PROBUSINESS SERVICES INC
10-Q, 1997-11-14
COMPUTER PROCESSING & DATA PREPARATION
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-Q
 
                                ---------------
 
(Mark One)
 
/X/    Quarterly report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934
 
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
 
                                         OR
 
/ /    Transition report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934
 
                           PROBUSINESS SERVICES, INC.
 
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      94-2976066
        (State or other jurisdiction                         (I.R.S. Employer
              of incorporation)                             Identification No.)
</TABLE>
 
                               4125 HOPYARD ROAