertise and his experience as a member of the board of directors of a public company.
81
Sanjay Swani has served as a member of our board of directors since April 2013. Mr. Swani is a member of the management committee of Welsh, Carson, Anderson & Stowe, having joined Welsh, Carson, Anderson & Stowe in 1999. He focuses on investments in the information/business services industry. Prior to joining Welsh, Carson, Anderson & Stowe, he was a Director with Fox Paine & Company, a San Francisco-based private equity firm. Mr. Swani also spent four years in the Mergers, Acquisitions & Restructuring Department and two years in the Debt Capital Markets Department of Morgan Stanley Dean Witter & Co. He earned an undergraduate degree from Princeton University in 1987 and concurrent degrees from the Harvard Law School and the MIT Sloan School of Management in 1994. Mr. Swani was selected to serve on our board of directors because of his financial and investment expertise.
Board of Directors Composition and Risk Oversight
Our board of directors consists of six members, two of whom qualify as independent according to the NYSE Listed Company Manual. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.
Our certificate of incorporation and bylaws provide that our board of directors is divided into three classes whose members serve three-year terms expiring in successive years. The terms of office of members of our board of directors are divided into three classes:
| Class I directors, whose term will expire at the annual meeting of the stockholders to be held in 2014; |
| Class II directors, whose term will expire at the annual meeting of the stockholders to be held in 2015; and |
| Class III directors, whose term will expire at the annual meeting of the stockholders to be held in 2016. |
Our Class I directors are Messrs. Minicucci and Mulvee, our Class II directors are Messrs. Levenson and Peters and our Class III directors are Messrs. Richison and Swani. At each annual meeting of stockholders, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following such election. Any vacancies in our classified board of directors will be filled by the remaining directors and the elected person will serve the remainder of the term of the class to which he or she is appointed. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.
In connection with the Reorganization, we and the Stockholders Agreement Parties entered into the Stockholders Agreement. Among other things, the Stockholders Agreement provides that upon the completion of this offering and for so long as the parties thereto continue to collectively hold 40% of our issued and outstanding shares of common stock, each party will vote and take all other necessary and desirable action within such partys control to (i) cause the authorized number of directors of our board of directors to be established at seven and (ii) elect to our board of directors:
| three representatives designated by the holders of a majority of the shares of common stock held by WCAS X and any of its affiliates to which shares of common stock are transferred pursuant to the Stockholders Agreement; |
| one representative designated by the holders of a majority of the shares of common stock held by WCAS Capital IV and any of its affiliates to which shares of common stock are transferred pursuant to the Stockholders Agreement; and |
| subject to certain conditions, one representative designated by the holders of a majority of the shares of common stock held by Chad Richison, Shannon Rowe, William Kerber, Jeffrey York, Robert J. Levenson and the Estate of Richard Aiello and any of their affiliates, or the Minority Holders, who shall be Chad Richison for so long as he is employed by us. |
82
As such, Welsh, Carson, Anderson & Stowe and its affiliates have effectively designated four representatives to our initial board of directors. Messrs. Levenson, Swani and Minicucci were designated by WCAS X. Mr. Mulvee was designated by WCAS Capital IV.
Our board of directors is responsible for, among other things, overseeing the conduct of our business; reviewing and, where appropriate, approving our long-term strategic, financial and organizational goals and plans; and reviewing the performance of our chief executive officer and other members of senior management. Our board of directors, as a whole and, following the completion of this offering, through its committees, has responsibility for the oversight of risk management. Our senior management is responsible for assessing and managing our risks on a day-to-day basis. Our audit committee will discuss with management our policies with respect to risk assessment and risk management and our significant financial risk exposures and the actions management has taken to limit, monitor or control such exposures, and our compensation committee will oversee risk related to compensation policies. Both our audit and compensation committees will report to the full board of directors with respect to these matters, among others.
Because the Stockholders Agreement Parties hold more than 50% of the voting power for the election of our directors, we have elected to be a controlled company under the NYSE Listed Company Manual. As a controlled company, exemptions under the NYSE Listed Company Manual exempt us from compliance with certain corporate governance requirements, including the requirements:
| that a majority of our board of directors consists of independent directors, as defined under the NYSE Listed Company Manual; |
| that any compensation committee or nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
| that any compensation committee or nominating and corporate governance committee have an annual performance evaluation. |
These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and the NYSE Listed Company Manual within the applicable time frame.
Committees
Our board of directors will establish the following committees prior to the completion of this offering: an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee will have the composition and primary responsibilities described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.
Audit Committee
Our audit committee oversees the accounting and financial reporting processes of the Company and the audit of the Companys financial statements. In that regard, our audit committee assists board oversight of: (i) the integrity of the Companys financial statements, (ii) the Companys compliance with legal and regulatory requirements, (iii) the independent auditors qualifications and independence, and (iv) the performance of the Companys internal audit function and independent auditors. Among other matters, the audit committee is responsible for the retention of our independent auditors; evaluating the qualifications, performance and independence of our independent auditors; reviewing the Companys annual and interim financial statements and discussing press releases, financial information and earnings guidance provided to analysts and rating agencies; discussing policies with respect to risk assessment and risk management; overseeing the Companys internal audit function; reviewing and ensuring the adequacy of the Companys internal control systems; reviewing and approving related party transactions; and annually reviewing the audit committee charter and the committees performance.
83
The current members of our audit committee are Messrs. Levenson, Minicucci and Peters with Mr. Peters serving as the chairman of the committee. All members of our audit committee meet the requirements for financial literacy under the NYSE Listed Company Manual and applicable SEC rules and regulations. Our board of directors has determined that Mr. Peters is an audit committee financial expert as defined under the applicable rules of the SEC, has the requisite financial management expertise as defined under the NYSE Listed Company Manual, Messrs. Levenson and Peters are also considered independent under applicable SEC rules and regulations and the NYSE Listed Company Manual. We expect to satisfy the independence requirements for the audit committee prior to the end of the transition period provided under applicable SEC rules and regulations and the NYSE Listed Company Manual for companies completing their initial public offering. The audit committee operates under a written charter that satisfies the applicable SEC rules and regulations and the NYSE Listed Company Manual.
Compensation Committee
Our compensation committee reviews and approves, or recommends that our board of directors approves, the compensation of our executive officers. Among other matters, the compensation committee reviews and approves corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives, and approves all stock option grants and other equity-related awards to our executive officers. The compensation committee also annually reviews the compensation committee charter and the committees performance.
The current members of our compensation committee are Messrs. Minicucci and Swani, with Mr. Minicucci serving as the chairman of the committee. None of the members of our compensation committee are independent under the applicable SEC rules and regulations and the NYSE Listed Company Manual and meet the definition of outside directors under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is responsible for identifying and recommending candidates for membership on our board of directors, including nominees recommended by stockholders, reviewing and recommending the composition of our committees, overseeing our code of business conduct and ethics, corporate governance guidelines and reporting and making recommendations to our board of directors concerning governance matters. The nominating and corporate governance committee also annually reviews the nominating and corporate governance committee charter and the committees performance. The current members of the nominating and corporate governance committee are Messrs. Minicucci and Swani, with Mr. Swani serving as chairman of the committee. None of the members of our nominating and corporate governance committee are independent under the NYSE Listed Company Manual and applicable SEC rules and regulations.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers currently serves or in the past year has served as a member of the board of directors or compensation or similar committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including our chief executive officer, chief financial officer and other principal executive and senior officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.investors.paycom.com. Our code of business conduct and ethics is a code of ethics, as defined in Item 406(b) of Regulation S-K. The information contained on, or accessible from, our website is not part of this prospectus by reference or otherwise. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.
84
Director Compensation
Upon completion of this offering, non-employee directors will receive annual fees for their service in the amount of $75,000 per year, payable two-thirds in shares of common stock and one-third in cash. The chairman of our board of directors receives an additional annual cash fee of $25,000. Audit committee members (other than the chairman) receive an additional annual cash fee $5,000 and the chairman of the audit committee receives an additional annual cash fee of $10,000. All directors are entitled to reimbursement for their reasonable out-of-pocket expenditures incurred in connection with their board or committee service.
Our directors received no compensation for their service as directors during the fiscal year ended December 31, 2013. The following table sets forth the number of equity incentive unit and option awards held by our non-employee directors that owned any such awards at December 31, 2013:
Name |
Units Outstanding
Subject to Unit Awards (#) |
Shares Outstanding
Subject to Option Awards (#) |
||||||
Richard Aiello (1) |
70 | | ||||||
Robert J. Levenson |
200 | |
(1) | Mr. Aiello ceased to serve as a member of our board of directors on February 28, 2014. |
(2) | In connection with the Reorganization, outstanding equity incentive units held by Messrs. Aiello and Levenson were converted into 220,060 and 628,745 shares of restricted stock, respectively. |
85
Overview of Executive Compensation
Our compensation committee makes the compensation decisions regarding our executive officers, including (i) Chad Richison, our chief executive officer, (ii) Craig E. Boelte, our chief financial officer, (iii) Jeffrey D. York, our chief sales officer and (iv) William X. Kerber III, our chief information officer, or collectively, the named executive officers.
We evaluate each executive officers performance for the prior year on an annual basis. Our chief executive officer, Mr. Richison, with respect to each executive officer other than himself, prepares a written evaluation of the executive officers with input from others within our company. The written evaluation focuses on the achievement of stated corporate and individual and performance criteria and the amount of contributions made to management and the leadership of our company. This process leads to a recommendation from the chief executive officer to the compensation committee with respect to each executive officers salary level, cash bonus, and whether or not equity incentive awards should be granted. The compensation committee (other than the chief executive officer) determines the salary level, cash bonus, and whether or not equity incentive awards should be granted to our chief executive officer.
Summary Compensation Table For Fiscal Years Ended December 31, 2013 and 2012
The following table contains information regarding compensation that was paid to our named executive officers for the fiscal years ended December 31, 2013 and 2012.
Name and Principal Position |
Year |
Salary
($) |
Bonus
($) |
Unit
Awards ($) (2) |
Non-Equity
Incentive Plan Compensation ($) (3) |
All Other
Compensation ($) (4) |
Total
($) |
|||||||||||||||||||||
Chad Richison (1) |
2013 | 534,788 | | 49,594 | 682,961 | 47,723 | (5) | 1,315,066 | ||||||||||||||||||||
Director, President and Chief Executive Officer | 2012 | 495,051 | 17,000 | 1,040,179 | 516,921 | 47,592 | (5) | 2,116,743 | ||||||||||||||||||||
Craig E. Boelte |
2013 | 280,954 | | 49,380 | 358,798 | 12,575 | 701,707 | |||||||||||||||||||||
Chief Financial Officer | 2012 | 260,020 | | 89,972 | 203,623 | 12,575 | 566,190 | |||||||||||||||||||||
Jeffrey D. York |
2013 | 343,363 | | 42,390 | 315,710 | 12,925 | 714,388 | |||||||||||||||||||||
Chief Sales Officer | 2012 | 330,028 | | 89,972 | 258,268 | 10,601 | 688,869 | |||||||||||||||||||||
William X. Kerber III |
2013 | 280,963 | | 49,380 | 269,107 | 12,575 | 612,025 | |||||||||||||||||||||
Chief Information Officer | 2012 | 260,028 | | 89,972 | 203,623 | 12,575 | 566,198 |
(1) | All amounts shown reflect compensation paid to Mr. Richison for his service as president and chief executive officer. Mr. Richison has elected not to receive additional compensation for his service as a director. |
(2) | Amounts shown do not reflect compensation actually received by the named executive officers. Rather, the amounts represent the aggregate grant date fair value of incentive units granted to each named executive officer in 2013 and 2012 computed in accordance with Accounting Standards Codification, or ASC, 718, CompensationStock Compensation , with the exception that the amount shown assumes no forfeitures. A discussion of the assumptions used in the calculation of these amounts are included in Note 9. Members Equity and Incentive Compensation in Holdings annual consolidated financial statements included in this prospectus. |
(3) | Amounts shown in this column represent the cash payment made to the named executive officer as performance-based cash bonuses. See Narrative Discussion Regarding Summary Compensation TablePerformance-Based Cash Bonuses for more details. |
(4) |
Amounts shown consist of insurance premiums paid by the Company, a monthly retainer for a supplemental medical plan and Company contributions to a 401(k) profit sharing plan for the benefit of the named executive officer. The amounts shown in this column also reflect the aggregate incremental cost of personal use of |
86
corporate aircraft by the named executive officer. Spouses and invited guests of executives occasionally fly on the corporate aircraft as additional passengers on business flights. In those cases, the aggregate incremental cost to us is a de minimis amount, and as a result, no amount is reflected in the table. |
(5) | In addition to the items listed in Note (4) above, the amounts shown also include country club dues and expenses and approximately $23,411 of lease payments for an automobile in each of 2013 and 2012. |
Narrative Discussion Regarding Summary Compensation Table
Executive Compensation Program Overview
The primary elements of our executive compensation program include:
| base salary; |
| cash bonuses; |
| equity incentive units; |
| performance-based cash bonuses; |
| retirement and other benefits; and |
| perquisites and personal benefits. |
Our compensation committee, after reviewing compensation information it considers relevant, has determined what it believes to be the appropriate level and mix of the various compensation components for our named executive officers. Ultimately, the objective in allocating between long-term and short-term compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our company and our stockholders.
Base Salary
We provide base salaries to our named executive officers to compensate them for services rendered during the fiscal year and to recognize their experience, skills, knowledge and responsibilities. Each of our named executive officers is currently party to an employment agreement. No formulaic base salary increases are provided to our named executive officers pursuant to the terms of their employment agreements. However, on an annual basis, our compensation committee reviews and evaluates, with input from our chief executive officer, the need for adjustment of the base salaries of our named executive officers. For additional information concerning the employment agreements, see Compensation Arrangements Adopted in Connection with this OfferingEmployment Agreements.
For 2012, Mr. Richison received an annual base salary of $495,051, Mr. York received an annual base salary of $330,028 and Mr. Boelte and Mr. Kerber received an annual base salary of $260,020 and $260,028, respectively. For 2013, Mr. Richison received an annual base salary of $534,788, Mr. York received an annual base salary of $343,363, and Mr. Boelte and Mr. Kerber received an annual base salary of $280,954 and $280,963, respectively. For 2014, Mr. Richison receives an annual base salary of $555,197, Mr. York receives an annual base salary of $356,400, and Mr. Boelte and Mr. Kerber each receive an annual base salary of $291,600.
Cash Bonuses
We generally only award performance-based cash bonuses to our named executive officers. However, in 2012 we awarded cash bonuses on a discretionary basis to our executive officers, including our named executive officers. For the named executive officers other than the Companys chief executive officer, the compensation committee, in consultation with the Companys chief executive officer, recommended cash bonuses for the boards approval. The compensation committee reviewed the performance of the Companys chief executive officer and recommended the bonus for the Companys chief executive officer to the board of directors. For 2012, the compensation committee awarded Mr. Richison a cash bonus in an amount equal to $17,000 or 3% of his base salary. None of the other named executive officers received a cash bonus for 2012. For 2013, the compensation committee did not award cash bonuses to any of our named executive officers.
87
Equity Incentive Units and Restricted Stock Awards
Our award of equity incentive units is the primary vehicle for offering long-term incentives to our executive officers, including our named executive officers. While we do not have any equity ownership guidelines for our named executive officers, we believe that equity incentive unit grants and restricted stock awards provide our named executive officers with a strong link to our long-term performance, create an incentive to achieve long-range performance goals and objectives and help to align the interests of our named executive officers and our stockholders. In 2012 and 2013, we issued equity incentive units to each of our named executive officers.
Material Terms of Equity Incentive Unit Grants
We have historically granted awards of equity incentive units to our named executive officers with a portion of the units being subject to time-based vesting conditions and another portion being subject to performance-based vesting conditions. Prior to the vesting of equity incentive units, the holder has no rights as a stockholder with respect to the shares subject to such unit, including voting rights or the right to receive dividends, dividend equivalents or distributions.
The following table sets forth the number of equity incentive units granted to our named executive officers during the fiscal year ended December 31, 2012, each of which were granted on April 3, 2012:
Name |
Number of
Management Incentive Units |
Number of
CEO Incentive Units |
||||||
Chad Richison |
9,359 | 126,067 | ||||||
Craig E. Boelte |
8,062 | | ||||||
Jeffrey D. York |
8,062 | | ||||||
William X. Kerber III |
8,062 | |
The following table sets forth the number of equity incentive units granted to our named executive officers during the fiscal year ended December 31, 2013, each of which were granted on October 14, 2013 (except for the units granted to Mr. York, which were granted on April 17, 2013):
Name |
Management
Incentive Units |
CEO
Incentive Units |
||||||
Chad Richison |
3,013 | | ||||||
Craig E. Boelte |
3,000 | | ||||||
Jeffrey D. York |
3,000 | | ||||||
William X. Kerber III |
3,000 | |
During 2012 and 2013, we granted management equity incentive units to each of our named executive officers and we granted CEO Incentive Units only to our chief executive officer only during 2012. 50% of the equity incentive units awarded to each of our named executive officers are subject to time-based vesting conditions and 50% of the units are subject to performance-based vesting conditions. The equity incentive units that are subject to time-based vesting conditions vest 20% on each of the first five anniversaries of the date of grant or upon the earlier sale of the Company. A sale of the Company includes (i) a transaction or series of transactions (including by way of merger, consolidation, or sale of equity) the result of which is that the holders of units of the Company immediately prior to such transaction, do not, after giving effect to such transaction, own, directly or indirectly, through one or more intermediaries, at least 50% of the units of the Company, or (ii) a sale, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the Companys assets determined on a consolidated basis to a person that is not affiliated with WCAS Holdings.
88
The equity incentive units that are subject to performance-based vesting conditions vest when the amount of cash, including cash dividends, distributions and proceeds, but excluding management fees, transaction-related fees and expense reimbursements with respect to, or in exchange for equity securities, or collectively, the Inflows, received by WCAS Holdings exceeds $280.4 million, as adjusted for payments made by WCAS Holdings with respect to or in exchange for securities after April 3, 2012 through the determination date, or the Outflows as follows. The equity incentive units vest 33% on the date for which the Inflows equal at least 2.0 times the Outflows and 100% on the date for which the Inflows equal at least 3.5 times the Outflows; provided the named executive officer is employed by us on such date. For any date on which the Inflows equal more than 2.0 times and less than 3.5 times the Outflows, the number of equity incentive units that are vested will be determined by straight-line interpolation.
25% of the CEO Incentive Units are subject to time-based vesting conditions and 75% of the units are subject to performance-based vesting conditions. The CEO Incentive Units that are subject to time-based vesting conditions vest 20% on each of the first five anniversaries of the date of grant or upon the earlier sale of the Company. The CEO Incentive Units that are subject to performance-based vesting conditions vest when the amount of the Inflows received by WCAS Holdings exceeds $386.3 million, as adjusted for payments made by WCAS Holdings with respect to or in exchange for securities after April 3, 2012 through the determination date, or the CEO Award Outflows. The CEO Incentive Units vest 33% on the date for which the Inflows equal at least 1.5 times the Outflows and 100% on the date on which either the Inflows equal at least (i) 2.0 times the CEO Award Outflows for a date on or prior to the second anniversary of the grant date or (ii) 2.5 times the CEO Award Outflows for a date following the second anniversary of the grant date; provided the chief executive officer continues to remain employed by us on such date. For any date on which the Inflows equal more than (i) 1.5 times and less than 2.0 times the CEO Award Outflows on or prior to the second anniversary of the grant date or (ii) 1.5 times and less than 2.5 times the CEO Award Outflows following the second anniversary of the grant date, the number of CEO Incentive Units that are vested will be determined by straight-line interpolation.
Material Terms of Restricted Stock Awards
Effective January 1, 2014, our outstanding equity incentive units were converted into shares of common and restricted stock as described in The Reorganization. The portion of the outstanding equity incentive units that had previously vested were converted into shares of common stock and the remaining portion of unvested outstanding equity incentive units were converted into shares of restricted stock. As a result, we granted shares of common stock and restricted stock to our named executive officers in connection with the Reorganization. A portion of the shares of restricted stock is subject to time-based vesting conditions and another portion is subject to performance-based vesting conditions. Prior to the vesting of restricted stock, the holder has certain rights as a stockholder with respect to the shares of restricted stock, including voting rights and the right to receive dividends, dividend equivalents or distributions; provided that the holder does not have the right to cash dividends and stock dividends are subject to the same restrictions as the restricted stock and shall vest as the restricted shares vest.
The following table sets forth the number of shares of our common and restricted stock that were granted to our named executive officers in connection with the Reorganization to replace the management incentive units and CEO Incentive Units which were granted to our named executive officers on April 3, 2012:
Management
Incentive Units |
CEO Incentive Units | |||||||||||||||
Name |
Number of
Shares of Common Stock |
Number of
Shares of Restricted Stock |
Number of
Shares of Common Stock |
Number of
Shares of Restricted Stock |
||||||||||||
Chad Richison |
39,701 | 357,309 | 254,987 | 4,844,765 | ||||||||||||
Craig E. Boelte |
34,199 | 307,792 | | | ||||||||||||
Jeffrey D. York |
34,199 | 307,792 | | | ||||||||||||
William X. Kerber III |
34,199 | 307,792 | | |
89
The following table sets forth the number of shares of our common and restricted stock that were granted to our named executive officers in connection with the Reorganization to replace the management incentive units that were granted to our named executive officers on October 14, 2013 (except for the units granted to Mr. York, which were granted on April 17, 2013):
Name |
Number of
Shares of Common Stock |
Number
of Shares of Restricted Stock |
||||||
Chad Richison |
| 121,833 | ||||||
Craig E. Boelte |
| 121,307 | ||||||
Jeffrey D. York |
| 127,192 | ||||||
William X. Kerber III |
| 121,307 |
With the exception of the shares of restricted stock granted to our chief executive officer, approximately 50% of the shares awarded to each of our named executive officers are subject to time-based vesting conditions and approximately 50% of the shares are subject to performance-based vesting conditions. The shares of restricted stock that are subject to time-based vesting conditions either vest: (i) 25% on each of the first four anniversaries of the date of grant of the management incentive units (for the shares of restricted stock granted to replace the equity incentive units awarded on April 3, 2012), provided that the person is employed by us on that date, (ii) 20% on each of the first five anniversaries of the date of grant of the management incentive units (for the shares of restricted stock granted to replace the equity incentive units awarded on October 14, 2013 or April 17, 2013), provided that the person is employed by us on that date, or (iii) upon a change in control. For purposes of our restricted stock award agreements, a change in control means: (i) a transaction or series of transactions in which any person becomes the beneficial owner of securities representing 30% or more of the combined voting power of our outstanding securities or 30% or more of our outstanding shares of our common stock, (ii) any merger or consolidation, or series of related transactions, which results in our voting securities outstanding immediately prior thereto failing to continue to represent at least 50% of the voting power of our voting securities, (iii) the sale or disposition of all or substantially all of our assets (or consummation of any transaction, or series of related transactions having a similar effect), (iv) during any consecutive twelve month period, the individuals who on the date of the award constitute the board of directors cease for any reason to constitute a majority of our board of directors, subject to certain exceptions, (v) our dissolution or liquidation or (vi) any transaction or series of related transactions having the substantial effect of any one or more of the foregoing. In the event of a change in control, all unvested shares of restricted stock not assumed by the surviving entity shall become fully vested immediately prior to the effective date of a change of control.
Shares of restricted stock subject to performance-based vesting conditions vest one-half upon the Company reaching a total enterprise value of $1.4 billion and one-half upon the Company reaching a total enterprise value of $1.8 billion, provided that the person is employed by us on that date. For purposes of our restricted stock award agreements, total enterprise value is defined as the sum of: (i) the product of (A) the volume weighted average price of a share of common stock not subject to vesting or other restrictions multiplied by (B) the number of outstanding shares of common stock, (ii) for each other class or series of equity securities of the Company, if any, the product of (A) the volume weighted average price per share for such class or series of such equity securities of the Company multiplied by (B) the number of shares of such class or series of such equity securities of the Company, and (iii) the principal amount of our outstanding funded indebtedness less the aggregate amount of cash and cash equivalents of the Company (exclusive of funds held on behalf of clients). The Companys total enterprise value includes outstanding shares of restricted stock and calculates the value of such shares as if there were no vesting or other restrictions.
Upon completion of this offering, all unvested shares of restricted stock will become fully vested in the event of the named executive officers death while performing his duties and responsibilities for the Company. In the event of a termination of service of the named executive officer due to disability, by the named executive officer for good reason (as defined above), by the Company without cause (as defined in the employment agreement), or death (other than while performing his duties and responsibilities for the Company), the Board
90
may, in its sole discretion, accelerate vesting of all or any portion of the unvested shares of restricted stock. Further, if the chief executive officers employment is terminated by the Company without cause (as defined in the employment agreement), all unvested shares of restricted stock subject to time-based vesting conditions will remain outstanding and eligible for vesting for one year following such termination of employment, and the board of directors may accelerate the vesting of the other remaining unvested shares of restricted stock, in its discretion. Other than as provided above, all unvested shares of restricted stock shall be forfeited upon the named executive officers termination of service or upon engaging in certain forfeiture activities involving violations of noncompetition, noninterference, non-solicitation provisions of his employment agreement.
Performance-Based Cash Bonuses
We award annual performance-based cash bonuses to certain members of our management, including our named executive officers, to emphasize pay-for-performance and to reward them for the achievement of specified corporate performance criteria. Each named executive officer is eligible to receive an annual performance-based cash bonus, which we refer to as an annual cash bonus, in an amount up to a fixed percentage of his base salary, or bonus percentage. Under the employment agreements, our named executive officers are eligible to receive a performance-based cash bonus equal to either 100% of their base salary (for Messrs. Richison and Boelte) or 75% of their base salary (for Messrs. York and Kerber).
Each of our compensation committee and our board of directors has authority, in its sole discretion, to adjust the bonus percentage and performance criteria each year in connection with its review of the executives performance and has authority to allow an executive to receive a bonus payment in excess of his or her annual cash bonus for exceptional performance. Further, our board of directors reviews the assessment of each executives performance conducted by the compensation committee with respect to the annual cash bonus and retains the authority, in its sole discretion, to modify the amount of the annual cash bonus above or below the amount recommended by the compensation committee.
Target Bonuses
For 2012, our chief executive officer was eligible for a bonus payout of up to 100% of his base salary, our chief financial officer, chief sales officer and chief information officer were each eligible for a bonus payout of up to 75% of their respective base salaries. For 2013, our chief executive officer and chief financial officer were each eligible for a bonus payout of up to 100% of their respective base salaries, our chief sales officer and chief information officer were each eligible for a bonus payout of up to 75% of their respective base salaries and other members of management were eligible for a bonus payout of between 25% and 50% of their respective base salaries, each as adjusted by the compensation committee based on achievement of our corporate performance criteria, in the event of exceptional individual or functional performance. The following table shows the 2012 and 2013 target bonus amounts as a percentage of base salary for each of our named executive officers.
Name |
2012 Target Bonus
Amount (as a percentage of base salary) |
2013 Target Bonus
Amount (as a percentage of base salary) |
||||||
Chad Richison |
100 | % | 100 | % | ||||
Craig E. Boelte |
75 | % | 100 | % | ||||
Jeffrey D. York |
75 | % | 75 | % | ||||
William X. Kerber III |
75 | % | 75 | % |
Corporate Performance Criteria
The corporate performance criteria that was used in determining the amount of performance bonuses for our named executive officers for 2012 and 2013 was GAAP revenue budget growth, with the exception of Mr. York,
91
whose corporate performance criteria was booked sales budget. For 2012 and 2013, the performance target for GAAP revenue budget growth was 31.4% and 31.4%, respectively, and the performance target for booked sales budget was $28.7 million and $37.2 million, respectively.
Our named executive officers are not awarded performance-based cash bonuses if less than 80% of the performance target is achieved. Our named executive officers are awarded performance-based cash bonuses equal to the amount of the performance target achievement when 80% or more of the performance target is achieved. For example, if 110% of the performance target is achieved, the named executive officer receives 110% of the cash bonus target.
Actual Bonuses
For 2012, the compensation committee determined that the actual performance achieved for GAAP revenue budget growth was 34.1% and for booked sales budget was $30.0 million. Based on these results, the compensation committee determined that the amount of the performance target achievement for the GAAP revenue budget growth was 108.6% and for booked sales budget was 104.4%. The actual bonuses paid by the compensation committee for 2012 were as follows.
Name |
Target 2012
Bonuses |
Actual 2012
Bonuses |
||||||
Chad Richison |
$ | 475,992 | $ | 516,921 | ||||
Craig E. Boelte |
$ | 187,500 | $ | 203,623 | ||||
Jeffrey D. York |
$ | 247,500 | $ | 258,268 | ||||
William X. Kerber III |
$ | 187,500 | $ | 203,623 |
For 2013, the compensation committee determined that the actual performance achieved for GAAP revenue budget growth was 40.1% and for booked sales budget was $45.6 million. Based on these results, the compensation committee determined that the amount of the performance target achievement for the GAAP revenue budget growth was 127.7% and for booked sales budget was 122.6%. The actual bonuses paid by the compensation committee for 2013 were as follows.
Name |
Target 2013
Bonuses |
Actual 2013
Bonuses |
||||||
Chad Richison |
$ | 534,788 | $ | 682,961 | ||||
Craig E. Boelte |
$ | 280,954 | $ | 358,798 | ||||
Jeffrey D. York |
$ | 257,522 | $ | 315,710 | ||||
William X. Kerber III |
$ | 210,722 | $ | 269,107 |
Retirement and Other Benefits
We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. We maintain broad-based benefits that are provided to all employees, including medical, dental, group life insurance, accidental death and dismemberment insurance, long and short term disability insurance, and a 401(k) plan. Our named executive officers are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees. The compensation committee in its discretion may revise, amend or add to the named executive officers benefits and perquisites if it deems it advisable.
401(k) Plan
We maintain a 401(k) profit sharing plan for our employees. Our 401(k) plan is intended to qualify as a tax-qualified plan under Section 401 of the Code so that contributions to our 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. Our 401(k) plan provides that each participant may contribute up to 100% of his or her pre-tax compensation, up to a statutory limit, which was $17,000 for 2012 and $17,500 for 2013. Participants who are at least 50 years old can also make
92
catch-up contributions, which in 2012 and 2013 was limited to an additional $5,500 above the statutory limit. Under our 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plans trustee, subject to participants ability to give investment directions by following certain procedures. Our 401(k) plan also permits us to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule.
We do not maintain any defined benefit pension plans or any nonqualified deferred compensation plans.
Perquisites and Other Personal Benefits
We provided our named executive officers with perquisites and other personal benefits in 2012 and 2013 that the compensation committee believed were reasonable and consistent with our overall compensation program. The perquisites and personal benefits that we provide to our named executive officers include matching 401(k) contributions, a supplemental medical plan that provides for visits and benefits with a private physician, key man insurance premium payments, country club dues and car lease payments. On limited occasions, we also allow named executive officers that are authorized to use chartered aircraft for business travel to, if space allows, bring family members or guests along on the trip. Because we reimburse for use of the aircraft only for business travel and we pay for the aircraft based on the flight hours regardless of the passenger load, the aggregate incremental cost to us for the additional passengers is a de minimis amount. The compensation committee periodically reviews the levels of perquisites and other personal benefits provided to our named executive officers.
Attributed costs, if any, of the personal benefits described above for the named executive officers for the years ended December 31, 2012 and 2013 are included in the summary compensation table under the heading All Other Compensation.
2013 Fiscal Year Outstanding Equity Awards At Fiscal Year-End Table
The following table lists all of the outstanding stock awards held on December 31, 2013 by each of the Companys named executive officers. The table also includes the value of the stock awards based on the estimated fair market value of our equity incentive units as of December 31, 2013:
Name |
Grant Date | Stock Awards | ||||||||||
Number of
Units of Stock That Have Not Vested (1)(2) |
Market
Value of Units of Stock That Have Not Vested ($) (3) |
|||||||||||
Chad Richison |
10/14/2013 | 3,013 | $ | 49,594 | ||||||||
4/30/2012 | 8,423 | $ | 231,879 | |||||||||
4/30/2012 | 119,764 | $ | 2,127,696 | |||||||||
Craig E. Boelte |
10/14/2013 | 3,000 | $ | 49,380 | ||||||||
4/30/2012 | 7,256 | $ | 199,744 | |||||||||
Jeffrey D. York |
4/17/2013 | 3,000 | $ | 42,390 | ||||||||
4/30/2012 | 7,256 | $ | 199,744 | |||||||||
William X. Kerber III |
10/14/2013 | 3,000 | $ | 49,380 | ||||||||
4/30/2012 | 7,256 | $ | 199,744 |
(1) | Equity incentive units vested in accordance with the terms described above and were rounded to the nearest whole unit. See Narrative Discussion Regarding Summary Compensation TableEquity Incentive UnitsMaterial Terms of Equity Incentive Units and Restricted Stock Awards for more details. |
93
(2) | In connection with the Reorganization, outstanding equity incentive units were converted into the corresponding number of shares of common stock or restricted stock set forth below for each of our named executive officers: |
Name |
Grant Date |
Number of Shares
of Common Stock |
Number of Shares of
Restricted Stock |
|||||||||
Chad Richison |
10/14/2013 | | 121,833 | |||||||||
4/30/2012 | 39,701 | 357,309 | ||||||||||
4/30/2012 | 254,987 | 4,844,675 | ||||||||||
Craig E. Boelte |
10/14/2013 | | 121,307 | |||||||||
4/30/2012 | 34,199 | 307,792 | ||||||||||
Jeffrey D. York |
4/17/2013 | | 127,192 | |||||||||
4/30/2012 | 34,199 | 307,792 | ||||||||||
William X. Kerber III |
10/14/2013 | | 121,307 | |||||||||
4/30/2012 | 34,199 | 307,792 |
See Executive CompensationNarrative Discussion Regarding Summary Compensation TableEquity Incentive Units and Restricted Stock Awards for more details.
(3) | The market value of our equity incentive units that have not vested is based on the estimated fair market value of our equity incentive units as of December 31, 2013, which was as follows: |
Management Time Vesting |
$ | 37.39 | ||
Management Performance Vesting |
$ | 19.64 | ||
CEO Time Vesting |
$ | 23.75 | ||
CEO Performance Vesting |
$ | 16.17 |
Compensation Arrangements Adopted in Connection with this Offering
Long-Term Incentive Plan
We adopted the 2014 Plan, effective January 1, 2014, which permits us to grant an array of equity-based incentive awards to our named executive officers and other key employees, key contractors and outside directors of the Company. The following is a summary of the material terms of the 2014 Plan.
Purpose . The purpose of the 2014 Plan is to:
| increase the interests of recipients of awards under the 2014 Plan in the Companys welfare; |
| advance the Companys interests by attracting and retaining qualified employees, outside directors and other persons providing services to the Company and/or its related companies; and |
| provide a means through which the Company may attract able persons as employees, contractors and outside directors. |
Administration . The 2014 Plan generally will be administered by the compensation committee of the board of directors. The compensation committee shall determine the recipients of awards, the types of awards to be granted and the applicable terms, provisions, limitations and performance requirements of such awards. The compensation committee will also have the authority to conclusively interpret the 2014 Plan and any award agreements under the plan. The compensation committee may delegate certain duties to one or more officers of the Company as provided in the 2014 Plan.
Types of Awards . The 2014 Plan will provide for grants of incentive stock options, or ISOs, nonqualified stock options, or NQSOs, stock appreciation rights, or SARs, restricted stock, restricted stock units, or RSUs, performance awards, dividend equivalent rights, and other awards.
94
| Stock Options . A stock option is a contractual right to purchase shares at a future date at a specified exercise price. The per share exercise price of a stock option will be determined by our compensation committee and many not be less than the fair market value of a share of our common stock on the grant date (or higher for certain employees receiving ISOs). The compensation committee will determine the date after which each stock option may be exercised and the expiration date of each option, which may not exceed ten years from the grant date. The compensation committee may grant either ISOs qualifying under Section 422 of the Code or NQSOs, provided that only employees of the Company and its subsidiaries (excluding subsidiaries that are not corporations) are eligible to receive ISOs. |
| SARs . SARs represent a contractual right to receive, in cash or shares, an amount equal to the appreciation of one share of our common stock from the grant date. The grant price of a SAR cannot be less than the fair market value of a share of our common stock on the grant date. The compensation committee will determine the date after which each SAR may be exercised and the expiration date of each SAR, which may not exceed ten years from the grant date. |
| Restricted Stock . Restricted stock is an award of shares of our common stock that are subject to restrictions on transfer and a substantial risk of forfeiture because of termination of service or failure to achieve certain performance conditions. Shares of restricted stock may be subject to restrictions which do not permit the holder to sell, transfer, pledge or assign his shares. The compensation committee will determine the vesting and forfeiture conditions for each grant of restricted stock. |
| RSUs . RSUs represent a contractual right to receive the value of a share of our common stock at a future date, subject to specified vesting and other restrictions determined by the compensation committee. The compensation committee will determine the vesting conditions, payment dates, and forfeiture conditions for each grant of RSUs. |
| Performance Awards . Performance awards, which may be denominated in cash or shares, will be earned on the satisfaction of performance conditions specified by our compensation committee at the end of a specified performance period. The compensation committee will determine the length of the performance period, the maximum payment value of an award, and the minimum performance goals required before payment will be made, so long as such provisions are not inconsistent with the terms of the 2014 Plan, and to the extent an award is subject to Section 409A of the Code, are in compliance with the applicable requirements of Section 409A of the Code and any applicable regulations or guidance. To the extent the Company determines that Section 162(m) of the Code shall apply to a performance award granted under the 2014 Plan, it is the intent of the Company that performance awards constitute performance-based compensation within the meaning of Section 162(m) of the Code and the regulations thereunder. Further, if complying with Section 162(m) of the Code, no participant may receive performance awards in any calendar year which have an aggregate value of more than $74,128,902, and if such awards involve the issuance of common stock, the aggregate value shall be based on the fair market value of such shares on the time of grant of such awards. In certain circumstances, the compensation committee may, in its discretion, determine that the amount payable with respect to certain performance awards will be reduced from the amount of any potential awards. However, the compensation committee may not, in any event, increase the amount of compensation payable to an individual upon the attainment of a performance goal intended to satisfy the requirements of Section 162(m) of the Code. With respect to a performance award that is not intended to satisfy the requirements of Section 162(m) of the Code, if the compensation committee determines in its sole discretion that the established performance measures or objectives are no longer suitable because of a change in the Companys business, operations, corporate structure, or for other reasons that the compensation committee deems satisfactory, it may modify the performance measures or objectives and/or the performance period. |
| Dividend Equivalent Rights . Dividend equivalent rights represent the right of the participant to receive cash or stock equal in value to the dividends that would have been paid on the shares of common stock specified in the award if such shares were held by the participant. |
95
| Other Awards . Our compensation committee is authorized to grant other forms of awards, based upon, payable in, or otherwise related to, in whole or in part, shares of common stock if the compensation committee determines that such other form of award is consistent with the purpose and restrictions of the 2014 Plan. |
Performance Measures . Awards of restricted stock, RSUs, performance awards and other awards under the 2014 Plan may be made subject to the attainment of performance goals relating to one or more business criteria used to measure the performance of the Company as a whole or any business unit of the Company, which, where applicable, shall be within the meaning of Section 162(m) of the Code and consist of one or more or any combination of the following criteria: cash flow; cost; revenues; sales; ratio of debt to debt plus equity; net borrowing, credit quality or debt ratings; profit before tax; economic profit; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; gross margin; earnings per share (whether on a pre-tax, after-tax, operational or other basis); operating earnings; capital expenditures; expenses or expense levels; economic value added; ratio of operating earnings to capital spending or any other operating ratios; free cash flow; net profit; net sales; net asset value per share; the accomplishment of mergers, acquisitions, dispositions, public offerings or similar extraordinary business transactions; sales growth; price of the Companys common stock; return on assets, equity or stockholders equity; market share; inventory levels, inventory turn or shrinkage; or total return to stockholders, or the Performance Criteria. Any Performance Criteria may be used to measure the performance of the Company as a whole or any business unit of the Company and may be measured relative to a peer group or index. Any Performance Criteria may include or exclude (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, (iv) the effect of a merger or acquisition, as identified in the Companys quarterly and annual earnings releases, or (v) other similar occurrences. In all other respects, Performance Criteria shall be calculated in accordance with the Companys financial statements, under generally accepted accounting principles, or under a methodology established by the compensation committee prior to the issuance of an award which is consistently applied and identified in the audited financial statements, including footnotes, or the Compensation Discussion and Analysis section of the Companys annual report. However, to the extent Section 162(m) of the Code is applicable, the compensation committee may not in any event increase the amount of compensation payable to an individual upon the attainment of a performance goal.
Authorized Shares . The Company has reserved 11,350,881 of our shares of common stock for issuance pursuant to the 2014 Plan, of which 100% may be delivered pursuant to ISOs. In addition, the maximum number of shares of common stock with respect to which stock options or SARs may be granted to an officer of the Company subject to Section 16 of the Exchange Act of 1934, as amended, or a covered employee as defined in Section 162(m)(3) of the Code during any calendar year is limited to 5,323,907 shares of common stock. To the extent any award under the 2014 Plan is forfeited, expired or cancelled, then the number of shares of common stock covered by the award or stock option so forfeited, expired or canceled will again be available for awards under the 2014 Plan.
Capital Adjustments . In the event that any extraordinary dividend or other extraordinary distribution, recapitalization, stock split, reverse stock split, rights offering, reorganization, merger, consolidation, split-up, spin-off, split-off, combination, subdivision, repurchase, or exchange of common stock or other securities of the Company, issuance of warrants or other rights to purchase common stock or other securities of the Company, or other similar corporate transaction or event affects the fair value of an award, the compensation committee shall adjust any or all of the following so that the fair value of the award immediate after the transaction or event is equal to the fair value of the award immediately prior to the transaction or event:
| the number of shares and type of common stock (or the securities or property) which thereafter may be made the subject of awards; |
| the number of shares and type of common stock (or other securities or property) subject to outstanding awards; |
96
| the number of shares and type of Common Stock (or other securities or property) specified as the annual per-participant limitation specified in the 2014 Plan; |
| the option price of each outstanding award; |
| the amount, if any, the Company pays for forfeited shares of common stock; and |
| the number of or SAR price of shares of common stock then subject to outstanding SARs previously granted and unexercised under the plan, to the end that the same proportion of the Companys issued and outstanding shares of common stock in each instance shall remain subject to exercise at the same aggregate SAR price, provided that, the number of shares of common stock (or other securities or property) subject to any award shall always be a whole number. |
Notwithstanding the foregoing, no adjustment shall be made or authorized to the extent that such adjustment would cause the 2014 Plan or any award to violate Section 422 of the Code or Section 409A of the Code. All such adjustments must be made in accordance with the rules of any securities exchange, stock market, or stock quotation system to which the Company is subject.
Eligibility . Any employees, contractors and outside directors whose judgment, initiative and efforts contributed or may be expected to contribute to the successful performance of the Company are eligible to receive awards under the 2014 Plan.
Vesting; Termination of Service . The compensation committee, in its sole discretion, may determine that an award will be immediately vested in whole or in part, or that all or any portion may not be vested until a date, or dates, subsequent to its grant date, or until the occurrence of one or more specified events, subject in any case to the terms of the 2014 Plan. If the compensation committee imposes conditions upon vesting, then, except as otherwise provided below, subsequent to the grant date the compensation committee may, in its sole discretion, accelerate the date on which all or any portion of the award may be vested. Full Value Awards (i.e., restricted stock or RSUs) that constitute performance awards must vest no earlier than one year after the date of grant, and Full Value Awards that are payable upon the completion of future services must vest no earlier than over the three year period commencing on the date of grant. Notwithstanding the foregoing, the compensation committee may, in its sole discretion, accelerate the vesting or waive any applicable restriction period for such Full Value Awards, provided that the shares of common stock subject to such awards shall be Exempt Shares (as defined in the 2014 Plan), unless such acceleration or waiver occurs by reason of the participants death, disability, retirement, or occurrence of a change in control. The number of Exempt Shares is limited to 10% of the number of shares available for issuance under the 2014 Plan, plus the total number of shares subject to awards that are received in exchange for incentive units in Paycom Payroll Holdings, LLC. The compensation committee may impose on any award, at the time of grant or thereafter, such additional terms and conditions as the compensation committee determines, including terms requiring forfeiture of awards in the event of a participants termination of service. The compensation committee will specify the circumstances under which performance awards may be forfeited in the event of a termination of service by a participant prior to the end of a performance period or settlement of awards. Except as otherwise determined by the compensation committee, restricted stock will be forfeited upon a participants termination of service during the applicable restriction period.
Change in Control . Upon the effective date of any change in control (as defined in the 2014 Plan), merger, consolidation or share exchange, or any issuance of bonds, debentures, preferred or preference stocks ranking prior to or otherwise affecting the common stock or the rights thereof (or any rights, options, or warrants to purchase same), or any proposed sale of all or substantially all of the assets of the Company, or of any dissolution or liquidation of the Company, all awards granted under the 2014 Plan may be cancelled by the Company upon (i) notice and a ten (10) day period during which the participant is permitted to purchase such shares of common stock subject to such awards or (ii) payment to the holder of an amount equal to a reasonable estimate of the difference between the fair market value of a share of stock underlying such award and the price per share of such award to be paid by the participant, multiplied by the number of shares subject to the award.
97
Transferability . Awards under the plan generally may not be transferred, assigned, pledged, hypothecated or otherwise conveyed or encumbered other than by will or the laws of descent and distribution; provided, however, that the compensation committee may permit transfers to or for the benefit of the participants family.
Effective Date and Expiration; Termination and Amendment . The 2014 Plan became effective on January 1, 2014, subject to and conditioned upon stockholder approval, and will terminate on January 1, 2024, unless it is terminated earlier by our board of directors. No awards may be made under the 2014 Plan after its expiration date, but awards made prior thereto may extend beyond that date. Our board of directors may at any time and from time to time, without the consent of the participants, alter, amend, revise, suspend, or discontinue the 2014 Plan in whole or in part. Our board of directors does not need stockholder approval to amend our 2014 Plan unless required by any securities exchange or inter-dealer quotation system on which the common stock is listed or by applicable law. Unless required by law, no action by our board of directors regarding amendment or discontinuance of the 2014 Plan may adversely affect any rights of any participants or obligations of the Company to any participants with respect to any outstanding award under the 2014 Plan without the consent of the affected participant.
Employment Agreements
On December 30, 2013, we entered into employment agreements with each of our named executive officers, each of which were effective on, and not effective until, January 1, 2014. With the exception of the annual compensation (base salary and annual bonus potential), the material terms of the employment agreements of all four of our named executive officers are substantially the same. The summary of the employment agreements below does not contain complete descriptions of all provisions of the employment agreements of our named executive officers, copies of which will be included as exhibits to the registration statement of which this prospectus forms a part. See Where You Can Find Additional Information.
Under the employment agreements, Mr. Richison receives an annual base salary of $555,197, Mr. Boelte receives an annual base salary of $291,600, Mr. York receives an annual base salary of $356,400 and Mr. Kerber receives an annual base salary of $291,600. Each named executive officer is eligible to receive an annual bonus equal to 100% of his base salary (for Messrs. Richison and Boelte) or 75% of his base salary (for Messrs. York and Kerber), with the amount of such bonus to be determined by our compensation committee in accordance with the plans, policies and procedures adopted by the compensation committee from time to time.
The employment agreements also provide that each named executive officer is eligible to participate in, or receive benefits under, the Companys executive benefit plan and any plan or arrangement made available to our employees, including any health, dental, vision, disability, life insurance, 401(k), or other retirement programs in accordance with the terms and conditions of such plans or arrangements. Each named executive officer is also entitled to vacation time, Company automobile and reimbursement of business expenses. In addition, we have agreed to provide Mr. Richison the use of a private aircraft, home security while he travels on Company business and a country club membership.
In connection with the employment agreements, each named executive officer agreed to confidentiality, noncompetition, noninterference and intellectual property protection provisions.
The employment agreements have initial terms of three (3) years following the consummation of this offering and automatically renew for successive one (1) year periods, unless earlier terminated by the Company or the named executive officer. Each named executive officers employment terminates upon death, disability, termination by the Company with or without cause, or termination by the named executive officer with or without good reason. In each case, the named executive officer is entitled to (i) payment of any earned but unpaid salary and accrued but unused vacation time and (ii) payment of any business expenses incurred but not reimbursed. In addition, if the named executive officers employment is terminated by the Company without cause or by the named executive officer with good reason, subject to the execution and return of a release of claims, the named executive officer is entitled to (i) continuation of his base salary for the length of the
98
remaining Restricted Period following his termination, (ii) continuation of health insurance benefits for the length of the remaining Restricted Period, and (iii) a pro rata amount of the bonus the named executive officer would have earned as determined by the Compensation Committee for the year in which the termination occurred. For purposes of the employment agreements, after the offering, the Restricted Period will elapse upon the later of thirty-six (36) months following the consummation of the offering or twelve (12) months following the named executive officers date of termination of employment.
Each of the employment agreements define cause as (i) the repeated failure to perform such duties as are lawfully requested by the board of directors, (ii) the failure by named executive officer to observe material policies of the Company and its subsidiaries, (iii) gross negligence or willful misconduct in the performance of his duties, (iv) the material breach of employment or any non-competition, non-solicitation or similar restrictive agreement with the Company, (v) fraud, embezzlement, disloyalty or dishonesty with respect to the Company, (vi) use of illegal drugs or repetitive abuse of other drugs or alcohol which interferes with the performance of his duties, or (vii) the commission of any felony or of a misdemeanor involving dishonesty, disloyalty or moral turpitude. Each of the employment agreements define good reason as (i) any material reduction by the Company in the named executive officers base salary without prior consent, (ii) following a change in control, any change in the named executive officers status, reporting, duties or position that represents a demotion or diminution from such named executive officers prior status, or (iii) any material breach by the Company of the employment agreement between the Company and the named executive officer.
In connection with the employment agreements, we issued shares of restricted stock under our 2014 Plan to each of our named executive officers on January 1, 2014 to replace unvested management incentive units held by our named executive officers prior to the Reorganization. These grants are designed to provide our named executive officers with shares of restricted stock equivalent in value to the management incentive units they held prior to the Reorganization and are subject to the terms of the respective restricted stock award agreements with each officer. Our named executive officers were issued shares of restricted stock in the following amounts:
Name |
Number of Shares of
Restricted Stock Subject to Time Vesting Awards (1) |
Number of Shares of
Restricted Stock Subject to Performance Vesting Awards (1) |
||||||
Chad Richison |
1,239,670 | 4,084,237 | ||||||
Craig E. Boelte |
197,451 | 231,648 | ||||||
Jeffrey D. York |
200,396 | 234,588 | ||||||
William X. Kerber III |
197,451 | 231,648 |
(1) | For additional information concerning the vesting conditions of the restricted stock, see Executive CompensationNarrative Discussion Regarding Summary Compensation TableEquity Incentive Units and Restricted Stock Awards. |
99
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the executive officer and director compensation arrangements discussed above under Executive Compensation, we describe transactions since January 1, 2010 to which we have been a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest below.
The Reorganization
In anticipation of this offering, we consummated the Reorganization as described under The Reorganization, which description is incorporated by reference herein.
2017 Note
In connection with the Reorganization, we assumed the 2017 Note that was issued by WCAS Holdings payable to WCAS X. As of March 31, 2014, the outstanding principal amount of the 2017 Note was $46.2 million (which excluded accrued interest of $1.6 million). The 2017 Note is due on April 3, 2017 and interest is payable at an annual rate of 14.0%, payable semiannually in arrears on June 30 and December 31 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the note that is due and payable on any payment date, provided that such amount of accrued interest shall be added to the principal amount of the note on such interest payment date (with the accrued but unpaid interest bearing interest at an annual rate of 14.0%). As of March 31, 2014, such option had not been elected and all interest had been paid in cash.
Stockholders Agreement
Election of Directors
In connection with the Reorganization, we and the Stockholders Agreement Parties entered into the Stockholders Agreement. Among other things, the Stockholders Agreement provides that upon the completion of this offering and for so long as the parties thereto continue to collectively hold 40% of our issued and outstanding shares of common stock, each party will vote and take all other necessary and desirable action within such partys control to (i) cause the authorized number of directors of our board of directors to be established at seven and (ii) elect to our board of directors:
| three representatives designated by the holders of a majority of the shares of common stock held by WCAS X and any of its affiliates to which shares of common stock are transferred pursuant to the stockholders agreement; |
| one representative designated by the holders of a majority of the shares of common stock held by WCAS Capital IV and any of its affiliates to which shares of common stock are transferred pursuant to the stockholders agreement; and |
| subject to certain conditions, one representative designated by the holders of a majority of the shares of common stock held by the Minority Holders, who shall be Chad Richison for so long as he is employed by us. |
As such, Welsh, Carson, Anderson & Stowe and its affiliates have effectively designated four representatives to our initial board of directors. Messrs. Levenson, Swani and Minicucci were designated by WCAS X. Mr. Mulvee was designated by WCAS Capital IV.
100
Termination
The Stockholders Agreement will terminate upon the latest of the date on which: (i) Chad Richison ceases to be our chief executive officer, (ii) the date on which Chad Richison ceases to be a director and (iii) the parties to the Stockholders Agreement collectively cease to own less than 40% of our issued and outstanding shares of common stock.
Registration Rights Agreement
In connection with the Reorganization, we and Payroll, the WCAS Funds, WCAS Holdings. the Estate of Richard Aiello, Robert J. Levenson, Sue Ann Jordan, Chad Richison, Jeffrey D. York and certain entities affiliated with these individuals became parties to a registration rights agreement, or the Registration Rights Agreement. After this offering, the parties to the Registration Rights Agreement will be entitled to certain rights with respect to registration of shares of our common stock under the Securities Act. These shares are referred to as registrable securities. The holders of these registrable securities will possess the registration rights contained in the Registration Rights Agreement that are described in additional detail below.
Demand Registration Rights
Under the Registration Rights Agreement, upon the written request of the holders of a majority of the registrable securities owned by WCAS Holdings and its affiliates to register all or part of their registrable securities on a registration statement under the Securities Act, we will be obligated to register the sale of all registrable securities that holders may request in writing to be registered within 20 days of the mailing of a notice by us to all holders of such registration. The demand registration rights may not be exercised until six months after the date of the execution of the underwriting agreement. We are required to effect no more than four registration statements on Form S-1, subject to certain exceptions, and an unlimited number of registration statements on Form S-3. We may postpone the filing of a registration statement for up to 120 days once in a 12-month period if in the good faith judgment of our board of directors such registration would be materially harmful to our economic prospects, and we are not required to effect the filing of a registration statement within six months following the effective date of, a previous registration of the registrable securities.
Piggyback Registration Rights
If we register any of our securities for public sale, we will have to register all registrable securities that the holders of such securities request in writing be registered within 20 days of mailing of notice by us to all holders of the proposed registration, subject to certain exceptions. However, this right does not apply to this offering, a registration statement on Form S-8 or S-4 or a demand registration. The managing underwriter of any underwritten offering will have the right to limit, due to marketing reasons, the number of shares registered by these holders.
Form S-3 Registration Rights
To the extent we are eligible to use a registration statement on Form S-3, the holders of a majority of the registrable securities owned by WCAS Holdings and its affiliates can request that we register all or a portion of their shares on a registration statement on Form S-3. We are required to use our best efforts to file one or more registration statements on Form S-3 upon the exercise of these rights, subject to certain exceptions.
Registration Expenses
We are required to pay all expenses incurred in connection with each of the registrations described above, except for underwriting discounts and commissions. We have also agreed to pay the expenses incurred by WCAS Holdings and its affiliates in connection with the registration of shares of common stock in this offering, which is currently approximately $656,000.
101
Expiration of Registration Rights
The registration rights described above will survive our initial public offering and will terminate as to any stockholder as such time as the stockholder no longer holds shares of common stock.
April 2012 Corporate Reorganization
Corporate Reorganization
In April 2012, Holdings was created and acquired 100% of the equity interests in Payroll pursuant to a corporate reorganization, or the April 2012 Corporate Reorganization. The April 2012 Corporate Reorganization was accomplished through the following steps:
| Payroll formed a new wholly-owned limited liability company subsidiary, Holdings, and Holdings formed a new wholly-owned limited liability company subsidiary, Paycom Payroll Merger Sub, LLC, or Merger Sub; |
| Merger Sub merged with and into Payroll, with Payroll remaining as the surviving entity and a wholly-owned subsidiary of Holdings; |
| Holdings issued the 2022 Note, a $18.8 million note payable to WCAS Capital IV, an affiliate of Welsh, Carson, Anderson & Stowe, in exchange for cash of $16.4 million and a discount of approximately $2.4 million; |
| WCAS CP IV Blocker, Inc., a subsidiary of WCAS Capital IV, purchased 6,839 Series A Preferred Units of Holdings for $2,409,122; and |
| Holdings distributed to its members either (i) cash or (ii) equivalent value of new 14% Series C Preferred Units, as elected by the members. |
Related Party Distribution
In connection with the April 2012 Corporate Reorganization, we paid a $18.8 million cash distribution to our common unit holders on a pro rata basis, including to our executive officers and certain of their affiliated entities.
Related Party Debt
In connection with the April 2012 Corporate Reorganization, we entered into the 2022 Note with WCAS Capital IV. WCAS Capital IV is an affiliate of Welsh, Carson, Anderson & Stowe. The 2022 Note is due on April 3, 2022 and interest accrues at an annual rate of 10% and is payable semiannually in arrears on December 31 and June 30 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the 2022 Note that is due and payable on any payment date, provided that such amount of accrued interest shall be multiplied by 1.3 and added to the principal amount of the note on such interest payment date (with the result that such interest will have accrued at an effective rate of 13.0% instead of 10.0% through such payment date). As of December 31, 2013, such option had not been elected and all interest had been paid in cash. As of December 31, 2013 and March 31, 2014, the outstanding principal amount of the 2022 Note was $14.7 million and $14.7 million, respectively, which included an unamortized discount of $4.1 million and $4.1 million, respectively.
Payables
At December 31, 2013 and 2012, Holdings owed $103,447 and $83,089, respectively, to Welsh, Carson, Anderson and Stowe and certain of their affiliates, representing tax distributions and travel expenses paid by Welsh, Carson, Anderson and Stowe and charged to Holdings.
102
Repurchase of Incentive Units
We entered into a Limited Liability Company Unit Redemption Agreement, effective as of January 26, 2013, pursuant to which we purchased 2,605 incentive units from John Kerber at a purchase price of $260.21 per unit, which price was based on a third party appraisal and an internal appraisal. The incentive units were purchased from John Kerber for an aggregate purchase price of approximately $677,847. John Kerber is one of our former employees and the brother of William X. Kerber III, our chief information officer.
Lease of Office Space
During 2014, we paid rent on our Dallas office space in the amount of $41,390. During the years ended December 31, 2013, 2012 and 2011, we paid rent on our Dallas office space in the amounts of $254,000, $267,000 and $257,000, respectively. The Dallas office building is owned by 417 Oakbend, LP, a Texas limited partnership. Jeffrey D. York, our Chief Sales Officer, owns a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP.
Real Property Agreements
During 2012 and 2013, we had the following related party transactions with Kilpatrick Partners, L.L.C., or Kilpatrick Partners. Mr. Richison, our President and Chief Executive Officer, is the manager of, and Mr. Richison and his wife own 100% of, Kilpatrick Partners.
| We entered into a Real Property Purchase Agreement, dated November 28, 2012, with Kilpatrick Partners pursuant to which we purchased approximately 17.6 acres of land for the construction of a second building at our corporate headquarters in December 2012. The land was purchased from Kilpatrick Partners for a purchase price of approximately $2,324,084, which valuation was determined by a third party appraiser. |
| We entered into a Real Property Purchase Agreement, dated October 16, 2013, with Kilpatrick Partners pursuant to which we purchased approximately 18.3 acres of land adjacent to our corporate headquarters in November 2013. The land was purchased from Kilpatrick Partners for a purchase price of approximately $4,788,586, which valuation was determined by a third party appraiser. |
| We entered into a Right of First Refusal Agreement, dated October 4, 2013, or the Right of First Refusal Agreement, with Kilpatrick Partners pursuant to which we were granted a right of first refusal to purchase approximately 28.1 acres of land adjacent to our corporate headquarters. Pursuant to the Right of First Refusal Agreement, we have the right to purchase any portion of the covered property for ten days after Kilpatrick Partners receipt of a third party bona fide offer to purchase the property. |
Indemnification of Directors and Officers
We have entered and intend to continue to enter into indemnification agreements with our directors which, subject to certain exceptions, require us to indemnify such persons to the fullest extent permitted by applicable law, including indemnification against certain expenses, including attorneys fees, judgments, fines or penalties or other amounts paid in settlement in connection with any legal proceedings to which the director was, or is threatened to be made, a party by reason of the fact that such director is or was a director, officer, employee, fiduciary or agent of the Company or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the express written request of the Company, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, the best interest of the Company and, with respect to any criminal proceeding, in a manner in which such person would have had no reasonable cause to believe his conduct was unlawful. Subject to certain limitations, these indemnification agreements also require us to advance expenses to our directors in advance of the final disposition of any action or proceeding for which indemnification is required or permitted.
103
Contribution Agreement
Under the terms of a contribution agreement that was entered into in connection with the Reorganization, we are required to direct a portion of any repayment of the 2017 Note to the Estate of Richard Aiello and Mr. Levenson and certain of their affiliated or related entities. The amount of these cash payments will be deemed have been paid to WCAS X and WCAS Management Corporation. We anticipate being required to make an aggregate cash payment of approximately $82,000 to such persons that will be allocated based on their pro rata share of the total outstanding Series B Preferred Units of Holdings held immediately prior to the Reorganization. See Use of Proceeds.
Directed Share Program
Chad Richison, our president, chief executive officer and director, Craig E. Boelte, our chief financial officer, William X. Kerber III, our chief information officer and Frederick C. Peters II, our director, on behalf of themselves and certain of their affiliates, have indicated an interest in purchasing an aggregate of up to approximately $1.3 million in shares of our common stock in this offering pursuant to the Directed Share Program. For more information, see UnderwritingDirected Share Program.
Review, Approval or Ratification of Transactions with Related Parties
We have adopted a formal written policy that our executive officers, directors, holders of more than 5% of any class of our voting securities, and any member of the immediate family of and any entity affiliated with any of the foregoing persons, are not permitted to enter into a related party transaction with us, in which the amount involved exceeds $120,000, without the prior review and approval of our audit committee. In approving or rejecting any such proposal, our audit committee will consider all of the relevant facts and circumstances of the related party transaction and the related partys relationship and interest in the transaction. All of the transactions described above were entered into prior to the adoption of this policy, except for the entry into the Stockholders Agreement, Registration Rights Agreement, Real Property Purchase Agreement, dated October 16, 2013 and the Right of First Refusal Agreement. All of the transactions described above were either approved or ratified in accordance with the terms of this policy.
104
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 2014, and as adjusted to reflect the sale of common stock offered by us in our initial public offering, for:
| each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our voting securities; |
| each of our directors; |
| each of our named executive officers; |
| all of our directors and executive officers as a group; and |
| each of the selling stockholders. |
We have determined beneficial ownership in accordance with the rules of the SEC. Under such rules, a person is generally deemed to beneficially own a security if such person has sole or shared voting or investment power with respect to that security, including with respect to options and warrants that are currently exercisable or exercisable within 60 days. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to community property laws where applicable. Each of the persons and entities named in the table below acquired their shares of common stock pursuant to the Reorganization. See The Reorganization for additional information.
Applicable percentage ownership is based on 53,808,304 shares of common stock outstanding at March 31, 2014. For purposes of the table below, we have assumed that 4,606,882 shares of common stock will be issued by us in our initial public offering and that the underwriters will not exercise their option to purchase up to an additional 996,750 shares of common stock. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all unvested shares of restricted stock because holders of unvested restricted stock under the 2014 Plan hold the right to vote such stock. The table below excludes any shares of common stock that may be purchased through the Directed Share Program.
Shares Beneficially
Owned Prior to Offering |
Shares Being
Offered |
Shares Beneficially
Owned After Offering |
||||||||||||||||||
Name of Beneficial Owner (1) |
Number |
% |
Number |
% |
||||||||||||||||
5% Stockholders: |
||||||||||||||||||||
Welsh, Carson, Anderson & Stowe X, L. P. (2) |
30,425,136 | 56.5 | 1,813,105 | 28,612,031 | 49.0 | |||||||||||||||
WCAS Capital Partners IV, L. P. (2) |
323,307 | * | 19,267 | 304,040 | * | |||||||||||||||
WCAS Management Corporation (2) |
163,337 | * | 9,734 | 153,603 | * | |||||||||||||||
Ernest Group, Inc. (3) |
7,170,999 | 13.3 | | 7,170,999 | 12.3 | |||||||||||||||
Non-Employee Directors: |
||||||||||||||||||||
Robert J. Levenson (4) |
628,745 | 1.2 | 152,000 | 476,745 | * | |||||||||||||||
Rob Minicucci |
| | | | | |||||||||||||||
Conner Mulvee |
|
|
|
| | | | |||||||||||||
Frederick C. Peters II |
| | | | | |||||||||||||||
Sanjay Swani |
| | | | | |||||||||||||||
Named Executive Officers: |
||||||||||||||||||||
Chad Richison (6) |
13,018,729 | 24.2 | | 13,018,729 | 22.3 | |||||||||||||||
Craig E. Boelte (7) |
545,769 | 1.0 | | 545,769 | * | |||||||||||||||
Jeffrey D. York (8) |
1,367,391 | 2.5 | | 1,367,391 | 2.3 | |||||||||||||||
William X. Kerber III (9) |
1,343,175 | 2.5 | | 1,343,175 | 2.3 | |||||||||||||||
Others: |
||||||||||||||||||||
The Estate of Richard Aiello (10) |
220,060 | * | 44,012 | 176,048 | * | |||||||||||||||
All directors and current executive officers as a group (9 persons) |
16,903,809 | 31.4 | 152,000 | 16,751,809 | 28.7 |
* | Less than one percent of common stock outstanding. |
105
(1) | Unless otherwise indicated, the address of each beneficial owner in the table above is c/o Paycom Software, Inc., 7501 W. Memorial Road, Oklahoma City, Oklahoma 73142. |
(2) | The stockholders are WCAS X, WCAS Capital IV and WCAS Management Corporation. WCAS X Associates LLC, or X Associates, is the general partner of WCAS X. The managing members of X Associates are Pat Welsh, Bruce Anderson, Russ Carson, Tony de Nicola, Paul Queally, Jon Rather, Sanjay Swani, Scott Mackesy, Sean Traynor, Eric Lee, Mike Donovan, Brian Regan, Tom Scully and Tony Ecock. As a result, and by virtue of the relationships described above, each of the managing members of X Associates may be deemed to share beneficial ownership of the shares owned by WCAS X. The general partner of WCAS Capital IV is WCAS CP IV Associates LLC, or CP Associates. The managing members of CP Associates are Pat Welsh, Bruce Anderson, Russ Carson, Tony de Nicola, Paul Queally, Jon Rather, Sanjay Swani, Scott Mackesy, Sean Traynor, Eric Lee, Mike Donovan, Brian Regan, Tom Scully and Tony Ecock. As a result, and by virtue of the relationships described above, each of the managing members of CP Associates may be deemed to share beneficial ownership of the shares owned by WCAS Capital IV. WCAS Management Corporation is an affiliate of Welsh, Carson, Anderson & Stowe. The members of the board of directors of WCAS Management Corporation are Jon Rather, Paul Queally, Tony de Nicola and Russ Carson. As a result, and by virtue of the relationships described above, each of the directors of WCAS Management Corporation may be deemed to share beneficial ownership of the shares owned by WCAS Management Corporation. The address of each of the entities identified in this footnote is 320 Park Avenue, Suite 2500, New York, New York 10022. |
(3) | Ernest Group, Inc. is a private corporation that is wholly owned by Mr. Richison and certain trusts for Mr. Richisons children, for which Mr. Richison serves as trustee. Mr. Richison may be deemed to beneficially own the shares of common stock owned by Ernest Group, Inc. |
(4) | Includes 78,593 shares of common stock owned by the ELK II 2012 Descendants Trust u/a dated December 26, 2012, or the ELK Trust, and 78,593 shares of common stock owned by the SLY II 2012 Descendants Trust u/a dated December 26, 2012, or the SLY Trust, for which Mr. Levenson is the settlor of the trust. Also includes 157,186 shares of common stock owned by Lenox Capital Group, LLC, for which Mr. Levenson is the managing member. Mr. Levenson plans to sell an aggregate of 152,000 shares of common stock in this offering, consisting of 38,500 shares of common stock owned by the ELK Trust, 38,500 shares of common stock owned by the SLY Trust and 75,000 shares of common stock owned by Lenox Capital Group, LLC. |
(6) | Includes 7,170,999 shares of common stock owned by Ernest Group, Inc., 229,135 shares of common stock owned by The Ruby Group, Inc. and 5,323,907 shares of restricted stock. Mr. Richison is the sole director of Ernest Group, Inc. and Ernest Group, Inc. is wholly owned by Mr. Richison and certain trusts for Mr. Richisons children, for which Mr. Richison serves as trustee. Mr. Richison may be deemed to beneficially own the shares of common stock owned by Ernest Group, Inc. Mr. Richison is the sole director and sole shareholder of The Ruby Group, Inc. and may be deemed to beneficially own the shares of common stock owned by The Ruby Group, Inc. |
(7) | Includes 429,099 shares of restricted stock. |
(8) | Includes 434,984 shares of restricted stock. |
(9) | Includes 879,877 shares of common stock owned by WK-EGI, Inc. and 429,099 shares of restricted stock. Mr. Kerber is the sole director of WK-EGI, Inc. and WK-EGI, Inc. is wholly owned by Mr. Kerber and certain trusts for which Mr. Kerber serves as trustee. Mr. Kerber may be deemed to beneficially own the shares of common stock owned by WK-EGI, Inc. |
(10) | Mr. Aiello was a former director of the Company. |
106
General
The following summary describes our capital stock as it will be in effect upon the consummation of this offering. Upon consummation of this offering, our authorized capital stock will consist of one hundred million shares of common stock, par value $0.01 per share, and ten million shares of preferred stock, par value $0.01 per share. The following information reflects the filing of our certificate of incorporation. Immediately following the completion of this offering, there are expected to be 50,333,739 shares of common stock and no shares of preferred stock outstanding.
Common Stock
Dividend Rights
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. See Dividend Policy.
Voting Rights
Except as required by law or matters relating solely to the terms of preferred stock, each outstanding share of common stock will be entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of our common stock shall have no cumulative voting rights. Except in respect of matters relating to the election and removal of directors on our board of directors and as otherwise provided in our certificate of incorporation or required by law, all matters to be voted on by our stockholders must be approved by a majority of the shares present in person or by proxy at the meeting and entitled to vote on the subject matter. In the case of election of directors, all matters to be voted on by our stockholders must be approved by a plurality of the votes entitled to be cast by all shares of our common stock.
Liquidation
In the event of the liquidation, dissolution or winding up of our company, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate in the future.
Undesignated Preferred Stock
Our board of directors may, without further action by our stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designations, powers, preferences, privileges, and relative participating, optional or special rights as well as the qualifications, limitations or restrictions thereof, including, but not limited to:
| the designation of the series; |
| the number of shares of the series, which our board of directors may, except where otherwise provided in the preferred stock designation, increase or decrease, but not below the number of shares then outstanding; |
107
| whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series; |
| the dates at which dividends, if any, will be payable; |
| the redemption rights and price or prices, if any, for shares of the series; |
| the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series; |
| the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of our company; |
| whether the shares of the series will be convertible into shares of any other class or series, or any other security, of our company or any other entity, and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made; |
| restrictions on the issuance of shares of the same series or of any other class or series; and |
| the voting rights, if any, of the holders of the series. |
Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of our common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation before any payment is made to the holders of shares of our common stock. Under specified circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. We may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of our common stock and the market value of our common stock. Upon consummation of this offering, there will be no shares of preferred stock outstanding and we have no present intention to issue any shares of preferred stock.
Equity Grants
As of December 31, 2013, no shares of our common stock were issuable upon exercise of outstanding options and no shares of restricted common stock were outstanding under the 2014 Plan.
Stockholders Agreement
After this offering, the Stockholders Agreement Parties will beneficially own or control, in the aggregate 41,111,514 shares of our common stock, or approximately 81.7% of our outstanding shares. For a description of the Stockholders Agreement, see Certain Relationships and Related Party TransactionsStockholders Agreement.
Registration Rights Agreement
After this offering, the parties to the Registration Rights Agreement, including Payroll, the WCAS Funds, WCAS Holdings, the Estate of Richard Aiello, Robert J. Levenson, Sue Ann Jordan, Chad Richison, Jeffrey D. York and certain entities affiliated with these individuals, holding approximately 38,728,664 shares of our common stock, will be entitled to certain registration rights with respect to such shares under the Securities Act. The holders of these registrable securities possess registration rights pursuant to the terms of the Registration Rights Agreement. For a description of the Registration Rights Agreement, see Certain Relationships and Related Party TransactionsRegistration Rights Agreement.
108
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Certain Provisions of Delaware Law
Our certificate of incorporation and our bylaws contain provisions that may delay, defer or discourage another party from acquiring control of us. We expect that these provisions, which are summarized below, will discourage coercive takeover practices or inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with the board of directors, which we believe may result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they also give the board of directors the power to discourage acquisitions that some stockholders may favor.
Classified Board of Directors
In accordance with the terms of our certificate of incorporation and bylaws, our board of directors will be divided into three classes, as nearly equal in number as practicable, with members of each class serving staggered three-year terms. Our bylaws will provide that the authorized number of directors shall be determined as set forth in the Stockholders Agreement, provided that following the time the Stockholders Agreement is terminated the number of directors shall be fixed exclusively from time to time solely by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes as the board of directors may determine in its discretion. Our certificate of incorporation and bylaws also provide that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors. Our classified board of directors could have the effect of delaying or discouraging an acquisition of us or a change in our management.
Undesignated Preferred Stock
The ability to authorize undesignated preferred stock under our certificate of incorporation will make it possible for our board of directors to issue preferred stock with super majority voting, special approval, dividend or other rights or preferences on a discriminatory basis that could impede the success of any attempt to acquire us or otherwise effect a change in control of us. These and other provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of our company.
Requirements for Advance Notification of Stockholder Meetings, Nominations and Proposals
Our certificate of incorporation and bylaws provide that special meetings of the stockholders may be called only by the majority of our board of directors or the president. Our bylaws prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of our company.
Our bylaws include advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors. In order for any matter to be properly brought before a meeting, a stockholder will have to comply with advance notice requirements and provide us with certain information. Subject to the terms of the Stockholders Agreement, vacancies and newly created directorships may be filled only by a vote of a majority of the directors then in office, even though less than a quorum, and not by the stockholders. Our bylaws allow the chairman of a meeting of the stockholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also defer, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company.
Our certificate of incorporation provides that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of not less than a majority of the total voting power of all outstanding securities of the Company entitled to vote generally in the election of directors.
109
No Cumulative Voting
Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless our certificate of incorporation provides otherwise and our certificate of incorporation will not expressly provide for cumulative voting.
Action by Written Consent
Pursuant to Section 228 of the Delaware General Corporation Law, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our stock entitled to vote thereon were present and voted, unless the Companys certificate of incorporation provides otherwise. Our certificate of incorporation provides that stockholders may only act by written consent until such date that the parties to the Stockholder Agreement cease collectively to beneficially own (directly or indirectly) more than 50% of the outstanding shares of common stock, or the Trigger Date.
Amendment Provisions
The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporations certificate of incorporation or bylaws, unless a corporations certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our bylaws may be amended or repealed by a majority vote of our board of directors or the affirmative vote of the holders of a majority of the total voting power of all outstanding securities of the Company entitled to vote in an annual election of directors. In addition, the affirmative vote of the holders of a majority of the total voting power of all outstanding securities of the Company entitled to vote in an annual election of directors is required to amend certain provisions of our certificate of incorporation prior to the Trigger Date. From and after the Trigger Date, the affirmative vote of the holders of at least 66 2 ⁄ 3 % of the total voting power of all outstanding securities of the Company entitled to vote in annual election of directors will be required to amend certain provisions of our certificate of incorporation.
Authorized but Unissued Shares
The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the NYSE. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares at prices higher than prevailing market prices.
Section 203 of Delaware General Corporation Law
In our certificate of incorporation, we have elected not to be governed by Section 203 of Delaware General Corporation Law. However, our certificate of incorporation will contain provisions that are similar to Section 203. Specifically, our certificate of incorporation will provide that we may not engage in certain business combinations with any interested stockholder for a three-year period following the time that the person became an interested stockholder, unless:
| prior to the time the person became an interested stockholder, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
110
| upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced, excluding certain shares; or |
| at or subsequent to the time the person became an interested stockholder, the business combination is approved by our board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. |
Generally, a business combination includes a merger, asset or stock sale, or other transaction 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 the previous three years owned, 15% or more of our voting stock. However, in our case, the principal investors (meaning WCAS X and WCAS Capital IV, and their respective affiliates, employees and representatives, and Chad Richison and his affiliates) and any of their direct or indirect transferees receiving 15% or more of our voting stock will not be deemed to be interested stockholders regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions, subject to certain exceptions for the acquisition of additional shares of common stock. This provision could delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us.
Choice of Forum
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or if no Court of Chancery located within the State of Delaware has jurisdiction, the Federal District Court for the District of Delaware) will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by our directors, officers, or other employees to us or to our stockholders, (iii) any action asserting a claim against us or any director, officer or other employee arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or bylaws or (iv) any action asserting a claim against us or any director, officer or other employee that is governed by the internal affairs doctrine. It is possible that a court could rule that this provision is not applicable or is unenforceable. Any person or entity purchasing or otherwise acquiring shares of capital stock of the Corporation will be deemed to have notice of and consented to this provision of our certificate of incorporation.
Limitations of Liability and Indemnification
See Certain Relationships and Related Party MattersIndemnification of Directors and Officers.
Listing
Our common stock has been approved for listing on the NYSE under the symbol PAYC.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company, LLC.
111
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options, in the public market after our initial public offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
Upon the completion of this offering, a total of 50,333,739 shares of our common stock will be outstanding, based on the number of shares outstanding as of March 31, 2014. This includes 4,606,882 shares of common stock that we are selling in this offering, which shares may be resold in the public market immediately without restriction or further registration under the Securities Act unless held by our affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining outstanding shares of our common stock will be deemed restricted securities as that term is defined under Rule 144. Restricted securities may be sold in the public market only if registered under the Securities Act or if those securities qualify for an exemption from registration, including exemptions provided by Rules 144 and 701 under the Securities Act, which are summarized below.
As a result of the lock-up agreements described below and the provisions of Rules 144 and 701, and assuming no extension of the lock-up period and no exercise of the underwriters option to purchase additional shares, the shares of our common stock that are deemed restricted securities will be available for sale in the public market following the completion of this offering as follows:
| shares will be eligible for sale on the date of this prospectus; and |
| additional shares will be eligible for sale upon expiration of the lock-up agreements described below 180 days after the date of this prospectus, subject in many cases to the limitations of either Rule 144 or Rule 701 under the Securities Act. |
Lock-Up Agreements
Our officers, directors, and stockholders holding substantially all of our outstanding capital stock have agreed with the underwriters not to dispose of any of our common stock or securities convertible into or exchangeable for shares of our common stock during the 180-day period following the date of this prospectus, except with the prior written consent of Barclays Capital Inc. and J.P. Morgan Securities LLC. See Underwriting.
After the offering, our employees, including our executive officers, and/or directors may enter into written trading plans that are intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934. Sales under these trading plans would not be permitted until the expiration of the lock-up agreements relating to the offering described above.
See Underwriting for a more complete description of the lock-up agreements with the underwriters.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
112
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon the expiration of the lock-up agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
| 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after our initial public offering, or |
| the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of our initial public offering that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will, subject to the lock-up restrictions described below, be eligible to resell such shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.
Registration Rights
Upon the expiration of the lock-up agreements, the holders of approximately 38,728,664 shares of our common stock, or their transferees, will be entitled to certain rights with respect to the registration of those shares under the Securities Act. For a description of these registration rights, see Description of Capital StockRegistration Rights. After these shares are registered, they will be freely tradable without restriction under the Securities Act.
Stock Options
As soon as practicable after the effectiveness of the registration statement of which this prospectus forms a part, we intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock subject to options outstanding or reserved for issuance under the 2014 Plan. This registration statement will become effective immediately upon filing, and shares covered by the Form S-8 registration statement will thereupon be eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above and Rule 144 limitations applicable to affiliates. For a more complete discussion of the 2014 Plan, see Executive CompensationCompensation Arrangements Adopted in Connection with this Offering.
113
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income and estate tax consequences to a non-U.S. holder of the acquisition, ownership and disposition of our common stock. For purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock, other than a partnership (or entity or arrangement treated as a partnership for U.S. federal income tax purposes), that is not for U.S. federal income tax purposes any of the following:
| an individual citizen or resident of the United States; |
| a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any state or the District of Columbia; |
| an estate whose income is subject to U.S. federal income tax regardless of its source; or |
| a trust (i) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (ii) which has made a valid election to be treated as a U.S. person. |
If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Accordingly, we urge partnerships that hold our common stock and partners in such partnerships to consult their own tax advisors regarding the tax treatment of acquiring, holding and disposing of our common stock.
This discussion assumes that a non-U.S. holder will hold our common stock as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation or any aspects of state, local or non-U.S. taxation, nor does it consider any U.S. federal income tax considerations that may be relevant to non-U.S. holders which may be subject to special treatment under U.S. federal income tax laws, including, without limitation, U.S. expatriates, controlled foreign corporations, passive foreign investment companies, insurance companies, tax-exempt or governmental organizations, dealers in securities or currency, banks or other financial institutions, and investors that hold our common stock as part of a hedge, straddle or conversion transaction. Furthermore, the following discussion is based on current provisions of the Code, and Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect.
We urge each prospective investor to consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.
Dividends on Common Stock
If we pay dividends on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holders adjusted tax basis in its common stock, but not below zero, and then will be treated as gain from the sale of the common stock (see Gain on Disposition of Common Stock).
Any dividend paid out of earnings and profits to a non-U.S. holder of our common stock generally will be subject to U.S. withholding tax at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder generally must provide us with an Internal Revenue Service, or IRS, Form W-8BEN (or other applicable form) certifying qualification for the reduced rate. A non-U.S. holder eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
114
Notwithstanding the foregoing, dividends received by a non-U.S. holder that are effectively connected with the conduct of a trade or business within the United States by the non-U.S. holder will be exempt from such withholding tax. To obtain this exemption, the non-U.S. holder must provide us with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, generally will be subject to U.S. federal income tax on a net income basis at the same graduated tax rates generally applicable to U.S. persons, subject to any applicable tax treaty providing otherwise. In addition to the income tax described above, dividends received by corporate non-U.S. holders that are effectively connected with the conduct of a trade or business in the United States by the corporate non-U.S. holder may be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless:
| the gain is effectively connected with the conduct of a trade or business within the United States by the non-U.S. holder and, if required by an applicable tax treaty, is attributable to a U.S. permanent establishment maintained by such non-U.S. holder; |
| the non-U.S. holder is an individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or |
| we become a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes, and the non-U.S. holder holds or has held, directly or indirectly, at any time within the shorter of (i) the five-year period preceding the disposition and (ii) the non-U.S. holders holding period, more than 5% of our common stock. Generally, a corporation is a U.S. real property holding corporation if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. |
In the case of a non-U.S. holder described in the first bullet point immediately above, the gain will be subject to U.S. federal income tax on a net income basis generally in the same manner as if the non-U.S. holder were a U.S. person as defined under the Code (unless an applicable income tax treaty provides otherwise), and a non-U.S. holder that is a foreign corporation may be subject to an additional branch profits tax equal to 30% of its effectively connected earnings and profits attributable to such gain (or at such lower rate as may be specified by an applicable income tax treaty). In the case of an individual non-U.S. holder described in the second bullet point immediately above, except as otherwise provided by an applicable income tax treaty, the gain, which may be offset by certain U.S.-source capital losses, will be subject to a flat 30% tax.
We believe we are not and do not anticipate becoming a USRPHC for U.S. federal income tax purposes. If, however, we are or become a USRPHC, so long as our common stock is considered to be regularly traded on an established securities market, only a non-U.S. holder who actually or constructively holds or held (at any time during the shorter of the five year period ending on the date of disposition or the non-U.S. holders holding period) more than 5% of our common stock will be subject to U.S. federal income tax, under the third bullet point immediately above, on the disposition of our common stock. Each non-U.S. holder should consult with its tax advisor about the consequences that could result if we are, or become, a USRPHC.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid to each non-U.S. holder, and the amount, if any, of tax withheld with respect to those dividends. A similar report is sent to each non-U.S. holder. These information reporting requirements apply even if withholding was not required. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipients country of residence.
115
Payments of dividends to a non-U.S. holder may be subject to backup withholding (at a rate of 28%) unless the non-U.S. holder establishes an exemption, for example, by properly certifying its non-U.S. status on an IRS Form W-8BEN or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding also may apply if we have actual knowledge, or reason to know, that the beneficial owner is a U.S. person that is not an exempt recipient.
Payments of proceeds from the sale or other disposition by a non-U.S. holder of our common stock effected outside the United States by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting will apply to those payments if the broker does not have documentary evidence that the holder is a non-U.S. holder, an exemption is not otherwise established, and the broker has certain relationships with the United States.
Payments of proceeds from the sale or other disposition by a non-U.S. holder of our common stock effected by or through a U.S. office of a broker generally will be subject to information reporting and backup withholding (at a rate of 28%) unless the non-U.S. holder establishes an exemption, for example, by properly certifying its non-U.S. status on an IRS Form W-8BEN or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, information reporting and backup withholding also may apply if the broker has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient.
Backup withholding is not an additional tax. Rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is timely furnished to the IRS.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act, or FATCA, imposes a 30% withholding tax on any withholdable payment to (i) a foreign financial institution (as specifically defined for this purpose), unless such institution enters into an agreement with the U.S. government to collect certain amounts and provide to the U.S. tax authorities substantial information regarding account holders or (ii) a foreign entity that is not a financial institution, unless such entity provides the withholding agent with a certification that the foreign entity does not have any substantial U.S. owners or provides the withholding agent with certain information relating to each of its substantial U.S. owners. Under certain limited circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes.
Withholdable payments include U.S.-source payments otherwise subject to nonresident withholding tax and the gross proceeds from the sale of any equity of U.S. issuers. The withholding tax will apply regardless of whether the payment would otherwise be exempt from U.S. nonresident withholding tax (e.g., as capital gain).
This withholding will apply to U.S.-source payments otherwise subject to nonresident withholding tax made on or after July 1, 2014 and to the payment of gross proceeds from the sale of any equity of U.S. issuers made on or after January 1, 2017.
Estate Tax
Our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as specifically defined for U.S. federal estate tax purposes) at the time of death will be includible in the individuals gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.
THE SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. POTENTIAL PURCHASERS OF OUR COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK.
116
Barclays Capital Inc. and J.P. Morgan Securities LLC are acting as the representatives of the underwriters of this offering. Under the terms of an underwriting agreement, which will be filed as an exhibit to the registration statement, each of the underwriters named below has severally agreed to purchase from us and the selling stockholders the respective number of common stock shown opposite its name below:
Underwriters |
Number of
Shares |
|
Barclays Capital Inc. |
||
J.P. Morgan Securities LLC |
||
Pacific Crest Securities LLC |
||
Stifel, Nicolaus & Company, Incorporated |
||
Canaccord Genuity Inc. |
||
|
||
Total |
||
|
The underwriting agreement provides that the underwriters obligation to purchase shares of common stock depends on the satisfaction of the conditions contained in the underwriting agreement including:
| the obligation to purchase all of the shares of common stock offered hereby (other than those shares of common stock covered by their option to purchase additional shares as described below), if any of the shares are purchased; |
| the representations and warranties made by us and the selling stockholders to the underwriters are true; |
| there is no material change in our business or the financial markets; and |
| we and the selling stockholders deliver customary closing documents to the underwriters. |
Commissions and Expenses
The following table summarizes the underwriting discounts and commissions we and the selling stockholders will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to us and the selling stockholders for the shares.
Us | Selling Stockholders | |||||||||||||||
No Exercise | Full Exercise | No Exercise | Full Exercise | |||||||||||||
Per Share |
$ | $ | $ | $ | ||||||||||||
Total |
$ | $ | $ | $ |
The representatives have advised us that the underwriters propose to offer the shares of common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, which may include the underwriters, at such offering price less a selling concession not in excess of $ per share. After the offering, the representatives may change the offering price and other selling terms.
The expenses of the offering that are payable by us and the selling stockholders are estimated to be approximately $5.6 million (excluding underwriting discounts and commissions). We have agreed to pay expenses incurred by the selling stockholders in connection with the offering, other than the underwriting discounts and commissions.
Option to Purchase Additional Shares
The selling stockholders have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase, from time to time, in whole or in part, up to an aggregate of 996,750 shares from the selling stockholders at the public offering price less underwriting discounts and commissions. This option may be
117
exercised to the extent the underwriters sell more than 6,645,000 shares in connection with this offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriters percentage underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting Section.
Lock-Up Agreements
We, all of our directors and executive officers and our stockholders have agreed that, for a period of 180 days after the date of the final prospectus subject to certain limited exceptions as described below, we and they will not directly or indirectly, without the prior written consent of each of Barclays Capital Inc. and J.P. Morgan Securities LLC, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by us or them in accordance with the rules and regulations of the SEC and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for, or that represent the right to receive shares of, common stock (other than shares that may be sold in this offering), (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of common stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or other securities, in cash or otherwise, (3) cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible, exercisable or exchangeable into common stock or any of our other, or (4) publicly disclose the intention to do any of the foregoing.
Each of the lock-up agreements contain certain exceptions, including the disposition of shares of common stock purchased in open market transactions after the completion of this offering, bona fide gifts, sales, transfers or other dispositions of shares of any class of our common stock, including by will or intestacy, made exclusively between and among the undersigned and members of the undersigneds family or certain other persons, and the adoption of a Rule 10b5-1 sales plan; provided, in each case, that no filing shall be required under the Exchange Act in connection with the transfer or disposition during the 180-day lock-up period.
Barclays Capital Inc. and J.P. Morgan Securities LLC, in their sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to release common stock and other securities from lock-up agreements, Barclays Capital Inc. and J.P. Morgan Securities LLC will consider, among other factors, the holders reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time. At least three business days before the effectiveness of any release or waiver of any of the restrictions described above with respect to an officer or director of the Company, Barclays Capital Inc. and J.P. Morgan Securities LLC will notify us of the impending release or waiver and we have agreed to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver, except where the release or waiver is effected solely to permit a transfer of common stock that is not for consideration and where the transferee has agreed in writing to be bound by the same terms as the lock-up agreements described above to the extent and for the duration that such terms remain in effect at the time of transfer.
As described below under Directed Share Program, any participant who had agreed to the lock-up provisions described above or any participant who is our employee, will be subject to a 180-day lock up with respect to any shares sold to them pursuant to that program, with the same restrictions and an identical extension provision as the lock-up agreement described above. Any shares sold in the directed share program to our directors or officers shall be subject to the lock-up agreement described above.
118
Offering Price Determination
Prior to this offering, there has been no public market for our common stock. The initial public offering price was negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives considered:
| the history and prospects for the industry in which we compete; |
| our financial information; |
| the ability of our management and our business potential and earning prospects; |
| the prevailing securities markets at the time of this offering; and |
| the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. |
Indemnification
We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities.
Directed Share Program
At our request, the underwriters have reserved for sale at the initial public offering price up to 5% of the shares offered hereby for our officers, directors, employees, clients, suppliers, vendors and friends and relatives of our employees. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. Any participants will be prohibited from selling, pledging or assigning any shares sold to them pursuant to this program for a period of 180 days after the date of this prospectus. The Directed Share Program will be arranged through our lead underwriter, Barclays Capital Inc.
Chad Richison, our president, chief executive officer and director, Craig E. Boelte, our chief financial officer, William X. Kerber III, our chief information officer and Frederick C. Peters II, our director, on behalf of themselves and certain of their affiliates, have indicated an interest in purchasing an aggregate of up to approximately $1.0 million, $0.1 million, $0.1 million and $0.1 million, respectively, in shares of our common stock at the initial public offering price through the Directed Share Program. Assuming an initial public offering price of $19.00 per share, which is the midpoint of the price range on the cover page of this prospectus, Messrs. Richison, Boelte, Kerber and Peters, directly or through their affiliates, would purchase an aggregate of up to approximately 52,631 shares, 5,263 shares, 5,263 shares and 5,263 shares, respectively, of the 6,645,000 shares in this offering based on these indications of interest. Because these indications of interest, however, are not binding agreements or commitments to purchase, Messrs. Richison, Boelte, Kerber and Peters and these affiliates may determine to purchase fewer shares than they indicated an interest in purchasing or not to purchase any shares in this offering. It is also possible that Messrs. Richison, Boelte, Kerber and Peters and these affiliates could indicate an interest in purchasing additional shares of our common stock. In addition, the underwriters could determine to sell fewer shares to Messrs. Richison, Boelte, Kerber and Peters and these affiliates than they indicated an interest in purchasing or not to sell any shares to such persons.
119
Stabilization, Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:
| Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
| A short position involves a sale by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. |
| Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Listing
Our common stock has been approved for listing on the NYSE under the symbol PAYC.
Stamp Taxes
If you purchase shares of common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.
Other Relationships
The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory,
120
investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for the issuer and its affiliates, for which they received or may in the future receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and certain of their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer or its affiliates. If the underwriters or their affiliates have a lending relationship with us, certain of those underwriters or their affiliates routinely hedge, and underwriters or their affiliates may hedge, their credit exposure to us consistent with their customary risk management policies. Typically, the underwriters and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the shares of common stock offered hereby. Any such credit default swaps or short positions could adversely affect future trading prices of the shares of common stock offered hereby. The underwriters and certain of their affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Pursuant to an engagement agreement, we retained Solebury Capital LLC, or Solebury, a FINRA member, to provide certain financial consulting services in connection with this offering. We agreed to pay Solebury, only upon successful completion of this offering, a fee of $350,000 and, at our sole discretion, an additional potential incentive fee of $100,000, which will be included in the underwriting discounts and commissions set forth above. In determining whether we elect to award any or all of the incentive fee, we will consider the level of, and our satisfaction with, the services provided by Solebury throughout the offering process. We also agreed to reimburse Solebury for reasonable and documented travel and other out-of-pocket expenses, not to exceed in each instance $1,000 without our prior written consent and up to a maximum of $25,000, and have provided indemnification of Solebury pursuant to the engagement agreement. Solebury is not acting as an underwriter and has no contact with any public or institutional investor on behalf of us or the underwriters. In addition, Solebury will not underwrite or purchase any of our common shares in this offering or otherwise participate in any such undertaking. We have also engaged Solebury Communications Group LLC, an affiliate of Solebury, to provide us with certain investor relations services on an ongoing basis for a fee of $10,000 per month, and reimbursement of reasonable and duly documented travel and other out-of-pocket expenses incurred in connection with the engagement, not to exceed in each instance $1,000 without our prior written consent. FINRA has determined that payments by us received by Solebury Communications Group LLC within 90 days of effectiveness of the Registration Statement are to be included in underwriting compensation pursuant to FINRA rules. In no event will such payments exceed $50,000.
Selling Restrictions
This prospectus does not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which such an offer or solicitation is not authorized, (ii) in which any person making such offer or solicitation is not qualified to do so or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended to, permit a public offer of the shares of common stock or possession or distribution of this prospectus or any other offering or publicity material relating to the shares of common stock in any country or jurisdiction (other than the United States) where any such action for that purpose is required. Accordingly, each underwriter has undertaken that it will not, directly or indirectly, offer or sell any shares of common stock or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of shares of common stock by it will be made on the same terms.
121
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any common stock which are the subject of the offering contemplated herein may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
| to legal entities which are qualified investors as defined under the Prospectus Directive; |
| by the underwriters to fewer than 100, or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives of the underwriters for any such offer; or |
| in any other circumstances falling within Article 3(2) of the Prospectus Directive, |
provided that no such offer of common stock shall result in a requirement for us, the selling stockholders or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
Each person in a Relevant Member State who receives any communication in respect of, or who acquires any common stock under, the offers contemplated here in this prospectus will be deemed to have represented, warranted and agreed to and with each underwriter, the selling stockholders and us that:
| it is a qualified investor as defined under the Prospectus Directive; and |
| in the case of any common stock acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (i) the common stock acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in the circumstances in which the prior consent of the representatives of the underwriters has been given to the offer or resale or (ii) where common stock have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of such common stock to it is not treated under the Prospectus Directive as having been made to such persons. |
For the purposes of this representation and the provision above, the expression an offer of common stock to the public in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any common stock to be offered so as to enable an investor to decide to purchase or subscribe for the common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
This prospectus has only been communicated or caused to have been communicated and will only be communicated or caused to be communicated as an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act of 2000, or the FSMA, as received in connection with the issue or sale of the common stock in circumstances in which Section 21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA have been and will be complied with in respect to anything done in relation to the common stock in, from or otherwise involving the United Kingdom.
122
Notice to Residents of Canada
The common stock may be sold only to purchasers purchasing as principal that are both accredited investors as defined in National Instrument 45-106 Prospectus and Registration Exemptions and permitted clients as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations . Any resale of the common stock must be made in accordance with an exemption from the prospectus requirements and in compliance with the registration requirements of applicable securities laws.
123
The validity of the shares of common stock offered hereby will be passed upon for us by Haynes and Boone, LLP, Dallas, Texas. Certain legal matters will be passed upon for the selling stockholders by Kirkland & Ellis LLP, New York, New York. The underwriters are being represented by Gibson, Dunn & Crutcher LLP, New York, New York in connection with the offering.
The audited financial statements included in this prospectus and elsewhere in this registration statement have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the common stock offered hereby, we refer you to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. We currently do not file periodic reports with the SEC. Upon closing of our initial public offering, we will be required to file periodic reports, proxy statements and other information with the SEC pursuant to the Exchange Act. A copy of the registration statement and the exhibits filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
124
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
Paycom Software, Inc. and Subsidiary |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
Paycom Payroll Holdings, LLC and Subsidiaries |
||||
Consolidated Annual Financial Statements |
||||
F-6 | ||||
F-7 | ||||
Consolidated Statements of Income, Years Ended December 31, 2013, 2012 and 2011 |
F-8 | |||
Consolidated Statements of Members Equity, Years Ended December 31, 2013, 2012 and 2011 |
F-9 | |||
Consolidated Statements of Cash Flows, Years Ended December 31, 2013, 2012 and 2011 |
F-10 | |||
F-11 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Paycom Software, Inc.
We have audited the accompanying consolidated balance sheet of Paycom Software, Inc. (a Delaware corporation) and subsidiary (the Company) as of December 31, 2013. This financial statement is the responsibility of the Companys management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statement referred to above presents fairly, in all material respects, the financial position of Paycom Software, Inc. and Subsidiary as of December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 10, 2014
F-2
PAYCOM SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2013
December 31,
2013 |
||||
Assets |
||||
Current assets: |
||||
Cash and cash equivalents |
$ | 1,000 | ||
|
|
|||
Total assets |
$ | 1,000 | ||
|
|
|||
Commitments and contingencies |
||||
Stockholders equity |
||||
Common stock, $0.01 par value100,000,000 shares authorized, 1,000 shared issued and outstanding |
$ | 10 | ||
Additional paid-in capital |
990 | |||
|
|
|||
Total stockholders equity |
$ | 1,000 | ||
|
|
See accompanying notes to the consolidated financial statements.
F-3
PAYCOM SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2013
1. | ORGANIZATION |
Paycom Software, Inc. and its wholly-owned subsidiary, Paycom Software Merger Sub, LLC (collectively, we, our, us or Software) were incorporated as Delaware corporations on October 31, 2013 and December 24, 2013, respectively, in anticipation of an initial public offering (IPO) and was a wholly-owned subsidiary of Paycom Payroll, LLC (Paycom). Subsequent to year end, we effected a reorganization whereby we control directly or indirectly, Paycom Payroll Holdings, LLC (Holdings), Paycom, WCAS Paycom Holdings, Inc. (WCAS Holdings) and WCAS CP IV Blocker, Inc. (CP IV Blocker). As a result, we will consolidate the financial results of each of the above listed entities effective January 1, 2014.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Accounting and Principles of Consolidation
The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America. Separate statements of income, changes in stockholders equity and cash flows have not been presented in the financial statements because we have had no business activities.
Our consolidated balance sheet includes Software and its wholly-owned subsidiary, Paycom Software Merger Sub, LLC. Intercompany balances and transactions are eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a maturity of three months or less and money market mutual funds to be cash equivalents. We maintain cash and cash equivalents in bank deposit accounts which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. As of December 31, 2013, all amounts were held in deposit on demand. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts.
3. | STOCKHOLDERS EQUITY |
We are authorized to issue 100,000,000 shares of common stock, par value $0.01 per share (Common Stock). We have issued 1,000 shares of Common Stock in exchange for $10, all of which were held by Paycom at December 31, 2013.
4. | COMMITMENTS AND CONTINGENCIES |
In July 2013, Dr. Lakshmi Arunachalam filed a complaint against Paycom in the U.S. District Court for the District of Delaware alleging that Paycom infringes on U.S. Patent No. 8,244,833 assigned to her. The complaint seeks a permanent injunction, damages, and attorneys fees should Paycom be found to infringe. Dr. Arunachalam has asserted similar claims in Delaware for the alleged infringement of the same patent against other payroll processing companies. Dr. Arunachalam has also accused various other entities of infringing related U.S. patents. On October 4, 2013, Paycom filed an answer, affirmative defenses and counterclaims to the complaint. Paycom denied all claims made against us by Dr. Arunachalam in her complaint, asserted various defenses and counterclaims for non-infringement and challenged the validity and enforceability of U.S. Patent No. 8,244,833. Dr. Arunachalam filed a reply to Paycoms counterclaim on October 28, 2013 and denied non-infringement and invalidity. Paycom believes that this litigation is without merit and intends to vigorously defend itself in this matter. Due to the nature of the claims for this litigation and the uncertainties of the litigation, we are unable to provide an estimate of the potential amount of any loss related to this litigation.
F-4
We are involved in various other legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.
5. | SUBSEQUENT EVENTS |
In anticipation of an initial public offering, Software consummated the reorganization as of January 1, 2014, pursuant to which, (i) the owners of WCAS Holdings and CP IV Blocker, which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software. Immediately after these contributions, our wholly-owned subsidiary merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings ownership interest in Software was cancelled. Following these transactions, all outstanding Series C Preferred Units were eliminated in an intercompany transaction between Holdings and WCAS Holdings, and Software assumed a 14% note with a face value $46,193 due 2017 (2017 Note) (collectively, the 2014 Reorganization). In connection with the 2014 Reorganization, Software authorized and reserved 11,350,881 shares of our common stock for future issuance under the 2014 Long-Term Incentive Plan (the 2014 Plan), effective January 1, 2014. The 2014 Plan permits Software to grant an array of equity-based incentive awards to certain officers, employees, contractors and directors.
Effective March 10, 2014, Software adopted an Amended and Restated Certificate of Incorporation, as approved by its board of directors and the majority of its stockholders, which, among other things, increased the number of authorized shares of capital stock from 100,000,000 shares of consisting solely of common stock, $0.01 par value per share, to 110,000,000 shares of capital stock consisting of 100,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of undesignated preferred stock, $0.01 per share. Softwares board of directors may fix the voting powers, designations, powers, preferences and other rights, and any qualifications, limitations or restrictions thereof on each series of preferred stock.
We have evaluated subsequent events through March 10, 2014, the date on which this balance sheet was issued, and determined that no subsequent events had occurred that would require additional disclosure.
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Members
Paycom Payroll Holdings, LLC
We have audited the accompanying consolidated balance sheets of Paycom Payroll Holdings, LLC (a Delaware limited liability company) and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, members equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Paycom Payroll Holdings, LLC and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 10, 2014
F-6
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2013 AND 2012
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
Pro Forma
December 31, |
December 31, | |||||||||||
2013 | 2013 | 2012 | ||||||||||
(Unaudited) | ||||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 13,273 | $ | 13,273 | $ | 13,435 | ||||||
Restricted cash |
369 | 369 | 368 | |||||||||
Accounts receivable |
1,705 | 1,705 | 622 | |||||||||
Prepaid expenses |
2,133 | 2,133 | 686 | |||||||||
Inventory |
578 | 578 | 714 | |||||||||
Deferred tax assets |
423 | | | |||||||||
|
|
|
|
|
|
|||||||
Current assets before funds held for clients |
18,481 | 18,058 | 15,825 | |||||||||
Funds held for clients |
455,779 | 455,779 | 324,266 | |||||||||
|
|
|
|
|
|
|||||||
Total current assets |
474,260 | 473,837 | 340,091 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $11,540 and $8,015 respectively |
38,671 | 38,671 | 25,139 | |||||||||
Deposits and other assets |
461 | 461 | 417 | |||||||||
Goodwill |
51,889 | 51,889 | 51,889 | |||||||||
Intangible assets, net of accumulated amortization of $19,703 and $18,091, respectively |
6,709 | 6,709 | 8,321 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 571,990 | $ | 571,567 | $ | 425,857 | ||||||
|
|
|
|
|
|
|||||||
Liabilities and Members Equity |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 5,020 | $ | 5,020 | $ | 2,354 | ||||||
Accrued commissions and bonuses |
3,598 | 3,598 | 1,953 | |||||||||
Accrued payroll and vacation |
3,087 | 3,087 | 1,925 | |||||||||
Deferred revenue |
1,582 | 1,582 | 1,037 | |||||||||
Current portion of long-term debt |
9,545 | 9,545 | 2,151 | |||||||||
Accrued expenses and other current liabilities |
4,372 | 4,372 | 1,978 | |||||||||
|
|
|
|
|
|
|||||||
Current liabilities before client fund obligation |
27,204 | 27,204 | 11,398 | |||||||||
Client funds obligation |
455,779 | 455,779 | 324,266 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
482,983 | 482,983 | 335,664 | |||||||||
|
|
|
|
|
|
|||||||
Deferred tax liabilities |
2,738 | | | |||||||||
Long-term deferred revenue |
10,990 | 10,990 | 7,356 | |||||||||
Long-term debt, less current portion |
11,545 | 11,545 | 11,959 | |||||||||
Long-term debt to related party |
60,875 | 14,682 | 14,440 | |||||||||
Derivative liability |
1,107 | 1,107 | 1,767 | |||||||||
|
|
|
|
|
|
|||||||
Total long-term liabilities |
87,255 | 38,324 | 35,522 | |||||||||
|
|
|
|
|
|
|||||||
Commitments and contingencies |
||||||||||||
Members equity: |
||||||||||||
Common units, $0.00 par value (285,000 authorized, 270,750 issued and outstanding) |
| | | |||||||||
Series A Preferred Units, $0.00 par value (700,000 authorized, 671,839 issued and outstanding) |
| | | |||||||||
Series B Preferred Units, $0.00 par value (270 authorized, 270 issued and outstanding) |
| | | |||||||||
Series C Preferred Units, $0.00 par value (50,000 authorized, 46,193 issued and outstanding) |
| | | |||||||||
Members capital |
| 63,645 | 63,542 | |||||||||
Preferred stock (no shares authorized, no shares issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding on a pro forma basis) |
| | | |||||||||
Common stock (no shares authorized, no shares issued and outstanding, actual 100,000,000 shares authorized, 45,708,573 shares issued and outstanding on a pro forma basis) |
17,452 | | | |||||||||
Additional paid in capital |
(13,385 | ) | | | ||||||||
Accumulated deficit |
(2,315 | ) | (13,385 | ) | (8,871 | ) | ||||||
|
|
|
|
|
|
|||||||
Total members equity |
1,752 | 50,260 | 54,671 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities and members equity |
$ | 571,990 | $ | 571,567 | $ | 425,857 | ||||||
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-7
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues |
||||||||||||
Recurring |
$ | 105,560 | $ | 75,420 | $ | 56,382 | ||||||
Implementation and other |
2,041 | 1,390 | 824 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
107,601 | 76,810 | 57,206 | |||||||||
|
|
|
|
|
|
|||||||
Cost of revenues |
||||||||||||
Operating expenses |
19,070 | 14,895 | 12,287 | |||||||||
Depreciation |
1,821 | 1,431 | 987 | |||||||||
|
|
|
|
|
|
|||||||
Total cost of revenues |
20,891 | 16,326 | 13,274 | |||||||||
|
|
|
|
|
|
|||||||
Administrative expenses |
||||||||||||
Sales and marketing |
42,681 | 29,255 | 22,244 | |||||||||
Research and development |
2,146 | 1,632 | 1,225 | |||||||||
General and administrative |
28,884 | 19,450 | 14,707 | |||||||||
Depreciation and amortization |
3,682 | 4,092 | 4,300 | |||||||||
|
|
|
|
|
|
|||||||
Total administrative expenses |
77,393 | 54,429 | 42,476 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
98,284 | 70,755 | 55,750 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
9,317 | 6,055 | 1,456 | |||||||||
Interest expense |
(2,805 | ) | (2,171 | ) | (134 | ) | ||||||
Other income, net |
1,199 | 354 | 108 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 7,711 | $ | 4,238 | $ | 1,430 | ||||||
|
|
|
|
|
|
|||||||
Less: Distribution to Series C Preferred Unitholder |
(6,467 | ) | (4,806 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) available to Series A Preferred Unitholders and common unit holders |
$ | 1,244 | $ | (568 | ) | $ | 1,430 | |||||
|
|
|
|
|
|
|||||||
Net income (loss) per Series A Preferred Unit and common unit: |
||||||||||||
Basic |
$ | 1.30 | $ | (0.60 | ) | $ | 1.53 | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 1.22 | $ | (0.57 | ) | $ | 1.49 | |||||
|
|
|
|
|
|
|||||||
Weighted average units outstanding: |
||||||||||||
Basic |
955,983 | 948,181 | 935,750 | |||||||||
|
|
|
|
|
|
|||||||
Diluted |
1,018,305 | 1,004,436 | 960,611 | |||||||||
|
|
|
|
|
|
|||||||
Pro forma net income per share (unaudited): |
||||||||||||
Basic |
$ | 0.02 | ||||||||||
Diluted |
$ | 0.02 | ||||||||||
Pro forma weighted average shares outstanding (unaudited): |
||||||||||||
Basic |
47,686,326 | |||||||||||
Diluted |
48,371,489 |
See accompanying notes to the consolidated financial statements.
F-8
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
Number of units |
Total
Members Equity |
|||||||||||||||||||||||||||
Common |
Series A
Preferred |
Series B
Preferred |
Series C
Preferred |
Members
Capital |
Accumulated
Deficit |
|||||||||||||||||||||||
Balances at December 31, 2010 |
285,000 | 665,000 | 270 | | $ | 80,208 | $ | (8,130 | ) | $ | 72,078 | |||||||||||||||||
Distributions to members |
| | | | | (1,443 | ) | (1,443 | ) | |||||||||||||||||||
Common units redeemed |
(14,250 | ) | | | | (1,000 | ) | | (1,000 | ) | ||||||||||||||||||
Incentive compensation |
| | | | 165 | | 165 | |||||||||||||||||||||
Net income |
| | | | | 1,430 | 1,430 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances at December 31, 2011 |
270,750 | 665,000 | 270 | | $ | 79,373 | $ | (8,143 | ) | $ | 71,230 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Issuance of Series A Preferred Units |
| 6,839 | | | 2,409 | | 2,409 | |||||||||||||||||||||
Issuance of Series C Preferred Units |
| | | 46,193 | | | | |||||||||||||||||||||
Distribution paid to members as return of capital |
| | | | (18,807 | ) | | (18,807 | ) | |||||||||||||||||||
Incentive compensation |
| | | | 567 | | 567 | |||||||||||||||||||||
Distributions to members |
| | | | | (4,966 | ) | (4,966 | ) | |||||||||||||||||||
Net income |
| | | | | 4,238 | 4,238 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances at December 31, 2012 |
270,750 | 671,839 | 270 | 46,193 | $ | 63,542 | $ | (8,871 | ) | $ | 54,671 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Incentive units redeemed |
| | | | (1,061 | ) | | (1,061 | ) | |||||||||||||||||||
Incentive compensation |
| | | | 1,164 | | 1,164 | |||||||||||||||||||||
Distributions to members |
| | | | | (12,225 | ) | (12,225 | ) | |||||||||||||||||||
Net income |
| | | | | 7,711 | 7,711 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances at December 31, 2013 |
270,750 | 671,839 | 270 | 46,193 | $ | 63,645 | $ | (13,385 | ) | $ | 50,260 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-9
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS)
Year Ended December 31 | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating activities |
||||||||||||
Net income |
$ | 7,711 | $ | 4,238 | $ | 1,430 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Depreciation and amortization |
5,486 | 5,522 | 5,286 | |||||||||
Gain on sale of property, plant and equipment |
(248 | ) | | | ||||||||
Amortization of debt discount |
241 | 143 | | |||||||||
Amortization of debt issuance costs |
17 | 19 | | |||||||||
Incentive compensation |
934 | 503 | 165 | |||||||||
Change in fair value of derivative liability |
(660 | ) | (333 | ) | | |||||||
Changes in operating assets and liabilities |
||||||||||||
Accounts receivable |
(1,083 | ) | (133 | ) | (241 | ) | ||||||
Prepaid expenses |
(800 | ) | (395 | ) | 256 | |||||||
Inventory |
136 | 8 | (75 | ) | ||||||||
Deposits and other assets |
(44 | ) | (75 | ) | (204 | ) | ||||||
Accounts payable |
2,667 | 1,157 | (597 | ) | ||||||||
Accrued commissions and bonuses |
1,645 | 1,461 | 3 | |||||||||
Accrued payroll and vacation |
1,162 | 351 | 406 | |||||||||
Deferred revenue |
4,163 | 2,778 | 2,185 | |||||||||
Accrued expenses and other liabilities |
2,394 | 538 | 471 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
23,721 | 15,782 | 9,085 | |||||||||
|
|
|
|
|
|
|||||||
Investing activities |
||||||||||||
Increase in funds held for clients |
(131,513 | ) | (71,001 | ) | (87,190 | ) | ||||||
Increase in restricted cash |
(1 | ) | (117 | ) | (251 | ) | ||||||
Additions to property, plant and equipment |
(17,176 | ) | (5,971 | ) | (14,867 | ) | ||||||
Proceeds from sale of property, plant and equipment |
248 | 106 | 9 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(148,442 | ) | (76,983 | ) | (102,299 | ) | ||||||
|
|
|
|
|
|
|||||||
Financing activities |
||||||||||||
Proceeds from issuance of long-term debt |
6,979 | 1,750 | 9,612 | |||||||||
Proceeds from issuance of long-term debt to related party |
| 16,398 | | |||||||||
Payments on long-term debt |
| (401 | ) | | ||||||||
Increase in client funds obligations |
131,513 | 71,001 | 87,191 | |||||||||
Proceeds from issuance of Series A Preferred Units |
| 2,409 | | |||||||||
Common units redeemed |
| | (1,000 | ) | ||||||||
Distributions paid to members as return of capital |
| (18,807 | ) | | ||||||||
Incentive units redeemed |
(1,061 | ) | | | ||||||||
Payments of deferred offering costs |
(647 | ) | | | ||||||||
Distributions paid to members |
(12,225 | ) | (4,966 | ) | (1,443 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash provided by financing activities |
124,559 | 67,384 | 94,360 | |||||||||
|
|
|
|
|
|
|||||||
Change in cash and cash equivalents |
(162 | ) | 6,183 | 1,146 | ||||||||
Cash and cash equivalents |
||||||||||||
Beginning of year |
13,435 | 7,252 | 6,106 | |||||||||
|
|
|
|
|
|
|||||||
End of year |
$ | 13,273 | $ | 13,435 | $ | 7,252 | ||||||
|
|
|
|
|
|
|||||||
Supplemental cash flow disclosure |
||||||||||||
Cash paid for interest, net of amounts capitalized |
$ | 2,831 | $ | 2,028 | $ | 134 | ||||||
Noncash financing and investing activities |
||||||||||||
Purchase of property, plant and equipment on account |
368 | 167 | 45 | |||||||||
Issuance of Series C Preferred Units as return of capital distribution |
| 46,193 | |
See accompanying notes to the consolidated financial statements.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. | ORGANIZATION AND DESCRIPTION OF BUSINESS |
Paycom Payroll Holdings, LLC (Holdings), formerly known as Paycom Payroll, LLC, and its wholly owned subsidiaries, Paycom Payroll, LLC (Paycom) and Paycom Benefits, LLC (collectively, we or our), is a leading provider of a cloud-based human capital management solution delivered as Software-as-a-Service. We are headquartered in Oklahoma City, Oklahoma, and have sales offices in 20 states nationwide.
Holdings was incorporated on April 3, 2012 for the purpose of acquiring Paycom and its subsidiary, Paycom Benefits, LLC. Holdings was initially created as a subsidiary of Paycom. As part of the reorganization process, Holdings formed a new wholly-owned subsidiary, Paycom Payroll Merger Sub, LLC (Merger Sub), which merged with and into Paycom, with Paycom remaining as the surviving entity. Paycom subsequently cancelled its ownership in Holdings, and became a wholly owned subsidiary of Holdings (April 2012 Corporate Reorganization). In connection with the April 2012 Corporate Reorganization, the four existing authorized classes of ownership interest of Paycom were contributed into Holdings and new ownership units were authorized by Holdings.
On October 31, 2013, we incorporated Paycom Software, Inc. (Software), which is an indirect wholly-owned subsidiary of Payroll, prior to a reorganization which was consummated on January 1, 2014.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The creation of Holdings and its acquisition of Paycom under the April 2012 Corporate Reorganization represented a transaction under common control, which was considered a change in reporting unit and was required to be retrospectively applied to the financial statements of all prior periods when the financial statements were issued for a period that included the date the transaction occurred. Therefore, the consolidated financial statements of Holdings are presented as if Holdings existed and controlled Paycom in periods prior to the creation of Holdings.
Our consolidated financial statements include the financial results of Holdings, Paycom and its wholly owned subsidiaries, Paycom Benefits, LLC and Software. Intercompany balances and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications were made to the 2012 and 2011 consolidated financial statements to conform to the 2013 presentation. These reclassifications were not material to the financial statements and had no effect on the consolidated members equity or net income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates include useful life for long lived and intangible assets, the average life of our clients, the fair market value of our employee incentive units and the fair values of our financial instruments. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under circumstances. As such, actual results could differ from these estimates.
F-11
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Segment Information
We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Our chief operating decision maker allocates resources and assesses performance based upon financial information at the consolidated level. Since we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements.
Pro Forma Information (Unaudited)
In anticipation of an initial public offering (IPO), Software consummated the reorganization as of January 1, 2014 as described under Note 12 (the 2014 Reorganization). The unaudited pro forma consolidated balance sheet and pro forma basic and diluted net income per share of common stock are not inclusive of all entities described under Note 12 to be reflected in the 2014 Reorganization as those entities are not reflected in our historical financial statements. The unaudited pro forma consolidated balance sheet is based upon the historical consolidated balance sheet as adjusted to reflect:
| Adjustments to deferred income tax assets and liabilities as a result of recognizing related deferred tax assets and liabilities assuming that the 2014 Reorganization occurred on December 31, 2013. |
| The conversion of common units and Series A Preferred Units to common stock. The amount was estimated given that the Members Capital balance ceased to exist upon the 2014 Reorganization. |
| The assumption of the 14% note due 2017 which replaced the Series C Preferred Units in connection with the 2014 Reorganization. |
| The reclassification of historic accumulated deficit to additional paid in capital due to the 2014 Reorganization. |
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a maturity of three months or less and money market mutual funds to be cash equivalents. We maintain cash and cash equivalents in bank deposit accounts and money market funds, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. As of December 31, 2013 and 2012, all amounts were held in deposit on demand. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts.
Restricted Cash
Restricted cash in our consolidated balance sheets primarily consists of cash held in restricted accounts due to requirements under an existing office building lease and our corporate building loan agreements. As of December 31, 2013 and 2012, we had restricted cash of $369 and $368, respectively.
Accounts Receivable
We generally collect revenue from our customers via automatic deduction from clients bank accounts at the time processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last day of the period, which are collected on the following business day. Because
F-12
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
accounts receivable are collected via automatic deduction on the following business day, the Company has not recorded an allowance for doubtful accounts.
Deferred offering costs
Deferred offering costs represent legal, accounting and other direct costs related to our efforts to raise capital through an IPO. Future costs related to IPO activities will be deferred until the completion of the IPO, at which time they will be offset against the IPO proceeds. In the event that we terminate our plan for an IPO, any deferred offering costs would be expensed at that time.
As of December 31, 2013, we had capitalized $647 associated with IPO activities and included such amount in prepaid expenses on the consolidated balance sheets. There were no deferred offering costs capitalized as of December 31, 2012.
Inventory
Our inventory consists of five types of time clocks sold to clients as part of our time and attendance services and are stated at the lower of cost or market. Cost is determined using the FIFO cost method.
Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks issued to clients under month-to-month operating leases are classified as property, plant, and equipment. We retain inventory in certain lines primarily as replacements for those clients who use the various clocks and have determined that no write-downs for obsolete items was required based on inventory turnover and our historical experience during the years ended December 31, 2013, 2012 and 2011.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Depreciation is determined using the straight line method over the estimated useful lives of the assets as follows:
Office equipment and furniture & fixtures |
5 years | |||
Computer equipment and software |
3 years | |||
Buildings |
30 years | |||
Leasehold improvements |
3 years | |||
Rental clocks |
5 years | |||
Vehicles |
3 years |
Our leasehold improvements are depreciated over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service.
We capitalize interest incurred related to construction in progress. For the years ended December 31, 2013, 2012 and 2011, we incurred interest costs of $2,563, $2,028 and $439, respectively. For the years ended December 31, 2013, 2012 and 2011, interest expense of $95, $0 and $305, respectively, was capitalized.
Internal Use Software
Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Capitalized costs include external
F-13
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
direct costs of materials and services associated with developing or obtaining internal use computer software and certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of payroll costs that are capitalized with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. We also expense internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.
The total capitalized payroll costs related to internal use computer software projects was $1,221 and $585 as of December 31, 2013 and 2012, respectively which have been included in property, plant and equipment. Amortization expense related to capitalized software costs of $647, $429 and $436 was charged to expense for the years ended December 31, 2013, 2012 and 2011, respectively.
Goodwill and Other Intangible Assets
Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2013. For the years ended December 31, 2013, 2012 and 2011, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets for the years ended December 31, 2013, 2012 or 2011.
Funds Held for Clients and Client Funds Obligation
As part of our payroll and tax filing application, we collect funds for federal, state and local employment taxes from clients, handle applicable regulatory tax filings, correspondence and amendments, remit the funds to appropriate tax agencies, and handle other employer-related services. Amounts collected by us from clients for their federal, state and local employment taxes earn interest during the interval between receipt and disbursement, as we invest these funds in money market funds and certificates of deposit. The interest earned from these investments is included in the consolidated statements of income as other income, net. These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation.
As of December 31, 2013 and 2012, the funds held for clients were invested in demand deposits, short-term certificates of deposit and money market funds.
F-14
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Revenue Recognition
Our total revenue is comprised of recurring revenues and implementation and other revenues. We recognize revenue in accordance with accounting standards for software and service companies when all of the following criteria have been met:
| There is persuasive evidence of an arrangement; |
| The service has been or is being provided to the customer; |
| Collection of the fees is reasonably assured; and |
| The amount of fees to be paid by the customer is fixed or determinable |
Recurring
Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and human resources applications. Talent acquisition includes application tracking, employment and background checks, on/off-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling, time-off requests, labor allocation and labor management reports. Payroll includes payroll and tax management, paycom pay, expense management and garnishment management. Talent management includes employee self-service, compensation budgeting, performance management and executive dashboard. Human resources management includes document management, government and compliance, benefits and COBRA administration and personnel action forms.
The services related to recurring revenues are rendered during each clients payroll period, with the agreed-upon fee being charged and collected as part of our processing of the clients payroll. Recurring revenues are recognized at the conclusion of processing of each clients payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an Automated Clearing House (ACH) as part of the clients payroll cycle or through direct wire transfer, which minimizes the default risk.
Implementation and other
Implementation and other revenues represent non-refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenue from the sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenue, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements.
For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have stand-alone value upon delivery, the deliverables that do not have stand-alone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when
F-15
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (TPE) of selling price is used to establish the selling price if it exists, and if not it would be based on our best estimate of selling price.
For the years ended December 31, 2013, 2012 and 2011, we have determined that there is no stand-alone value associated with the upfront conversion fees as they do not have value to our clients on a stand-alone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratably over the estimated life of our clients, which we have estimated to be ten years.
For the years ended December 31, 2013, 2012, and 2011, we have determined that the revenues from the employee time and attendance services, and the revenues from the sale of time clocks as part of our time and attendance services, have VSOE of selling price as they are sold on a stand-alone basis. Revenue is therefore recognized for the respective deliverables as they are delivered.
Cost of Revenues
Our costs and expenses applicable to total revenues represent total operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation costs.
Advertising Costs
Advertising costs are expensed the first time that advertising takes place. Advertising expense for the years ended December 31, 2013, 2012 and 2011 was $3,375, $2,309 and $1,674, respectively.
Sales Taxes
We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are shown on a net basis, and as such, excluded from revenue. For the years ended December 31, 2013, 2012 and 2011, sales taxes paid were $2,194, $1,604 and $1,092, respectively.
Employee Incentive Units
All incentive unit awards to employees are recognized pro rata over the respective vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant.
Income Taxes
We operate as a limited liability company (LLC). An LLC combines a corporations protection from personal liability for business debts along with the pass-through tax structure of a partnership or sole proprietorship. Business income passes through the business to the LLC members, who report their share of profits or losses on their individual income tax returns. Accordingly, no provision for income taxes is reflected in our consolidated financial statements. Our tax returns are subject to examination by federal and state taxing authorities. If such examinations result in adjustments to the income amounts, the amounts allocated to the LLC members could be adjusted accordingly.
F-16
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
We file income tax returns in the U.S. and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a more-likely-than-not threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that would not meet this threshold. Our policy is to record interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We are currently undergoing a sales tax audit in a certain jurisdiction and are not aware of any other potential examinations as of December 31, 2013. However, the tax years 2010 through 2013 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions.
Recently Adopted and Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued authoritative guidance which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income (AOCI). The update requires that an entity present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of AOCI based on its source and the income statement line items affected by the reclassification. The amendment is effective for fiscal years and interim periods beginning on after December 15, 2012. We adopted this new guidance for the year ended December 31, 2013, which did not have a material impact on our consolidated financial statements.
In February 2013, the FASB issued authoritative guidance, which added new disclosure requirements to measure obligations resulting from joint and several liability arrangement for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date and disclose the arrangements and the total outstanding amount of obligation for all joint parties. These disclosures are in addition to existing related party disclosure requirements. The amendment is effective for fiscal years and interim periods beginning after December 15, 2013 and we do not expect the adoption of such guidance to have a material impact on our consolidated financial statements.
3. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment and accumulated depreciation are as follows:
December 31, | ||||||||
2013 | 2012 | |||||||
Property, plant and equipment |
||||||||
Furniture, fixtures and office equipment |
$ | 3,189 | $ | 2,887 | ||||
Computer equipment |
4,832 | 3,498 | ||||||
Software and capitalized software costs |
5,578 | 3,588 | ||||||
Rental clocks |
4,865 | 3,480 | ||||||
Vehicles |
421 | 468 | ||||||
Buildings |
14,828 | 14,828 | ||||||
Leasehold improvements |
135 | 135 | ||||||
|
|
|
|
|||||
33,848 | 28,884 | |||||||
Less: accumulated depreciation |
(11,540 | ) | (8,015 | ) | ||||
|
|
|
|
|||||
22,308 | 20,869 | |||||||
Land |
8,993 | 4,205 | ||||||
Construction in process |
7,370 | 65 | ||||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 38,671 | $ | 25,139 | ||||
|
|
|
|
F-17
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Rental clocks included in property, plant and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to fixed assets and depreciated over their estimated useful lives.
In October 2012, we began the initial phase on construction of a second building/processing center at our headquarters. Estimated completion of the building is April 2014, and is financed with our funds, along with a construction note convertible to long-term notes payable, upon completion of the construction.
In November 2013 and December 2012, we purchased approximately 18.3 acres and 17.6 acres of land, respectively, from a related party for future expansion at our headquarters for total costs of $4,788 and $2,324, respectively. For more information see Note 10Related Party Transactions.
Depreciation expense for property, plant and equipment, net was $3,873, $3,093 and $2,046 for the years ended December 31, 2013, 2012 and 2011, respectively.
4. | GOODWILL AND INTANGIBLE ASSETS, NET |
We had goodwill of $51,889 as of December 31, 2013 and 2012. We performed the required impairment tests of goodwill for the years ended December 31, 2013, 2012 and 2011 and determined there was no impairment for each of those years then ended.
All of the intangible assets are considered to have finite lives and, as such, are subject to amortization. The components of intangible assets are as follows:
December 31, 2013 | ||||||||||||||||
Weighted Avg.
Remaining Useful Life |
Gross |
Accumulated
Amortization |
Net | |||||||||||||
(Years) | ||||||||||||||||
Intangibles: |
||||||||||||||||
Customer relationships |
3.5 | $ | 13,997 | $ | (9,098 | ) | $ | 4,899 | ||||||||
Trade name |
8.5 | 3,194 | (1,384 | ) | 1,810 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 17,191 | $ | (10,482 | ) | $ | 6,709 | |||||||||
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||
Weighted Avg.
Remaining Useful Life |
Gross |
Accumulated
Amortization |
Net | |||||||||||||
(Years) | ||||||||||||||||
Intangibles: |
||||||||||||||||
Customer relationships |
4.5 | $ | 13,997 | $ | (7,699 | ) | $ | 6,298 | ||||||||
Trade name |
9.5 | 3,194 | (1,171 | ) | 2,023 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 17,191 | $ | (8,870 | ) | $ | 8,321 | |||||||||
|
|
|
|
|
|
The weighted average remaining useful life of the intangible assets was 4.85 years as of December 31, 2013. Amortization of intangible assets for the years ended December 31, 2013, 2012 and 2011 totaled $1,613, $2,414 and $3,216, respectively.
F-18
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Estimated amortization expense for our existing intangible assets for the next five years and thereafter is as follows:
Year Ending |
Amortization | |||
2014 |
$ | 1,613 | ||
2015 |
1,613 | |||
2016 |
1,613 | |||
2017 |
913 | |||
2018 |
213 | |||
Thereafter |
744 | |||
|
|
|||
$ | 6,709 | |||
|
|
5. | LONG-TERM DEBT |
Our long-term debt consists of the following:
December 31, | ||||||||
2013 | 2012 | |||||||
$12,761 term note to bank due December 15, 2018 (1)(4) |
$ | 11,963 | $ | 12,360 | ||||
Land note to bank (2)(4) |
| 1,750 | ||||||
Construction note to bank (3)(4) |
9,127 | | ||||||
$18,807 note to related party due April 3, 2022 (5) |
18,807 | 18,807 | ||||||
Less: Unamortized debt discounts |
(4,125 | ) | (4,367 | ) | ||||
|
|
|
|
|||||
Total long-term debt (including current portion) |
35,772 | 28,550 | ||||||
Less: Current portion |
(9,545 | ) | (2,151 | ) | ||||
|
|
|
|
|||||
Total long-term debt, net |
$ | 26,227 | $ | 26,399 | ||||
|
|
|
|
(1) | In December 2011, we consolidated pre-existing construction loans for the construction of a new corporate headquarters/processing center and gymnasium into a term note. As of December 31, 2013 and 2012, we had a term note with an outstanding principal amount of $11,963 and $12,360, respectively, from Kirkpatrick Bank, due December 15, 2018 (the 2011 Consolidated Loan). Under the 2011 Consolidated Loan, principal and interest is payable monthly based on a 20 year amortization at an annual rate of 5.0%. The 2011 Consolidated Loan is collateralized by a first mortgage covering our corporate headquarters and is secured by a first lien security interest in certain personal property relating to our corporate headquarters. |
(2) | In December 2012, we entered into a loan agreement for the purchase of approximately 17.6 acres for future expansion at our headquarters. As of December 31, 2012, the loan agreement had an outstanding principal amount of $1,750 from Kirkpatrick Bank, due April 21, 2013 (the December 2012 Loan). Under the December 2012 Loan, interest accrues monthly at the Wall Street Journal U.S. Prime Rate plus 0.5%, adjusted from time to time, but not more often than each day, on the 21st day of each month. As of December 31, 2012, this equated to a rate of 3.25%. Principal on the note was due in one payment on the maturity date, collateralized by a first mortgage covering our corporate headquarters and a first security interest in certain personal property relating to our corporate headquarters. The December 2012 Loan was paid in full during the year ended December 31, 2013 with an advance from the construction loan entered into on March 2013, which is described below. |
F-19
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(3) | In March 2013, we entered into a construction loan agreement for the construction of a second building at our corporate headquarters with Kirkpatrick Bank due May 1, 2015, which allowed for a maximum principal amount of $12,271 (the 2013 Construction Loan). Under the terms of the 2013 Construction Loan, the loan will be converted to long-term notes payable at the Term Loan Commencement Date. The Term Loan Commencement Date is defined as the first day of the first month after all of the following requirements are completed to the satisfaction of the lender: (i) the construction project has been substantially completed; (ii) we have delivered to the lender a final as-built survey of the mortgaged property, acceptable to the lender; (iii) we have delivered all necessary and required insurance covering the mortgaged property, acceptable to the lender; (iv) we have delivered the certificates of occupancy for the premises; and (v) we have accepted the building. Outstanding amounts under the 2013 Construction Loan are secured by a first mortgage covering all of the second headquarters building and a first lien security interest in certain personal property relating to the second headquarters building. Under the 2013 Construction Loan, interest accrues monthly at the Wall Street Journal U.S. Prime Rate plus 0.5%, adjusted monthly, subject to a minimum interest rate of 4.0% per annum. Interest on the 2013 Construction Loan will be paid monthly on the first day of each month. Estimated completion of the building is July 2014. During the year ended December 31, 2013, a portion of the advancement was drawn to repay the December 2012 Loan. |
In November 2013, we entered into a loan agreement for the purchase of approximately 18.3 acres for future expansion at our headquarters with Kirkpatrick Bank, which allowed for a maximum principal amount of $3,000 (2013 Land Loan). Under the 2013 Land Loan, interest accrues monthly at the Wall Street Journal U.S. Prime Rate plus 0.5%, adjusted monthly, subject to a minimum interest rate of 4% per annum. Principal and interest on the 2013 Land Loan is due on February 1, 2014.
In December 2013, we consolidated the 2013 Construction Loan and the 2013 Land Loan (2013 Consolidated Loan) under a modification agreement whereby the combined maximum principal amount was increased to $14,631. The 2013 Consolidated Loan is collateralized by security interests in the construction mortgage, land mortgage and assignment of leases in property relating to the second building at our corporate headquarters. Under the 2013 Consolidated Loan, interest accrues monthly at the Wall Street Journal U.S. Prime rate plus 0.5%, adjusted monthly subject to a minimum interest rate of 4.0% per annum. As of December 31, 2013, the 2013 Consolidated Loan had an outstanding principal amount of $9,127 and availability of $5,504 for future construction from Kirkpatrick Bank.
(4) | The 2013 Consolidated Loan, December 2012 Loan, and 2011 Consolidated Loan are subject to certain financial covenants, as defined in the agreements, including, maintaining a debt coverage ratio of indebtedness (defined as current maturities of long-term debt, interest expense and distributions) to EBITDA of less than 1.5 to 1.0. As of December 31, 2013 and 2012, we were not in compliance with one of the financial covenants, related to the debt service ratio. This was due to the December 2012 Loan and the 2013 Consolidated Loan being included in the calculation of the debt service ratio. We obtained a letter of waiver from the lender that excludes these items from the calculation as of December 31, 2013 and 2012, which remains in effect through January 15, 2015. |
(5) |
In connection with the April 2012 Corporate Reorganization, we entered into a 10% Senior Note due 2022 with WCAS Capital Partners IV, L.P., a related party (the 2022 Note). The 2022 Note is due on April 3, 2022 and interest is payable at an annual rate of 10%, payable semiannually in arrears on December 31 and June 30 of each year. We may, at our option, choose to defer all or a portion of the accrued interest on the notes that is due and payable on any payment date, provided that such amount of accrued interest shall be multiplied by 1.3 and added to the principal amount of the notes on such interest payment date (with the result that such interest shall have accrued at an effective rate of 13.0% |
F-20
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
instead of 10.0% through such payment date). As of December 31, 2013 and 2012, such option has not been elected and all interest has been paid in cash. |
The note was issued at a discount of $2,409. We are amortizing the discount over the term of the note using the effective interest method. The note also contains certain features by which the holder, WCAS Capital Partners IV, L.P., may force redemption at principal amount plus any accrued interest upon our completion of a public offering or certain events of default. The note also provides for mandatory redemption upon a liquidation event. These features (collectively, the Prepayment Features) were determined to meet the definition of a derivative required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. At inception, the Prepayment Features were valued at $2,100 and recorded as a derivative liability, which is re-measured to determine its fair value as of each reporting date.
The total unamortized discount related to this note was $4,125 and $4,367 as of December 31, 2013 and 2012, respectively.
As of December 31, 2013, the carrying value and fair value of our total long-term debt, including current portion were $35,772 and $38,667, respectively. As of December 31, 2012, the carrying value and fair value of our total long-term debt, including current portion were $28,550 and $29,697. The fair value of variable rate long-term debt approximates market value because the cost of borrowing fluctuates based upon market conditions. The fair value of fixed rate long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.
Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2013 are as follows:
Year Ending December 31, |
||||
2014 |
$ | 9,545 | ||
2015 |
440 | |||
2016 |
461 | |||
2017 |
486 | |||
2018 |
10,158 | |||
Thereafter |
14,682 | |||
|
|
|||
$ | 35,772 | |||
|
|
6. | EMPLOYEE SAVINGS PLAN |
Under our 401(k) plan, employees are eligible to participate when they have attained the age of 21 and have completed 90 days of service. We have made a safe-harbor election whereby it makes a Qualified Automatic Contribution Arrangement (QACA) matching contribution equal to 100% of the first 1% of salary deferrals and 50% of deferrals between 2% and 6%, up to a maximum of 3.5% of salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions will be 100% vested after two full years of employment from hire date. If an employee terminates prior to completing two full years of employment, they will be 0% vested in these contributions. The discretionary contributions are vested over a six year period. Matching contributions amounted to $1,242, $985 and $702 for the years ended December 31, 2013, 2012 and 2011, respectively.
F-21
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
7. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client fund obligations, long-term debt and derivative liability. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligations approximates fair value because of the short-term nature of the instruments.
We measure certain financial assets and liabilities at fair value at each reporting period. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A financial instruments classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value are as follow:
Level 1Unadjusted observable inputs that reflect quoted prices in active markets
Level 2Input other than quoted prices in active markets that are directly or indirectly observable
Level 3Unobservable inputs that are supported by little or no market activity
We use observable data, when available. During the years ended December 31, 2013, 2012 and 2011, we did not have any transfers between level 1, 2 or 3 in the three-tier fair value hierarchy.
The following tables provide a summary of the fair value of financial instruments that are measured on a recurring basis using the above input categories:
December 31, 2013 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities |
||||||||||||||||
Derivative |
$ | | $ | | $ | 1,107 | $ | 1,107 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | | $ | | $ | 1,107 | $ | 1,107 | |||||||||
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities |
||||||||||||||||
Derivative |
$ | 1,767 | $ | 1,767 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | | $ | | $ | 1,767 | $ | 1,767 | |||||||||
|
|
|
|
|
|
|
|
The derivative liability related to long-term debt to related party is classified as a Level 3 derivative due to valuation based upon significant unobservable inputs.
The key inputs used to calculate the fair value of the embedded derivative are: probability of exit, remaining term, yield volatility, credit spread, and risk-free rate. In general, increases in the probability of exit, credit spread, and risk-free rate would increase the value of the embedded derivative. Conversely, increases in the remaining term and yield volatility would decrease the value of the embedded derivative.
F-22
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments as of December 31, 2013 and 2012 were as follows:
December 31, 2013 | ||||||||
Valuation Technique | Key Inputs | Range | ||||||
Derivative Liability |
Lattice Model | Probability of exit | 90% | |||||
Remaining term | 0.8 years - 8.3 years | |||||||
Yield Volatility | 21.4% - 31.1% | |||||||
Credit Spread | 8.90% | |||||||
Risk-free rate | 0.13% - 2.45% |
December 31, 2012 | ||||||||
Valuation Technique | Key Inputs | Range | ||||||
Derivative Liability |
Lattice Model | Probability of exit | 90% | |||||
Remaining term | 3.3 years - 9.3 years | |||||||
Yield Volatility | 20.4% - 28.5% | |||||||
Credit Spread | 11.94% | |||||||
Risk-free rate | 0.36% - 1.78% |
The following table summarizes the change in fair value of our Level 3 financial instruments for the years ended December 31, 2013 and 2012.
2013 | 2012 | |||||||
Balance, beginning of year |
$ | 1,767 | $ | | ||||
Issuances |
| 2,100 | ||||||
Change in fair value of derivative liability |
(660 | ) | (333 | ) | ||||
|
|
|
|
|||||
Balance, end of year |
$ | 1,107 | $ | 1,767 | ||||
|
|
|
|
Total change in fair value of derivative liability recognized as other income, net in the consolidated statements of income was $660 and $333 for the years ended December 31, 2013 and 2012, respectively. There was no change in fair value of derivative liability recognized during the year ended December 31, 2011.
8. | EARNINGS PER UNIT AND PRO FORMA NET INCOME PER SHARE |
Earnings per unit
Earnings per unit (EPU) are based on the weighted average number of Series A Preferred Units and common units for the period. Diluted EPU is computed in a similar manner to basic EPU after assuming issuance of common units for all potentially dilutive common units whether or not they are exercisable. Series A Preferred Units and common units have been combined as a single class for purposes of basic and diluted EPU as Series A Preferred Units and common units contain the same rights and preferences.
F-23
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
The following is a reconciliation of net income (loss) available to Series A Preferred and common unitholders, and the units used in the computation of basic and diluted net earnings (loss) per unit:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Basic earnings (loss) per unit: |
||||||||||||
Net income |
$ | 7,711 | $ | 4,238 | $ | 1,430 | ||||||
Less: Distribution to Series C Preferred Unitholder |
(6,467 | ) | (4,806 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) available to Series A Preferred Unitholders and common unitholders |
1,244 | (568 | ) | 1,430 | ||||||||
Weighted-average common units outstanding |
955,983 | 948,181 | 935,750 | |||||||||
|
|
|
|
|
|
|||||||
Basic earnings (loss) per unit |
$ | 1.30 | $ | (0.60 | ) | $ | 1.53 | |||||
|
|
|
|
|
|
|||||||
Diluted earnings (loss) per unit: |
||||||||||||
Net income (loss) available to Series A Preferred Unitholders and common unitholders |
$ | 1,244 | $ | (568 | ) | $ | 1,430 | |||||
Weighted-average common units outstanding |
955,983 | 948,181 | 935,750 | |||||||||
Dilutive effect of Incentive Units |
62,322 | 56,255 | 24,861 | |||||||||
|
|
|
|
|
|
|||||||
Total weighted-average common units outstanding, assuming dilution |
1,018,305 | 1,004,436 | 960,611 | |||||||||
|
|
|
|
|
|
|||||||
Diluted earnings (loss) per unit |
$ | 1.22 | $ | (0.57 | ) | $ | 1.49 | |||||
|
|
|
|
|
|
Pro forma net income per Share (UNAUDITED)
Pro forma basic and diluted net income per share of common stock (unaudited) has been computed to give effect to the pro forma adjustments discussed below. On January 1, 2014, in anticipation of an IPO, we consummated a reorganization as described under Note 12 (the 2014 Reorganization). Pro forma basic and diluted net income per share of common stock (unaudited) is not inclusive of all entities as described under Note 12 to be reflected in the 2014 Reorganization as those entities are not reflected in our historical financial statements.
Outstanding common units, Series B Preferred Units, and incentive units of Holdings were converted into 45,708,573 common shares and 8,121,101 restricted shares of common stock of Software at the following conversion rates:
| Outstanding common units, Series B Preferred Units, WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, the number of common shares determined by a ratio of common units, Series B Preferred Units and Series A Preferred Units to shares of common stock of approximately 1:47, resulting in issuance of 44,560,053 common shares. |
| Vested incentive units were converted to common shares and restricted shares at various conversion ratios, which ranged from approximately 1:0.2 to 1:24. Unvested incentive units were converted to restricted shares at various conversion ratios, which ranged from 1:24 to 1:47. The conversion to common shares versus restricted shares was determined based on the underlying conditions of the pre-conversion incentive units, reflecting any pre-existing vesting conditions. This resulted in issuance of 1,148,520 and 8,121,101 common shares and restricted shares, respectively. |
F-24
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
A reconciliation of the numerators and denominators of the pro forma basic and diluted net income per share calculations is as follows (in thousands, except per share amounts):
The pro forma net income applied in computing the unaudited pro forma net income per share for the year ended December 31, 2013 is based upon the Companys historical net income as adjusted to reflect:
(1) | Adjustment to income tax expense in connection with the deferred income tax assets and liabilities recognized, which assumed that Holdings was operating as a C-corporation. The amount was determined using an estimated statutory rate of 39%. |
(2) | Inclusion of interest expense upon assuming 14% note with a face value of $46,193 due 2017 which accrues interest at 14% per annum (2017 Note). The 2017 Note replaced the Series C Preferred Units in the 2014 Reorganization. The adjustment was tax effected using an estimated statutory tax rate of 39%. |
9. | MEMBERS EQUITY AND INCENTIVE COMPENSATION |
Members Equity
Prior to the April 2012 Corporate Reorganization, Paycom had authorized four classes of limited liability company interests (each a Unit). Series A Preferred Units are voting units with first priority of distribution, which are entitled to a preferred yield (as defined within our LLC agreement) of 9% with
F-25
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
regard to certain future asset distributions, and conversion features. The Board of Directors authorized 700,000 Series A Preferred Units and as of December 31, 2013 and 2012, 671,839 were issued and outstanding.
Series B Preferred Units are non-voting units, of which 270 units were authorized and as of December 31, 2013 and 2012, 270 were issued and outstanding. These Series B Preferred Units are entitled to receive distributions only after certain conditions have been met. As of December 31, 2013, these conditions had not been met.
Common units are voting units with third priority of distribution. The Board of Directors authorized 285,000 common units and as of December 31, 2013 and 2012, 270,750 were issued and outstanding.
Incentive units are non-voting units reserved for issuance to our employees, officers, directors and other service providers. The Board of Directors authorized 50,000 incentive units. Upon consummation of the April 2012 Corporate Reorganization, all four classes of previously issued units of Paycom were exchanged for our units bearing identical terms. We authorized an additional 24,381 incentive units for the purpose of converting previously issued units.
In connection with the April 2012 Corporate Reorganization, Series C Preferred Units with a face value of $46,193 were issued to one of our members, and 50,000 Series C Preferred Units were authorized and 46,193 Series C Preferred Units were issued. Subsequent to the April 2012 Corporate Reorganization, the Series C Preferred Units holder has first priority to distribution and is entitled to a cumulative preferred yield of 14%. The distributions are paid semi-annually in cash and there were no distributions in arrears as of December 31, 2013 and 2012. These Series C Preferred Units are redeemable upon a deemed liquidation event, and the Series C Preferred Units holder has the ability to cause such liquidation event. Upon such deemed liquidation event, all equity holders are entitled to the same form of consideration. Upon our completion of a qualified initial public offering, the Series C Preferred Unitholders ability to cause a liquidation event would be eliminated.
Upon liquidation and following the distribution of the Series C Preferred Units liquidation preference of $46,193 plus any accrued but unpaid dividends, any remaining proceeds would be distributed to the holders of the Series A Preferred Units and common units on a pro rata basis. Series B Preferred Unitholders are entitled to receive distribution only after certain conditions are met.
Employee Incentive Units
2009 Incentive Units
We authorized 50,000 2009 Incentive Units (2009 Incentive Units) as part of the 2009 Incentive Units Plan (2009 Plan). We may award 2009 Incentive Units under the 2009 Plan to certain officers and employees of Paycom at the discretion of the compensation committee. The units vest 50% on the third annual anniversary of the date of issuance and 50% on the fourth annual anniversary of the date of issuance, provided there is no Company Sale. Company Sale is defined as (i) a transaction or series of transactions (including by way of merger, consolidation, or sale of the equity) the result of which is that the holders of the units immediately prior to such transaction(s), do not, after giving effect to such transaction(s), own directly or indirectly through one or more intermediaries, at least 50% of the units, (ii) a sale, transfer, conveyance or other disposition, in one or a series of related transaction, of all or substantially all of our assets determined on a consolidated basis, or (iii) the initial sale, in an underwritten public offering registered under the Securities Act of 1933, as amended, or our (or a successor corporations) equity securities. Any unvested units become immediately vested upon a Company Sale and would convert to
F-26
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
common units. In addition, all unvested units terminate upon the employees termination with us. We have the right, but not the obligation, to repurchase all or any portion of vested units upon termination. We authorized 24,381 units for purposes of converting previously issued units of Paycom into equivalent units of our company as previously discussed.
2012 Management Incentive Units
In connection with April 2012 Corporate Reorganization, we authorized 107,441 Management Incentive Units (Management Incentive Units), of which 25,953 and 57,057 were awarded to certain officers and employees of Paycom at the discretion of the Compensation Committee during the years ended December 31, 2013 and 2012, respectively. Vesting of the 2012 Management Incentive Units pool is 50% time based over five years and 50% market based. The market based vesting is based on a cash return on investment of our majority unitholder with a linear vesting scale. Vesting percentages range from 0% up to 2.0 times return on investment from grant value, up to 100% vesting at 3.5 times return on investment from grant value.
2012 CEO Incentive Units
In connection with April 2012 Corporate Reorganization, we authorized and issued 126,067 of CEO Incentive Units (CEO Incentive Units) during the year ended December 31, 2012. Vesting of the CEO Incentive Units is 25% time based over five years and 75% market based. The market based vesting is based on a cash return on investment of our majority unitholder with a linear vesting scale. Vesting percentage ranges from 0% up to 1.5 times return on investment from grant value, up to 100% vesting at 2.5 times return on investment from grant value.
We estimate the fair value of grants of all incentive units using a Monte Carlo simulation model. The model requires various assumptions as inputs, including expected life, volatility, risk free rate (based on U.S. Treasury rates as of the grant date), and no expected dividends. Annual volatility was estimated using the historical volatility of comparable guideline companies. We are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest.
The following table presents a summary of the grant-date fair values of incentive units granted and the related assumptions:
Year Ended December 31, | ||||||||
2013 | 2012 | 2011 | ||||||
Grant-date fair value |
||||||||
2009 Plan |
| $71.78 | $ | 51.16 | ||||
2012 Management Incentive Units |
$4.67 - $37.39 | $8.03 - $14.29 | | |||||
2012 CEO Incentive Units |
| $6.78 - $9.35 | | |||||
Risk-free interest rates |
0.71% - 1.41% | 0.72% | 1.74 | % | ||||
Estimated Volatility |
50.0% | 60.0% | 60.0 | % | ||||
Expected life (in years) |
5.0 | 5.0 | 5.0 |
F-27
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
The following table sets forth the compensation resulting from employee incentive unit arrangements for the years ended December 31, 2013, 2012 and 2011:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating expenses |
$ | 222 | $ | 87 | $ | 36 | ||||||
Sales and marketing |
114 | 83 | 57 | |||||||||
Research and development |
345 | 100 | 25 | |||||||||
General and administrative |
253 | 233 | 47 | |||||||||
|
|
|
|
|
|
|||||||
$ | 934 | $ | 503 | $ | 165 | |||||||
|
|
|
|
|
|
The capitalized non-cash incentive compensation expense related to software developed for internal use of $230 and $64 was included in software and capitalized software costs in property, plant and equipment, net in our consolidated balance sheets as of December 31, 2013 and 2012, respectively.
A summary of the status of our non-vested incentive units as of December 31, 2013 and 2012, and related changes during the years ended December 31, 2013, 2012 and 2011 are presented below:
2009 Incentive Units | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Nonvested
Units |
Weighted
Average Grant-Date Fair Value |
Nonvested
Units |
Weighted
Average Grant-Date Fair Value |
Nonvested
Units |
Weighted
Average Grant-Date Fair Value |
|||||||||||||||||||
Beginning of period |
13,050 | $ | 38.35 | 25,631 | $ | 35.74 | 22,843 | $ | 33.14 | |||||||||||||||
Awards |
| | | | 3,875 | $ | 51.16 | |||||||||||||||||
Modifications |
| | 3,405 | $ | 71.78 | | | |||||||||||||||||
Forfeitures |
(128 | ) | $ | 47.34 | (5,716 | ) | $ | 33.74 | (1,087 | ) | $ | 36.19 | ||||||||||||
Vesting |
(7,981 | ) | $ | 33.22 | (10,270 | ) | $ | 45.48 | | | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
End of period |
4,941 | $ | 46.40 | 13,050 | $ | 38.35 | 25,631 | $ | 35.74 | |||||||||||||||
|
|
|
|
|
|
2012 Incentive Units (including CEO) | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Nonvested
Units |
Weighted
Average Grant-Date Fair Value |
Nonvested
Units |
Weighted
Average Grant-Date Fair Value |
|||||||||||||
Beginning of year |
179,224 | $ | 8.53 | | | |||||||||||
Awards |
25,953 | $ | 14.96 | 183,124 | $ | 8.59 | ||||||||||
Forfeitures |
(1,275 | ) | $ | 14.17 | (3,900 | ) | $ | 11.16 | ||||||||
Vesting |
(11,564 | ) | $ | 9.47 | | | ||||||||||
|
|
|
|
|||||||||||||
End of year |
192,338 | $ | 9.31 | 179,224 | $ | 8.53 | ||||||||||
|
|
|
|
Our incentive units do not have an exercise price and therefore the intrinsic value of the units equal the fair value.
During the year ended December 31, 2013, we redeemed some of our incentive units through total cash payments of $1,061, resulting in total incremental compensation cost of $796, of which $212 has been capitalized on the date of redemptions.
F-28
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
During the year ended December 31, 2012, there was one modification that affected two employees. The modification amended the vesting period from the original 50% on the third and 50% on the fourth anniversaries, to immediate vesting of 100% of the units. This modification resulted in total incremental compensation costs of $129 for the year ended December 31, 2012. There were no modifications to the incentive units during the years ended December 31, 2013 or 2011.
As of December 31, 2013 and 2012, there was $1,272 and $1,338 of total unrecognized compensation costs related to nonvested incentive units issued to employees, respectively. The unrecognized compensation cost is expected to be recognized over a weighted average of 3.7 years. The fair market value of the incentive unit awards shown in the preceding table are based on our estimated enterprise value at the date of grant, with consideration given to rights and terms of such units relative to other classes of units as appropriate. There were also no units converted during the years ended December 31, 2013, 2012 and 2011.
10. | RELATED-PARTY TRANSACTIONS |
During the years ended December 31, 2013, 2012 and 2011, we paid Advantage Benefits Plus (Advantage) a total of $10, $11 and $13, respectively, for administering the Companys employee cafeteria plan. Employee payroll deductions are sent to Advantage and we are billed monthly for an administrative fee. Advantage is owned by the spouse of our Chief Financial Officer.
In addition, during the years ended December 31, 2013, 2012 and 2011, we paid rent on our Dallas office space in the amounts of $254, $267 and $257, respectively. The Dallas office building is owned by 417 Oakbend, LP, a Texas limited partnership. Our Chief Sales Officer owns a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP.
In November 2013 and December 2012, we purchased approximately 18.3 acres and 17.6 acres of land, respectively, for future expansion at our corporate headquarters. The land was purchased from Kilpatrick Partners, L.L.C., for a total cost of $4,788 and $2,324, respectively. The manager of Kilpatrick Partners, L.L.C. is our President and Chief Executive Officer.
In connection with the April 2012 Corporate Reorganization, we entered into the 2022 Note with WCAS Capital Partners IV, L.P., a related party as described in Note 5. The 2022 Note is due on April 3, 2022 and interest is payable at an annual rate of 10%, payable semiannually in arrears on December 31 and June 30 of each year.
At December 31, 2013 and 2012, Holdings owed $103,447 and $83,089, respectively, to Welsh, Carson, Anderson and Stowe and certain of their affiliates, representing tax distributions and travel expenses paid by Welsh, Carson, Anderson and Stowe and charged to Holdings.
We entered into a Limited Liability Company Unit Redemption Agreement, effective as of January 26, 2013, pursuant to which we purchased 2,605 incentive units from John Kerber at a purchase price of $260.21 per unit, which price was based on a third party appraisal and an internal appraisal. The incentive units were purchased from John Kerber for an aggregate purchase price of approximately $677,847. John Kerber is one of our former employees and the brother of William X. Kerber III, our Chief Information Officer.
11. | COMMITMENTS AND CONTINGENCIES |
In March 2010, we entered into a funding agreement with the Oklahoma City Economic Development Trust (the Trust), and the city of Oklahoma City. The Trust provided $1,968 as an up-front job creation payment
F-29
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
for the construction of certain public infrastructure improvements to our new global headquarters in northwest Oklahoma City. In exchange for the funding, we agreed to create at least 492 jobs over a five year period, with an average first year wage in excess of $37 and make a minimum capital investment in the project of at least $15,000. We further agreed that we would be responsible for repayment of any amount that was not offset by earned job creation payments. As of December 31, 2013 and 2012, we had earned $1,529 and $899, respectively. We believe that we will fulfill the obligations under the agreement within the time frame specified.
In July 2013, Dr. Lakshmi Arunachalam filed a complaint against us in the U.S. District Court for the District of Delaware alleging that Paycom infringes on U.S. Patent No. 8,244,833 assigned to her. The complaint seeks a permanent injunction, damages, and attorneys fees should we be found to infringe. Dr. Arunachalam has asserted similar claims in Delaware for the alleged infringement of the same patent against other payroll processing companies. Dr. Arunachalam has also accused various other entities of infringing related U.S. patents. On October 4, 2013, we filed an answer, affirmative defenses and counterclaims to the complaint. We denied all claims made against us by Dr. Arunachalam in her complaint, asserted various defenses and counterclaims for non-infringement and challenged the validity and enforceability of U.S. Patent No. 8,244,833. Dr. Arunachalam filed a reply to our counterclaim on October 28, 2013 and denied non-infringement and invalidity. We believe that this litigation is without merit and intend to vigorously defend ourselves in this matter. Due to the nature of the claims for this litigation and the uncertainties of the litigation, we are unable to provide an estimate of the potential amount of any loss related to this litigation.
We are involved in various other legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Operating Leases
We lease office space under several noncancellable operating leases with contractual terms expiring 2014 to 2019. Minimum rent expenses are recognized over the lease term. Lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amount payable under the lease as a liability.
Future annual minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 2013 are as follows:
Year Ending |
Operating | |||
2014 |
$ | 2,222 | ||
2015 |
2,092 | |||
2016 |
1,767 | |||
2017 |
1,465 | |||
2018 |
705 | |||
Thereafter |
53 | |||
|
|
|||
Total minimum |
||||
lease payments |
$ | 8,304 | ||
|
|
F-30
PAYCOM PAYROLL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013, 2012 AND 2011
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Rent expense under operating leases for the years ended December 31, 2013, 2012 and 2011 was $1,946, $1,487, and $1,644, respectively.
12. | SUBSEQUENT EVENTS |
In anticipation of an IPO, Software consummated the reorganization as of January 1, 2014, pursuant to which, (i) the owners of WCAS Paycom Holdings Inc. (WCAS Holdings) and WCAS CP IV Blocker, Inc. (CP IV Blocker), which are affiliates of Welsh, Carson, Anderson & Stowe, contributed WCAS Holdings and CP IV Blocker to Software in exchange for shares of common stock of Software and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units for shares of common stock of Software. Immediately after these contributions, a wholly-owned subsidiary of Software merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common stock of Software for their common and incentive units by operation of Delaware law and Holdings ownership interest in Software was cancelled. Following these transactions, all outstanding Series C Preferred Units were eliminated in an intercompany transaction between Holdings and WCAS Holdings, and Software assumed a 14% note with a face value $46,193 due 2017 (2017 Note) (collectively, the 2014 Reorganization). In connection with the 2014 Reorganization, Software authorized and reserved 11,350,881 shares of our common stock for future issuance under the 2014 Long-Term Incentive Plan (the 2014 Plan), effective January 1, 2014. The 2014 Plan permits Software to grant an array of equity-based incentive awards to certain officers, employees, contractors and directors.
Effective March 10, 2014, Software adopted an Amended and Restated Certificate of Incorporation, as approved by its board of directors and the majority of its stockholders, which, among other things, increased the number of authorized shares of capital stock from 100,000,000 shares of consisting solely of common stock, $0.01 par value per share, to 110,000,000 shares of capital stock consisting of 100,000,000 shares of common stock, $0.01 par value per share, and 10,000,000 shares of undesignated preferred stock, $0.01 per share. Softwares board of directors may fix the voting powers, designations, powers, preferences and other rights, and any qualifications, limitations or restrictions thereof on each series of preferred stock.
Subsequent to December 31, 2013, we signed seven new leases for our sales offices and entered into one amendment to our existing leases thereby resulting in an additional $5,769 in future commitments of noncancellable operating leases with initial or remaining terms of one year or more.
Subsequent events were evaluated for disclosure through March 10, 2014, the date on which these consolidated financial statements were issued.
F-31
6,645,000 Shares
Paycom Software, Inc.
Common Stock
Prospectus
Barclays | J.P. Morgan |
Pacific Crest Securities | Stifel | Canaccord Genuity |
, 2014
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the expenses payable by the registrant expected to be incurred in connection with the issuance and distribution of the common stock being registered hereby (other than underwriting discounts and commissions). All of such expenses are estimates, except for the Securities and Exchange Commission, or the SEC, registration fee, the Financial Industry Regulatory Authority, or FINRA, filing fee and the listing fee.
SEC registration fee |
$ | 19,686 | ||
FINRA filing fee |
15,500 | |||
Listing fee |
250,000 | |||
Printing fees and expenses |
300,000 | |||
Legal fees and expenses |
2,050,000 | |||
Registrar and transfer agent fees |
10,000 | |||
Accounting fees and expenses |
2,720,000 | |||
Miscellaneous expenses |
200,000 | |||
|
|
|||
Total |
$ | 5,565,186 | ||
|
|
Item 14. | Indemnification of Directors and Officers |
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.
Our certificate of incorporation provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our bylaws provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law.
We have entered and intend to continue to enter into indemnification agreements with our directors which, subject to certain exceptions, require us to indemnify such persons to the fullest extent permitted by applicable law, including indemnification against certain expenses, including attorneys fees, judgments, fines or penalties or other amounts paid in settlement in connection with any legal proceedings to which the director was, or is threatened to be made, a party by reason of the fact that such director is or was a director, officer, employee, fiduciary or agent of the Company or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the express written request of the Company, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, the best interest of the Company and, with respect to any criminal proceeding, in a manner in which such person would have had no reasonable cause to believe his conduct was unlawful. Subject to certain limitations, these indemnification agreements also require us to advance expenses to our directors in advance of the final disposition of any action or proceeding for which indemnification is required or permitted.
We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act and the Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.
II-1
The underwriters are obligated, under certain circumstances, pursuant to the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us, our officers, directors and the selling stockholders against liabilities under the Securities Act.
Item 15. | Recent Sales of Unregistered Securities |
During the past three years, our predecessors, Paycom Software Holdings, LLC, or Holdings, and Paycom Payroll, LLC, or Payroll, issued the following securities that were not registered under the Securities Act:
Incentive Units
During 2011, Payroll granted 3,875 incentive units to eligible officers and other employees under the 2009 Incentive Units Plan. These incentive units vest 50% on the third anniversary of the date of issuance and 50% on the fourth anniversary of the date of issuance. These incentive units were issued with a strike price that was based upon an $80.0 million company enterprise value.
During 2012, Holdings granted 57,057 Management Incentive Units to eligible officers and other employees under the 2012 Incentive Units Plan. These Management Incentive Units vest 50% over five years and 50% based on a cash return on investment to WCAS Paycom Holdings, Inc. with a linear vesting scale. These Management Incentive Units were issued with a strike price that was based upon a $400.0 million company enterprise value.
During 2012, Holdings granted 126,067 CEO Incentive Units to the Chief Executive Officer under the 2012 Incentive Units Plan. These CEO Incentive Units vest 25% over five years and 75% based on a cash return on investment to WCAS Paycom Holdings, Inc. with a linear vesting scale. These CEO Incentive Units were issued with a strike price that was based upon a $550.0 million company enterprise value.
During 2013, Holdings granted 25,953 Management Incentive Units to eligible officers and other employees under the 2012 Incentive Units Plan. These Management Incentive Units vest 50% over five years and 50% based on a cash return on investment of WCAS Paycom Holdings, Inc. with a linear vesting scale. These Management Incentive Units were issued with strike prices that were based upon a company enterprise values of $400.0 million and $550.0 million.
April 2012 Corporate Reorganization
On April 3, 2012, Holdings sold 6,839.0057 Series A Preferred Units to WCAS CP IV Blocker, Inc. for an aggregate purchase price of $2,409,122.44.
On April 3, 2012, pursuant to the Agreement and Plan of Merger by and among Holdings, Payroll and Paycom Payroll Merger Sub, LLC, by operation of Delaware law, all equity securities in Payroll were converted into equivalent equity securities in Holdings bearing identical terms. See Related Party Transactions.
On April 3, 2012, Holdings distributed 46,192.8934 Series C Preferred Units to WCAS Paycom Holdings, Inc. as part of the election of WCAS Paycom Holdings, Inc. to receive Series C Preferred Units instead of cash in connection with the recapitalization of Holdings set forth in the limited liability company agreement of Holdings.
The Reorganization
Effective January 1, 2014, we issued 30,452,458 and 136,015 shares of our common stock to WCAS X and WCAS Management Corporation, respectively, in exchange for the contribution of all of the shares of common stock of WCAS Paycom Holdings, Inc. to Software. In addition, we issued 323,307 shares of our common stock to WCAS IV in exchange for the contribution of all of the shares of common stock of WCAS CP IV Blocker, Inc. to Software.
II-2
Effective January 1, 2014, we issued 628,745 shares of our common stock to Robert J. Levenson (and certain affiliated entities) in exchange for his contribution of 200 Series B Preferred Units of Holdings to Software and we issued 220,060 shares of our common stock Richard Aiello in exchange for his contribution of 70 Series B Preferred Units of Holdings to Software.
Effective January 1, 2014, pursuant to the Agreement and Plan of Merger by and among Paycom, Holdings, Payroll and Paycom Software Merger Sub, LLC, or Software Merger Sub, Software Merger Sub merged with and into Holdings, with all outstanding common units and incentive units of Holdings being converted into shares of our common stock or restricted common stock by operation of Delaware law.
The sales of the above securities were deemed exempt from registration under Section 4(a)(2) or Regulation D of the Securities Act, and in certain circumstances, in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. The recipients of securities in the transactions exempt under Section 4(a)(2) or Regulation D of the Securities Act represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the units and instruments issued in such transactions.
Item 16. | Exhibits and Financial Statement Schedules |
(a) Exhibits. The following exhibits are included herein or incorporated herein by reference:
Exhibit No. |
Description |
|
1.1* | Form of Underwriting Agreement. | |
2.1** | Agreement and Plan of Merger, by and among Paycom Payroll, LLC, Paycom Payroll Holdings, LLC and Paycom Payroll Merger Sub, LLC, dated April 3, 2012. | |
2.2** | Contribution Agreement, by and between WCAS Capital Partners IV, L.P. and WCAS CP IV Blocker, Inc., dated April 3, 2012. | |
2.3** | Securities Purchase Agreement, by and among Paycom Payroll Holdings, LLC, WCAS Capital Partners IV, L.P. and WCAS CP IV Blocker, Inc., dated April 3, 2012. | |
2.4** | Merger Agreement, by and among Paycom Software, Inc., Paycom Payroll Holdings, LLC, Paycom Payroll, LLC and Paycom Merger Sub, LLC, dated December 30, 2013. | |
2.5** | Contribution Agreement, by and between WCAS Capital Partners, IV, L.P. and Paycom Software, Inc., dated December 30, 2013. | |
2.6** | Contribution Agreement, by and among Welsh, Carson, Anderson & Stowe X, L.P., WCAS Management Corporation and Paycom Software, Inc., dated December 30, 2013. | |
2.7** | Contribution Agreement, by and among Paycom Software, Inc. and each of the signatories thereto, dated December 30, 2013. | |
3.1* | Amended and Restated Certificate of Incorporation, as currently in effect. | |
3.2* | Bylaws, as currently in effect. | |
4.1* | Form of Common Stock Certificate. | |
4.2** | Amended and Restated Stockholders Agreement. | |
4.3** | Registration Rights Agreement. | |
5.1* | Opinion of Haynes and Boone, LLP. |
II-3
Exhibit No. |
Description |
|
10.1** | Form of Indemnification Agreement between Paycom Software, Inc. and each of its directors and executive officers. | |
10.2** | Paycom Software, Inc. 2014 Long-Term Incentive Plan. | |
10.3** | Form of Restricted Stock Award Agreement (Post-IPO). | |
10.4* | Form of Restricted Stock Award Agreement for Non-Executives. | |
10.5* | Form of Restricted Stock Award Agreement for Executives with Employment Agreements. | |
10.6* | Form of Restricted Stock Award Agreement for Chief Executive Officer. | |
10.7** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Chad Richison, dated December 30, 2013. | |
10.8** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Craig E. Boelte, dated December 30, 2013. | |
10.9** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Jeffrey D. York, dated December 30, 2013. | |
10.10** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and William X. Kerber III, dated December 30, 2013. | |
10.11** | Consolidated, Amended and Restated Loan Agreement, by and between Kirkpatrick Bank and Paycom Payroll, LLC, dated December 15, 2011. | |
10.12** | Loan Agreement, by and between Kirkpatrick Bank and Paycom Payroll, LLC, dated March 28, 2013. | |
10.13** | 10% Senior Note due April 3, 2022, by and between WCAS Capital Partners IV, L.P. and Paycom Payroll Holdings, LLC, dated April 3, 2012. | |
10.14** | 14% Note due April 3, 2017, by and between WCAS Paycom Holdings, Inc. and Welsh, Carson, Anderson & Stowe X, L.P., dated April 3, 2012. | |
10.15** | Real Property Purchase Agreement by and between Paycom Payroll, LLC and Kilpatrick Partners, L.L.C., dated November 28, 2012. | |
10.16** | Real Property Purchase Agreement by and between Paycom Payroll, LLC Kilpatrick Partners, L.L.C., dated October 16, 2013. | |
10.17** | Right of First Refusal Agreement, by and between Kilpatrick Partners, L.L.C. and Paycom Payroll, LLC, dated October 4, 2013. | |
21.1** | List of subsidiaries of the Registrant. | |
23.1* | Consent of Grant Thornton LLP. | |
23.2* | Consent of Grant Thornton LLP. | |
23.3* | Consent of Haynes and Boone, LLP (included in Exhibit 5.1). | |
24.1** | Power of Attorney. |
* | Filed herewith. |
** | Previously filed. |
II-4
Item 17. | Undertakings |
The undersigned registrant hereby undertakes:
1. | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
i. | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement. |
iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
2. | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. |
3. | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
4. | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
We have agreed to indemnify our director and officer against certain liabilities, including liabilities under the Securities Act and the benefits of such indemnification are not waived by our director and officer. Insofar as indemnification for liabilities arising under the Securities Act 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.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Oklahoma City, State of Oklahoma, on March 31, 2014.
PAYCOM SOFTWARE, INC. | ||
By: | /s/ Chad Richison | |
Chad Richison Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following person in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Chad Richison Chad Richison |
Chief Executive Officer and Director (Principal Executive Officer) |
March 31, 2014 | ||
/s/ Craig E. Boelte Craig E. Boelte |
Chief Financial Officer (Principal Accounting and Financial Officer) |
March 31, 2014 | ||
* Robert J. Levenson |
Director |
March 31, 2014 | ||
* Rob Minicucci |
Chairman of the Board |
March 31, 2014 | ||
* Conner Mulvee |
Director |
March 31, 2014 | ||
* Frederick C. Peters II |
Director |
March 31, 2014 | ||
* Sanjay Swani |
Director |
March 31, 2014 |
* By: |
/s/ Craig E. Boelte |
|
Craig E. Boelte | ||
Attorney-in-fact |
II-6
EXHIBIT INDEX
Exhibit No. |
Description |
|
1.1* | Form of Underwriting Agreement. | |
2.1** | Agreement and Plan of Merger, by and among Paycom Payroll, LLC, Paycom Payroll Holdings, LLC and Paycom Payroll Merger Sub, LLC, dated April 3, 2012. | |
2.2** | Contribution Agreement, by and between WCAS Capital Partners IV, L.P. and WCAS CP IV Blocker, Inc., dated April 3, 2012. | |
2.3** | Securities Purchase Agreement, by and among Paycom Payroll Holdings, LLC, WCAS Capital Partners IV, L.P. and WCAS CP IV Blocker, Inc., dated April 3, 2012. | |
2.4** | Merger Agreement, by and among Paycom Software, Inc., Paycom Payroll Holdings, LLC, Paycom Payroll, LLC and Paycom Merger Sub, LLC, dated December 30, 2013. | |
2.5** | Contribution Agreement, by and between WCAS Capital Partners, IV, L.P. and Paycom Software, Inc., dated December 30, 2013. | |
2.6** | Contribution Agreement, by and among Welsh, Carson, Anderson & Stowe X, L.P., WCAS Management Corporation and Paycom Software, Inc., dated December 30, 2013. | |
2.7** | Contribution Agreement, by and among Paycom Software, Inc. and each of the signatories thereto, dated December 30, 2013. | |
3.1* | Amended and Restated Certificate of Incorporation, as currently in effect. | |
3.2* | Bylaws, as currently in effect. | |
4.1* | Form of Common Stock Certificate. | |
4.2** | Amended and Restated Stockholders Agreement. | |
4.3** | Registration Rights Agreement. | |
5.1* | Opinion of Haynes and Boone, LLP. | |
10.1** | Form of Indemnification Agreement between Paycom Software, Inc. and each of its directors and executive officers. | |
10.2** | Paycom Software, Inc. 2014 Long-Term Incentive Plan. | |
10.3** | Form of Restricted Stock Award Agreement (Post-IPO). | |
10.4* | Form of Restricted Stock Award Agreement for Non-Executives. | |
10.5* | Form of Restricted Stock Award Agreement for Executives with Employment Agreements. | |
10.6* | Form of Restricted Stock Award Agreement for Chief Executive Officer. | |
10.7** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Chad Richison, dated December 30, 2013. | |
10.8** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Craig E. Boelte, dated December 30, 2013. | |
10.9** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and Jeffrey D. York, dated December 30, 2013. | |
10.10** | Executive Employment Agreement by and between Paycom Payroll Holdings, LLC and William X. Kerber III, dated December 30, 2013. | |
10.11** | Consolidated, Amended and Restated Loan Agreement, by and between Kirkpatrick Bank and Paycom Payroll, LLC, dated December 15, 2011. |
Exhibit No. |
Description |
|
10.12** | Loan Agreement, by and between Kirkpatrick Bank and Paycom Payroll, LLC, dated March 28, 2013. | |
10.13** | 10% Senior Note due April 3, 2022, by and between WCAS Capital Partners IV, L.P. and Paycom Payroll Holdings, LLC, dated April 3, 2012. | |
10.14** | 14% Note due April 3, 2017, by and between WCAS Paycom Holdings, Inc. and Welsh, Carson, Anderson & Stowe X, L.P., dated April 3, 2012. | |
10.15** | Real Property Purchase Agreement by and between Paycom Payroll, LLC and Kilpatrick Partners, L.L.C., dated November 28, 2012. | |
10.16** | Real Property Purchase Agreement by and between Paycom Payroll, LLC Kilpatrick Partners, L.L.C., dated October 16, 2013. | |
10.17** | Right of First Refusal Agreement, by and between Kilpatrick Partners, L.L.C. and Paycom Payroll, LLC, dated October 4, 2013. | |
21.1** | List of subsidiaries of the Registrant. | |
23.1* | Consent of Grant Thornton LLP. | |
23.2* | Consent of Grant Thornton LLP. | |
23.3* | Consent of Haynes and Boone, LLP (included in Exhibit 5.1). | |
24.1** | Power of Attorney. |
* | Filed herewith. |
** | Previously filed. |
Exhibit 1.1
shares
PAYCOM SOFTWARE, INC.
Common Stock
UNDERWRITING AGREEMENT
, 2014
B ARCLAYS C APITAL I NC .
J.P. M ORGAN S ECURITIES LLC,
As Representatives of the several
Underwriters named in Schedule I attached hereto,
c/o Barclays Capital Inc.
745 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
Paycom Software, Inc., a Delaware corporation (the Company ), and certain stockholders of the Company named in Schedule II attached hereto (the Selling Stockholders ), propose to sell an aggregate of shares (the Firm Stock ) of the Companys common stock, par value $0.01 per share (the Common Stock ). Of the shares of the Firm Stock, are being sold by the Company and are being sold by the Selling Stockholders. In addition, the Selling Stockholders propose to grant to the underwriters (the Underwriters ) named in Schedule I attached to this agreement (this Agreement ) options to purchase up to an aggregate of additional shares of the Common Stock on the terms set forth in Section 3 (the Option Stock ). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the Stock . This Agreement is to confirm the agreement concerning the purchase of the Stock from the Company and the Selling Stockholders by the Underwriters.
The Company is the successor to Paycom Payroll Holdings, LLC, a Delaware limited liability company (the LLC ). Effective as of January 1, 2014, (i) pursuant to the Agreement and Plan of Merger, dated as of December 30, 2013 (the Merger Agreement ), duly adopted and approved by the board of managers and members of the LLC and the Certificate of Merger filed with the Secretary of State of the State of Delaware (the Merger Certificate ), the LLC was merged with and into Paycom Software Merger Sub, LLC, a wholly owned subsidiary of the Company ( Merger Sub ), with the LLC surviving the merger, all as provided in the Merger Agreement and the Certificate of Merger (the Merger ) and (ii) the common units of the LLC issued and outstanding immediately prior to the Merger were contributed to the Company pursuant to separately executed contribution agreements, and by virtue of the Merger and without any action by the LLC, converted into shares of Common Stock of the Company in such amounts and to each of the Company stockholders consistent with the Merger Agreement. The transactions contemplated by the Certificate of Merger and Merger Agreement are collectively referred to in this Agreement as the Reorganization . The Reorganization Documents refer to the Certificate of Merger and Merger Agreement. The defined term, Company , for all periods prior to the effectiveness of the Reorganization, refers to Paycom Payroll Holdings, LLC and, from and after the effectiveness of the Reorganization, refers to Paycom Software, Inc.
As used in this Agreement:
(i) Applicable Time means [a.m.][p.m.] (New York City time) , 2014;
(ii) Commission means the Securities and Exchange Commission;
(iii) Effective Date means the date and time as of which such registration statement or any post-effective amendment thereto relating to the Stock was declared effective by the Commission;
(iv) Emerging Growth Company means an emerging growth company as defined in Section 2(a) of the Securities Act.
(v) Exchange Act means the Securities Exchange Act of 1934, as amended;
(vi) FINRA means the Financial Industry Regulatory Authority, Inc.;
(vii) Issuer Free Writing Prospectus means each free writing prospectus (as defined in Rule 405 under the Securities Act) prepared by or on behalf of the Company or used or referred to by the Company in connection with the offering of the Stock;
(viii) Preliminary Prospectus means any preliminary prospectus relating to the Stock included in such registration statement or filed with the Commission pursuant to Rule 424(b) under the Securities Act;
(ix) Pricing Disclosure Package means, as of the Applicable Time, the most recent Preliminary Prospectus, together with the pricing information included in Schedule IV hereto and each Issuer Free Writing Prospectus filed or used by the Company on or before the Applicable Time, other than a road show that is an Issuer Free Writing Prospectus but is not required to be filed under Rule 433 under the Securities Act, if any;
(x) Prospectus means the final prospectus relating to the Stock, as filed with the Commission pursuant to Rule 424(b) under the Securities Act;
(xi) Registration Statement means the registration statement on form S-1 (File No. 333-194462) relating to the Stock, as amended as of the Effective Date, including any Preliminary Prospectus or the Prospectus, all exhibits to such registration statement and including the information deemed by virtue of Rule 430A under the Securities Act to be part of such registration statement as of the Effective Date;
(xii) Securities Act means the Securities Act of 1933, as amended;
2
(xiii) Testing-the-Waters Communication means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act; and
(xiv) Written Testing-the-Waters Communication means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.
Any reference herein to the term Registration Statement shall be deemed to include the abbreviated registration statement to register additional shares of Stock under Rule 462(b) under the Securities Act (the Rule 462(b) Registration Statement ). Any reference to the most recent Preliminary Prospectus shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement or filed pursuant to Rule 424(b) under the Securities Act prior to or on the date hereof.
1. Representations, Warranties and Agreements of the Company . The Company represents, warrants and agrees that:
(a) The Registration Statement relating to the Stock has (i) been prepared by the Company in conformity with the requirements of the Securities Act and the rules and regulations of the Commission thereunder; (ii) been filed with the Commission under the Securities Act; and (iii) been declared effective by the Commission under the Securities Act. Copies of such Registration Statement and any amendment thereto have been delivered by the Company to you as the representatives (the Representatives ) of the Underwriters. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending the effectiveness of the Registration Statement, and no proceeding or examination for such purpose has been instituted or, to the Companys knowledge, threatened by the Commission.
(b) From the time of initial confidential submission of the Registration Statement to the Commission through the date hereof, the Company has been and is an Emerging Growth Company.
(c) The Company (i) has not engaged in any Testing-the-Waters Communication, and (ii) has not authorized anyone other than the Representatives to engage in Testing-the-Waters Communications. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed or approved for distribution any Written Testing-the-Waters Communications.
(d) The Company was not at the time of initial filing of the Registration Statement and at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) under the Securities Act) of the Stock, is not on the date hereof and will not be on the applicable Delivery Date (as defined in Section 5 herein), an ineligible issuer (as defined in Rule 405 under the Securities Act).
3
(e) The Registration Statement conformed and will conform in all material respects on the Effective Date and on the applicable Delivery Date, and any amendment to the Registration Statement filed after the date hereof will conform in all material respects when filed, to the requirements of the Securities Act and the rules and regulations thereunder. The most recent Preliminary Prospectus conformed, and the Prospectus will conform, in all material respects when filed with the Commission pursuant to Rule 424(b) under the Securities Act and on the applicable Delivery Date to the requirements of the Securities Act and the rules and regulations thereunder.
(f) The Registration Statement did not, as of the Effective Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 10(f).
(g) The Prospectus will not, as of its date or as of the applicable Delivery Date, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 10(f).
(h) The Pricing Disclosure Package did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Pricing Disclosure Package in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 10(f).
(i) Each Issuer Free Writing Prospectus listed in Schedule V hereto, when taken together with the Pricing Disclosure Package, did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from such Issuer Free Writing Prospectus listed in Schedule V hereto in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 10(f).
(j) Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the Securities Act and the rules and regulations thereunder on the date of first use, and the Company has complied with all prospectus delivery and any filing requirements applicable to such Issuer Free Writing Prospectus pursuant to the Securities Act and the rules and regulations thereunder. The Company has not made any offer relating to the Stock that would constitute an Issuer Free Writing Prospectus without the prior
4
written consent of the Representatives. The Company has retained in accordance with the Securities Act and the rules and regulations thereunder all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the Securities Act and the rules and regulations thereunder. The Company has taken all actions necessary so that any road show (as defined in Rule 433 under the Securities Act) in connection with the offering of the Stock will not be required to be filed pursuant to the Securities Act and the rules and regulations thereunder.
(k) The Company and each of its subsidiaries have been duly organized, is validly existing and in good standing as a corporation or other business entity under the laws of its jurisdiction of organization and is duly qualified to do business and in good standing as a foreign corporation or other business entity in each jurisdiction in which its ownership or lease of property or the conduct of its businesses requires such qualification, except where the failure to be so qualified or in good standing could not, in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or otherwise), results of operations, stockholders equity, properties, business or prospects of the Company and its subsidiaries taken as a whole (a Material Adverse Effect ). Each of the Company and its subsidiaries has all power and authority necessary to enter into and preform its obligations under the Reorganization Documents and own or hold its properties and to conduct its businesses as described in the Registration Statement. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed on Schedule IX hereto. None of the subsidiaries of the Company (other than Paycom Payroll, LLC (the Significant Subsidiary )) is a significant subsidiary (as defined in Rule 1-02(w) of Regulation S-X under the Exchange Act).
(l) The Company has an authorized capitalization as set forth in each of the most recent Preliminary Prospectus and the Prospectus as of the date or dates set forth therein, and all of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, conform in all material respects to the description thereof contained in the most recent Preliminary Prospectus and were issued in compliance with federal and state securities laws and not in violation of any preemptive right, resale right, right of first refusal or similar right. All of the Companys options, warrants and other rights to purchase or exchange any securities for shares of the Companys capital stock have been duly authorized and validly issued, conform in all material respects to the description thereof contained in the most recent Preliminary Prospectus and were issued in compliance with federal and state securities laws. All of the issued shares of capital stock or other equity interest of each subsidiary of the Company have been duly authorized and validly issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims, except for such liens, encumbrances, equities or claims as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(m) The shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly authorized and, upon payment and delivery in accordance with this Agreement, will be validly issued, fully paid and non-assessable, will conform in all material respects to the description thereof contained in the most recent Preliminary Prospectus, will be issued in compliance with federal and state securities laws and will be free of statutory and contractual preemptive rights, rights of first refusal and similar rights.
5
(n) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Reorganization Documents. This Agreement and the Reorganization Documents have been duly and validly authorized, executed and delivered by the Company.
(o) The issue and sale of the Stock, the execution, delivery and performance of this Agreement and the Reorganization Documents by the Company, the consummation of the transactions contemplated hereby and thereby and the application of the proceeds from the sale of the Stock as described under Use of Proceeds in the most recent Preliminary Prospectus and the consummation of the Reorganization as contemplated by the Reorganization Documents will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, impose any lien, charge or encumbrance upon any property or assets of the Company and its subsidiaries, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, license, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; (ii) result in any violation of the provisions of the charter or bylaws (or similar organizational documents) of the Company or any of its subsidiaries; or (iii) result in any violation of any statute or any judgment, order, decree, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets, except, with respect to clauses (i) and (iii), conflicts, breaches, violations, liens, charges encumbrances or defaults that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(p) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets is required for the issue and sale of the Stock, the execution, delivery and performance of this Agreement and the Reorganization Documents by the Company, the consummation of the transactions contemplated hereby and the consummation of the Reorganization, the application of the proceeds from the sale of the Stock as described under Use of Proceeds in the most recent Preliminary Prospectus, except in each case for (i) the registration of the Stock under the Securities Act and such consents, approvals, authorizations, orders, filings, registrations or qualifications as may be required under the Exchange Act, and applicable foreign securities, state securities or Blue Sky laws, and the rules and regulations of FINRA in connection with the purchase and sale of the Stock by the Underwriters, (iii) consents that have been, or prior to the Delivery Date will be, obtained and (iv) such consents, approvals, authorizations, orders, filings, registrations or qualifications that, if not obtained, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(q) The historical financial statements (including the related notes and supporting schedules) included in the most recent Preliminary Prospectus comply as to form in all material respects with the requirements of Regulation S-X under the Securities Act and present fairly in all material respects the financial condition, results of operations and cash flows of the entities
6
purported to be shown thereby at the dates and for the periods indicated and have been prepared in conformity with accounting principles generally accepted in the United States applied on a consistent basis throughout the periods involved, except, in the case of interim unaudited financial statements, for the absence of year end audit adjustments and the absence of certain notes that are included in an annual filing.
(r) The unaudited pro forma financial statements included in the most recent Preliminary Prospectus include assumptions that provide a reasonable basis for presenting the significant effects directly attributable to the transactions and events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma adjustments reflect the proper application of those adjustments to the historical financial statement amounts in the unaudited pro forma financial statements included in the most recent Preliminary Prospectus. The unaudited pro forma financial statements included in the most recent Preliminary Prospectus comply as to form in all material respects with the applicable requirements of Regulation S-X under the Act.
(s) Grant Thornton LLP, who have certified the audited financial statements of the Company and its consolidated subsidiaries included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, whose report appears in the most recent Preliminary Prospectus and who have delivered the initial letter referred to in Section 9(g) hereof, is an independent registered public accounting firm as required by the Securities Act and the rules and regulations thereunder.
(t) The Company and each of its subsidiaries maintain a system of internal control over financial reporting (as such term is defined in Rule 13(a)-15(f) of the Exchange Act) that complies with the requirements of the Exchange Act and that has been designed by, or under the supervision of the Companys principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. The Company maintains internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States and to maintain accountability for its assets, (iii) access to the Companys assets is permitted only in accordance with managements general or specific authorization, and (iv) the recorded accountability for the Companys assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. As of the date of the most recent balance sheet of the Company and its consolidated subsidiaries reviewed or audited by Grant Thornton LLP and the audit committee of the board of directors of the Company, there were no material weaknesses in the Companys internal controls.
(u) (i) The Company and each of its subsidiaries maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), (ii) such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management of the Company and its subsidiaries, including
7
their respective principal executive officers and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure and, and (iii) except as disclosed in the Preliminary Prospectus and the Prospectus, such disclosure controls and procedures are effective at a reasonable assurance level to perform the functions for which they were established.
(v) Except as disclosed in the most recent Preliminary Prospectus and the Prospectus, since the date of the most recent balance sheet of the Company and its consolidated subsidiaries reviewed or audited by Grant Thornton LLP and the audit committee of the board of directors of the Company, (i) the Company has not been advised of or become aware of (A) any significant deficiencies in the design or operation of internal controls that could adversely affect the ability of the Company or any of its subsidiaries to record, process, summarize and report financial data, or any material weaknesses in internal controls, and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal controls of the Company and each of its subsidiaries; and (ii) there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
(w) The section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies set forth in the most recent Preliminary Prospectus accurately and fully describes (i) the accounting policies that the Company believes are the most important in the portrayal of the Companys financial condition and results of operations and that require managements most difficult, subjective or complex judgments ( Critical Accounting Policies ); and (ii) the judgments and uncertainties affecting the application of Critical Accounting Policies.
(x) The Company, and the Companys directors and officers, in their capacities as such, are in compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith.
(y) Except as disclosed in the most recent Preliminary Prospectus or pursuant to the Reorganization, since the date of the latest audited financial statements included in the most recent Preliminary Prospectus, (a) neither the Company nor any of its subsidiaries has (i) sustained any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, other than as would not reasonably be expected to have a Material Adverse Effect, (ii) issued or granted any securities, (iii) incurred any material liability or obligation, direct or contingent, other than liabilities and obligations that were incurred in the ordinary course of business, (iv) entered into any material transaction not in the ordinary course of business, or (v) declared or paid any dividend on its capital stock, and (b) there has not been any material change in the capital stock, partnership or limited liability interests, as applicable, or long-term debt of the Company or any of its subsidiaries or any adverse change, or any development involving a prospective adverse change, in or affecting the condition (financial or otherwise), results of operations, stockholders equity, properties, management, business or prospects of the Company and its subsidiaries taken as a whole, in each case except as would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
8
(z) The Company and each of its subsidiaries have good and marketable title, which in the case of real property shall be in fee simple to, or have valid rights to lease or otherwise use, all items of real property and personal property that are material to the conduct of the respective businesses of the Company, in each case free and clear of all liens, encumbrances and defects, except such liens, encumbrances and defects as (i) are described in the most recent Preliminary Prospectus, (ii) do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries and (iii) would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(aa) The Company and each of its subsidiaries have such permits, licenses, franchises, certificates of need and other approvals or authorizations of governmental or regulatory authorities ( Permits ) as are necessary under applicable law to own their properties and conduct their businesses in the manner described in the most recent Preliminary Prospectus, except for any of the foregoing that would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company and each of its subsidiaries have fulfilled and performed all of its obligations with respect to the Permits, and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other impairment of the rights of the holder or any such Permits, except for any of the foregoing that could not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries has received notice of any revocation or modification of any such Permits, which would individually, or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(bb) The Company and each of its subsidiaries own or possess, or can acquire on reasonable terms, adequate rights to use all material patents, trademarks, service marks, trade names, copyrights, trade secrets and other proprietary or confidential information (collectively, Intellectual Property ) necessary for the conduct of their respective businesses as now operated or as currently contemplated to be operated. Neither the Company nor any of its subsidiaries have received written notice of a claim of infringement, misappropriation or other violation of the Intellectual Property right of a third person that has not been resolved.
(cc) Except as disclosed in the most recent Preliminary Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its subsidiaries is the subject that could, in the aggregate, reasonably be expected to have a Material Adverse Effect or would, in the aggregate, reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated hereby; and to the Companys knowledge, no such proceedings are threatened or contemplated by governmental authorities or others.
(dd) There are no contracts or other documents required under the Securities Act to be described in the Registration Statement or the most recent Preliminary Prospectus or filed as exhibits to the Registration Statement that are not described and filed as required. The statements made in the most recent Preliminary Prospectus, insofar as they purport to constitute summaries of the terms of the contracts and other documents described and filed, constitute accurate summaries of the terms of such contracts and documents in all material respects. Neither the Company nor any of its subsidiaries has knowledge that any other party to any such contract or other document has any intention not to render full performance as contemplated by the terms thereof.
9
(ee) Except as would not reasonably be expected to have a Material Adverse Effect, the Company and each of its subsidiaries maintain insurance in such amounts and covering such risks as is commercially reasonable in accordance with customary practices for companies engaged in similar businesses in similar industries for the conduct of their respective businesses and the value of their respective properties. All policies of insurance of the Company and its subsidiaries are in full force and effect; the Company and each of its subsidiaries are in compliance with the terms of such policies in all material respects; and neither the Company nor any of its subsidiaries has received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance; there are no material claims by the Company or any of its subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that could not reasonably be expected to have a Material Adverse Effect.
(ff) No relationship, direct or indirect, exists between or among the Company, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, on the other hand, that is required to be described in the most recent Preliminary Prospectus which is not so described.
(gg) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent that would reasonably be expected to have a Material Adverse Effect.
(hh) Neither the Company nor any of its subsidiaries (i) is in violation of its charter or bylaws (or similar organizational documents), (ii) is in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant, condition or other obligation contained in any indenture, mortgage, deed of trust, loan agreement, license or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, or (iii) is in violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over it or its property or assets or has failed to obtain any license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, except in the case of clauses (ii) and (iii), to the extent any such conflict, breach, violation or default could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(ii) Except as described in the most recent Preliminary Prospectus or as could not, in the aggregate, reasonably be expected to have a Material Adverse Effect, (i) there are no proceedings that are pending, or known to be contemplated, against the Company or any of its subsidiaries under any laws, regulations, ordinances, rules, orders, judgments, decrees, permits or other legal requirements of any governmental authority, including without limitation any
10
international, foreign, national, state, provincial, regional, or local authority, relating to pollution, the protection of human health or safety as relating to exposure to pollutants, the environment, or natural resources, or to use, handling, storage, manufacturing, transportation, treatment, discharge, disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants ( Environmental Laws ) in which a governmental authority is also a party, other than such proceedings regarding which it is reasonably believed no monetary sanctions of $100,000 or more will be imposed, (ii) the Company and its subsidiaries are not aware of any issues regarding compliance with Environmental Laws, including any pending or proposed Environmental Laws, or liabilities or other obligations under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that could reasonably be expected to have a material effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries, and (iii) none of the Company and its subsidiaries anticipates material capital expenditures relating to Environmental Laws.
(jj) The Company and each of its subsidiaries have filed all material federal, state, local and foreign tax returns required to be filed through the date hereof, subject to permitted extensions, and have paid all taxes due, and no tax deficiency has been determined adversely to the Company or any of its subsidiaries, nor does the Company have any knowledge of any tax deficiencies other than those (i) that are being contested in good faith or for which adequate reserves have been established in accordance with generally accepted accounting principles or (ii) which, if not paid, would not reasonably be expected to have a Material Adverse Effect.
(kk) Except as would not, in the aggregate, reasonably be expected to have in a Material Adverse Effect: (i) each employee benefit plan (within the meaning of Section 3(3) of the Employee Retirement Security Act of 1974, as amended ( ERISA )) for which the Company or any member of its Controlled Group (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the Code )) would have any material liability (each a Plan ) has been maintained in all material respects in compliance with its terms and with the requirements of all applicable statutes, rules and regulations including ERISA and the Code; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan excluding transactions effected pursuant to a statutory or administrative exemption that could reasonably be expected to result in a material liability to the Company or its subsidiaries; (iii) with respect to each Plan subject to Title IV of ERISA (A) no reportable event (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur, (B) no accumulated funding deficiency (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, has occurred or is reasonably expected to occur, (C) the fair market value of the assets under each Plan exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan), and (D) neither the Company nor any member of its Controlled Group has incurred, or reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the Pension Benefit Guaranty Corporation in the ordinary course and without default) in respect of a Plan (including a multiemployer plan, within the meaning of Section 4001(c)(3) of ERISA); and (iv) each Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, to the Companys knowledge, whether by action or by failure to act, which would cause the loss of such qualification.
11
(ll) The statistical and market-related data included in the most recent Preliminary Prospectus and the consolidated financial statements of the Company and its subsidiaries included in the most recent Preliminary Prospectus are based on or derived from sources that the Company believes to be reliable in all material respects.
(mm) Neither the Company nor any of its subsidiaries is, and as of the applicable Delivery Date and, after giving effect to the offer and sale of the Stock and the application of the proceeds therefrom as described under Use of Proceeds in the most recent Preliminary Prospectus and the Prospectus, none of them will be, (i) an investment company or company controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder, or (ii) a business development company (as defined in Section 2(a)(48) of the Investment Company Act).
(nn) The statements set forth in each of the most recent Preliminary Prospectus and the Prospectus under the captions Description of Capital Stock, Material United States Federal Income Tax Considerations and Underwriting, insofar as they purport to summarize the provisions of the laws and documents referred to therein, are accurate summaries in all material respects.
(oo) Except as described in the most recent Preliminary Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person. Other than rights that have been waived in writing, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to include any securities of the Company in the securities registered pursuant to the Registration Statement or to otherwise register securities of such person under the Securities Act as a result of the filing of the Registration Statement.
(pp) Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against any of them or the Underwriters for a brokerage commission, finders fee or like payment in connection with the offering and sale of the Stock.
(qq) The Company has not sold or issued any securities that would reasonably be expected to be integrated with the offering of the Stock contemplated by this Agreement pursuant to the Securities Act, the rules and regulations thereunder or the interpretations thereof by the Commission.
(rr) The Company and its affiliates have not taken, directly or indirectly, any action designed to or that has constituted or that could reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the shares of the Stock.
(ss) The Stock has been approved for listing, subject to official notice of issuance and evidence of satisfactory distribution, on The New York Stock Exchange.
12
(tt) The Company has not distributed and, prior to the later to occur of any Delivery Date and completion of the distribution of the Stock, will not distribute any offering material in connection with the offering and sale of the Stock other than any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus to which the Representatives have consented in accordance with Section 1(j) or 6(a)(vi) and any Issuer Free Writing Prospectus set forth on Schedule VI hereto and, in connection with the Directed Share Program described in Section 4, the enrollment materials prepared by Barclays Capital Inc. on behalf of the Company.
(uu) Neither the Company nor any subsidiary is in violation of or has received written notice from a court of competent jurisdiction or governmental agency of any violation with respect to any federal or state law relating to discrimination in the hiring, promotion or pay of employees, nor any applicable federal or state wage and hour laws, the violation of any of which could reasonably be expected to have a Material Adverse Effect.
(vv) Neither the Company nor any of its subsidiaries, nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom or any other applicable anti-bribery or anti-corruption laws; or (iv) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment. The Company and its subsidiaries have instituted and maintain and will continue to maintain policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.
(ww) The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the applicable money laundering statutes of all jurisdictions where the Company or any of its subsidiaries conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
13
(xx) Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company is currently subject to any sanctions administered or enforced by the U.S. Government, (including, without limitation, the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State and including, without limitation, the designation as a specially designated national or blocked person), the United Nations Security Council, the European Union, Her Majestys Treasury, or other relevant sanctions authority (collectively, Sanctions ), nor is the Company or any of its subsidiaries located, organized or resident in a country or territory that is the subject or the target of Sanctions; and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity (i) to fund or facilitate any activities of or business with any person, or in any country or territory, that, at the time of such funding or facilitation, is the subject or the target of Sanctions or (ii) in any other manner that will result in a violation by any person (including any person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of Sanctions.
(yy) None of the Directed Shares distributed in connection with the Directed Share Program (each as defined in Section 4) will be offered or sold outside of the United States.
(zz) The Conversion was duly authorized by the board of managers and the members of the LLC and has been effected in compliance with the relevant Delaware statutory provisions;
(aaa) The Reorganization has been consummated prior to the execution and delivery of this Agreement, all in the manner, at the times and on the terms contemplated in the Reorganization Documents, the Registration Statement, the General Disclosure Package and the Prospectus;
(bbb) The Company has not offered, or caused Barclays Capital Inc. to offer, Stock to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customers or suppliers level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company, its business or its products.
Any certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Stock shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each Underwriter.
2. Representations, Warranties and Agreements of the Selling Stockholders . Each Selling Stockholder, severally and not jointly, represents, warrants and agrees that:
(a) Neither the Selling Stockholder nor any person acting on behalf of the Selling Stockholder (other than, if applicable, the Company and the Underwriters) has used or referred to any free writing prospectus (as defined in Rule 405 under the Securities Act) relating to the Stock.
14
(b) The Selling Stockholder has, and immediately prior to any Delivery Date on which the Selling Stockholder is selling shares of Stock, the Selling Stockholder will have valid title, or a valid security entitlement within the meaning of Section 8-501 of the New York Uniform Commercial Code (the UCC ) in respect thereof, to the shares of Stock to be sold by the Selling Stockholder hereunder on such Delivery Date free and clear of all liens, equities or other encumbrances. The shares of Stock to be sold by the Selling Stockholders pursuant to this Agreement will be sold in compliance with federal and state securities laws.
(c) Upon payment for the Stock to be sold by such Selling Stockholder, delivery of such Stock, as directed by the Underwriters, to Cede & Co. ( Cede ) or such other nominee as may be designated by The Depository Trust Company ( DTC ), registration of such Stock in the name of Cede or such other nominee and the crediting of such Stock on the records of DTC to securities accounts of the Underwriters (i) DTC shall be a protected purchaser of such Stock within the meaning of Section 8-303 of the UCC, (ii) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Stock and (iii) no action based on an adverse claim, within the meaning of Section 8-102 of the UCC, to such Stock may be successfully asserted against the Underwriters with respect to such security entitlement. For purposes of this representation, such Selling Stockholder may assume that when such payment, delivery and crediting occur, (x) such Stock will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC, and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC.
(d) The Selling Stockholder has full right, power and authority, corporate or otherwise, to enter into this Agreement.
(e) This Agreement has been duly and validly authorized, executed and delivered by or on behalf of the Selling Stockholder.
(f) The issue and sale of the Stock by the Selling Stockholder, the execution, delivery and performance of this Agreement and the consummation by the Selling Stockholder of the transactions contemplated hereby and thereby do not and will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, license, lease or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound or to which any of the property or assets of the Selling Stockholder is subject, (ii) result in any violation of the provisions of the charter or bylaws (or similar organizational documents) of the Selling Stockholder, or (iii) result in any violation of any statute or any judgment, order, decree, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Stockholder or the property or assets of the Selling Stockholder except in the case of clauses (i) and (iii), for any such contraventions that would not, individually or in the aggregate, materially interfere with the consummation of the transactions contemplated by this Agreement.
15
(g) No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body having jurisdiction over the Selling Stockholder or the property or assets of the Selling Stockholder is required for the issue and sale of the Stock by the Selling Stockholder, the execution, delivery and performance of this Agreement and the consummation by the Selling Stockholder of the transactions contemplated hereby and thereby, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, orders, filings, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and sale of the Stock by the Underwriters.
(h) To the knowledge of the Selling Stockholder, the Registration Statement did not, as of the Effective Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that the representations and warranties set forth in this paragraph 2(h) are limited in all respects to statements or omissions made in reliance upon and in conformity with information (the Selling Stockholder Information ) relating to such Selling Stockholder furnished to the Company in writing by such Selling Stockholder expressly for use in the Registration Statement, it being understood and agreed that the only information furnished by such Selling Stockholder consists of the name of such Selling Stockholder, the number of offered shares and the address and other information with respect to such Selling Stockholder (excluding percentages) which appear in the Registration Statement in the table (and corresponding footnotes) under the caption Principal and Selling Stockholders.
(i) To the knowledge of the Selling Stockholder, the Prospectus will not, as of its date or as of the applicable Delivery Date, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the representations and warranties set forth in this paragraph 2(i) are limited in all respects to statements or omissions made in reliance upon and in conformity with the Selling Stockholder Information.
(j) To the knowledge of the Selling Stockholder, the Pricing Disclosure Package did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the representations and warranties set forth in this paragraph 2(j) are limited in all respects to statements or omissions made in reliance upon and in conformity with the Selling Stockholder Information.
(k) The Selling Stockholder is not prompted to sell shares of Common Stock by any information concerning the Company that is not set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
(l) The Selling Stockholder has not taken, directly or indirectly, any action that is designed to or that has constituted or that could reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the shares of the Stock.
16
(m) The Selling Stockholder has executed a lock-up agreement, substantially in the form of Exhibit A hereto, relating to sales and certain other dispositions of shares of Common Stock or certain other securities, that is in full force and effect as of the date hereof and shall be in full force and effect as of the Closing Date.
3. Purchase of the Stock by the Underwriters. On the basis of the representations, warranties and covenants contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell [ ] shares of the Firm Stock and each Selling Stockholder agrees to sell the number of shares of the Firm Stock set forth opposite its name in Schedule II hereto, severally and not jointly, to the several Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set forth opposite that Underwriters name in Schedule I hereto. Each Underwriter shall be obligated to purchase from the Company, and from each Selling Stockholder, that number of shares of the Firm Stock that represents the same proportion of the number of shares of the Firm Stock to be sold by the Company and by each Selling Stockholder as the number of shares of the Firm Stock set forth opposite the name of such Underwriter in Schedule I represents to the total number of shares of the Firm Stock to be purchased by all of the Underwriters pursuant to this Agreement. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, each Selling Stockholder grants to the Underwriters an option to purchase up to the number of shares of Option Stock set forth opposite such Selling Stockholders name in Schedule II hereto, severally and not jointly. Such option is exercisable in the event that the Underwriters sell more shares of Common Stock than the number of shares of Firm Stock in the offering and as set forth in Section 5 hereof. Any such election to purchase Option Stock shall be made in proportion to the maximum number of shares of Option Stock to be sold by each Selling Shareholder as set forth in Schedule II hereto. Each Underwriter agrees, severally and not jointly, to purchase the number of shares of Option Stock (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of shares of Option Stock to be sold on such Delivery Date as the number of shares of Firm Stock set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of shares of Firm Stock.
The purchase price payable by the Underwriters for each of the Firm Stock and any Option Stock is $ per share.
The Company and the Selling Stockholders are not obligated to deliver any of the Firm Stock or Option Stock to be delivered on the applicable Delivery Date, except upon payment for all such Stock to be purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters . Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions to be set forth in the Prospectus.
17
It is understood that approximately shares of the Firm Stock (the Directed Shares ) will initially be reserved by the several Underwriters for offer and sale upon the terms and conditions to be set forth in the most recent Preliminary Prospectus and in accordance with the rules and regulations of FINRA to employees of the Company and its subsidiaries and persons having business relationships with the Company and its subsidiaries and affiliates who have heretofore delivered to Barclays Capital Inc. offers or indications of interest to purchase shares of Firm Stock in form reasonably satisfactory to Barclays Capital Inc. (such program, the Directed Share Program ) and that any allocation of such Firm Stock among such persons will be made in accordance with timely directions received by Barclays Capital Inc. from the Company; provided that under no circumstances will Barclays Capital Inc. or any Underwriter be liable to the Company or to any such person for any action taken or omitted in good faith in connection with such Directed Share Program. It is further understood that any Directed Shares not affirmatively reconfirmed for purchase by any participant in the Directed Share Program by :00 A.M., New York City time, on the first business day following the date hereof or otherwise are not purchased by such persons will be offered by the Underwriters to the public upon the terms and conditions set forth in the Prospectus.
The Company agrees to pay all reasonable fees and disbursements incurred by the Underwriters in connection with the Directed Share Program and any stamp duties or other taxes incurred by the Underwriters in connection with the Directed Share Program.
5. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at 10:00 A.M., New York City time, on the third full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the Initial Delivery Date . Delivery of the Firm Stock shall be made to the Representatives for the account of each Underwriter against payment by the several Underwriters through the Representatives and of the respective aggregate purchase prices of the Firm Stock being sold by the Company and the Selling Stockholders to or upon the order of the Company and the Selling Stockholders of the purchase price by wire transfer in immediately available funds to the accounts specified by the Company and the Selling Stockholders. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. The Company shall deliver the Firm Stock through the facilities of DTC unless the Representatives shall otherwise instruct.
The option granted in Section 3 will expire 30 days after the date of this Agreement and may be exercised in whole or from time to time in part by written notice being given to the Company and the Selling Stockholders by the Representatives; provided that if such date falls on a day that is not a business day, the option granted in Section 3 will expire on the next succeeding business day. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representatives, when the shares of Option Stock are to be delivered; provided that this date and time shall not be earlier than the Initial Delivery Date nor earlier than the second business day after the date on which the options shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. Each date and time the shares of Option Stock are delivered is sometimes referred to as an Option Stock Delivery Date , and the Initial Delivery Date and any Option Stock Delivery Date are sometimes each referred to as a Delivery Date .
18
Delivery of the Option Stock by the Selling Stockholders and payment for the Option Stock by the several Underwriters through the Representatives shall be made at 10:00 A.M., New York City time, on the date specified in the corresponding notice described in the preceding paragraph or at such other date or place as shall be determined by agreement between the Representatives and the Company. On each Option Stock Delivery Date, the Selling Stockholders shall deliver or cause to be delivered the Option Stock to the Representatives for the account of each Underwriter against payment by the several Underwriters through the Representatives and of the respective aggregate purchase prices of the Option Stock being sold by the Selling Stockholders to or upon the order of the Selling Stockholders of the purchase price by wire transfer in immediately available funds to the accounts specified by the Selling Stockholders. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. The Selling Stockholders shall deliver the Option Stock through the facilities of DTC unless the Representatives shall otherwise instruct.
6. Further Agreements of the Company and the Underwriters. (a) The Company agrees:
(i) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commissions close of business on the second business day following the execution and delivery of this Agreement; to make no further amendment or any supplement to the Registration Statement or the Prospectus prior to the last Delivery Date except as provided herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment or supplement to the Registration Statement or the Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of the Prospectus or any Issuer Free Writing Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding or examination for any such purpose or of any request by the Commission for the amending or supplementing of the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of the Prospectus or any Issuer Free Writing Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal.
(ii) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith.
19
(iii) To deliver promptly to the Representatives: (A) a conformed copy of the Registration Statement as originally filed with the Commission and each amendment thereto, in each case excluding exhibits, (B) as many copies of each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus as the Representatives may reasonably request, and (C) as many copies of each Issuer Free Writing Prospectus as the Representatives may reasonably request; and, if the delivery of a prospectus is required at any time after the date hereof in connection with the offering or sale of the Stock or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus that will correct such statement or omission or effect such compliance.
(iv) To file promptly with the Commission any amendment or supplement to the Registration Statement or the Prospectus that may, in the reasonable judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission.
(v) Prior to filing with the Commission any amendment or supplement to the Registration Statement or the Prospectus, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing, which consent shall not be unreasonably withheld or delayed; provided that, the foregoing provision shall not apply if such filing is, in the written opinion of counsel to the Company, required by law.
(vi) Not to make any offer relating to the Stock that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representatives, which shall be deemed to have been given for any Issuer Free Writing Prospectus listed on Schedule V and Schedule VI.
(vii) To comply with all applicable requirements of Rule 433 under the Securities Act with respect to any Issuer Free Writing Prospectus. If at any time after the date hereof any events shall have occurred as a result of which any Issuer Free Writing Prospectus, as then amended or supplemented, would conflict with the information in the Registration Statement, the most recent Preliminary Prospectus or the Prospectus or would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or, if for any other reason it shall be necessary to amend or supplement any Issuer Free Writing Prospectus, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Issuer Free Writing Prospectus that will correct such conflict, statement or omission or effect such compliance.
20
(viii) As soon as practicable after the Effective Date (it being understood that the Company shall have until at least 410 days or, if the fourth quarter following the fiscal quarter that includes the Effective Date is the last fiscal quarter of the Companys fiscal year, 455 days after the end of the Companys current fiscal quarter), to make generally available to the Companys stockholders and to deliver to the Representatives an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the rules and regulations thereunder (including, at the option of the Company, Rule 158); provided that (i) such requirements to the Companys stockholders shall be deemed met by the Companys compliance with its reporting requirements pursuant to the Exchange Act if such compliance satisfies the conditions of Rule 158 and (ii) such requirements to the Representatives shall be deemed met by the Company if the related reports are available on the Commissions Electronic Data Gathering, Analysis and Retrieval System.
(ix) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Stock for offering and sale under the securities or Blue Sky laws of Canada and such other jurisdictions as the Representatives may reasonably request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock; provided that in connection therewith, the Company shall not be required to (i) qualify as a foreign corporation in any jurisdiction in which it would not otherwise be required to so qualify, (ii) file a general consent to service of process in any such jurisdiction, or (iii) subject itself to taxation in any jurisdiction in which it would not otherwise be subject.
(x) For a period commencing on the date hereof and ending on the 180th day after the date of the Prospectus (the Lock-Up Period ), not to, directly or indirectly, (A) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (other than Stock that may be sold under this Agreement, the issuance of stock options, restricted stock awards and other equity-based incentive awards pursuant to the Companys employee benefit plans, qualified stock option plans or other equity-based compensation plans existing on the date hereof or the issuance of Common Stock upon the exercise of options or any other awards or the vesting of any awards issued under the Companys equity-based compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights not issued under one of those plans), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the grant of options pursuant to option plans or the issuance of stock options, restricted stock awards and other equity-based incentive awards pursuant to the Companys employee benefit plans, qualified stock option plans or other equity-based compensation plans existing on the date hereof), (B) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, (C) file or cause to be filed a
21
registration statement, including any amendments thereto, with respect to the registration of any shares of Common Stock or securities convertible, exercisable or exchangeable into Common Stock or any other securities of the Company (other than any registration statement on Form S-8), or (D) publicly disclose the intention to do any of the foregoing, in each case without the prior written consent of Barclays Capital Inc. and J.P. Morgan Securities LLC, on behalf of the Underwriters, and to cause each officer, director and stockholder of the Company set forth on Schedule III hereto to furnish to the Representatives, prior to the Initial Delivery Date, a letter or letters, substantially in the form of Exhibit B hereto (the Lock-Up Agreements ).
(xi) If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a Lock-Up Agreement for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by issuing a press release substantially in the form of Exhibit C hereto, and containing such other information as Barclays Capital Inc. may require with respect to the circumstances of the release or waiver and/or the identity of the officer(s) and/or director(s) with respect to which the release or waiver applies, through a major news service at least two business days before the effective date of the release or waiver.
(xii) To apply the net proceeds from the sale of the Stock being sold by the Company substantially in accordance with the description as set forth in the Prospectus under the caption Use of Proceeds.
(xiii) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Securities Act.
(xiv) If the Company elects to rely upon Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing pay the Commission the filing fee for the Rule 462(b) Registration Statement.
(xv) In connection with the Directed Share Program, to ensure that the Directed Shares will be restricted from sale, transfer, assignment, pledge or hypothecation to the same extent as sales and dispositions of Common Stock by the Company are restricted pursuant to Section 6(a)(x), and Barclays Capital Inc. will notify the Company as to which Directed Share Participants will need to be so restricted. At the request of Barclays Capital Inc., the Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time as is consistent with Section 6(a)(x).
(xvi) The Company will promptly notify the Representatives if the Company ceases to be an Emerging Growth Company at any time prior to the later of (A) the time when a prospectus relating to the offering or sale of the Stock or any other securities relating thereto is not required by the Securities Act to be delivered (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule) and (B) completion of the Lock-Up Period.
22
(xvii) If at any time following the distribution of any Written Testing-the-Waters Communication listed on Schedule VIII hereto there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission. The Company will promptly notify the Representatives of (A) any distribution by the Company of Written Testing the Waters Communications and (B) any request by the Commission for information concerning the Written Testing the Waters Communications.
(xviii) The Company and its affiliates will not take, directly or indirectly, any action designed to or that has constituted or that reasonably would be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the Stock.
(xix) The Company will do and perform all things required or necessary to be done and performed under this Agreement by it prior to each Delivery Date, and to satisfy all conditions precedent to the Underwriters obligations hereunder to purchase the Stock.
(b) Each Underwriter severally agrees that such Underwriter shall not: (i) include any issuer information (as defined in Rule 433 under the Securities Act) in any free writing prospectus (as defined in Rule 405 under the Securities Act) used or referred to by such Underwriter without the prior consent of the Company (any such issuer information with respect to whose use the Company has given its consent, Permitted Issuer Information ), any such Permitted Issuer Information as set forth on Schedule VII hereto; provided that (A) no such consent shall be required with respect to any such issuer information contained in the then most recent Preliminary Prospectus filed by the Company with the Commission prior to the use of such free writing prospectus or any Issuer Free Writing Prospectus listed in Schedule V hereto, and (B) issuer information, as used in this Section 6(b), shall not be deemed to include information prepared by or on behalf of such Underwriter on the basis of or derived from issuer information; and (ii) take any action that would result in the Company being required to file with the Commission under Rule 433 under the Securities Act a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
7. Further Agreements of the Selling Stockholders . Each Selling Stockholder agrees, severally and not jointly:
(a) Neither the Selling Stockholder nor any person acting on behalf of the Selling Stockholder (other than, if applicable, the Company and the Underwriters) shall use or refer to any free writing prospectus (as defined in Rule 405 under the Securities Act), relating to the Stock;
23
(b) To deliver to the Representatives prior to the Initial Delivery Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the Selling Stockholder is a United States person).
(c) The Selling Stockholder will not take, directly or indirectly, any action designed to or that has constituted or that reasonably would be expected to cause or result in the stabilization or manipulation of the price of any security of the Company in connection with the offering of the Stock.
(d) The Selling Stockholder will do and perform all things required or necessary to be done and performed under this Agreement by it prior to each Delivery Date, and to satisfy all conditions precedent to the Underwriters obligations hereunder to purchase the Stock.
8. Expenses. The Company agrees, whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, to pay all expenses, costs, fees and taxes incident to and in connection with (a) the authorization, issuance, sale and delivery of the Stock and any stamp duties or other taxes payable in that connection, and the preparation and printing of certificates for the Stock; (b) the preparation, printing and filing under the Securities Act of the Registration Statement (including any exhibits thereto), any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, and any amendment or supplement thereto; (c) the distribution of the Registration Statement (including any exhibits thereto), any Preliminary Prospectus, the Prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, and any amendment or supplement thereto, all as provided in this Agreement; (d) the distribution of this Agreement, any supplemental agreement among Underwriters, and any other related documents in connection with the offering, purchase, sale and delivery of the Stock; (e) the delivery and distribution of the Custody Agreements and the Powers of Attorney and the fees and expenses of the Custodian (and any other attorney-in-fact); (f) any required review by the FINRA of the terms of sale of the Stock (including reasonable related fees and expenses of counsel to the Underwriters in an amount that is not greater than $30,000); (g) the listing of the Stock on the New York Stock Exchange and/or any other exchange; (h) the qualification of the Stock under the securities laws of the several jurisdictions as provided in Section 6(a)(ix) and the preparation, printing and distribution of a Blue Sky Memorandum (including reasonable related fees and expenses of counsel to the Underwriters); (i) the preparation, printing and distribution of one or more versions of the Preliminary Prospectus and the Prospectus for distribution in Canada, including in the form of a Canadian wrapper (including reasonable related fees and expenses of Canadian counsel to the Underwriters); (j) the offer and sale of shares of the Stock by the Underwriters in connection with the Directed Share Program, including the reasonable fees and disbursements of counsel to the Underwriters related thereto, the costs and expenses of preparation, printing and distribution of the Directed Share Program material and all stamp duties or other taxes incurred by the Underwriters in connection with the Directed Share Program; (k) the investor presentations on any road show or any
24
Testing-the-Waters Communication, undertaken in connection with the marketing of the Stock, including, without limitation, expenses associated with any electronic road show, travel and lodging expenses of the representatives and officers of the Company and one-half of the cost of any aircraft chartered in connection with the road show (to the extent the Company does not provide its own aircraft); and (l) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement; provided that, except as provided in this Section 8 and in Section 13, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, the Custodian (and any other attorney-in-fact), any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters.
9. Conditions of Underwriters Obligations . The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company and the Selling Stockholders contained herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i). The Company shall have complied with all filing requirements applicable to any Issuer Free Writing Prospectus used or referred to after the date hereof; no stop order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Prospectus or any Issuer Free Writing Prospectus shall have been issued and no proceeding or examination for such purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. If the Company has elected to rely upon Rule 462(b) under the Securities Act, the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement.
(b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement, the Prospectus or the Pricing Disclosure Package, or any amendment or supplement thereto, contains an untrue statement of a fact which, in the opinion of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading in light of the circumstances under which such statements were made.
(c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Custody Agreements, the Powers of Attorney, the Stock, the Registration Statement, the Prospectus and any Issuer Free Writing Prospectus, and all other legal matters relating to this Agreement and the
25
transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company and the Selling Stockholders shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters.
(d) Haynes and Boone, LLP shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, substantially in the form attached hereto as Exhibit D-1.
(e) The counsel for the Selling Stockholders shall have furnished to the Representatives its written opinion, as counsel to the Selling Stockholders, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, substantially in the form attached hereto as Exhibit D-2.
(f) The Representatives shall have received from Gibson, Dunn & Crutcher, LLP, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and the Pricing Disclosure Package and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the Representatives shall have received from Grant Thornton LLP a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, and (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the most recent Preliminary Prospectus, as of a date not more than three days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants comfort letters to underwriters in connection with registered public offerings.
(h) With respect to the letter of Grant Thornton LLP referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the initial letter ), the Company shall have furnished to the Representatives a letter (the bring-down letter ) of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than three
26
days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter, and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter.
(i) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chief Executive Officer and its Chief Financial Officer as to the following:
(i) The representations, warranties and agreements of the Company in Section 1 are true and correct on and as of such Delivery Date, and the Company has complied with all its agreements contained herein and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Delivery Date;
(ii) No stop order suspending the effectiveness of the Registration Statement has been issued; and no proceedings or examination for that purpose have been instituted or, to the knowledge of such officers, threatened;
(iii) They have examined the Registration Statement, the Prospectus and the Pricing Disclosure Package, and, in their opinion, (A) (1) the Registration Statement, as of the Effective Date, (2) the Prospectus, as of its date and on the applicable Delivery Date, and (3) the Pricing Disclosure Package, as of the Applicable Time, did not and do not contain any untrue statement of a material fact and did not and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (except in the case of the Registration Statement, in the light of the circumstances under which they were made) not misleading, and (B) since the Effective Date, no event has occurred that should have been set forth in a supplement or amendment to the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus that has not been so set forth; and
(iv) To the effect of Section 9(l) ( provided that no representation with respect to the judgment of the Representatives need be made) and Section 9(m).
(j) Each Selling Stockholder (or the Custodian or one or more attorneys-in-fact on behalf of the Selling Stockholders) shall have furnished to the Representatives on such Delivery Date a certificate, dated such Delivery Date, signed by, or on behalf of, the Selling Stockholder (or the Custodian or one or more attorneys-in-fact) stating that the representations, warranties and agreements of the Selling Stockholder contained herein are true and correct on and as of such Delivery Date and that the Selling Stockholder has complied with all its agreements contained herein and has satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Delivery Date.
27
(k) Each Selling Stockholder shall have furnished to the Representatives on such Delivery Date a certificate, dated such Delivery Date, signed by, or on behalf of, such Selling Stockholder stating that such Selling Stockholder has examined the Registration Statement, the Prospectus and the Pricing Disclosure Package, and, to its knowledge, (i) (A) the Registration Statement, as of the Effective Date, (B) the Prospectus, as of its date and on the applicable Delivery Date, and (C) the Pricing Disclosure Package, as of the Applicable Time, did not and do not contain any untrue statement of a material fact and did not and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (except in the case of the Registration Statement, in the light of the circumstances under which they were made) not misleading, and (ii) since the Effective Date, no event has occurred that should have been set forth in a supplement or amendment to the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus that has not been so set forth.
(l) Except as described in the most recent Preliminary Prospectus, (i) neither the Company nor any of its subsidiaries shall have sustained, since the date of the latest audited financial statements included in the most recent Preliminary Prospectus, any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, or (ii) since such date there shall not have been any material change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), results of operations, stockholders equity, properties, management, business or prospects of the Company and its subsidiaries taken as a whole, the effect of which, in any such case described in clause (i) or (ii), is, individually or in the aggregate, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus.
(m) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) (A) trading in securities generally on any securities exchange that has registered with the Commission under Section 6 of the Exchange Act (including the New York Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market), or (B) trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or materially limited or the settlement of such trading generally shall have been materially disrupted or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a general moratorium on commercial banking activities shall have been declared by federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States, or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions, including, without limitation, as a result of terrorist activities after the date hereof (or the effect of international conditions on the financial markets in the United States shall be such) or any other calamity or crises either within or outside the United States, in the case of clauses (i) through (iv), as to make it, in the judgment of the Representatives, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus.
28
(n) The New York Stock Exchange shall have approved the Stock for listing, subject only to official notice of issuance and evidence of satisfactory distribution.
(o) The Lock-Up Agreements between the Representatives and the officers, directors and stockholders of the Company set forth on Schedule III, delivered to the Representatives on or before the date of this Agreement, shall be in full force and effect on such Delivery Date.
(p) On or prior to each Delivery Date, the Company shall have furnished to the Underwriters such further certificates and documents as the Representatives may reasonably request.
All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution .
(a) The Company hereby agrees to indemnify and hold harmless each Underwriter and any affiliate thereof that assists such Underwriter in the distribution of the Shares in the Offering, and each of their respective directors, officers and employees and each person, if any, who controls any Underwriter (or any such affiliate) within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter (or any such affiliate thereof), director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in (A) any Preliminary Prospectus, the Registration Statement, the Prospectus or in any amendment or supplement thereto (in the case of any Preliminary Prospectus or the Prospectus, in light of the circumstances under which such statements were made), (B) any Issuer Free Writing Prospectus or in any amendment or supplement thereto in light of the circumstances under which such statements were made, (C) any Permitted Issuer Information used or referred to in any free writing prospectus (as defined in Rule 405 under the Securities Act) used or referred to by any Underwriter, or (D) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Stock, including any road show (as defined in Rule 433 under the Securities Act) not constituting an Issuer Free Writing Prospectus and any Written Testing-the-Waters Communication ( Marketing Materials ) or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Permitted Issuer Information or any Marketing Materials, any material fact required to be stated therein (in
29
light of the circumstances under which they were made) or necessary to make the statements therein not misleading, and shall reimburse each Underwriter (or any such affiliate thereof), and each director, officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter (or any such affiliate thereof), director, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided , that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any such amendment or supplement thereto or in any Permitted Issuer Information or any Marketing Materials, in reliance upon and in conformity with written information concerning such Underwriter (or any such affiliate thereof) furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information consists solely of the information specified in Section 10(f). The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter (or any such affiliate thereof), director, officer, employee or controlling person of that Underwriter.
(b) Each Selling Stockholder, severally and not jointly, shall indemnify and hold harmless the Company, each Underwriter and any affiliate thereof that assists such Underwriter in the distribution of the Shares in the Offering, and each of their respective directors, officers and employees, and each person, if any, who controls the Company or such Underwriter (or any such affiliate thereof) within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which the Company, such Underwriter, or any such director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in (A) any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto (in the case of any Preliminary Prospectus, the Prospectus or any Issuer Free Writing Prospectus, in light of the circumstances under which such statements were made) or (B) in any Permitted Issuer Information, any Marketing Materials or any free writing prospectus (as defined in Rule 405 under the Securities Act) (any such free writing prospectus that was prepared by or on behalf of the Selling Stockholder or used or referred to by the Selling Stockholder in connection with the offering of the Stock in violation of Section 7(a) being referred to as a Selling Stockholder Free Writing Prospectus ), (ii) the omission or alleged omission to state in any Preliminary Prospectus, Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Permitted Issuer Information, any Marketing Materials or any Selling Stockholder Free Writing Prospectus, any material fact required to be stated therein (in light of the circumstances under which they were made) or necessary to make the statements therein not misleading, and shall reimburse the Company, such Underwriter
30
(or any such affiliate thereof), and their respective directors, officers and employees and each such controlling person promptly upon demand for any legal or other expenses reasonably incurred by the Company, such Underwriter (or any such affiliate thereof), and their respective directors, officers and employees or controlling persons in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred, or (iii) any breach of any representation or warranty of the Selling Stockholders in this Agreement or any certificate or other agreement delivered pursuant hereto or contemplated hereby; provided that the Selling Stockholder shall be liable only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or any Selling Stockholder Free Writing Prospectus in reliance upon and in conformity with the Selling Stockholder Information. The liability of the Selling Stockholder under the indemnity agreement contained in this paragraph shall be limited to an amount equal to the total gross proceeds from the offering of the shares of the Stock purchased under the Agreement received by the Selling Stockholder, as set forth in the table on the cover page of the Prospectus. The foregoing indemnity agreement is in addition to any liability that the Selling Stockholders may otherwise have to the Company, such Underwriter (or any such affiliate thereof), director, officer, employee or controlling persons.
(c) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each Selling Stockholder, their respective directors (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company), officers and employees, and each person, if any, who controls the Company or such Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company, such Selling Stockholder or any such director, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Marketing Materials or Blue Sky Application, or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Marketing Materials or Blue Sky Application, any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, which information is limited to the information set forth in Section 10(f). The foregoing indemnity agreement is in addition to any liability that any Underwriter may otherwise have to the Company, such Selling Stockholder or any such director, officer, employee or controlling person.
31
(d) Promptly after receipt by an indemnified party under this Section 10 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 10, notify the indemnifying party in writing of the claim or the commencement of that action; provided , that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 10 except to the extent it has been materially prejudiced (through the forfeiture of substantive rights and defenses) by such failure and, provided , further , that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 10. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 10 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, that the indemnified party shall have the right to employ counsel to represent jointly the indemnified party and those other indemnified parties and their respective directors, officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought under this Section 10 if (i) the indemnified party and the indemnifying party shall have so mutually agreed; (ii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to the indemnified party; (iii) the indemnified party and its directors, officers, employees and controlling persons shall have reasonably concluded that there may be legal defenses available to them that are different from or in addition to those available to the indemnifying party; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the indemnified parties or their respective directors, officers, employees or controlling persons, on the one hand, and the indemnifying party, on the other hand, and representation of both sets of parties by the same counsel would present such counsel with an actual or potential conflict of interest and in any such event the fees and expenses of such separate counsel shall be paid by the indemnifying party. No indemnifying party shall (x) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and does not include a statement as to, or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party, or (y) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any
32
indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 10(a) or (b) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request or disputed in good faith the indemnified partys entitlement to such reimbursement prior to the date of such settlement.
(e) If the indemnification provided for in this Section 10 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 10(a), 10(b), 10(c) or 10(g) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other, from the offering of the Stock, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of Stock shall be deemed to be in the same respective proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company and the Selling Stockholders, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, in each case as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 10(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 10(e) shall be deemed to include, for purposes of this Section 10(e), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions
33
of this Section 10(e), in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Stock exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations to contribute as provided in this Section 10(e) are several in proportion to their respective underwriting obligations and not joint.
(f) The Underwriters severally confirm and the Company and each Selling Stockholder acknowledges and agrees that the statements regarding delivery of shares by the Underwriters set forth on the cover page of, and the concession and reallowance figures and the paragraph relating to stabilization by the Underwriters appearing under the caption Underwriting in, the most recent Preliminary Prospectus and the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in any Preliminary Prospectus, the Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or in any amendment or supplement thereto or in any Marketing Materials.
(g) The Company shall indemnify and hold harmless Barclays Capital Inc. (including any affiliate thereof that assists in the distribution of the Shares in the Offering, and each of their respective directors, officers and employees) and each person, if any, who controls Barclays Capital Inc. within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act ( Barclays Entities ), from and against any loss, claim, damage or liability or any action in respect thereof to which any of the Barclays Entities may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action (i) arises out of, or is based upon, any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the approval of the Company for distribution to Directed Share Participants in connection with the Directed Share Program or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, when considered in conjunction with the Prospectus, the Pricing Disclosure Package or any applicable Preliminary Prospectus, not misleading, (ii) arises out of, or is based upon, the failure of the Directed Share Participant to pay for and accept delivery of Directed Shares that the Directed Share Participant agreed to purchase, or (iii) is otherwise related to the Directed Share Program; provided that the Company shall not be liable under this clause (iii) for any loss, claim, damage, liability or action that is determined in a final judgment by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of the Barclays Entities. The Company shall reimburse the Barclays Entities promptly upon demand for any legal or other expenses reasonably incurred by them in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred.
34
11. Defaulting Underwriters .
(a) If, on any Delivery Date, any Underwriter defaults in its obligations to purchase the Stock that it has agreed to purchase under this Agreement, the remaining non-defaulting Underwriters may in their discretion arrange for the purchase of such Stock by the non-defaulting Underwriters or other persons satisfactory to the Company on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Stock, then the Company shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Underwriters to purchase such Stock on such terms. In the event that within the respective prescribed periods, the non-defaulting Underwriters notify the Company that they have so arranged for the purchase of such Stock, or the Company notifies the non-defaulting Underwriters that it has so arranged for the purchase of such Stock, either the non-defaulting Underwriters or the Company may postpone such Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement, the Prospectus or in any such other document or arrangement that effects any such changes. As used in this Agreement, the term Underwriter includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule I hereto that, pursuant to this Section 11, purchases Stock that a defaulting Underwriter agreed but failed to purchase.
(b) If, after giving effect to any arrangements for the purchase of the Stock of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the total number of shares of the Stock that remains unpurchased does not exceed one-eleventh of the total number of shares of all the Stock, then the Company shall have the right to require each non-defaulting Underwriter to purchase the total number of shares of Stock that such Underwriter agreed to purchase hereunder plus such Underwriters pro rata share (based on the total number of shares of Stock that such Underwriter agreed to purchase hereunder) of the Stock of such defaulting Underwriter or Underwriters for which such arrangements have not been made; provided that the non-defaulting Underwriters shall not be obligated to purchase more than 110% of the total number of shares of Stock that it agreed to purchase on such Delivery Date pursuant to the terms of Section 3.
(c) If, after giving effect to any arrangements for the purchase of the Stock of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters and the Company as provided in paragraph (a) above, the total number of shares of Stock that remains unpurchased exceeds one-eleventh of the total number of shares of all the Stock, or if the Company shall not exercise the right described in paragraph (b) above, then this Agreement shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 11 shall be without liability on the part of the Company, except that the Company will continue to be liable for the payment of expenses as set forth in Sections 8 and 13 and except that the provisions of Section 10 shall not terminate and shall remain in effect.
35
(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company or any non-defaulting Underwriter for damages caused by its default.
12. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company and the Selling Stockholders prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 9(m), 9(n) and 9(o) shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters Expenses. If (a) the Company or any Selling Stockholder shall fail to tender the Stock for delivery to the Underwriters for any reason, or (b) the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement (other than a failure to close pursuant to (i)(A), (ii), (iii) or (iv) of Section 9(m) hereof), the Company and the Selling Stockholders will reimburse the Underwriters for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel for the Underwriters) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company and the Selling Stockholders shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 11 by reason of the default of one or more Underwriters, neither the Company nor the Selling Stockholders shall be obligated to reimburse any defaulting Underwriter on account of those expenses.
14. Research Analyst Independence. The Company acknowledges that the Underwriters research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such Underwriters research analysts may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company and/or the offering that differ from the views of their respective investment banking divisions. The Company and the Selling Stockholders hereby waive and release, to the fullest extent permitted by law, any claims that the Company or the Selling Stockholders may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by their independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company or the Selling Stockholders by such Underwriters investment banking divisions. The Company and the Selling Stockholders acknowledge that each of the Underwriters is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the companies that may be the subject of the transactions contemplated by this Agreement.
36
15. No Fiduciary Duty . The Company and the Selling Stockholders acknowledge and agree that in connection with this offering, sale of the Stock or any other services the Underwriters may be deemed to be providing hereunder, notwithstanding any preexisting relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by the Underwriters: (a) no fiduciary or agency relationship between the Company, the Selling Stockholders and any other person, on the one hand, and the Underwriters, on the other, exists; (b) the Underwriters are not acting as advisors, expert or otherwise, to either the Company or the Selling Stockholders, including, without limitation, with respect to the determination of the public offering price of the Stock, and such relationship between the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other, is entirely and solely commercial, based on arms-length negotiations; (c) any duties and obligations that the Underwriters may have to the Company or Selling Stockholders shall be limited to those duties and obligations specifically stated herein; and (d) the Underwriters and their respective affiliates may have interests that differ from those of the Company and the Selling Stockholders. The Company and the Selling Stockholders hereby waive any claims that the Company or the Selling Stockholders may have against the Underwriters with respect to any breach of fiduciary duty in connection with this offering.
16. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail or facsimile transmission to Barclays Capital Inc., 745 Seventh Avenue, New York, New York 10019, Attention: Syndicate Registration (Fax: ), with a copy, in the case of any notice pursuant to Section 10(d), to the Director of Litigation, Office of the General Counsel, Barclays Capital Inc., 745 Seventh Avenue, New York, New York 10019;
(b) if to the Company, shall be delivered or sent by mail or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Craig Boelte (Fax: ); and
(c) if to any Selling Stockholder, shall be delivered or sent by mail or facsimile transmission to such Selling Stockholder at the address set forth on Schedule II hereto.
Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company and the Selling Stockholders shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Barclays Capital Inc. on behalf of the Representatives.
17. Persons Entitled to Benefit of Agreement . This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, the Selling Stockholders and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (a) the representations, warranties, indemnities and agreements of the Company and the Selling Stockholders contained in this Agreement shall also be deemed to be for the benefit of the directors, officers and employees of the Underwriters and each person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act, and (b) the indemnity agreement of the Underwriters contained in Section 10(c) of this Agreement shall be deemed to be for the benefit of the directors of the
37
Company, the officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 17, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.
18. Survival. The respective indemnities, representations, warranties and agreements of the Company, the Selling Stockholders and the Underwriters contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them.
19. Definition of the Terms Business Day, Affiliate and Subsidiary . For purposes of this Agreement, (a) business day means each Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close, and (b) affiliate and subsidiary have the meanings set forth in Rule 405 under the Securities Act.
20. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of laws principles (other than Section 5-1401 of the General Obligations Law).
21. Waiver of Jury Trial . The Company and the Underwriters hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
22. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument.
23. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
38
If the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the Underwriters, please indicate your acceptance in the space provided for that purpose below.
Very truly yours,
PAYCOM SOFTWARE, INC. |
||
By: | ||
Name: Title: |
39
WELSH, CARSON, ANDERSON & STOWE X, L.P.
By: WCAS X ASSOCIATES LLC, its general partner |
||
By: | ||
Name: Title: |
WCAS MANAGEMENT CORPORATION | ||
By: | ||
Name: Title: |
WCAS CAPITAL PARTNERS IV, L.P.
By: WCAS CP IV ASSOCIATES LLC, its general partner |
||
By: | ||
Name: Title: |
40
Accepted:
B ARCLAYS C APITAL I NC .
J.P. M ORGAN S ECURITIES LLC
For themselves and as Representatives
of the several Underwriters named
in Schedule I hereto
By B ARCLAYS C APITAL I NC .
By: | ||
Authorized Representative |
By J.P. M ORGAN S ECURITIES LLC
By: | ||
Authorized Representative |
41
SCHEDULE I
Underwriters |
Number of Shares of
Firm Stock |
|
Barclays Capital Inc. |
||
J.P. Morgan Securities LLC |
||
Pacific Crest Securities LLC |
||
Stifel, Nicolaus & Company, Incorporated |
||
Canaccord Genuity Inc. |
||
|
||
Total |
||
|
SCHEDULE II
Name and Address of Selling Stockholder |
Number of
Shares of Firm Stock |
Number of
Shares of Option Stock |
||
Welsh, Carson, Anderson & Stowe X, L.P. |
||||
WCAS Management Corporation |
||||
WCAS Capital Partners IV, L.P. |
||||
ELK II 2012 Descendants Trust u/a dated December 26, 2012 |
||||
SLY II 2012 Descendants Trust u/a dated December 26, 2012 |
||||
Lenox Capital Group, LLC |
||||
Estate of Richard Aiello |
||||
|
|
|||
Total |
||||
|
|
SCHEDULE III
PERSONS DELIVERING LOCK-UP AGREEMENTS
Directors
Chad Richison
Robert Levenson
Rob Minicucci
Sanjay Swani
Officers
Craig Boelte
Jeffrey York
William X. Kerber III
Stockholders
Welsh, Carson, Anderson & Stowe X, L.P.
WCAS Management Corporation
WCAS Capital Partners IV, L.P.
Richard Aiello
Anna Allen
Christopher Allen
Brian Alt
Christina Asher
Bryan Bagby
Amanda Bagby (Wilson)
Henry Binkowski
Tiffany Blain
Matt Bowman
Christopher Brewer
Alison Bringham
Tom Bubb
Vincent Capuana
Nicholas Chiaparas
Amy Cook
Carol Corral
Margaret De Fore
Chris Dingess
Monty Durham
Tiffany English
Reagan Evans
Holly Faurot
Dana Follis
Gina Fontenot (Biondillo)
Phuong Ha
Shane Hadlock
Tosha Henning
Brooke Hluza
Britton Holley
Erin Holman
John Horsch
Michelle Houk
Megan Howe
Brandie Humphrey
Lara F. Irvin
Mackenzie Jenkins
Ashley Jennings
Michelle Kalush
Staci Keese
Shawn Khan
Nacim Khavarian
Kirsten LaTorre
Vickie Lee
Glen Love
Robert Magness
Asberg Mahanti
Lisa Maldonado
Megan Marshall
Shirley McArdle
Tiffany McGowan
Greg McPherson
Zach Miller
Hannah Morris
Michelle Murphy (Mask)
Nick Nelson
Amy Newman
Samuel Norman
Chris Nusbaum
Rebecca Oakes
Mark T. Oare
Kathy Oden-Hall
Randy Peck
Stacey Pezold
Cynthia Hailey Pope
Jim Quillen
Chad Raymond
Brent A. Reynolds
Brad Richardson
Ryan Roberts
Kristy Ross (Reeder)
Shannon Rowe
Alan Rutledge
Melissa Sandburg
Chantel Sandersfield
Molly Sanjule
Ashley Scalzott
Jim Schein
Debbie Shipman
Josh Sipes
Brad Smith
Robert Smith
Jenny Stepp
Richard Stupansky
Ryan Tate
Brad Taylor
Victoria Titus
Lauren Toppins
Amy Vickroy
Robin Waters
Brooklyn Workman
Matthew Young
Sara Zellner
SCHEDULE IV
ORALLY CONVEYED PRICING INFORMATION
1. [ Public offering price ]
2. [ Number of shares offered ]
SCHEDULE V
ISSUER FREE WRITING PROSPECTUSES ROAD SHOW MATERIALS
[Insert list of certain road show materials]
SCHEDULE VI
ISSUER FREE WRITING PROSPECTUS
[Insert list of all Issuer Free Writing Prospectuses]/[None]
SCHEDULE VII
PERMITTED ISSUER INFORMATION
[None]
SCHEDULE VIII
WRITTEN TESTING-THE-WATERS COMMUNICATIONS
[None]
SCHEDULE IX
SUBSIDIARIES
WCAS Paycom Holdings, Inc.
WCAS CP IV Blocker, Inc.
Paycom Benefits, LLC
Paycom Payroll Holdings, LLC
Paycom Payroll, LLC
EXHIBIT A
Form of Selling Stockholder Lock-Up Letter Agreement
B ARCLAYS C APITAL I NC .
J.P. M ORGAN S ECURITIES LLC
As Representatives of the several
Underwriters named in Schedule I,
c/o Barclays Capital Inc.
745 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
The undersigned understands that you and certain other firms (the Underwriters ), propose to enter into an Underwriting Agreement (the Underwriting Agreement ) providing for the purchase by the Underwriters of shares (the Shares ) of common stock (the Common Stock ) of the successor corporation of Paycom Payroll LLC. Paycom Software Holdings LLC, or any successor corporation thereof, shall be referred to herein as the Company . It is currently contemplated that the successor corporation of Paycom Software Holdings LLC will be Paycom Software, Inc., a Delaware corporation. The Underwriters propose to reoffer the Shares to the public pursuant to a Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission (the Offering ). For the avoidance of doubt, Common Stock shall include any shares issued in exchange for the Preferred A Units, Preferred B Units, Common Units and Incentive Units (each as defined in the Amended and Restated Limited Liability Company Agreement of Paycom Payroll LLC, as amended) of Paycom Software Holdings, LLC.
In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Barclays Capital Inc. and J.P. Morgan Securities LLC, on behalf of the Underwriters, the undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of Common Stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for, or that represent the right to receive shares of, Common Stock, other than any Shares that may be sold in the Offering, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of Common Stock, whether any such transaction
Exhibit A-1
described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, (3) cause to be filed a registration statement during the Lock-up Period (as defined below), including any amendments thereto, with respect to the registration of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock or any other securities of the Company, or (4) publicly disclose the intention to do any of the foregoing for a period commencing on the date hereof and ending on the 180 th day after the date of the final prospectus relating to the Offering (such 180-day period, the Lock-Up Period ).
The foregoing paragraph shall not apply to (a) transactions relating to shares of Common Stock or other securities acquired in the open market after the completion of the offering; (b) bona fide gifts, sales, transfers or other dispositions of shares of any class of the Companys capital stock, including by will or intestacy, in each case that are made exclusively between and among the undersigned and members of the undersigneds family, a trust established for the benefit of the undersigneds family, affiliates of the undersigned, including its partners (if a partnership), members (if a limited liability company) or stockholders (if a corporation), or another corporation, partnership, investment fund or other business entity that is controlled or managed by an affiliate of the undersigned; provided , that it shall be a condition to any transfer pursuant to this clause (b) that (i) the transferee/donee agrees to be bound by the terms of this Lock-Up Letter Agreement (including, without limitation, the restrictions set forth in the preceding paragraph) to the same extent as if the transferee/donee were a party hereto, (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the Securities Act ), and the Securities Exchange Act of 1934, as amended (the Exchange Act )) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the 180-day period referred to above; provided , that the foregoing restriction in clause (b)(ii) shall not be deemed to apply to any distributions of shares of Common Stock made by Welsh, Carson, Anderson & Stowe, L.P. or an affiliate thereof to its limited partners to the extent that any such filing or public announcement indicate that such transfer is not a sale, and (iii) the undersigned notifies Barclays Capital Inc. and J.P. Morgan Securities LLC at least two business days prior to the proposed gift, sale, transfer or disposition; (c) the exercise of warrants or stock options granted pursuant to the Companys stock option/incentive plans or the conversion or redemption of securities convertible into, or exchangeable or exercisable for, Common Stock, otherwise outstanding on the date hereof; provided , that the restrictions contained in this Lock-Up Agreement shall apply to shares of Common Stock issued upon such exercise or conversion; (d) the transfer of Common Stock to the Company in a transaction exempt from Section 16(b) of the Exchange Act, solely in connection with the payment of taxes due in connection with any exercise of securities convertible into Common Stock or any vesting of Common Stock; provided , that no such transfer of the undersigneds shares of Common Stock to the Company pursuant to the exercise of such right shall require a filing under Section 16 of the Exchange Act with respect to any of the undersigneds shares of Common Stock during the Lock-Up Period; (e) the establishment or modification of any contract,
Exhibit A-2
instruction or plan that satisfies all of the requirements of Rule 10b5-1 (a Rule 10b5-1 Plan ) under the Exchange Act; provided , that no sales of Common Stock or securities convertible into, or exchangeable or exercisable for, Common Stock, shall be made pursuant to a Rule 10b5-1 Plan prior to the expiration of the Lock-Up Period (as the same may be extended pursuant to the provisions hereof); provided further , that the Company is not required to report the establishment of such Rule 10b5-1 Plan in any public report or filing with the Commission under the Exchange Act during the lock-up period and does not otherwise voluntarily effect any such public filing or report regarding such Rule 10b5-1 Plan; (f) any demands or requests for, exercises of any right with respect to, or taking of any action in preparation of, the registration by the Company under the Securities Act of the undersigneds shares of Common Stock; provided , that no transfer of the undersigneds shares of Common Stock registered pursuant to the exercise of any such right and no registration statement shall be filed under the Securities Act with respect to any of the undersigneds shares of Common Stock during the Lock-Up Period, (g) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement; provided , that each such transferee executes an agreement stating that the transferee is receiving and holding such Shares subject to the restrictions contained in this Lock-Up Agreement; and (h) the transfer of Common Stock to the Company or its parent entities from an executive officer of the Company upon such executive officers death, disability or termination of employment. Furthermore, the restrictions contained herein shall not apply to any transfers, sales, tenders or other dispositions of any of the undersigneds Shares pursuant to a tender offer made to all holders of the Companys securities for securities of the Company that would, if consummated, result in not less than a majority of the outstanding voting securities of the Company being disposed in such transaction or pursuant to any other transaction, including, without limitation, a merger, consolidation or other business combination, resulting in not less than a majority of the outstanding voting securities of the Company being disposed in such transaction (including, without limitation, entering into any lock-up, voting or similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of any of the undersigneds Shares in connection with any such transaction or to vote any of the undersigneds Shares in favor of any such transaction); provided that, if such tender offer or other transaction is not completed, any of the undersigneds Shares subject to this Lock-Up Agreement shall remain subject to the restrictions contained in this Lock-Up Agreement.
If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares, as referred to in FINRA Rule 5131(d)(2)(A), that the undersigned may purchase in the Offering pursuant to an allocation of Shares that is directed in writing by the Company; (ii) each of Barclays Capital Inc. and J.P. Morgan Securities LLC agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, Barclays Capital Inc. and J.P. Morgan Securities LLC will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by issuing a press release through a major
Exhibit A-3
news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by Barclays Capital Inc. and J.P. Morgan Securities LLC hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if both (a) the release or waiver is effected solely to permit a transfer not for consideration, and (b) the transferee has agreed in writing to be bound by the same terms described in this letter that are applicable to the transferor, to the extent and for the duration that such terms remain in effect at the time of the transfer.
In furtherance of the foregoing, the Company and its transfer agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement.
The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement.
Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company, the Selling Stockholders named therein and the Underwriters.
This Lock-Up Letter Agreement shall automatically terminate, and the undersigned will, in each case, be released from its obligations under this Lock-Up Letter Agreement upon the earliest to occur, if any, of (1) written notice from the Company on the one hand, or the Representatives, on the other hand, notifying the other in writing that it does not intend to proceed with the Offering prior to the execution of the Underwriting Agreement; (2) the termination of the Underwriting Agreement (other than the provisions thereof which survive termination) before the payment for and delivery of any Shares to the Underwriters; or (3) September 30, 2014, in the event that the Underwriting Agreement has not been executed by that date.
[ Signature page follows ]
Exhibit A-4
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours, | ||
By: | ||
Name: | ||
Title: |
Dated:
Exhibit A-5
EXHIBIT B
Form of Company Lock-Up Letter Agreement
B ARCLAYS C APITAL I NC .
J.P. M ORGAN S ECURITIES LLC
As Representatives of the several
Underwriters named in Schedule I,
c/o Barclays Capital Inc.
745 Seventh Avenue
New York, New York 10019
Ladies and Gentlemen:
The undersigned understands that you and certain other firms (the Underwriters ), propose to enter into an Underwriting Agreement (the Underwriting Agreement ) providing for the purchase by the Underwriters of shares (the Shares ) of common stock (the Common Stock ) of the successor corporation of Paycom Payroll LLC. Paycom Software Holdings LLC, or any successor corporation thereof, shall be referred to herein as the Company . It is currently contemplated that the successor corporation of Paycom Software Holdings LLC will be Paycom Software, Inc., a Delaware corporation. The Underwriters propose to reoffer the Shares to the public pursuant to a Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission (the Offering ). For the avoidance of doubt, Common Stock shall include any shares issued in exchange for the Preferred A Units, Preferred B Units, Common Units and Incentive Units (each as defined in the Amended and Restated Limited Liability Company Agreement of Paycom Payroll LLC, as amended) of Paycom Software Holdings, LLC.
In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Barclays Capital Inc. and J.P. Morgan Securities LLC, on behalf of the Underwriters, the undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (including, without limitation, shares of Common Stock that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and shares of Common Stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for, or that represent the right to receive shares of, Common Stock, other than any Shares that may be sold in the Offering, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, or (3) make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of Common
Exhibit B-1
Stock or securities convertible into or exercisable or exchangeable for Common Stock or any other securities of the Company, or (4) publicly disclose the intention to do any of the foregoing for a period commencing on the date hereof and ending on the 180 th day after the date of the final prospectus relating to the Offering (such 180-day period, the Lock-Up Period ).
The foregoing paragraph shall not apply to (a) transactions relating to shares of Common Stock or other securities acquired in the open market after the completion of the offering; (b) bona fide gifts, sales, transfers or other dispositions of shares of any class of the Companys capital stock, including by will or intestacy, in each case that are made exclusively between and among the undersigned and members of the undersigneds family, a trust established for the benefit of the undersigneds family, affiliates of the undersigned, including its partners (if a partnership), members (if a limited liability company) or stockholders (if a corporation), or another corporation, partnership, investment fund or other business entity that is controlled or managed by an affiliate of the undersigned; provided , that it shall be a condition to any transfer pursuant to this clause (b) that (i) the transferee/donee agrees to be bound by the terms of this Lock-Up Letter Agreement (including, without limitation, the restrictions set forth in the preceding paragraph) to the same extent as if the transferee/donee were a party hereto, (ii) each party (donor, donee, transferor or transferee) shall not be required by law (including without limitation the disclosure requirements of the Securities Act of 1933, as amended (the Securities Act ), and the Securities Exchange Act of 1934, as amended (the Exchange Act )) to make, and shall agree to not voluntarily make, any filing or public announcement of the transfer or disposition prior to the expiration of the 180-day period referred to above; provided , that the foregoing restriction in clause (b)(ii) shall not be deemed to apply to any distributions of shares of Common Stock made by Welsh, Carson, Anderson & Stowe, L.P. or an affiliate thereof to its limited partners to the extent that any such filing or public announcement indicate that such transfer is not a sale, and (iii) the undersigned notifies Barclays Capital Inc. and J.P. Morgan Securities LLC at least two business days prior to the proposed gift, sale, transfer or disposition; (c) the exercise of warrants or stock options granted pursuant to the Companys stock option/incentive plans or the conversion or redemption of securities convertible into, or exchangeable or exercisable for, Common Stock, otherwise outstanding on the date hereof; provided , that the restrictions contained in this Lock-Up Agreement shall apply to shares of Common Stock issued upon such exercise or conversion; (d) the transfer of Common Stock to the Company in a transaction exempt from Section 16(b) of the Exchange Act, solely in connection with the payment of taxes due in connection with any exercise of securities convertible into Common Stock or any vesting of Common Stock; provided , that no such transfer of the undersigneds shares of Common Stock to the Company pursuant to the exercise of such right shall require a filing under Section 16 of the Exchange Act with respect to any of the undersigneds shares of Common Stock during the Lock-Up Period; (e) the establishment or modification of any contract, instruction or plan that satisfies all of the requirements of Rule 10b5-1 (a Rule 10b5-1 Plan ) under the Exchange Act; provided , that no sales of Common Stock or securities convertible into, or exchangeable or exercisable for, Common Stock, shall be made pursuant to a Rule 10b5-1 Plan prior to the expiration of the Lock-Up Period (as the same may be extended pursuant to the provisions hereof); provided further , that the Company is not required to report the establishment of such Rule 10b5-1 Plan in any public report or filing with the Commission under the Exchange Act during the lock-up period and does not otherwise voluntarily effect any such public filing or report regarding such Rule 10b5-1 Plan; (f) any demands or requests for, exercises of any right with respect to, or taking of any action in
Exhibit B-2
preparation of, the registration by the Company under the Securities Act of the undersigneds shares of Common Stock; provided , that no transfer of the undersigneds shares of Common Stock registered pursuant to the exercise of any such right and no registration statement shall be filed under the Securities Act with respect to any of the undersigneds shares of Common Stock during the Lock-Up Period, (g) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement; provided , that each such transferee executes an agreement stating that the transferee is receiving and holding such Shares subject to the restrictions contained in this Lock-Up Agreement; and (h) the transfer of Common Stock to the Company or its parent entities from an executive officer of the Company upon such executive officers death, disability or termination of employment. Furthermore, the restrictions contained herein shall not apply to any transfers, sales, tenders or other dispositions of any of the undersigneds Shares pursuant to a tender offer made to all holders of the Companys securities for securities of the Company that would, if consummated, result in not less than a majority of the outstanding voting securities of the Company being disposed in such transaction or pursuant to any other transaction, including, without limitation, a merger, consolidation or other business combination, resulting in not less than a majority of the outstanding voting securities of the Company being disposed in such transaction (including, without limitation, entering into any lock-up, voting or similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of any of the undersigneds Shares in connection with any such transaction or to vote any of the undersigneds Shares in favor of any such transaction); provided that, if such tender offer or other transaction is not completed, any of the undersigneds Shares subject to this Lock-Up Agreement shall remain subject to the restrictions contained in this Lock-Up Agreement.
If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares, as referred to in FINRA Rule 5131(d)(2)(A), that the undersigned may purchase in the Offering pursuant to an allocation of Shares that is directed in writing by the Company; (ii) each of Barclays Capital Inc. and J.P. Morgan Securities LLC agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, Barclays Capital Inc. and J.P. Morgan Securities LLC will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by issuing a press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by Barclays Capital Inc. and J.P. Morgan Securities LLC hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if both (a) the release or waiver is effected solely to permit a transfer not for consideration, and (b) the transferee has agreed in writing to be bound by the same terms described in this letter that are applicable to the transferor, to the extent and for the duration that such terms remain in effect at the time of the transfer.
In furtherance of the foregoing, the Company and its transfer agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement.
The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement.
Exhibit B-3
Whether or not the Offering actually occurs depends on a number of factors, including market conditions. Any Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company, the Selling Stockholders named therein and the Underwriters.
This Lock-Up Letter Agreement shall automatically terminate, and the undersigned will, in each case, be released from its obligations under this Lock-Up Letter Agreement upon the earliest to occur, if any, of (1) written notice from the Company on the one hand, or the Representatives, on the other hand, notifying the other in writing that it does not intend to proceed with the Offering prior to the execution of the Underwriting Agreement; (2) the termination of the Underwriting Agreement (other than the provisions thereof which survive termination) before the payment for and delivery of any Shares to the Underwriters; or (3) September 30, 2014, in the event that the Underwriting Agreement has not been executed by that date.
[ Signature page follows ]
Exhibit B-4
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.
Very truly yours, | ||
By: | ||
Name: | ||
Title: |
Dated:
Exhibit B-5
EXHIBIT C
Form of Press Release
Paycom Software, Inc.
[ Insert date ]
Paycom Software, Inc. (the Company ) announced today that Barclays Capital Inc., the lead book-running manager in the Companys recent public sale of shares of common stock [and the other underwriters of such offering whose consent is required][is][are][waiving] [releasing] a lock-up restriction with respect to shares of the Companys common stock held by [certain officers or directors] [an officer or director] of the Company The [waiver] [release] will take effect on [ insert date ], and the shares may be sold or otherwise disposed of on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
Exhibit C-1
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PAYCOM SOFTWARE, INC.,
a Delaware corporation
Paycom Software, Inc., a Delaware corporation (the Corporation), hereby certifies as follows:
1. The name of the Corporation is Paycom Software, Inc. The date of filing of the Corporations original Certificate of Incorporation was October 31, 2013.
2. The Amended and Restated Certificate of Incorporation attached hereto as Exhibit A , which restates, integrates and further amends the provisions of the existing Amended and Restated Certificate of Incorporation of the Corporation, as heretofore amended, has been duly adopted by the Corporations Board of Directors and the stockholders in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, with the adoption of the Corporations stockholders having been made by written consent in lieu of a meeting thereof in accordance with Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by Chad Richison, its Chief Executive Officer , this 25 th day of March, 2014.
PAYCOM SOFTWARE, INC. | ||
By: |
/s/ Chad Richison |
|
Name: Chad Richison | ||
Title: Chief Executive Officer |
Exhibit A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PAYCOM SOFTWARE, INC.
ARTICLE I
NAME
Section 1.1. Name . The name of the corporation is Paycom Software, Inc. (the Corporation ).
ARTICLE II
REGISTERED OFFICE AND AGENT
Section 2.1. Address . The address of its registered office in the State of Delaware is 1675 South State Street, Suite B, City of Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Capitol Services, Inc.
ARTICLE III
PURPOSE AND POWERS
Section 3.1. Purpose . The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ( Delaware Law ).
ARTICLE IV
CAPITAL STOCK
Section 4.1. Capitalization . The total number of shares of stock that the Corporation shall have authority to issue is one hundred and ten million (110,000,000) shares, consisting of one hundred million (100,000,000) shares of Common Stock, par value $0.01 per share (the Common Stock ), and ten million (10,000,000) shares of Preferred Stock, par value $0.01 per share (the Preferred Stock ).
Section 4.2. Common Stock . The Common Stock shall have the rights, powers, qualifications and limitations as set forth in this Section 4.2 .
(a) Voting Rights . Each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote; provided , that except as otherwise required by Delaware Law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any certificate of designations relating to any series of Preferred Stock) or pursuant to Delaware Law.
(b) Dividends and Distributions . Subject to the rights of the holders of Preferred Stock, holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, securities or other property of the Corporation as may be declared thereon by the Board of Directors (the Board ) from time to time out of the assets or funds of the Corporation legally available therefor and shall share equally on a per share basis in all such dividends and other distributions.
(c) Liquidation, Dissolution or Winding Up . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and subject to the rights of the holders of shares of any series of Preferred Stock upon such liquidation, dissolution or winding up, if any, the holders of all outstanding shares of Common Stock shall be entitled to receive the remaining assets of the
Corporation available therefor and shall share equally on a per share basis in all such distributions. A merger or consolidation of the Corporation with or into any other corporation or entity, or a sale, lease, exchange, conveyance or other disposition of all or any part of the assets of the Corporation shall not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Corporation within the meaning of this Section 3(c).
(d) Conversion Rights . The Common Stock shall not be convertible into, or exchangeable for, shares of any other class or classes of the Corporations capital stock.
Section 4.3. Preferred Stock . Shares of Preferred Stock may be issued from time to time in one or more series. The Board is authorized, to provide by resolution or resolutions from time to time for the issuance, out of the authorized but unissued shares of Preferred Stock, of all or any of the shares of Preferred Stock in one or more series, and to establish the number of shares to be included in each such series, and to fix the voting powers (full, limited or no voting powers), designations, powers, preferences, and relative, participating, optional or other rights, if any, and any qualifications, limitations or restrictions thereof, of such series, including, without limitation, that any such series may be (i) subject to redemption at such time or times and at such price or prices, (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of capital stock, (iii) entitled to such rights upon the liquidation, dissolution or winding up of, or upon any distribution of the assets of, the Corporation or (iv) convertible into, or exchangeable for, shares of any other class or classes of capital stock, or of any other series of the same class of capital stock, of the Corporation at such price or prices or at such rates and with such adjustments; all as may be stated in such resolution or resolutions, which resolution or resolutions shall be set forth on a certificate of designations filed with the Secretary of State of the State of Delaware in accordance with Delaware Law. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation. Notwithstanding the provisions of Section 242(b)(2) of Delaware Law, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the Corporation entitled to vote, without the separate vote of the holders of the Preferred Stock as a class. Subject to Section 4.1 of this Article IV, the Board is also expressly authorized to increase or decrease the number of shares of any series of Preferred Stock subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. Unless otherwise expressly provided in the certificate of designations in respect of any series of Preferred Stock, in case the number of shares of such series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.
ARTICLE V
AMENDMENTS
Section 5.1. Bylaws . The Board shall have the power to adopt, alter, amend, change or repeal the Bylaws of the Corporation (the Bylaws ) solely by resolution adopted by the affirmative vote of a majority of the Whole Board (as defined below). The stockholders may adopt, amend or repeal the Bylaws only with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors (the Voting Stock ), voting together as a single class.
Section 5.2. Certificate of Incorporation . The Corporation reserves the right at any time from time to time to alter, amend, change or repeal any provision contained in this Certificate of Incorporation, and to adopt any other provision authorized by Delaware Law, in the manner now or hereafter prescribed herein and by Delaware Law, and all rights conferred upon stockholders herein are granted subject to this reservation. Notwithstanding anything to the contrary contained in this Certificate of Incorporation or the Bylaws, and notwithstanding that a lesser percentage or vote may be permitted from time to time by applicable law, no provision of this Article V, Article VI, Article VII, Article VIII, Article IX, Article X, Article XI or Article XII may be altered, amended, changed or repealed in any respect, nor may any provision of this Certificate of Incorporation or of the Bylaws inconsistent therewith be adopted, unless in addition to any other vote required by this Certificate of Incorporation or otherwise required by law, (i) prior to the Trigger Date, such alteration, amendment, repeal or adoption is approved by the affirmative vote of the holders of a majority of the Voting Stock, voting together as a single class and (ii) from and after the Trigger Date, such alteration, amendment, repeal or adoption is approved at a meeting of the stockholders called for that purpose by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the Voting Stock, voting together as a single class.
ARTICLE VI
BOARD OF DIRECTORS
Section 6.1. Board of Directors . The business and affairs of the Corporation shall be managed by or under the direction of the Board, which shall consist of not less than one (1) director, with the exact number of directors to be determined from time to time solely by resolution adopted by the affirmative vote of a majority of the Whole Board. For purposes of this Certificate of Incorporation, the term Whole Board shall mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships.
Section 6.2. Composition . The directors of the Corporation shall be divided into three (3) classes (each, a Class ) as nearly equal in size as practicable, designated Class I, Class II and Class III. Each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected; provided , that directors initially designated as Class I directors shall serve for a term ending on the date of the annual meeting held in 2014, directors initially designated as Class II directors shall serve for a term ending on the annual meeting held in 2015, and directors initially designated as Class III directors shall serve for a term ending on the date of the annual meeting held in 2016. Notwithstanding the foregoing, each director shall hold office until such directors successor shall have been duly elected and qualified or until such directors earlier death, resignation or removal. In the event of any change in the number of directors, the Board shall apportion any newly created directorships among, or reduce the number of directorships in, such class or classes as the Board may determine in its discretion. In no event will a decrease in the number of directors shorten the term of any incumbent director. A majority of the Whole Board shall constitute a quorum for the transaction of business at any meeting of the Board and, except as otherwise expressly required by law or by this Certificate of Incorporation, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. Election of directors need not be by written ballot unless the Bylaws so provide.
Section 6.3. Initial Directors . The names and mailing addresses of the persons who are to serve initially as directors of each Class are:
Name | Mailing Address | |||
Class I |
Conner Mulvee
Robert Minicucci |
c/o Paycom Software, Inc.
7501 W. Memorial Road Oklahoma City, OK 73142 |
||
Class II |
Robert Levenson
Frederick C. Peters II |
c/o Paycom Software, Inc.
7501 W. Memorial Road Oklahoma City, OK 73142 |
||
Class III |
Sanjay Swani
Chad Richison |
c/o Paycom Software, Inc.
7501 W. Memorial Road Oklahoma City, OK 73142 |
Section 6.4. Cumulative Voting . There shall be no cumulative voting in the election of directors.
Section 6.5. Board Vacancies . Vacancies on the Board resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors shall, except as otherwise provided by law, be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected.
Section 6.6. Removal . (i) Prior to the Trigger Date, any director may be removed from office at any time with or without cause by the affirmative vote of the holders of at least a majority of the Voting Stock, voting together as a single class and (ii) after the Trigger Date, any director may be removed from office at any time with or without cause, at a meeting called for that purpose, by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the Voting Stock, voting together as a single class.
Section 6.7. Class . Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolution or resolutions adopted by the Board pursuant to Article IV applicable thereto, and such directors so elected shall not be subject to the provisions of this Article VI unless otherwise provided therein.
ARTICLE VII
MEETINGS OF STOCKHOLDERS
Section 7.1. Annual Meetings . An annual meeting of stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held at such place, on such date, and at such time as the Board shall determine (or the Chairman in the absence of a designation by the Board). Advance notice of stockholder nominations for the election of directors of the Corporation and of business to be brought by stockholders before any meeting of stockholders of the Corporation will be given in the manner provided in the Bylaws.
Section 7.2. Special Meetings . Special meetings of the stockholders may be called only by (i) the Board acting pursuant to a resolution adopted by a majority of the Whole Board, or by the President of the Corporation and may not be called by any other person or (ii) prior to the Trigger Date, by the Secretary of the Corporation at the request of the holders of fifty percent (50%) or more of the outstanding shares of Common Stock, and shall not be called by the stockholders. Any business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. Notwithstanding the foregoing, whenever holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board pursuant to Article IV hereto, special meetings of holders of such Preferred Stock.
Section 7.3. Action by Written Consent . Any action required or permitted to be taken by stockholders at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than a majority of the shares entitled to vote, or, if greater, not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided , that from and after the Trigger Date, any action required or permitted to be taken by the stockholders of the Corporation may be effected only at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
ARTICLE VIII
INDEMNIFICATION
Section 8.1. Limitation of Liability . To the fullest extent permitted by Delaware Law, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if Delaware Law is hereafter amended to authorize the further elimination or limitation of the liabilities of a director, then the liability of a director of the Corporation will be eliminated or limited to the fullest extent permitted by Delaware Law, as so amended.
Section 8.2. Indemnification . The Corporation shall have the power to indemnify to the fullest extent permitted by Delaware Law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer, employee or agent of the Corporation, any predecessor of the Corporation or any subsidiary or affiliate of the Corporation, or serves or served at any other enterprise as a director, officer, employee or agent at the request of the Corporation or any predecessor to the Corporation. The Corporation shall indemnify any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation, any predecessor to the Corporation or any subsidiary or any affiliate of the Corporation as and to the extent (and on the terms and subject to the conditions) set forth in the Bylaws or in any contract of indemnification entered into by the Corporation and any such person.
Section 8.3. Insurance . The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such persons status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware Law.
Section 8.4. Non-Exclusivity . The rights and authority conferred in this Article VIII shall not be exclusive of any other right which any person may otherwise have or hereafter acquire.
Section 8.5. Vested Rights . Neither the amendment nor repeal of this Article VIII, nor the adoption of any provision of this Certificate of Incorporation or the Bylaws, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall adversely affect any right or protection of any person granted pursuant hereto existing at, or arising out of or related to any event, act or omission that occurred prior to, the time of such amendment, repeal, adoption or modification (regardless of when any proceeding (or part thereof) relating to such event, act or omission arises or is first threatened, commenced or completed).
ARTICLE IX
BUSINESS COMBINATIONS
Section 9.1. Election . The Corporation shall not be governed by Section 203 of Delaware Law.
Section 9.2. Business Combinations . Notwithstanding the foregoing, the Corporation shall not engage in any business combination (as defined below), at any point in time at which the Corporations Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, with any interested stockholder (as defined below) for a period of three (3) years following the time that such stockholder became an interested stockholder, unless:
(a) prior to such time, the Board approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or
(b) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least eighty-five percent (85%) of the Voting Stock of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the Voting Stock outstanding (but not the outstanding Voting Stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
(c) at or subsequent to such time, the business combination is approved by the Board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding Voting Stock which is not owned by the interested stockholder.
ARTICLE X
CORPORATE OPPORTUNITIES
Section 10.1. Scope . The provisions of this Article X are set forth to define, to the extent permitted by applicable law, the duties of Exempted Persons (as defined below) to the Corporation with respect to certain classes or categories of business opportunities. Exempted Persons means the WCAS Holders and the CP IV Holders, each as defined in the Stockholders Agreement and the respective affiliates, employees and representatives (other than the Corporation and its subsidiaries) and all of their respective partners, principals, directors, officers, members, managers and employees, including any of the foregoing who serve as officers or directors of the Corporation.
Section 10.2. Competition and Allocation of Corporate Opportunities . To the fullest extent permitted by law, the Exempted Persons shall not have any fiduciary duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Corporation or any of its subsidiaries. To the fullest extent permitted by applicable law, the Corporation, on behalf of itself and its subsidiaries, renounces any interest or expectancy of the Corporation and its subsidiaries in, or in being offered an opportunity to participate in, business opportunities that are from time to time presented to the Exempted Persons, even if the opportunity is one that the Corporation or its subsidiaries might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so, and each such Exempted Person shall have no duty to communicate or offer such business opportunity to the Corporation and, to the fullest extent permitted by applicable law, shall not be liable to the Corporation or any of its subsidiaries for breach of any fiduciary or other duty, as a director or officer or otherwise, by reason of the fact that such Exempted Person pursues or acquires such business opportunity, directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to the Corporation or its subsidiaries.
Section 10.3. Certain Matters Deemed Not Corporate Opportunities . In addition to and notwithstanding the foregoing provisions of this Article X, a corporate opportunity shall not be deemed to belong to the Corporation if it is a business opportunity that the Corporation is not financially or legally able or contractually permitted to undertake, or that is, from its nature, not in the line of the Corporations business or is of no practical advantage to it or that is one in which the Corporation has no interest or reasonable expectancy.
Section 10.4. Amendment of this Article . To the fullest extent permitted by law, no amendment or repeal of this Article X shall apply to or have any effect on the liability or alleged liability of any Exempted Person for or with respect to any activities or opportunities of which such Exempted Person becomes aware prior to such amendment or repeal. This Article X shall not limit or eliminate any protections or defenses otherwise available to, or any rights to indemnification or advancement of expenses of, any director or officer of the Corporation under this Certificate of Incorporation, the Bylaws, any agreement between the Corporation and such officer or director, or any applicable law.
Section 10.5. Deemed Notice . Any person or entity purchasing, holding or otherwise acquiring any interest in any shares of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article X.
ARTICLE XI
FORUM SELECTION
Section 11.1. Choice of Forum . Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporations stockholders, (iii) any action asserting a claim against the Corporation or any director, officer or other employee of the Corporation arising pursuant to any provision of Delaware Law or this Certificate of Incorporation or Bylaws (as either may be amended from time to time) or (iv) any action asserting a claim against the Corporation or any director, officer or other employee of the Corporation governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or if no Court of Chancery located within the State of Delaware has jurisdiction, the Federal District Court for the District of Delaware). Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XII.
ARTICLE XII
DEFINITIONS
Section 12.1. Definitions . Except as otherwise set forth herein, for purposes of this Certificate of Incorporation the following terms shall have the meanings indicated:
(a) affiliate shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.
(b) associate , when used to indicate a relationship with any person, shall mean:
(i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of twenty percent (20%) or more of any class of voting stock;
(ii) any trust or other estate in which such person has at least a twenty percent (20%) beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and
(iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
(c) beneficial ownership shall be determined in accordance with Rule 13d-3 promulgated under the Exchange Act.
(d) business combination , when used in reference to the Corporation and any interested stockholder of the Corporation, shall mean:
(i) any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation with (A) the interested stockholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation Section 9.2 is not applicable to the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the Corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to ten percent (10%) or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Corporation;
(iii) any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any stock of the Corporation or of such subsidiary to the interested stockholder, except: (A) pursuant to the exercise, exchange or conversion of any security exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security was outstanding prior to the time that the interested stockholder became such; (B) pursuant to a merger under Section 251(g) of Delaware Law; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into, stock of the Corporation or any such subsidiary which security is distributed pro rata to all holders of a class or series of stock of the Corporation subsequent to the time the interested stockholder became such; (D) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all holders of said stock; or (E) any issuance or transfer of stock by the Corporation; provided , that in no case under items (C)-(E) of this subparagraph shall there be an increase in the interested stockholders proportionate share of the stock of any class or series of the Corporation or of the Voting Stock of the Corporation;
(iv) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or of securities exercisable for, exchangeable for or convertible into the stock of any class or series, of the Corporation or of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or
(v) any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in Section 13.1(d)(i)-(iv) of this Article XIII) provided by or through the Corporation or any direct or indirect majority-owned subsidiary.
(e) control , including the terms controlling , controlled by and under common control with , shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of twenty percent (20%) or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) interested stockholder shall mean any person (other than the Corporation and any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of fifteen percent (15%) or more of the outstanding Voting Stock of the Corporation, or (ii) is an affiliate or associate of the Corporation and was the owner of fifteen percent (15%) or more of the outstanding Voting Stock of the Corporation at any time within the three year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person; provided, that the term interested stockholder shall not include (A) the Principal Investors or any Principal Investor Direct Transferee or Principal Investor Indirect Transferee, or (B) any person whose ownership of shares in excess of the fifteen percent (15%) limitation set forth herein is the result of any action taken solely by the Corporation; provided, that such person specified in this clause (B) shall
be an interested stockholder if thereafter such person acquires additional shares of Voting Stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the Voting Stock of the Corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of the definition of owner below but shall not include any other unissued stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(h) owner , including the terms own and owned , when used with respect to any stock, shall mean a person that individually or with or through any of its affiliates or associates:
(i) beneficially owns such stock;
(ii) has (a) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided , that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such persons affiliates or associates until such tendered stock is accepted for purchase or exchange; or (b) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided , that a person shall not be deemed the owner of any stock because of such persons right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten (10) or more persons; or
(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (b) of subsection (ii) above), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.
(i) person shall mean an individual, any general partnership, limited partnership, limited liability company, corporation, trust, business trust, joint stock company, joint venture, unincorporated association, cooperative or association or any other legal entity or organization of whatever nature, and shall include any successor (by merger or otherwise) of such entity.
(j) Principal Investors shall mean the Exempted Persons and Chad Richison and his affiliates.
(k) Principal Investor Direct Transferee shall mean any person (and its affiliates) who acquires (other than in a registered public offering) directly in one or more related transactions from a Principal Investor or any group , or member of any such group, to which a Principal Investor is a party under Rule 13d-5(b)(1) under the Exchange Act, beneficial ownership of fifteen percent (15%) or more in the aggregate of the then outstanding Voting Stock of the Corporation.
(l) Principal Investor Indirect Transferee shall mean any person (and its affiliates) who acquires (other than in a registered public offering) directly in one or more related transactions from any Principal Investor Direct Transferee or any other Principal Investor Indirect Transferee beneficial ownership of fifteen percent (15%) or more in the aggregate of the then outstanding Voting Stock of the Corporation.
(m) stock shall mean, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.
(n) Stockholders Agreement shall mean that certain Stockholders Agreement made as of December 30, 2013 by and among Paycom Software, Inc., WCAS Paycom Holdings, Inc., WCAS Capital Partners IV, L.P., and The Ruby Group Inc. and the other holders party thereto.
(o) Trigger Date shall mean the first date on which the parties to the Stockholders Agreement cease collectively to beneficially own (directly or indirectly) more than fifty percent (50%) of the outstanding shares of Common Stock.
**********
Exhibit 3.2
BYLAWS
OF
PAYCOM SOFTWARE, INC.
*****
ARTICLE I
OFFICES
Section 1.01 . Registered Office . The address of the registered office of Paycom Software, Inc. (the Corporation ) in the State of Delaware is 1675 South State Street, Suite B, City of Dover, County of Kent, Delaware 19901.
Section 1.02 . Other Offices . The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
Section 1.03 . Books . The books of the Corporation may be kept within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01 . Time and Place of Meetings . All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors).
Section 2.02 . Annual Meetings . An annual meeting of stockholders, commencing with the year 2014, shall be held for the election of directors and to transact such other business as may properly be brought before the meeting.
Section 2.03 . Special Meetings . A special meeting of stockholders may be called only by the Board of Directors acting pursuant to a resolution adopted by a majority of the Whole Board (as defined below) or by the President of the Corporation and may not be called by any other person.
Section 2.04. Conduct at Meetings . The Chairman of the Board of Directors or the President of the Corporation shall act as chairman or co-chairman, as applicable, of any meetings of stockholders. The Secretary or Assistant Secretary of the Corporation shall act as secretary of the meeting. If neither the Secretary nor an Assistant Secretary is present, the chairman of the meeting shall appoint a secretary of the meeting. The Board of Directors may adopt such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Unless otherwise determined by the Board of Directors prior to the meeting, the chairman of the meeting shall determine the order of business and shall have the authority in his or her discretion to regulate the conduct of any such meeting, including, without limitation, convening the meeting and adjourning the meeting (whether or not a quorum is present), announcing the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote, imposing restrictions on the persons (other than stockholders of record of the Corporation or their duly appointed proxies) who may attend any such meeting, establishing procedures for the dismissal of business not properly presented, maintaining order at the meeting and safety of those present, restricting entry to the meeting after the time fixed for commencement thereof and limiting the circumstances in which any person may make a statement or ask questions at any meeting of stockholders.
Section 2.05. Notice of Meetings and Adjourned Meetings; Waivers of Notice .
(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended ( Delaware Law ), such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. The Board of Directors or the chairman of the meeting may adjourn the meeting to another time or place (whether or not a quorum is present), and notice need not be given of the adjourned meeting if the time, place, if any, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and voting at such meeting, are announced at the meeting at which such adjournment is made. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person entitled thereto, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Section 2.06 . Quorum . Unless otherwise provided under the Corporations Certificate of Incorporation or these Bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the chairman of the meeting or a majority in voting interest of the stockholders present in person or represented by proxy may adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted that might have been transacted at the meeting as originally notified.
Section 2.07. Voting.
(a) Unless otherwise provided by Delaware Law or the Certificate of Incorporation, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Except as otherwise provided by Delaware Law, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of the shares of capital stock of the Corporation present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Subject to the rights of the holders of any series of preferred stock to elect additional directors under specific circumstances, directors shall be elected by a plurality of the votes of the shares of capital stock of the Corporation present in person or represented by proxy at the meeting and entitled to vote on the election of directors.
(b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized, or by proxy sent by cable, telegram or by any means of electronic communication permitted by law, which results in a writing from such stockholder or by his attorney, and delivered to the secretary of the meeting. Except as otherwise provided in the Stockholders Agreement of the Corporation, by and among the Corporation, Welsh, Carson, Anderson & Stowe X, L.P., a Delaware limited partnership ( WCAS ), WCAS Capital Partners, IV, L.P., a Delaware limited partnership ( CP IV ), Chad Richison, Shannon Rowe, William Kerber, Jeff York, Robert Levenson, Richard Aiello and each other signatory thereto (as the same may be amended, restated, supplemented or modified, the Stockholders Agreement ), a copy of which is on file with the Corporation, pursuant to which such stockholders have entered into certain voting and other arrangements as set forth therein, no proxy shall be voted after three (3) years from its date, unless said proxy provides for a longer period.
(c) In determining the number of votes cast for or against a proposal or nominee, shares abstaining from voting on a matter and votes by a broker that have not been directed by the beneficial owner will be counted for purposes of determining a quorum but not for purposes of determining the number of votes cast.
2
Section 2.08. Permitted Actions by Written Consent . Unless otherwise provided in the Stockholders Agreement or the Certificate of Incorporation, an action to be taken at any annual or special meeting of stockholders may not be taken without a meeting, without prior notice or without a vote.
Section 2.09 . Organization . At each meeting of stockholders, the Chairman of the Board of Directors, if one shall have been elected, or in the Chairmans absence or if one shall not have been elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary (or in the Secretarys absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.
Section 2.10 . Order of Business . The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting.
Section 2.11. Voting Lists . The officer or agent having charge of the transfer book for stock of the Corporation shall make, at least ten (10) days before such meeting, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares of stock held by each, available for inspection by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at the Corporations principal executive offices or at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the entire meeting, and may be inspected by any stockholder who is present at the meeting. The original stock transfer books (or any duplicates thereof maintained by the Corporation) shall be the only evidence of the identity of the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders.
Section 2.12. Advance Notice of Stockholder Nominations and Proposals .
(a) Timely Notice . At an annual meeting of the stockholders, only such nominations of persons for the election to the Board of Directors shall be considered and such other business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, nominations or such other business must be: (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before an annual meeting by a stockholder (A) who is a stockholder of record of the Corporation (and, with respect to any beneficial owner, if different, on whose behalf such business is proposed or such nomination or nominations are made, only if such beneficial owner is the beneficial owner of shares of the Corporation) both at the time such notice of meeting is delivered and on the record date for the determination of stockholders entitled to vote at the annual meeting of stockholders, (B) who is entitled to vote at the meeting and (C) who complies with the notice procedures set forth in this Section 2.12 . In addition, any proposal of business (other than the nomination of persons for election to the Board of Directors) must be a proper matter for stockholder action. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder or stockholders of record intending to propose the business (the Proposing Stockholder ) must have given timely notice thereof pursuant to this Section 2.12(a) or Section 2.12(c) below, as applicable, in writing to the Secretary of the Corporation. To be timely, a Proposing Stockholders notice must be delivered to or mailed and received at the principal executive offices of the Corporation: (x) not later than the close of business on the ninetieth (90 th ) day, nor earlier than the close of business on the one hundred and twentieth (120 th ) day in advance of the anniversary of the previous years annual meeting if such meeting is to be held on a day which is not more than thirty (30) days in advance of the anniversary of the previous years annual meeting or not later than seventy (70) days after the anniversary of the previous years annual meeting; and (y) with respect to any other annual meeting of stockholders, not later than the close of business on the later of the ninetieth (90 th ) day prior to such annual meeting or the close of business on the tenth (10 th ) day following the date of Public Disclosure of the date of such meeting. In no event shall an adjournment, deferral or postponement of an annual meeting or Public Disclosure thereof commence a new notice time period (or extend any notice time period) for the giving of a stockholders notice as described above. For purposes of this Section 2.12(a) , Public Disclosure shall mean a disclosure made in a press release reported by the Dow Jones News Services, The Associated Press or a comparable national news service or in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and the rules and regulations promulgated thereunder.
3
(b) Stockholder Nominations . For the nomination of any person or persons for election to the Board of Directors, a Proposing Stockholders notice to the Secretary of the Corporation shall set forth (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation which are owned of record and beneficially by each such nominee (if any), (iv) such other information concerning each such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved) or that is otherwise required to be disclosed, under Section 14(a) of the Exchange Act, (v) a description of all direct and indirect compensation and other material agreements, arrangements and understandings during the past three (3) years, and any other material relationships, between or among the Proposing Stockholder or beneficial owner or any of their affiliates or associates, or others acting in concert therewith, on the one hand, and each proposed nominee and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, or any affiliate or associate thereof or person acting in concert therewith, were the registrant for purposes of such rule and the nominee were a director or executive officer of such registrant, (vi) a completed and signed questionnaire regarding the background and qualification of such person to serve as a director, a copy of which may be obtained upon request to the Secretary, (vii) the consent of the nominee to being named in the proxy statement as a nominee and to serving as a director if elected, and (viii) as to the Proposing Stockholder: (A) the name and address of the Proposing Stockholder as they appear on the Corporations books and of the beneficial owner, if any, on whose behalf the nomination is being made, (B) the class or series and number of shares of the Corporations capital stock which are directly or indirectly owned by the Proposing Stockholder (beneficially and of record) and owned by the beneficial owner, if any, on whose behalf the nomination is being made, as of the date of the Proposing Stockholders notice, and a representation that the Proposing Stockholder will notify the Corporation in writing of the class and number of such shares owned of record and beneficially as of the record date for the meeting promptly following the later of the record date or the date notice of the record date is first publicly disclosed, (C) a description of any agreement, arrangement or understanding with respect to such nomination between or among the Proposing Stockholder and any of its affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the Proposing Stockholder will notify the Corporation in writing of any such agreement, arrangement or understanding in effect as of the record date for the meeting promptly following the later of the record date or the date notice of the record date is first publicly disclosed, (D) the class or series, if any, and number of options, warrants, puts, calls, convertible securities, stock appreciation rights, or similar rights, obligations or commitments with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares or other securities of the Corporation or with a value derived in whole or in part from the value of any class or series of shares or other securities of the Corporation, whether or not such instrument, right, obligation or commitment shall be subject to settlement in the underlying class or series of shares or other securities of the Corporation (each a Derivative Security ), which are, directly or indirectly, beneficially owned by the Proposing Stockholder or beneficial owner or any of their affiliates or associates, (E) any agreement, arrangement, understanding, or relationship, including any repurchase or similar so-called stock borrowing agreement or arrangement, engaged in, directly or indirectly, by the Proposing Stockholder or beneficial owner or any of their affiliates or associates, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of any class or series of capital stock or other securities of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such stockholder or beneficial owner or any affiliate or associate of the Proposing Stockholder or beneficial owner with respect to any class or series of capital stock or other securities of the Corporation, or that provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of any class or series or capital stock or other securities of the Corporation, (F) a description of any other direct or indirect opportunity to profit or share in any profit (including any performance-based fees) derived from any increase or decrease in the value of shares or other securities of the Corporation, (G) any proxy, contract, arrangement, understanding or relationship pursuant to which the Proposing Stockholder or beneficial owner or any of their affiliates or associates has a right to vote any shares or other securities of the Corporation, (H) any rights to dividends on the shares of the Corporation owned beneficially by the Proposing Stockholder or such beneficial owner or any of their affiliates or associates that are separated or separable from the underlying shares of the Corporation, (I) any proportionate interest in shares of the Corporation or Derivative Securities held directly or indirectly, by a general or limited partnership in which the Proposing Stockholder or beneficial owner or any of their affiliates or associates is a general partner or, directly or indirectly, beneficially owns an interest in a general partner, if any, (J) a description of all agreements,
4
arrangements, and understandings between the Proposing Stockholder or beneficial owner or any of their affiliates or associates and any other person(s) (including their name(s)) in connection with or related to the ownership or voting of capital stock of the Corporation or Derivative Securities, (K) a representation that the Proposing Stockholder is a holder of record of shares of the Corporation entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (L) a representation as to whether the Proposing Stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to approve the nomination and/or otherwise to solicit proxies from stockholders in support of the nomination. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholders understanding of the independence, or lack thereof, of such nominee.
(c) Other Stockholder Proposals . For all business other than director nominations, a Proposing Stockholders notice to the Secretary of the Corporation shall set forth as to each matter the Proposing Stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) any other information relating to such stockholder and beneficial owner, if any, on whose behalf the proposal is being made, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal and pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder and (iii) the information required by Section 2.12(b) above.
(d) Proxy Rules . Notwithstanding the foregoing provisions of this Section 2.12 , a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.12 . Nothing in this section shall be deemed to (i) affect any rights of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act (or any successor rule thereto), (ii) confer upon any stockholder a right to have a nominee or any proposed business included in the Corporations proxy statement, or (iii) affect any rights of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.
(e) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as is a proper matter for stockholder action under Delaware Law and as shall have been brought before the meeting pursuant to the Corporations notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporations notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who (A) is a stockholder of record of the Corporation (and, with respect to any beneficial owner, if different, on whose behalf such nomination or nominations are made, only if such beneficial owner is the beneficial owner of shares of the Corporation) both at the time the notice provided for in this Section 2.12 is delivered to the Secretary of the Corporation and upon the record date for the determination of stockholders entitled to vote at the meeting, (B) who is entitled to vote at the meeting and upon such election and (C) who complies with the notice procedures set forth in this Section 2.12 . In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporations notice of meeting, if the stockholders notice required by this Section 2.12 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90 th ) day prior to such special meeting and not earlier than the close of business on the later of the one hundred and twentieth (120 th ) day prior to such special meeting or the tenth (10th) day following the date of Public Disclosure of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the Public Disclosure of an adjournment or postponement of a special meeting commence a new time period (or extend any notice time period) for the giving of a stockholders notice as described above.
(f) Effect of Noncompliance . Notwithstanding anything in these Bylaws to the contrary: (i) no nominations shall be made or business shall be conducted at any annual or special meeting except in accordance with the procedures set forth in this Section 2.12 , and (ii) unless otherwise required by law, if a Proposing Stockholder intending to propose business or make nominations at an annual or special meeting pursuant to this Section 2.12
5
does not provide the information required under this Section 2.12 to the Corporation promptly following the later of the record date or the date notice of the record date is first publicly disclosed, or the Proposing Stockholder (or a qualified representative of the Proposing Stockholder) does not appear at the meeting to present the proposed business or nominations, such business or nominations shall not be considered, notwithstanding that proxies in respect of such business or nominations may have been received by the Corporation. The requirements of this Section 2.12 shall apply to any business or nominations to be brought before an annual or special meeting by a stockholder whether such business or nominations are to be included in the Corporations proxy statement pursuant to Rule 14a-8 of the Exchange Act or presented to stockholders by means of an independently financed proxy solicitation. The requirements of the Section 2.12 are included to provide the Corporation notice of a stockholders intention to bring business or nominations before an annual or special meeting and shall in no event be construed as imposing upon any stockholder the requirement to seek approval from the Corporation as a condition precedent to bringing any such business or make such nominations before an annual meeting.
ARTICLE III
DIRECTORS
Section 3.01 . General Powers . Except as otherwise provided by Delaware Law or the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 3.02 . Number, Election and Term Of Office . The number of directors which shall constitute the Board of Directors shall be determined as set forth in the Stockholders Agreement provided that following such time that the Stockholders Agreement is terminated in accordance with its terms, then the number of directors which shall constitute the Board of Directors shall be fixed exclusively from time to time solely by resolution adopted by the affirmative vote of a majority of the Whole Board. For purposes of these Bylaws, the term Whole Board shall mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships. As set forth in Article VI of the Certificate of Incorporation, as amended to date, the directors shall be divided into three (3) classes (each, a Class ), designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Except as otherwise provided in the Stockholders Agreement or the Certificate of Incorporation, each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected. Notwithstanding the foregoing, each director shall hold office until such directors successor shall have been duly elected and qualified or until such directors earlier death, resignation or removal. Directors need not be stockholders.
Section 3.03 . Quorum and Manner of Acting . Unless the Certificate of Incorporation or these Bylaws require a greater number, a majority of the Whole Board shall constitute a quorum for the transaction of business at any meeting of the Board of Directors and, except as otherwise expressly required by Delaware Law, the Certificate of Incorporation or these Bylaws, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat shall adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 3.04 . Time and Place of Meetings . The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors).
Section 3.05 . Annual Meeting . The Board of Directors shall meet for the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.07 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.
6
Section 3.06 . Regular Meetings . Regular meetings of the Board of Directors may be held without notice being given at such time and at such place as shall from time to time be determined by resolution of the Board of Directors.
Section 3.07 . Special Meetings . Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors or by the President and shall be called by the Chairman of the Board of Directors or by the President on the written request of a majority of the Whole Board. Notice of special meetings of the Board of Directors shall be given to each director at least twenty-four (24) hours before the date of the meeting in such manner as is determined by the Board of Directors.
Section 3.08 . Committees . The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (b) adopting, amending or repealing the Bylaws of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
Section 3.09. Committee Rules . Each committee of the Board of Directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the Board of Directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum. In the event that a member is absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member.
Section 3.10 . Action by Consent . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions, are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 3.11 . Telephonic Meetings . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
Section 3.12 . Resignation . Any director may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
7
Section 3.13 . Vacancies . Subject to the terms of the Stockholders Agreement or as otherwise provided in the Certificate of Incorporation, vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors may be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected. Subject to the terms of the Stockholders Agreement, if there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the Stockholders Agreement or the Certificate of Incorporation, when one or more directors shall resign from the Board effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies and each director so chosen shall hold office as provided in the filling of the other vacancies.
Section 3.14 . Removal . Subject to the terms of the Stockholders Agreement, no director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class.
Section 3.15 . Compensation . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.
Section 3.16 . Preferred Stock Directors . Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolutions applicable thereto adopted by the Board of Directors pursuant to the Certificate of Incorporation, and such directors so elected shall not be subject to the provisions of Sections 3.02 , 3.13 and 3.14 of this Article III unless otherwise provided therein.
ARTICLE IV
OFFICERS
Section 4.01 . Principal Officers . The principal officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Board of Directors may, by resolution, designate the Chairman of the Board of Directors of the Corporation as a principal officer. The Corporation may also have such other principal officers, including one or more Controllers, as the Board of Directors may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary.
(a) Chief Executive Officer . The Chief Executive Officer of the Corporation (the Chief Executive Officer ) shall perform such duties as may be assigned to him or her from time to time by the Board of Directors. Subject to the direction of the Board of Directors, he or she shall have, and exercise, direct charge of, and general supervision over, the business and affairs of the Corporation and shall be its chief policy making officer. He or she shall from time to time report to the Board of Directors all matters within his or her knowledge that the interests of the Corporation may require to be brought to its notice, and shall also have such other powers and perform such other duties as may be specifically assigned to him or her from time to time by the Board of Directors. The Chief Executive Officer shall see that all resolutions and orders of the Board of Directors are carried into effect, and in connection with the foregoing, shall be authorized to delegate to a Vice President and the other officers such of his or her powers and such of his or her duties as the Board of Directors may deem to be advisable. The Chief Executive Officer shall possess the power to sign all contracts, certificates and other instruments of the Corporation as the Board of Directors from time to time may prescribe.
(b) President . The President of the Corporation (the President ) shall perform such duties as may be assigned to him or her from time to time by the Board of Directors. Subject to the direction of the Board of Directors, he or she shall perform all duties incident to the office of a president in a corporation organized under Delaware Law. The President shall see that all resolutions and orders of the Board of Directors are carried into effect, and in connection
8
with the foregoing, shall be authorized to delegate to a Vice President and the other officers such of his or her powers and such of his or her duties as the Board of Directors may deem to be advisable. The President may execute and deliver certificates for shares of the Corporation, any deeds, mortgages, bonds, contracts or other instruments that the Board of Directors has authorized to be executed and delivered, except in cases where the execution and delivery thereof shall be expressly delegated solely to another officer or delivery thereof shall be otherwise required by law to be executed and delivered by another person.
(c) Vice Presidents . The Vice President of the Corporation (a Vice President ), or if there be more than one, the Vice Presidents, shall perform such duties as may be assigned to them from time to time by the Board of Directors or as may be designated by the Chief Executive Officer or the President. In case of the absence or disability of the President, the duties of the office shall, if the Board of Directors or the President has so authorized, be performed by the Vice President, or if there be more than one Vice President, by such Vice President as the Board of Directors shall designate. Certain Vice Presidents may from time to time be designated by the Board of Directors or the Chief Executive Officer or the President as Executive Vice Presidents or Senior Vice Presidents, which positions shall have such varying degrees of authority as the Board of Directors, the Chief Executive Officer or the President shall prescribe.
(d) Chief Financial Officer and Treasurer . The Chief Financial Officer and Treasurer (the Treasurer ) shall have the custody of the Corporations funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board of Directors or by any officer authorized by the Board of Directors to make such designation. The Treasurer shall exercise such powers and perform such duties as generally pertain or are necessarily incident to his or her office and shall perform such other duties as may be specifically assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer, the President or any Vice President. The Treasurer may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors and may execute and deliver such documents, certificates and such other instruments that the Board of Directors has authorized to be executed and delivered, except in cases where the execution and delivery thereof shall be expressly delegated to another officer or as otherwise required by law to be executed and delivered by another person.
(e) Secretary . The Secretary of the Corporation (the Secretary ) shall attend all meetings of the Board of Directors and all meetings of stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for any committee when required. He or she shall give, or cause to be given, notice of all meetings of stockholders and, when necessary, special meetings of the Board of Directors. The Secretary shall exercise such powers and perform such duties as generally pertain or are necessarily incident to his or her office, and he or she shall perform such other duties as may be assigned to him or her from time to time by the Board of Directors, the President or by any Vice President. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the Chairman of the Board of Directors may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or an Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature.
Section 4.02 . Appointment, Term of Office and Remuneration . The principal officers of the Corporation shall be appointed annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his or her successor is appointed, or until his or her earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.
Section 4.03 . Subordinate Officers . In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees or delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.
9
Section 4.04 . Removal . Any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors or by other principal officers upon whom such power of removal may have been conferred by the Board of Directors.
Section 4.05 . Resignations . Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 4.06 . Powers and Duties . The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.
Section 4.07. Compensation . Compensation of all executive officers shall be approved by the Board of Directors, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the Corporation; provided , that compensation of some or all executive officers may be determined by a committee established for that purpose if so authorized by the Board of Directors or as required by applicable law or any applicable rule or regulation, including any rule or regulation of any stock exchange upon which the Corporations securities are then listed for trading.
ARTICLE V
CAPITAL STOCK
Section 5.01 . Certificates For Stock; Uncertificated Shares . The shares of the Corporation shall be represented by certificates; provided , that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock may be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Except as otherwise provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of shares represented by certificates of the same class and series shall be identical. Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, or the Chief Executive Officer, President or Vice President, and by the Chief Financial Officer, Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of such Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The Corporation shall not have power to issue a certificate in bearer form.
Section 5.02 . Transfer Of Shares . Shares of the stock of the Corporation may be transferred on the record of stockholders of the Corporation by the holder thereof or by such holders duly authorized attorney upon surrender of a certificate therefor properly endorsed or upon receipt of proper transfer instructions from the registered holder of uncertificated shares or by such holders duly authorized attorney and upon compliance with appropriate procedures for transferring shares in uncertificated form, unless waived by the Corporation.
Section 5.03 . Authority for Additional Rules Regarding Transfer . The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificated or uncertificated shares of the stock of the Corporation, as well as for the issuance of new certificates in lieu of those which may be lost or destroyed, and may require of any stockholder requesting replacement of lost or destroyed certificates, bond in such amount and in such form as they may deem expedient to indemnify the Corporation, and/or the transfer agents, and/or the registrars of its stock against any claims arising in connection therewith.
10
Section 5.04. Lost, Stolen or Destroyed Stock Certificates . The Corporation may issue a new stock certificate in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.
Section 5.05 Consideration for Shares . Subject to applicable law and the Certificate of Incorporation, shares of stock may be issued for such consideration, having in the case of shares with par value a value not less than the par value thereof, and to such persons, as determined from time to time by the Board of Directors. The consideration may consist of any tangible or intangible property or benefit to the Corporation including, but not limited to, cash, promissory notes, services performed, contracts for services to be performed or other securities. Shares may not be issued until the full amount of the consideration has been paid, unless upon the face or back of each certificate issued to represent any partly paid shares of capital stock or upon the books and records of the Corporation in the case of partly paid uncertificated shares, there will have been set forth the total amount of the consideration to be paid therefor and the amount paid thereon up to and including the time said certificate representing certificated shares or said uncertificated shares are issued.
ARTICLE VI
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 6.01. General . The Corporation shall, to the fullest extent permitted by law, indemnify and hold harmless any person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he or she is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director or officer in any other capacity while serving as a director or officer, against all expenses, liability and loss (including attorneys fees and related disbursements, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended from time to time ( ERISA ), and any other penalties and amounts paid or to be paid in settlement) actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the persons conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, have reasonable cause to believe that the persons conduct was unlawful.
Section 6.02. Actions by or in the Right of the Corporation . The Corporation shall, to the fullest extent permitted by law, indemnify and hold harmless any person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director or officer in any other capacity while serving as a director or officer, against all expenses, liability and loss (including attorneys fees and related disbursements, judgments, fines, excise taxes or penalties under ERISA, and any other penalties and amounts paid or to be paid in settlement) actually and reasonably incurred by the person in connection with the defense or settlement of such
11
action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State Delaware or such other court shall deem proper.
Section 6.03. Indemnification Against Expenses . To the extent that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.01 and 6.02 hereof, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith.
Section 6.04. Board Determinations . Any indemnification under Sections 6.01 and 6.02 hereof (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 6.01 and 6.02 hereof. Such determination shall be made with respect to a person who is a director or officer at the time of such determination: (a) by a majority vote of the directors who were not parties to such action, suit or proceeding, even though less than a quorum; (b) by a committee of such directors designated by majority vote of such directors, even though less than a quorum; (c) if there are no such disinterested directors, by independent counsel in a written opinion to the Board; or (d) by the stockholders.
Section 6.05. Advancement of Expenses . Expenses (including attorneys fees) incurred by an officer or director of the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized by law or in this Section. Such expenses (including attorneys fees) incurred by former directors and officers or other employees and agents of the Corporation or persons serving at the request of the Corporation as directors, officers, employees or agents of another corporation, partnership, limited liability company, joint venture, trust or other enterprise may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.
Section 6.06. Nonexclusive . The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, these Bylaws, or under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such persons official capacity and as to action in another capacity while holding office, and shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person.
Section 6.07. Insurance . The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against any expense, liability or loss asserted against such person and incurred by such person in any such capacity or arising out of such persons status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of Delaware Law, the Certificate of Incorporation or this Article VI.
Section 6.08. Other Indemnification . The Corporation may, by action of the Board of Directors, provide indemnification to employees and agents of the Corporation with the same or lesser scope and effect as the foregoing indemnification of directors and officers.
12
Section 6.09. Certain Definitions . For purposes of this Article VI, (a) references to the Corporation shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (b) references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; (c) references to serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and (d) a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation.
Section 6.10. Change in Governing Law . In the event of any amendment or addition to Section 145 of Delaware Law or the addition of any other section to such law which shall limit indemnification rights thereunder, the Corporation shall, to the fullest extent permitted by Delaware Law, indemnify and hold harmless to the fullest extent authorized or permitted hereunder, any person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation), by reason of the fact that he or she is or was a director, officer, employee, fiduciary or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against all expenses, liability and loss (including attorneys fees and related disbursements, judgments, fines, excise taxes or penalties under ERISA, and any other penalties and amounts paid or to be paid in settlement) actually and reasonably incurred by him in connection with such action, suit or proceeding.
Section 6.11. Repeal or Modification of Indemnification . All rights to indemnification and to the advancement of expenses under this Article VI shall be deemed to be a contract between the Corporation and each director, officer, employee, fiduciary or agent who serves or served in such capacity at any time while this Article VI is in effect. Any repeal or modification of this Article VI or any repeal or modification of relevant provisions of Delaware Law or any other applicable laws shall not in any way diminish any rights to indemnification and advancement of expenses of such indemnitee or the obligations of the Corporation arising hereunder with respect to any proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such repeal or modification.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01. Fixing the Record Date .
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing such record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , that the Board of Directors may in its discretion or as required by law fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
13
(c) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date upon which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of stockholders meeting are recorded. Delivery made to the Corporations registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action.
Section 7.02 . Dividends . Subject to limitations contained in Delaware Law and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.
Section 7.03 . Year . Except as otherwise determined by the Board of Directors, the fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year.
Section 7.04 . Corporate Seal . The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words Corporate Seal, Delaware. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 7.05 . Voting of Stock Owned by the Corporation . The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.
Section 7.06 . Amendments . Subject to the terms of the Stockholders Agreement, these Bylaws or any of them, may be altered, amended or repealed, or new Bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors. Unless a higher percentage is required by the Stockholders Agreement or the Certificate of Incorporation as to any matter that is the subject of these Bylaws, all such amendments must be approved by the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, or by a majority of the Whole Board.
Section 7.07. Headings . Section or paragraph headings are inserted herein only for convenience of reference and shall not be considered in the construction of any provision hereof.
**********
14
Exhibit 4.1
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 | under Uniform Gifts to Minors | ||
of survivorship and not as tenants | Act | |||
in common | (State) |
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer 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 evidenced by this Certificate, and do hereby irrevocably constitute and appoint
Attorney
to transfer the said shares on the books of the within-named Corporation with full power of substitution.
Dated
X |
||||
X |
||||
NOTICE: | THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. |
Signature(s) Guaranteed:
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 17Ad-15. |
Exhibit 5.1
March 31, 2014
Paycom Software, Inc.
7501 W. Memorial Road
Oklahoma City, OK 73142
Re: | Paycom Software, Inc. |
Registration Statement on Form S-1, Registration No. 333-194462
Ladies and Gentlemen:
We have acted as counsel to Paycom Software, Inc., a Delaware corporation (the Company ), in connection with the preparation of the Companys registration statement on Form S-1, Registration No. 333-194462 (the Registration Statement ), under the Securities Act of 1933, as amended (the Securities Act ), initially filed by the Company with the Securities and Exchange Commission (the Commission ) on March 10, 2014, as thereafter amended or supplemented. The Registration Statement relates to (a) the issuance by the Company of shares of common stock, par value $0.01 per share (the Common Stock ), proposed to be sold to the several underwriters (the Underwriters ) named in Schedule I to the Underwriting Agreement (the Underwriting Agreement ) to be entered into by and among the Company and the Underwriters (the Company Shares ), and (b) the sale by the selling stockholders listed in the Registration Statement (the Selling Stockholders ) of shares of Common Stock of the Company proposed to be sold to the Underwriters named in the Underwriting Agreement, together with any additional shares of Common Stock proposed to be sold pursuant to an over-allotment option (the Over-allotment Option ) granted by the Selling Stockholders to the Underwriters named in the Underwriting Agreement (the Selling Stockholder Shares and, together with the Company Shares, the Shares ). The Company and the Selling Stockholders will sell in the aggregate up to 7,641,750 Shares, including the Over-allotment Option.
In rendering the opinions set forth herein, we have examined the originals, or photostatic or certified copies, of (i) the Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Company, each as amended and/or restated as of the date hereof; (ii) certain resolutions of the Board of Directors of the Company related to the filing of the Registration Statement, the authorization and issuance of the Shares and and related matters; (iii) the Registration Statement and all exhibits thereto; (iv) the form of Underwriting Agreement; (v) the specimen Common Stock certificate; (vi) a certificate executed by an officer of the Company, dated as of the date hereof; and (vii) such other records, documents and instruments as we deemed relevant and necessary for purposes of the opinion stated herein.
We have relied upon such certificates of officers of the Company and of public officials and statements and information furnished by officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established by us. In such examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic or certified copies, and the authenticity of the originals of such copies.
We have not considered, and express no opinion herein as to, the laws of any state or jurisdiction other than the General Corporation Law of the State of Delaware, as currently in effect (the DGCL ).
In rendering the opinion set forth below, we have assumed that, at the time of the issuance of the Shares, (i) the Company will continue to be incorporated and in existence and good standing under the DGCL; (ii) the Registration Statement and any amendments thereto (including post-effective amendments) will have become effective and will remain effective; (iii) no stop order of the Commission preventing or suspending the use of the prospectus contained in the Registration Statement will have been issued; (v) the prospectus contained in the Registration Statement and any required prospectus supplement will have been delivered to the purchaser of the Shares as required in accordance with applicable law; (vi) the resolutions of the Board of Directors of the Company referred to above will not have been modified or rescinded; (vii) the Company will receive consideration for the issuance of the Shares that is at least equal to the par value of the Common Stock; (viii) the stock certificates (if any) representing the Shares will comply with the provisions of Delaware Law, the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws of the Company when the Shares are issued; (ix) all Shares will be issued in compliance with applicable federal, state and other laws and in the manner stated in the Registration Statement, or any amendment thereto, along with any applicable prospectus supplement; and (x) the Underwriting Agreement will have been duly authorized and validly executed and delivered by the parties thereto (other than the Company) and will be enforceable obligations of the parties thereto (other than the Company).
Based upon the foregoing, and subject to the qualifications, assumptions and limitations stated herein, we are of the opinion that (1) upon payment and delivery in accordance with the Underwriting Agreement approved by the Pricing Committee of the Board of Directors of the Company (the Pricing Committee ) and the Selling Stockholders, the Company Shares will be validly issued, fully paid and nonassessable and (2) upon payment and delivery in accordance with the Underwriting Agreement approved by the Pricing Committee and the Selling Stockholders, the Selling Stockholders Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We further consent to the reference to our firm under the caption Legal Matters in the Prospectus constituting a part of the Registration Statement. In giving this consent, we are not admitting that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Haynes and Boone, LLP
HAYNES AND BOONE, LLP
2
Exhibit 10.4
RESTRICTED STOCK AWARD AGREEMENT
PAYCOM SOFTWARE, INC.
2014 LONG-TERM INCENTIVE PLAN
1. Grant of Award . In connection with that certain Merger Agreement dated as of December 30, 2013 (the Merger Agreement ) by and among Paycom Software, Inc., a Delaware corporation (the Company ), Paycom Payroll Holdings, LLC, a Delaware limited liability company ( Paycom Holdings ), Paycom Payroll, LLC, a Delaware limited liability company, and Paycom Software Merger Sub, LLC, a Delaware limited liability company, incentive units of Paycom Holdings are being converted into shares of Common Stock, par value $0.001, of the Company as provided in the Merger Agreement and certain of these shares of Common Stock received upon the conversion of and in exchange for unvested Incentive Units shall be subject to the terms and conditions set forth in this Restricted Stock Award Agreement (the Agreement ). Accordingly, pursuant to the terms of the Merger Agreement and the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the Plan ) for Employees, Contractors, and Outside Directors of the Company, the Company grants to
(the Participant )
an Award of Restricted Stock in accordance with Section 6.4 of the Plan. The number of shares of Common Stock awarded under this Agreement is [ ] shares (the Awarded Shares ), as follows:
a. [ ] of the total Awarded Shares shall be subject to time-based vesting as set forth below (referred to herein as, the Tranche A Shares ); and
b. [ ] of the total Awarded Shares shall be subject to performance-based vesting as set forth below (referred to herein as, the Tranche B Shares ).
The Date of Grant of this Award is January 1, 2014.
2. Subject to Plan; Definitions .
a. This Agreement is subject to the terms and conditions of the Plan, and the terms of the Plan shall control to the extent not otherwise inconsistent with the provisions of this Agreement. To the extent the terms of the Plan are inconsistent with the provisions of the Agreement, this Agreement shall control. This Agreement is subject to any rules promulgated pursuant to the Plan by the Board or the Committee and communicated to the Participant in writing.
b. The capitalized terms used herein that are defined in the Plan shall have the same meanings assigned to them in the Plan; provided , that the following terms shall have the meanings set forth below:
i. Agreement has the meaning set forth in Section 1.
ii. Appraised Value means the value ascribed to a share of the subject Equity Securities as set forth in the most recent written appraisal previously issued by an independent Person selected by the audit committee of the Company nationally
recognized as having experience in providing investment banking or similar appraisal or valuation services and with expertise generally in the valuation of securities; provided , that it being understood that neither the Board nor the audit committee shall have any obligation to obtain any such appraisal more than once per calendar year.
iii. Awarded Shares has the meaning set forth in Section 1.
iv. Cause means, with respect to Participant, any of the following: (a) the repeated failure of Participant to perform such duties as are lawfully requested by the Chief Executive Officer or the direct supervisor of Participant, (b) the failure by such Participant to observe all reasonable, lawful material policies of the Company and its subsidiaries applicable to Participant and communicated to Participant in writing, (c) any action or omission constituting gross negligence or willful misconduct of such Person in the performance of his or her duties, (d) the material breach by Participant of any provision of Participants employment or the breach by Participant of any non-competition, non-solicitation or similar restrictive agreement with the Company or any of its subsidiaries, (e) any act or omission by Participant constituting fraud, embezzlement, disloyalty or dishonesty with respect to the Company or its subsidiaries, (f) the use by Participant of illegal drugs or repetitive abuse of other drugs or repetitive excess consumption of alcohol interfering with the performance of Participants duties, or (g) the commission by Participant of any felony or of a misdemeanor involving dishonesty, disloyalty or moral turpitude.
v. Company has the meaning set forth in Section 1 (and, for purposes of Section 25, Section 25).
vi. Committee means the compensation committee of the Board of Directors of the Company.
vii. Date of Grant has the meaning set forth in Section 1.
viii. Equity Securities means, as applicable, (a) any capital stock, membership interests or other share capital, (b) any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other share capital or containing any profit participation features, (c) any rights or options directly or indirectly to subscribe for or to purchase any capital stock, membership interests, other share capital or securities containing any profit participation features or to subscribe for or to purchase any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests, other share capital or securities containing any profit participation features, (d) any share appreciation rights, phantom share rights or other similar rights, or (e) any Equity Securities as defined in clauses (a) through (d) above issued or issuable with respect to the securities referred to in clauses (a) through (d) above in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization.
ix. Equity Securities Value Per Share means, for any class or series of Equity Securities of the Company, for any date, the price determined by the first of the following clauses that applies: (a) if such Equity Securities are then listed or quoted on a Trading Market, the arithmetic average of the VWAP of a share of such Equity Securities on each of the twenty (20) consecutive Trading Days immediately preceding such date; (b) if the Equity Securities are not then listed or quoted for trading on a Trading Market
- 2 -
and if prices for such Equity Securities are then reported on the OTC Bulletin Board (or a similar organization or agency succeeding to its functions of reporting prices), the arithmetic average of the closing bid price per share of the Common Stock so reported on each of the twenty (20) consecutive Trading Days immediately preceding such date; or (c) in all other cases, the Appraised Value of a share of such Equity Securities.
x. First TEV Threshold means $1.4 billion.
xi. Forfeiture Activities has the meaning set forth in Section 4(c).
xii. Incentive Units shall have the meaning set forth in that certain limited liability company agreement of Paycom Holdings dated as of April 3, 2012, as amended from time to time, by and among Paycom Payroll Holdings, LLC, WCAS Paycom Holdings, Inc., a Delaware corporation, WCAS CP IV Blocker, Inc., a Delaware corporation, The Ruby Group, Inc., an Oklahoma corporation, and the other parties thereto.
xiii. Merger Agreement has the meaning set forth in Section 1.
xiv. Participant has the meaning set forth in Section 1.
xv. Paycom Holdings has the meaning set forth in Section 1.
xvi. Plan has the meaning set forth in Section 1.
xvii. Public Offering means an underwritten sale to the public of the Companys Equity Securities (or its successors Equity Securities) pursuant to an effective registration statement filed with the SEC on Form S-1 (or any successor form adopted by the SEC) and after which the Companys (or its successors) Equity Securities are listed on the New York Stock Exchange, the NYSE MKT or The NASDAQ Stock Market; provided , that a Public Offering shall not include any issuance of Equity Securities in any merger or other business combination, and shall not include any registration of the issuance of Equity Securities to existing securityholders or employees of the Company and its Subsidiaries on Form S-4 or Form S-8 (or any successor form adopted by the SEC).
xviii. Restriction Period has the meaning set forth in Section 5.
xix. SEC means the Securities and Exchange Commission.
xx. Second TEV Threshold means $1.8 billion.
xxi. Total Enterprise Value means the sum of: (i) the product of (A) the Equity Securities Value Per Share of a share of Common Stock not subject to vesting or other restrictions multiplied by (B) the number of outstanding shares of Common Stock, (ii) for each other class or series of Equity Securities of the Company, if any, the product of (A) Equity Securities Value Per Share for such class or series of such Equity Securities of the Company multiplied by (B) the number of shares of such class or series of such Equity Securities of the Company, and (iii) the principal amount of all outstanding funded indebtedness of the Company less the aggregate amount of cash and cash equivalents of the Company (exclusive of funds held on behalf of clients).
- 3 -
xxii. Trading Day means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable Trading Market or in the applicable securities market.
xxiii. Trading Market means the primary securities exchange on which the Common Stock is listed or quoted for trading on the date in question.
xxiv. Tranche A Shares has the meaning set forth in Section 1(a).
xxv. Tranche B Shares has the meaning set forth in Section 1(b).
xxvi. VWAP means the daily volume weighted average price of a share of the Common Stock for such date on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (or successor thereto) using its Volume at Price function (based on a Trading Day from 9:30 a.m. (New York City time) to 4:00 p.m. (New York City time)).
3. Vesting . Except as specifically provided in this Agreement and subject to certain restrictions and conditions set forth in the Plan, the Awarded Shares shall vest as follows:
a. The Tranche A Shares shall vest as follows:
i. of the total Tranche A Shares shall vest on , provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
ii. of the total Tranche A Shares shall vest on , provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
iii. of the total Tranche A Shares shall vest on , provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
iv. of the total Tranche A Shares shall vest on , provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
b. The Tranche B Shares shall vest as follows:
i. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the First TEV Threshold, provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
ii. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the Second TEV Threshold, provided the Participant is employed by (or if the Participant is a Contractor or an Outside Director, is providing services to) the Company or a Subsidiary on that date.
- 4 -
c. Notwithstanding the foregoing, if a Public Offering shall have been consummated, all Awarded Shares not previously vested shall immediately become vested in full upon a Termination of Service as a result of the Participants death while performing his duties and responsibilities for the Company.
If a Public Offering shall have been consummated, in the event the Participants death occurs other than while performing his duties and responsibilities for the Company, or in the event of a Termination of Service as a result of the Participants Total and Permanent Disability or a Termination of Service by the Company without Cause, the Board may, in its sole discretion, accelerate the vesting of all or any portion of the Awarded Shares not previously vested based on the Participants time and performance and other factors, as the Board may deem appropriate.
In the event that a Change in Control occurs in which the surviving entity, if any, does not assume the obligations of this Award, then immediately prior to the effective date of such Change in Control, all Awarded Shares not previously vested shall thereupon immediately become fully vested.
4. Forfeiture of Awarded Shares . Notwithstanding anything herein to the contrary other than pursuant to Section 3(c), Awarded Shares shall be forfeited and shall cease to be outstanding as set forth below:
a. Awarded Shares that are not vested in accordance with Section 3, whether then held by the Participant or any other Person, shall be forfeited and shall cease to be outstanding on the date of the Participants Termination of Service.
b. The Participant acknowledges that: (i) the Participant performs services of a unique nature for the Company that are irreplaceable, and that the Participants performance of such services to a competing business will result in irreparable harm to the Company, (ii) the Participant has had and will continue to have access to confidential information which, if disclosed, would unfairly and inappropriately assist in competition against the Company or any of its Subsidiaries, (iii) in the course of the Participants employment by a competitor, the Participant would inevitably use or disclose such confidential information, (iv) the Participant has generated and will continue to generate goodwill for the Company and its Subsidiaries in the course of the Participants employment, and (v) the Participant acknowledges that the restrictive covenants outlined below in Paragraph 4(c) arise from and are related to the Participants sale of the goodwill of a business, and that such restrictive covenants are necessary to protect against the unfair competition that would result if the Participant were to begin competing against the Company after selling such goodwill to the Company. Accordingly, all Awarded Shares (whether or not vested and whether then held by the Participant or any other Person) shall be forfeited and shall cease to be outstanding, as of the first date the Participant engages in Forfeiture Activities and, if the Committee has consented to the transfer of all or a portion of such Awarded Shares, then the Participant shall pay to the Company all money received in respect of such transferred Awarded Shares, if the Participant engages in Forfeiture Activities at any time during the term of the Participants employment with the Company and its Subsidiaries or during the one-year period following termination of such employment.
c. The Participant shall have engaged in Forfeiture Activities if at any time the Participant: (i) directly or indirectly manages, operates, controls, participates in, consults with, renders services for or in any manner engages in any business or enterprise (including any
- 5 -
division, group or franchise of a larger organization), whether as a proprietor, owner, member, partner, stockholder, director, officer, employee, consultant, joint venturer, investor, sales representative or other participant, in which the Company or any of its Subsidiaries engaged at any time during the two year period immediately preceding the date such Persons employment with the Company and its Subsidiaries terminates (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated) or engages or proposes to engage as of such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated), in each case, anywhere in any State where the Company or one of its Subsidiaries maintained an office immediately preceding such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated); (ii) directly or indirectly induces or attempts to induce any employee of the Company or any of its Subsidiaries to leave the employ of such entity; (iii) subject to the restrictions of any applicable law, directly or indirectly induces or attempts to induce any established customer of the Company or any of its Subsidiaries to cease doing business with, or materially alter its business relationship with, such entity; (iv) directly or indirectly solicits the sale of goods or services, or a combination thereof, to established customers of the Company or any of its Subsidiaries, or (v) makes or solicits or encourages others to make or solicit directly or indirectly any derogatory or negative statement or communication about the Company, its Subsidiaries or any of their respective businesses, products, services or activities; provided , that the restriction set forth in clause (v) will not prohibit truthful testimony compelled by valid legal process. Notwithstanding the foregoing, engaging in Forfeiture Activities shall not include owning up to one percent of the outstanding stock of a corporation which is publicly traded, so long as the Participant has no active participation in the business of such corporation.
Upon forfeiture, all of the Participants rights with respect to the forfeited Awarded Shares shall cease and terminate, without any further obligations on the part of the Company.
5. Restrictions on Awarded Shares . Subject to the provisions of the Plan and the terms of this Agreement, from the Date of Grant until the date the Awarded Shares are vested in accordance with Section 3 and are no longer subject to forfeiture in accordance with Section 4 (the Restriction Period ), the Participant shall not be permitted to sell, transfer, pledge, hypothecate, margin, assign or otherwise encumber any of the Awarded Shares. Except for these limitations, the Committee may in its sole discretion, remove any or all of the restrictions on such Awarded Shares whenever it may determine that, by reason of changes in applicable laws or changes in circumstances after the date of this Agreement, such action is appropriate.
6. Legend . The following legend shall be placed on all certificates issued representing Awarded Shares:
On the face of the certificate:
Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate.
On the reverse:
The shares of stock evidenced by this certificate are subject to and transferable only in accordance with that certain Paycom Software, Inc. 2014 Long-Term Incentive Plan, a copy of which is on file at the principal office of the Company in Oklahoma
- 6 -
City, Oklahoma. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan.
The following legend shall be inserted on a certificate evidencing Common Stock issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws:
Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company.
All Awarded Shares owned by the Participant shall be subject to the terms of this Agreement and shall be represented by a certificate or certificates bearing the foregoing legend.
7. Delivery of Certificates; Registration of Shares . The Company shall deliver certificates for the Awarded Shares to the Participant or shall register the Awarded Shares in the Participants name, free of restriction under this Agreement, promptly after, and only after, the Restriction Period has expired without forfeiture pursuant to Section 4 . In connection with any issuance of a certificate for Restricted Stock, the Participant shall endorse such certificate in blank or execute a stock power in a form satisfactory to the Company in blank and deliver such certificate and executed stock power to the Company.
8. Rights of a Stockholder . Except as provided in Section 4 and Section 5 above, the Participant shall have, with respect to his Awarded Shares, all of the rights of a stockholder of the Company, including the right to vote the shares; provided , the Participant shall not have a right to cash dividends and any stock dividends paid with respect to Awarded Shares shall at all times be treated as Awarded Shares and shall be subject to all restrictions placed on such Awarded Shares. Any such stock dividends paid with respect to Awarded Shares shall vest as the related Awarded Shares become vested.
9. Voting . The Participant, as record holder of the Awarded Shares, has the exclusive right to vote, or consent with respect to, such Awarded Shares until such time as the Awarded Shares are transferred in accordance with this Agreement or forfeited; provided , that this Section 9 shall not create any voting right where the holders of such Awarded Shares otherwise have no such right.
10. Adjustment to Number of Awarded Shares . The number of Awarded Shares shall be subject to adjustment in accordance with Articles 11-13 of the Plan.
11. Specific Performance . The parties acknowledge that remedies at law will be inadequate remedies for breach of this Agreement and consequently agree that this Agreement shall be enforceable by specific performance. The remedy of specific performance shall be cumulative of all of the rights and remedies at law or in equity of the parties under this Agreement.
- 7 -
12. Participants Representations . Notwithstanding any of the provisions hereof, the Participant hereby agrees that he or she will not acquire any Awarded Shares, and that the Company will not be obligated to issue any Awarded Shares to the Participant hereunder, if the issuance of such shares shall constitute a violation by the Participant or the Company of any provision of any law or regulation of any governmental authority. Any determination in this connection by the Company shall be final, binding, and conclusive. The rights and obligations of the Company and the rights and obligations of the Participant are subject to all Applicable Laws, rules, and regulations.
13. Investment Representation . Unless the Awarded Shares are issued in a transaction registered under applicable federal and state securities laws, by his or her execution hereof, the Participant represents and warrants to the Company that all Common Stock which may be purchased and or received hereunder will be acquired by the Participant for investment purposes for his or her own account and not with any intent for resale or distribution in violation of federal or state securities laws. Unless the Common Stock is issued to him or her in a transaction registered under the applicable federal and state securities laws, all certificates issued with respect to the Common Stock shall bear an appropriate restrictive investment legend and shall be held indefinitely, unless they are subsequently registered under the applicable federal and state securities laws or the Participant obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required.
14. Participants Acknowledgments . The Participant acknowledges that a copy of the Plan has been made available for his review by the Company, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Award subject to all the terms and provisions thereof. The Participant hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Agreement.
15. Law Governing . This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Delaware (excluding any conflict of laws rule or principle of Delaware law that might refer the governance, construction, or interpretation of this agreement to the laws of another state). To the extent that a court of competent jurisdiction concludes that application of Delaware Law to all or part of Section 4 is contrary to Oklahoma public policy or statutes, the Participant acknowledges that this Agreement relates to the Participants sale of the goodwill of the Company, as defined in 15 O.S. § 218, and agrees to comply with Section 4 to the fullest extent permitted by law.
16. No Right to Continue Service or Employment . Nothing herein shall be construed to confer upon the Participant the right to continue in the employ or to provide services to the Company or any Subsidiary, whether as an Employee or as a Contractor or as an Outside Director, or interfere with or restrict in any way the right of the Company or any Subsidiary to discharge the Participant as an Employee, Contractor, or Outside Director at any time.
17. Legal Construction. In the event that any one or more of the terms, provisions, or agreements that are contained in this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect for any reason, the invalid, illegal, or unenforceable term, provision, or agreement shall not affect any other term, provision, or agreement that is contained in this Agreement and this Agreement shall be construed in all respects as if the invalid, illegal, or unenforceable term, provision, or agreement had never been contained herein.
18. Covenants and Agreements as Independent Agreements . Each of the covenants and agreements that are set forth in this Agreement shall be construed as a covenant and agreement independent of any other provision of this Agreement. The existence of any claim or cause of action of the Participant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements that are set forth in this Agreement.
- 8 -
19. Entire Agreement . This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to the said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
20. Parties Bound . The terms, provisions, and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. No person shall be permitted to acquire any Awarded Shares without first executing and delivering an agreement in the form satisfactory to the Company making such person or entity subject to the restrictions on transfer contained herein.
21. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Company may amend the Plan to the extent permitted by the Plan.
22. Headings . The headings that are used in this Agreement are used for reference and convenience purposes only and do not constitute substantive matters to be considered in construing the terms and provisions of this Agreement.
23. Gender and Number . Words of any gender used in this Agreement shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise.
24. Notice . Any notice required or permitted to be delivered hereunder shall be deemed to be delivered only when actually received by the Company or by the Participant, as the case may be, at the addresses set forth below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith:
a. Notice to the Company shall be addressed and delivered as follows:
Paycom Software, Inc.
7501 W. Memorial Rd.
Oklahoma City, OK 73142
Attn: Chief Financial Officer
b. Notice to the Participant shall be addressed and delivered as set forth on the signature page.
25. Tax Requirements . The Participant is hereby advised to consult immediately with his or her own tax advisor regarding the tax consequences of this Agreement and shares of Common Stock being issued pursuant to the terms of the Merger Agreement, the method and timing for
- 9 -
filing an election to include any amounts received under this Agreement in income under Section 83(b) of the Code (to the extent determined to be taxable), and the tax consequences of such election. By execution of this Agreement, the Participant agrees that if the Participant makes such an election, the Participant shall provide the Company with written notice of such election in accordance with the regulations promulgated under Section 83(b) of the Code. The Company or, if applicable, any Subsidiary (for purposes of this Section 25, the term Company shall be deemed to include any applicable Subsidiary), shall have the right to deduct from all amounts paid in cash or other form in connection with the Plan, any Federal, state, local, or other taxes required by law to be withheld in connection with this Award. The Company may, in its sole discretion, also require the Participant receiving shares of Common Stock issued under the Merger Agreement or the Plan to pay the Company the amount of any taxes that the Company is required to withhold in connection with the Participants income arising with respect to this Award or with respect to the issuance of Common Stock under the Merger Agreement. Such payments shall be required to be made when requested by the Company, including under the terms of the Merger Agreement, and may be required to be made prior to the delivery of any certificate representing shares of Common Stock. Such payment may be made (i) by the delivery of cash to the Company in an amount that equals or exceeds (to avoid the issuance of fractional shares under (iii) below) the required tax withholding obligations of the Company; (ii) if the Company, in its sole discretion, so consents in writing, the actual delivery by the Participant to the Company of shares of Common Stock, other than (A) Restricted Stock, or (B) Common Stock that the Participant has acquired from the Company within six (6) months prior thereto, which shares so delivered have an aggregate Fair Market Value that equals or exceeds (to avoid the issuance of fractional shares under (iii) below) the required tax withholding payment; (iii) if the Company, in its sole discretion, so consents in writing, the Companys withholding of a number of shares to be delivered upon the vesting of this Award, which shares so withheld have an aggregate Fair Market Value that equals (but does not exceed) the required tax withholding payment; or (iv) any combination of (i), (ii), or (iii). The Company may, in its sole discretion, withhold any such taxes from any other cash remuneration otherwise paid by the Company to the Participant.
* * * * * * * * * *
[ Remainder of Page Intentionally Left Blank.
Signature Page Follows ]
- 10 -
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Participant, to evidence his or her consent and approval of all the terms hereof, has duly executed this Agreement, as of the date specified in Section 1 hereof.
COMPANY: |
||
Paycom Software, Inc. | ||
By: |
|
|
Name: |
|
|
Title: |
|
|
PARTICIPANT: | ||
Signature |
||
Name: |
|
|
Address: |
|
|
|
- 11 -
Exhibit 10.5
RESTRICTED STOCK AWARD AGREEMENT
PAYCOM SOFTWARE, INC.
2014 LONG-TERM INCENTIVE PLAN
1. Grant of Award . In connection with that certain Merger Agreement dated as of December 30, 2013 (the Merger Agreement ) by and among Paycom Software, Inc., a Delaware corporation (the Company ), Paycom Payroll Holdings, LLC, a Delaware limited liability company ( Paycom Holdings ), Paycom Payroll, LLC, a Delaware limited liability company, and Paycom Software Merger Sub, LLC, a Delaware limited liability company, incentive units of Paycom Holdings are being converted into shares of Common Stock, par value $0.001, of the Company as provided in the Merger Agreement and certain of these shares of Common Stock received upon the conversion of and in exchange for unvested Incentive Units shall be subject to the terms and conditions set forth in this Restricted Stock Award Agreement (the Agreement ). Accordingly, pursuant to the terms of the Merger Agreement and the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the Plan ) for Employees, Contractors, and Outside Directors of the Company, the Company grants to
(the Participant )
an Award of Restricted Stock in accordance with Section 6.4 of the Plan. The number of shares of Common Stock awarded under this Agreement is [ ] shares (the Awarded Shares ), as follows:
a. [ ] of the total Awarded Shares shall be subject to time-based vesting as set forth below (referred to herein as, the Tranche A Shares ); and
b. [ ] of the total Awarded Shares shall be subject to performance-based vesting as set forth below (referred to herein as, the Tranche B Shares ).
The Date of Grant of this Award is January 1, 2014.
2. Subject to Plan; Definitions .
a. This Agreement is subject to the terms and conditions of the Plan, and the terms of the Plan shall control to the extent not otherwise inconsistent with the provisions of this Agreement. To the extent the terms of the Plan are inconsistent with the provisions of the Agreement, this Agreement shall control. This Agreement is subject to any rules promulgated pursuant to the Plan by the Board or the Committee and communicated to the Participant in writing.
b. The capitalized terms used herein that are defined in the Plan shall have the same meanings assigned to them in the Plan; provided , that the following terms shall have the meanings set forth below:
i. Agreement has the meaning set forth in Section 1.
ii. Appraised Value means the value ascribed to a share of the subject Equity Securities as set forth in the most recent written appraisal previously issued by an independent Person selected by the audit committee of the Company nationally
recognized as having experience in providing investment banking or similar appraisal or valuation services and with expertise generally in the valuation of securities; provided , that it being understood that neither the Board nor the audit committee shall have any obligation to obtain any such appraisal more than once per calendar year.
iii. Awarded Shares has the meaning set forth in Section 1.
iv. Company has the meaning set forth in Section 1 (and, for purposes of Section 25, Section 25).
v. Committee means the compensation committee of the Board of Directors of the Company.
vi. Date of Grant has the meaning set forth in Section 1.
vii. Employment Agreement means that certain Executive Employment Agreement by and between Paycom Software, Inc. and the Participant, dated as of , 2013.
viii. Equity Securities means, as applicable, (a) any capital stock, membership interests or other share capital, (b) any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other share capital or containing any profit participation features, (c) any rights or options directly or indirectly to subscribe for or to purchase any capital stock, membership interests, other share capital or securities containing any profit participation features or to subscribe for or to purchase any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests, other share capital or securities containing any profit participation features, (d) any share appreciation rights, phantom share rights or other similar rights, or (e) any Equity Securities as defined in clauses (a) through (d) above issued or issuable with respect to the securities referred to in clauses (a) through (d) above in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization.
ix. Equity Securities Value Per Share means, for any class or series of Equity Securities of the Company, for any date, the price determined by the first of the following clauses that applies: (a) if such Equity Securities are then listed or quoted on a Trading Market, the arithmetic average of the VWAP of a share of such Equity Securities on each of the twenty (20) consecutive Trading Days immediately preceding such date; (b) if the Equity Securities are not then listed or quoted for trading on a Trading Market and if prices for such Equity Securities are then reported on the OTC Bulletin Board (or a similar organization or agency succeeding to its functions of reporting prices), the arithmetic average of the closing bid price per share of the Common Stock so reported on each of the twenty (20) consecutive Trading Days immediately preceding such date; or (c) in all other cases, the Appraised Value of a share of such Equity Securities.
x. First TEV Threshold means $1.4 billion.
xi. Forfeiture Activities has the meaning set forth in Section 4(c).
- 2 -
xii. Incentive Units shall have the meaning set forth in that certain limited liability company agreement of Paycom Holdings dated as of April 3, 2012, as amended from time to time, by and among Paycom Payroll Holdings, LLC, WCAS Paycom Holdings, Inc., a Delaware corporation, WCAS CP IV Blocker, Inc., a Delaware corporation, The Ruby Group, Inc., an Oklahoma corporation, and the other parties thereto.
xiii. Merger Agreement has the meaning set forth in Section 1.
xiv. Participant has the meaning set forth in Section 1.
xv. Paycom Holdings has the meaning set forth in Section 1.
xvi. Plan has the meaning set forth in Section 1.
xvii. Public Offering means an underwritten sale to the public of the Companys Equity Securities (or its successors Equity Securities) pursuant to an effective registration statement filed with the SEC on Form S-1 (or any successor form adopted by the SEC) and after which the Companys (or its successors) Equity Securities are listed on the New York Stock Exchange, the NYSE MKT or The NASDAQ Stock Market; provided , that a Public Offering shall not include any issuance of Equity Securities in any merger or other business combination, and shall not include any registration of the issuance of Equity Securities to existing securityholders or employees of the Company and its Subsidiaries on Form S-4 or Form S-8 (or any successor form adopted by the SEC).
xviii. Restriction Period has the meaning set forth in Section 5.
xix. SEC means the Securities and Exchange Commission.
xx. Second TEV Threshold means $1.8 billion.
xxi. Total Enterprise Value means the sum of: (i) the product of (A) the Equity Securities Value Per Share of a share of Common Stock not subject to vesting or other restrictions multiplied by (B) the number of outstanding shares of Common Stock, (ii) for each other class or series of Equity Securities of the Company, if any, the product of (A) Equity Securities Value Per Share for such class or series of such Equity Securities of the Company multiplied by (B) the number of shares of such class or series of such Equity Securities of the Company, and (iii) the principal amount of all outstanding funded indebtedness of the Company less the aggregate amount of cash and cash equivalents of the Company (exclusive of funds held on behalf of clients).
xxii. Trading Day means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable Trading Market or in the applicable securities market.
xxiii. Trading Market means the primary securities exchange on which the Common Stock is listed or quoted for trading on the date in question.
xxiv. Tranche A Shares has the meaning set forth in Section 1(a).
xxv. Tranche B Shares has the meaning set forth in Section 1(b).
- 3 -
xxvi. VWAP means the daily volume weighted average price of a share of the Common Stock for such date on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (or successor thereto) using its Volume at Price function (based on a Trading Day from 9:30 a.m. (New York City time) to 4:00 p.m. (New York City time)).
3. Vesting . Except as specifically provided in this Agreement and subject to certain restrictions and conditions set forth in the Plan, the Awarded Shares shall vest as follows:
a. The Tranche A Shares shall vest as follows:
i. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
ii. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
iii. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
iv. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
b. The Tranche B Shares shall vest as follows:
i. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the First TEV Threshold, provided the Participant is employed by the Company or a Subsidiary on that date.
ii. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the Second TEV Threshold, provided the Participant is employed by the Company or a Subsidiary on that date.
c. Notwithstanding the foregoing, if a Public Offering shall have been consummated, all Awarded Shares not previously vested shall immediately become vested in full upon a Termination of Service as a result of the Participants death while performing his duties and responsibilities for the Company.
If a Public Offering shall have been consummated, in the event the Participants death occurs other than while performing his duties and responsibilities for the Company, or in the event of a Termination of Service as a result of the Participants Total and Permanent Disability, a Termination of Service by the Participant for Good Reason (as defined in the Employment Agreement) or a Termination of Service by the Company without Cause (as defined in the Employment Agreement), the Board may, in its sole discretion, accelerate the vesting of all or any portion of the Awarded Shares not previously vested based on the Participants time and performance and other factors, as the Board may deem appropriate.
- 4 -
In the event that a Change in Control occurs in which the surviving entity, if any, does not assume the obligations of this Award, then immediately prior to the effective date of such Change in Control, all Awarded Shares not previously vested shall thereupon immediately become fully vested.
4. Forfeiture of Awarded Shares . Notwithstanding anything herein to the contrary other than pursuant to Section 3(c), Awarded Shares shall be forfeited and shall cease to be outstanding as set forth below:
a. Awarded Shares that are not vested in accordance with Section 3, whether then held by the Participant or any other Person, shall be forfeited and shall cease to be outstanding on the date of the Participants Termination of Service.
b. The Participant acknowledges that: (i) the Participant performs services of a unique nature for the Company that are irreplaceable, and that the Participants performance of such services to a competing business will result in irreparable harm to the Company, (ii) the Participant has had and will continue to have access to confidential information which, if disclosed, would unfairly and inappropriately assist in competition against the Company or any of its Subsidiaries, (iii) in the course of the Participants employment by a competitor, the Participant would inevitably use or disclose such confidential information, (iv) the Participant has generated and will continue to generate goodwill for the Company and its Subsidiaries in the course of the Participants employment, and (v) the Participant acknowledges that the restrictive covenants outlined below in Paragraph 4(c) arise from and are related to the Participants sale of the goodwill of a business, and that such restrictive covenants are necessary to protect against the unfair competition that would result if the Participant were to begin competing against the Company after selling such goodwill to the Company. Accordingly, all Awarded Shares (whether or not vested and whether then held by the Participant or any other Person) shall be forfeited and shall cease to be outstanding, as of the first date the Participant engages in Forfeiture Activities and, if the Committee has consented to the transfer of all or a portion of such Awarded Shares, then the Participant shall pay to the Company all money received in respect of such transferred Awarded Shares, if the Participant engages in Forfeiture Activities at any time during the term of the Participants employment with the Company and its Subsidiaries or during the one-year period following termination of such employment.
c. The Participant shall have engaged in Forfeiture Activities if at any time the Participant: (i) directly or indirectly manages, operates, controls, participates in, consults with, renders services for or in any manner engages in any business or enterprise (including any division, group or franchise of a larger organization), whether as a proprietor, owner, member, partner, stockholder, director, officer, employee, consultant, joint venturer, investor, sales representative or other participant, in which the Company or any of its Subsidiaries engaged at any time during the two year period immediately preceding the date such Persons employment with the Company and its Subsidiaries terminates (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated) or engages or proposes to engage as of such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated), in each case, anywhere in any State where the Company or one of its Subsidiaries maintained an office immediately preceding such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated); (ii) directly or indirectly induces or attempts to induce any employee of the Company or any of its Subsidiaries to leave the employ of such entity; (iii) subject to the restrictions of any applicable law, directly or indirectly induces or attempts to induce any established customer of the Company or any of its Subsidiaries to cease doing business with, or materially alter its business relationship with, such entity; (iv) directly or
- 5 -
indirectly solicits the sale of goods or services, or a combination thereof, to established customers of the Company or any of its Subsidiaries, or (v) makes or solicits or encourages others to make or solicit directly or indirectly any derogatory or negative statement or communication about the Company, its Subsidiaries or any of their respective businesses, products, services or activities; provided , that the restriction set forth in clause (v) will not prohibit truthful testimony compelled by valid legal process. Notwithstanding the foregoing, engaging in Forfeiture Activities shall not include owning up to one percent of the outstanding stock of a corporation which is publicly traded, so long as the Participant has no active participation in the business of such corporation.
Upon forfeiture, all of the Participants rights with respect to the forfeited Awarded Shares shall cease and terminate, without any further obligations on the part of the Company.
5. Restrictions on Awarded Shares . Subject to the provisions of the Plan and the terms of this Agreement, from the Date of Grant until the date the Awarded Shares are vested in accordance with Section 3 and are no longer subject to forfeiture in accordance with Section 4 (the Restriction Period ), the Participant shall not be permitted to sell, transfer, pledge, hypothecate, margin, assign or otherwise encumber any of the Awarded Shares. Except for these limitations, the Committee may in its sole discretion, remove any or all of the restrictions on such Awarded Shares whenever it may determine that, by reason of changes in applicable laws or changes in circumstances after the date of this Agreement, such action is appropriate.
6. Legend . The following legend shall be placed on all certificates issued representing Awarded Shares:
On the face of the certificate:
Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate.
On the reverse:
The shares of stock evidenced by this certificate are subject to and transferable only in accordance with that certain Paycom Software, Inc. 2014 Long-Term Incentive Plan, a copy of which is on file at the principal office of the Company in Oklahoma City, Oklahoma. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan.
The following legend shall be inserted on a certificate evidencing Common Stock issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws:
Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under
- 6 -
such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company.
All Awarded Shares owned by the Participant shall be subject to the terms of this Agreement and shall be represented by a certificate or certificates bearing the foregoing legend.
7. Delivery of Certificates; Registration of Shares . The Company shall deliver certificates for the Awarded Shares to the Participant or shall register the Awarded Shares in the Participants name, free of restriction under this Agreement, promptly after, and only after, the Restriction Period has expired without forfeiture pursuant to Section 4. In connection with any issuance of a certificate for Restricted Stock, the Participant shall endorse such certificate in blank or execute a stock power in a form satisfactory to the Company in blank and deliver such certificate and executed stock power to the Company.
8. Rights of a Stockholder . Except as provided in Section 4 and Section 5 above, the Participant shall have, with respect to his Awarded Shares, all of the rights of a stockholder of the Company, including the right to vote the shares; provided , the Participant shall not have a right to cash dividends and any stock dividends paid with respect to Awarded Shares shall at all times be treated as Awarded Shares and shall be subject to all restrictions placed on such Awarded Shares. Any such stock dividends paid with respect to Awarded Shares shall vest as the related Awarded Shares become vested.
9. Voting . The Participant, as record holder of the Awarded Shares, has the exclusive right to vote, or consent with respect to, such Awarded Shares until such time as the Awarded Shares are transferred in accordance with this Agreement or forfeited; provided , that this Section 9 shall not create any voting right where the holders of such Awarded Shares otherwise have no such right.
10. Adjustment to Number of Awarded Shares . The number of Awarded Shares shall be subject to adjustment in accordance with Articles 11-13 of the Plan.
11. Specific Performance . The parties acknowledge that remedies at law will be inadequate remedies for breach of this Agreement and consequently agree that this Agreement shall be enforceable by specific performance. The remedy of specific performance shall be cumulative of all of the rights and remedies at law or in equity of the parties under this Agreement.
12. Participants Representations . Notwithstanding any of the provisions hereof, the Participant hereby agrees that he or she will not acquire any Awarded Shares, and that the Company will not be obligated to issue any Awarded Shares to the Participant hereunder, if the issuance of such shares shall constitute a violation by the Participant or the Company of any provision of any law or regulation of any governmental authority. Any determination in this connection by the Company shall be final, binding, and conclusive. The rights and obligations of the Company and the rights and obligations of the Participant are subject to all Applicable Laws, rules, and regulations.
13. Investment Representation . Unless the Awarded Shares are issued in a transaction registered under applicable federal and state securities laws, by his execution hereof, the Participant represents and warrants to the Company that all Common Stock which may be purchased and or received hereunder will be acquired by the Participant for investment purposes for his own account and not with any intent for resale or distribution in violation of federal or state securities laws. Unless the Common Stock is issued to him in a transaction registered under the applicable federal and state securities laws, all certificates issued with respect to the Common Stock shall bear an appropriate restrictive investment legend and shall be held indefinitely, unless they are subsequently registered under the applicable federal and state securities laws or the Participant obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required.
- 7 -
14. Participants Acknowledgments . The Participant acknowledges that a copy of the Plan has been made available for his review by the Company, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Award subject to all the terms and provisions thereof. The Participant hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Agreement.
15. Law Governing . This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Delaware (excluding any conflict of laws rule or principle of Delaware law that might refer the governance, construction, or interpretation of this agreement to the laws of another state). To the extent that a court of competent jurisdiction concludes that application of Delaware Law to all or part of Section 4 is contrary to Oklahoma public policy or statutes, the Participant acknowledges that this Agreement relates to the Participants sale of the goodwill of the Company, as defined in 15 O.S. § 218, and agrees to comply with Section 4 to the fullest extent permitted by law.
16. No Right to Continue Service or Employment . Nothing herein shall be construed to confer upon the Participant the right to continue in the employ or to provide services to the Company or any Subsidiary, whether as an Employee or as a Contractor or as an Outside Director, or interfere with or restrict in any way the right of the Company or any Subsidiary to discharge the Participant as an Employee, Contractor, or Outside Director at any time.
17. Legal Construction. In the event that any one or more of the terms, provisions, or agreements that are contained in this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect for any reason, the invalid, illegal, or unenforceable term, provision, or agreement shall not affect any other term, provision, or agreement that is contained in this Agreement and this Agreement shall be construed in all respects as if the invalid, illegal, or unenforceable term, provision, or agreement had never been contained herein.
18. Covenants and Agreements as Independent Agreements . Each of the covenants and agreements that are set forth in this Agreement shall be construed as a covenant and agreement independent of any other provision of this Agreement. The existence of any claim or cause of action of the Participant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements that are set forth in this Agreement.
19. Entire Agreement . This Agreement together with the Plan and the Employment Agreement supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and thereof and constitute the sole and only agreements between the parties with respect to the said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
20. Parties Bound . The terms, provisions, and agreements that are contained and referenced in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. No person shall be permitted to acquire any Awarded Shares without first executing and delivering an agreement in the form satisfactory to the Company making such person or entity subject to the restrictions on transfer contained herein.
- 8 -
21. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Company may amend the Plan to the extent permitted by the Plan.
22. Headings . The headings that are used in this Agreement are used for reference and convenience purposes only and do not constitute substantive matters to be considered in construing the terms and provisions of this Agreement.
23. Gender and Number . Words of any gender used in this Agreement shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise.
24. Notice . Any notice required or permitted to be delivered hereunder shall be deemed to be delivered only when actually received by the Company or by the Participant, as the case may be, at the addresses set forth below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith:
a. Notice to the Company shall be addressed and delivered as follows:
Paycom Software, Inc.
7501 W. Memorial Rd.
Oklahoma City, OK 73142
Attn: Chief Financial Officer
b. Notice to the Participant shall be addressed and delivered as set forth on the signature page.
25. Tax Requirements . The Participant is hereby advised to consult immediately with his or her own tax advisor regarding the tax consequences of this Agreement and shares of Common Stock being issued pursuant to the terms of the Merger Agreement, the method and timing for filing an election to include any amounts received under this Agreement in income under Section 83(b) of the Code (to the extent determined to be taxable), and the tax consequences of such election. By execution of this Agreement, the Participant agrees that if the Participant makes such an election, the Participant shall provide the Company with written notice of such election in accordance with the regulations promulgated under Section 83(b) of the Code. The Company or, if applicable, any Subsidiary (for purposes of this Section 25, the term Company shall be deemed to include any applicable Subsidiary), shall have the right to deduct from all amounts paid in cash or other form in connection with the Plan, any Federal, state, local, or other taxes required by law to be withheld in connection with this Award. The Company may, in its sole discretion, also require the Participant receiving shares of Common Stock issued under the Merger Agreement or the Plan to pay the Company the amount of any taxes that the Company is required to withhold in connection with the Participants income arising with respect to this Award or with respect to the issuance of Common Stock under the Merger Agreement. Such payments shall be required to be made when requested by the Company, including under the terms of the Merger Agreement, and may be required to be made prior to the delivery of any certificate representing shares of Common Stock. Such payment may be made (i) by the delivery of cash to the Company in an amount that equals or exceeds (to avoid the issuance of fractional shares
- 9 -
under (iii) below) the required tax withholding obligations of the Company; (ii) if the Company, in its sole discretion, so consents in writing, the actual delivery by the Participant to the Company of shares of Common Stock, other than (A) Restricted Stock, or (B) Common Stock that the Participant has acquired from the Company within six (6) months prior thereto, which shares so delivered have an aggregate Fair Market Value that equals or exceeds (to avoid the issuance of fractional shares under (iii) below) the required tax withholding payment; (iii) if the Company, in its sole discretion, so consents in writing, the Companys withholding of a number of shares to be delivered upon the vesting of this Award, which shares so withheld have an aggregate Fair Market Value that equals (but does not exceed) the required tax withholding payment; or (iv) any combination of (i), (ii), or (iii). The Company may, in its sole discretion, withhold any such taxes from any other cash remuneration otherwise paid by the Company to the Participant.
* * * * * * * * * *
[ Remainder of Page Intentionally Left Blank.
Signature Page Follows ]
- 10 -
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Participant, to evidence his consent and approval of all the terms hereof, has duly executed this Agreement, as of the date specified in Section 1 hereof.
COMPANY: |
Paycom Software, Inc. |
By: |
Name: |
Title: |
PARTICIPANT: |
Signature |
Name: |
Address: |
- 11 -
Exhibit 10.6
RESTRICTED STOCK AWARD AGREEMENT
PAYCOM SOFTWARE, INC.
2014 LONG-TERM INCENTIVE PLAN
1. Grant of Award . In connection with that certain Merger Agreement dated as of December 30, 2013 (the Merger Agreement ) by and among Paycom Software, Inc., a Delaware corporation (the Company ), Paycom Payroll Holdings, LLC, a Delaware limited liability company ( Paycom Holdings ), Paycom Payroll, LLC, a Delaware limited liability company, and Paycom Software Merger Sub, LLC, a Delaware limited liability company, incentive units of Paycom Holdings are being converted into shares of Common Stock, par value $0.001, of the Company as provided in the Merger Agreement and certain of these shares of Common Stock received upon the conversion of and in exchange for unvested Incentive Units shall be subject to the terms and conditions set forth in this Restricted Stock Award Agreement (the Agreement ). Accordingly, pursuant to the terms of the Merger Agreement and the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the Plan ) for Employees, Contractors, and Outside Directors of the Company, the Company grants to
Chad Richison
(the Participant )
an Award of Restricted Stock in accordance with Section 6.4 of the Plan. The number of shares of Common Stock awarded under this Agreement is [ ] shares (the Awarded Shares ), as follows:
a. [ ] of the total Awarded Shares shall be subject to time-based vesting as set forth below (referred to herein as, the Tranche A Shares ); and
b. [ ] of the total Awarded Shares shall be subject to performance-based vesting as set forth below (referred to herein as, the Tranche B Shares ).
The Date of Grant of this Award is January 1, 2014.
2. Subject to Plan; Definitions .
a. This Agreement is subject to the terms and conditions of the Plan, and the terms of the Plan shall control to the extent not otherwise inconsistent with the provisions of this Agreement. To the extent the terms of the Plan are inconsistent with the provisions of the Agreement, this Agreement shall control. This Agreement is subject to any rules promulgated pursuant to the Plan by the Board or the Committee and communicated to the Participant in writing.
b. The capitalized terms used herein that are defined in the Plan shall have the same meanings assigned to them in the Plan; provided , that the following terms shall have the meanings set forth below:
i. Agreement has the meaning set forth in Section 1.
ii. Appraised Value means the value ascribed to a share of the subject Equity Securities as set forth in the most recent written appraisal previously issued by an independent Person selected by the audit committee of the Company nationally
recognized as having experience in providing investment banking or similar appraisal or valuation services and with expertise generally in the valuation of securities; provided , that it being understood that neither the Board nor the audit committee shall have any obligation to obtain any such appraisal more than once per calendar year.
iii. Awarded Shares has the meaning set forth in Section 1.
iv. Company has the meaning set forth in Section 1 (and, for purposes of Section 25, Section 25).
v. Committee means the compensation committee of the Board of Directors of the Company.
vi. Date of Grant has the meaning set forth in Section 1.
vii. Employment Agreement means that certain Executive Employment Agreement by and between Paycom Software, Inc. and the Participant, dated as of December 30, 2013.
viii. Equity Securities means, as applicable, (a) any capital stock, membership interests or other share capital, (b) any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other share capital or containing any profit participation features, (c) any rights or options directly or indirectly to subscribe for or to purchase any capital stock, membership interests, other share capital or securities containing any profit participation features or to subscribe for or to purchase any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests, other share capital or securities containing any profit participation features, (d) any share appreciation rights, phantom share rights or other similar rights, or (e) any Equity Securities as defined in clauses (a) through (d) above issued or issuable with respect to the securities referred to in clauses (a) through (d) above in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization.
ix. Equity Securities Value Per Share means, for any class or series of Equity Securities of the Company, for any date, the price determined by the first of the following clauses that applies: (a) if such Equity Securities are then listed or quoted on a Trading Market, the arithmetic average of the VWAP of a share of such Equity Securities on each of the twenty (20) consecutive Trading Days immediately preceding such date; (b) if the Equity Securities are not then listed or quoted for trading on a Trading Market and if prices for such Equity Securities are then reported on the OTC Bulletin Board (or a similar organization or agency succeeding to its functions of reporting prices), the arithmetic average of the closing bid price per share of the Common Stock so reported on each of the twenty (20) consecutive Trading Days immediately preceding such date; or (c) in all other cases, the Appraised Value of a share of such Equity Securities.
x. First TEV Threshold means $1.4 billion.
xi. Forfeiture Activities has the meaning set forth in Section 4(c).
- 2 -
xii. Incentive Units shall have the meaning set forth in that certain limited liability company agreement of Paycom Holdings dated as of April 3, 2012, as amended from time to time, by and among Paycom Payroll Holdings, LLC, WCAS Paycom Holdings, Inc., a Delaware corporation, WCAS CP IV Blocker, Inc., a Delaware corporation, The Ruby Group, Inc., an Oklahoma corporation, and the other parties thereto.
xiii. Merger Agreement has the meaning set forth in Section 1.
xiv. Participant has the meaning set forth in Section 1.
xv. Paycom Holdings has the meaning set forth in Section 1.
xvi. Plan has the meaning set forth in Section 1.
xvii. Public Offering means an underwritten sale to the public of the Companys Equity Securities (or its successors Equity Securities) pursuant to an effective registration statement filed with the SEC on Form S-1 (or any successor form adopted by the SEC) and after which the Companys (or its successors) Equity Securities are listed on the New York Stock Exchange, the NYSE MKT or The NASDAQ Stock Market; provided , that a Public Offering shall not include any issuance of Equity Securities in any merger or other business combination, and shall not include any registration of the issuance of Equity Securities to existing securityholders or employees of the Company and its Subsidiaries on Form S-4 or Form S-8 (or any successor form adopted by the SEC).
xviii. Restriction Period has the meaning set forth in Section 5.
xix. SEC means the Securities and Exchange Commission.
xx. Second TEV Threshold means $1.8 billion.
xxi. Termination Event has the meaning set forth in Section 3(c).
xxii. Total Enterprise Value means the sum of: (i) the product of (A) the Equity Securities Value Per Share of a share of Common Stock not subject to vesting or other restrictions multiplied by (B) the number of outstanding shares of Common Stock, (ii) for each other class or series of Equity Securities of the Company, if any, the product of (A) Equity Securities Value Per Share for such class or series of such Equity Securities of the Company multiplied by (B) the number of shares of such class or series of such Equity Securities of the Company, and (iii) the principal amount of all outstanding funded indebtedness of the Company less the aggregate amount of cash and cash equivalents of the Company (exclusive of funds held on behalf of clients).
xxiii. Trading Day means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable Trading Market or in the applicable securities market.
xxiv. Trading Market means the primary securities exchange on which the Common Stock is listed or quoted for trading on the date in question.
xxv. Tranche A Shares has the meaning set forth in Section 1(a).
- 3 -
xxvi. Tranche B Shares has the meaning set forth in Section 1(b).
xxvii. VWAP means the daily volume weighted average price of a share of the Common Stock for such date on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (or successor thereto) using its Volume at Price function (based on a Trading Day from 9:30 a.m. (New York City time) to 4:00 p.m. (New York City time)).
3. Vesting . Except as specifically provided in this Agreement and subject to certain restrictions and conditions set forth in the Plan, the Awarded Shares shall vest as follows:
a. The Tranche A Shares shall vest as follows:
i. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
ii. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
iii. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
iv. of the total Tranche A Shares shall vest on , provided the Participant is employed by the Company or a Subsidiary on that date.
b. The Tranche B Shares shall vest as follows:
i. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the First TEV Threshold, provided the Participant is employed by the Company or a Subsidiary on that date.
ii. Fifty percent (50%) of the Tranche B Shares shall vest on the first date, if any, that the Total Enterprise Value equals or exceeds the Second TEV Threshold, provided the Participant is employed by the Company or a Subsidiary on that date.
c. Notwithstanding the foregoing, if a Public Offering shall have been consummated, all Awarded Shares not previously vested shall immediately become vested in full upon a Termination of Service as a result of the Participants death while performing his duties and responsibilities for the Company.
If a Public Offering shall have been consummated, in the event the Participants death occurs other than while performing his duties and responsibilities for the Company, or in the event of a Termination of Service as a result of the Participants Total and Permanent Disability, or a Termination of Service by the Participant for Good Reason (as defined in the Employment Agreement) the Board may, in its sole discretion, accelerate the vesting of all or any portion of the Awarded Shares not previously vested based on the Participants time and performance and other factors, as the Board may deem appropriate.
- 4 -
If a Public Offering shall have been consummated, in the event of a Termination of Service by the Company without Cause (as defined in the Employment Agreement) (the Termination Event ), (i) the unvested Tranche A Shares shall remain outstanding for a period of one year following the Termination Event, and shall remain eligible for vesting in accordance with Section 3(a) and (ii) the unvested Tranche B Shares shall remain outstanding for a period of one year after the Termination Event, and shall remain eligible for vesting in accordance with Section 3(b) during such period of time. The Board may, in its sole discretion accelerate the vesting of all or any portion of the Awarded Shares not previously vested based on the Participants time and performance and other factors, as the Board may deem appropriate; provided , that any Tranche A Shares or Tranche B Shares that shall not have vested within the one year period immediately following the Termination Event shall be immediately forfeited and shall cease to be outstanding.
In the event that a Change in Control occurs in which the surviving entity, if any, does not assume the obligations of this Award, then immediately prior to the effective date of such Change in Control, all Awarded Shares not previously vested shall thereupon immediately become fully vested.
4. Forfeiture of Awarded Shares . Notwithstanding anything herein to the contrary other than pursuant to Section 3(c), Awarded Shares shall be forfeited and shall cease to be outstanding as set forth below:
a. Awarded Shares that are not vested in accordance with Section 3, whether then held by the Participant or any other Person, shall be forfeited and shall cease to be outstanding on the date of the Participants Termination of Service.
b. The Participant acknowledges that: (i) the Participant performs services of a unique nature for the Company that are irreplaceable, and that the Participants performance of such services to a competing business will result in irreparable harm to the Company, (ii) the Participant has had and will continue to have access to confidential information which, if disclosed, would unfairly and inappropriately assist in competition against the Company or any of its Subsidiaries, (iii) in the course of the Participants employment by a competitor, the Participant would inevitably use or disclose such confidential information, (iv) the Participant has generated and will continue to generate goodwill for the Company and its Subsidiaries in the course of the Participants employment, and (v) the Participant acknowledges that the restrictive covenants outlined below in Paragraph 4(c) arise from and are related to the Participants sale of the goodwill of a business, and that such restrictive covenants are necessary to protect against the unfair competition that would result if the Participant were to begin competing against the Company after selling such goodwill to the Company. Accordingly, all Awarded Shares (whether or not vested and whether then held by the Participant or any other Person) shall be forfeited and shall cease to be outstanding, as of the first date the Participant engages in Forfeiture Activities and, if the Committee has consented to the transfer of all or a portion of such Awarded Shares, then the Participant shall pay to the Company all money received in respect of such transferred Awarded Shares, if the Participant engages in Forfeiture Activities at any time during the term of the Participants employment with the Company and its Subsidiaries or during the one-year period following termination of such employment.
c. The Participant shall have engaged in Forfeiture Activities if at any time the Participant: (i) directly or indirectly manages, operates, controls, participates in, consults with, renders services for or in any manner engages in any business or enterprise (including any division, group or franchise of a larger organization), whether as a proprietor, owner, member, partner, stockholder, director, officer, employee, consultant, joint venturer, investor, sales representative or other participant, in which the Company or any of its Subsidiaries engaged at
- 5 -
any time during the two year period immediately preceding the date such Persons employment with the Company and its Subsidiaries terminates (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated) or engages or proposes to engage as of such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated), in each case, anywhere in any State where the Company or one of its Subsidiaries maintained an office immediately preceding such termination date (or the date of determination if the date of determination is prior to the date the Participants employment with the Company and its Subsidiaries terminated); (ii) directly or indirectly induces or attempts to induce any employee of the Company or any of its Subsidiaries to leave the employ of such entity; (iii) subject to the restrictions of any applicable law, directly or indirectly induces or attempts to induce any established customer of the Company or any of its Subsidiaries to cease doing business with, or materially alter its business relationship with, such entity; (iv) directly or indirectly solicits the sale of goods or services, or a combination thereof, to established customers of the Company or any of its Subsidiaries, or (v) makes or solicits or encourages others to make or solicit directly or indirectly any derogatory or negative statement or communication about the Company, its Subsidiaries or any of their respective businesses, products, services or activities; provided , that the restriction set forth in clause (v) will not prohibit truthful testimony compelled by valid legal process. Notwithstanding the foregoing, engaging in Forfeiture Activities shall not include owning up to one percent of the outstanding stock of a corporation which is publicly traded, so long as the Participant has no active participation in the business of such corporation.
Upon forfeiture, all of the Participants rights with respect to the forfeited Awarded Shares shall cease and terminate, without any further obligations on the part of the Company.
5. Restrictions on Awarded Shares . Subject to the provisions of the Plan and the terms of this Agreement, from the Date of Grant until the date the Awarded Shares are vested in accordance with Section 3 and are no longer subject to forfeiture in accordance with Section 4 (the Restriction Period ), the Participant shall not be permitted to sell, transfer, pledge, hypothecate, margin, assign or otherwise encumber any of the Awarded Shares. Except for these limitations, the Committee may in its sole discretion, remove any or all of the restrictions on such Awarded Shares whenever it may determine that, by reason of changes in applicable laws or changes in circumstances after the date of this Agreement, such action is appropriate.
6. Legend . The following legend shall be placed on all certificates issued representing Awarded Shares:
On the face of the certificate:
Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate.
On the reverse:
The shares of stock evidenced by this certificate are subject to and transferable only in accordance with that certain Paycom Software, Inc. 2014 Long-Term Incentive Plan, a copy of which is on file at the principal office of the Company in Oklahoma City, Oklahoma. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan.
- 6 -
The following legend shall be inserted on a certificate evidencing Common Stock issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws:
Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company.
All Awarded Shares owned by the Participant shall be subject to the terms of this Agreement and shall be represented by a certificate or certificates bearing the foregoing legend.
7. Delivery of Certificates; Registration of Shares . The Company shall deliver certificates for the Awarded Shares to the Participant or shall register the Awarded Shares in the Participants name, free of restriction under this Agreement, promptly after, and only after, the Restriction Period has expired without forfeiture pursuant to Section 4. In connection with any issuance of a certificate for Restricted Stock, the Participant shall endorse such certificate in blank or execute a stock power in a form satisfactory to the Company in blank and deliver such certificate and executed stock power to the Company.
8. Rights of a Stockholder . Except as provided in Section 4 and Section 5 above, the Participant shall have, with respect to his Awarded Shares, all of the rights of a stockholder of the Company, including the right to vote the shares; provided , the Participant shall not have a right to cash dividends and any stock dividends paid with respect to Awarded Shares shall at all times be treated as Awarded Shares and shall be subject to all restrictions placed on such Awarded Shares. Any such stock dividends paid with respect to Awarded Shares shall vest as the related Awarded Shares become vested.
9. Voting . The Participant, as record holder of the Awarded Shares, has the exclusive right to vote, or consent with respect to, such Awarded Shares until such time as the Awarded Shares are transferred in accordance with this Agreement or forfeited; provided , that this Section 9 shall not create any voting right where the holders of such Awarded Shares otherwise have no such right.
10. Adjustment to Number of Awarded Shares . The number of Awarded Shares shall be subject to adjustment in accordance with Articles 11-13 of the Plan.
11. Specific Performance . The parties acknowledge that remedies at law will be inadequate remedies for breach of this Agreement and consequently agree that this Agreement shall be enforceable by specific performance. The remedy of specific performance shall be cumulative of all of the rights and remedies at law or in equity of the parties under this Agreement.
- 7 -
12. Participants Representations . Notwithstanding any of the provisions hereof, the Participant hereby agrees that he or she will not acquire any Awarded Shares, and that the Company will not be obligated to issue any Awarded Shares to the Participant hereunder, if the issuance of such shares shall constitute a violation by the Participant or the Company of any provision of any law or regulation of any governmental authority. Any determination in this connection by the Company shall be final, binding, and conclusive. The rights and obligations of the Company and the rights and obligations of the Participant are subject to all Applicable Laws, rules, and regulations.
13. Investment Representation . Unless the Awarded Shares are issued in a transaction registered under applicable federal and state securities laws, by his execution hereof, the Participant represents and warrants to the Company that all Common Stock which may be purchased and or received hereunder will be acquired by the Participant for investment purposes for his own account and not with any intent for resale or distribution in violation of federal or state securities laws. Unless the Common Stock is issued to him in a transaction registered under the applicable federal and state securities laws, all certificates issued with respect to the Common Stock shall bear an appropriate restrictive investment legend and shall be held indefinitely, unless they are subsequently registered under the applicable federal and state securities laws or the Participant obtains an opinion of counsel, in form and substance satisfactory to the Company and its counsel, that such registration is not required.
14. Participants Acknowledgments . The Participant acknowledges that a copy of the Plan has been made available for his review by the Company, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Award subject to all the terms and provisions thereof. The Participant hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Agreement.
15. Law Governing . This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Delaware (excluding any conflict of laws rule or principle of Delaware law that might refer the governance, construction, or interpretation of this agreement to the laws of another state). To the extent that a court of competent jurisdiction concludes that application of Delaware Law to all or part of Section 4 is contrary to Oklahoma public policy or statutes, the Participant acknowledges that this Agreement relates to the Participants sale of the goodwill of the Company, as defined in 15 O.S. § 218, and agrees to comply with Section 4 to the fullest extent permitted by law.
16. No Right to Continue Service or Employment . Nothing herein shall be construed to confer upon the Participant the right to continue in the employ or to provide services to the Company or any Subsidiary, whether as an Employee or as a Contractor or as an Outside Director, or interfere with or restrict in any way the right of the Company or any Subsidiary to discharge the Participant as an Employee, Contractor, or Outside Director at any time.
17. Legal Construction. In the event that any one or more of the terms, provisions, or agreements that are contained in this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal, or unenforceable in any respect for any reason, the invalid, illegal, or unenforceable term, provision, or agreement shall not affect any other term, provision, or agreement that is contained in this Agreement and this Agreement shall be construed in all respects as if the invalid, illegal, or unenforceable term, provision, or agreement had never been contained herein.
18. Covenants and Agreements as Independent Agreements . Each of the covenants and agreements that are set forth in this Agreement shall be construed as a covenant and agreement independent of any other provision of this Agreement. The existence of any claim or cause of action of the Participant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements that are set forth in this Agreement.
- 8 -
19. Entire Agreement . This Agreement together with the Plan and the Employment Agreement supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and thereof and constitute the sole and only agreements between the parties with respect to the said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
20. Parties Bound . The terms, provisions, and agreements that are contained and referenced in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. No person shall be permitted to acquire any Awarded Shares without first executing and delivering an agreement in the form satisfactory to the Company making such person or entity subject to the restrictions on transfer contained herein.
21. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Company may amend the Plan to the extent permitted by the Plan.
22. Headings . The headings that are used in this Agreement are used for reference and convenience purposes only and do not constitute substantive matters to be considered in construing the terms and provisions of this Agreement.
23. Gender and Number . Words of any gender used in this Agreement shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, and vice versa, unless the context requires otherwise.
24. Notice . Any notice required or permitted to be delivered hereunder shall be deemed to be delivered only when actually received by the Company or by the Participant, as the case may be, at the addresses set forth below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith:
a. Notice to the Company shall be addressed and delivered as follows:
Paycom Software, Inc.
7501 W. Memorial Rd.
Oklahoma City, OK 73142
Attn: Chief Financial Officer
b. Notice to the Participant shall be addressed and delivered as set forth on the signature page.
25. Tax Requirements . The Participant is hereby advised to consult immediately with his or her own tax advisor regarding the tax consequences of this Agreement and shares of Common Stock being issued pursuant to the terms of the Merger Agreement, the method and timing for filing an election to include any amounts received under this Agreement in income under Section 83(b) of the Code (to the extent determined to be taxable), and the tax consequences of such election. By execution of this Agreement, the Participant agrees that if the Participant makes such
- 9 -
an election, the Participant shall provide the Company with written notice of such election in accordance with the regulations promulgated under Section 83(b) of the Code. The Company or, if applicable, any Subsidiary (for purposes of this Section 25, the term Company shall be deemed to include any applicable Subsidiary), shall have the right to deduct from all amounts paid in cash or other form in connection with the Plan, any Federal, state, local, or other taxes required by law to be withheld in connection with this Award. The Company may, in its sole discretion, also require the Participant receiving shares of Common Stock issued under the Merger Agreement or the Plan to pay the Company the amount of any taxes that the Company is required to withhold in connection with the Participants income arising with respect to this Award or with respect to the issuance of Common Stock under the Merger Agreement. Such payments shall be required to be made when requested by the Company, including under the terms of the Merger Agreement, and may be required to be made prior to the delivery of any certificate representing shares of Common Stock. Such payment may be made (i) by the delivery of cash to the Company in an amount that equals or exceeds (to avoid the issuance of fractional shares under (iii) below) the required tax withholding obligations of the Company; (ii) if the Company, in its sole discretion, so consents in writing, the actual delivery by the Participant to the Company of shares of Common Stock, other than (A) Restricted Stock, or (B) Common Stock that the Participant has acquired from the Company within six (6) months prior thereto, which shares so delivered have an aggregate Fair Market Value that equals or exceeds (to avoid the issuance of fractional shares under (iii) below) the required tax withholding payment; (iii) if the Company, in its sole discretion, so consents in writing, the Companys withholding of a number of shares to be delivered upon the vesting of this Award, which shares so withheld have an aggregate Fair Market Value that equals (but does not exceed) the required tax withholding payment; or (iv) any combination of (i), (ii), or (iii). The Company may, in its sole discretion, withhold any such taxes from any other cash remuneration otherwise paid by the Company to the Participant.
* * * * * * * * * *
[ Remainder of Page Intentionally Left Blank.
Signature Page Follows ]
- 10 -
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Participant, to evidence his consent and approval of all the terms hereof, has duly executed this Agreement, as of the date specified in Section 1 hereof.
COMPANY: |
||
Paycom Software, Inc. | ||
By: |
|
|
Name: Craig Boelte |
||
Title: Chief Financial Officer |
||
PARTICIPANT:
|
||
Signature |
||
Name: |
Chad Richison | |
Address: |
|
|
|
- 11 -
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 10, 2014, with respect to the consolidated balance sheet of Paycom Software, Inc. and Subsidiary as of December 31, 2013, contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption Experts.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 31, 2014
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 10, 2014, with respect to the consolidated financial statements of Paycom Payroll Holdings, LLC as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013, contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption Experts.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 31, 2014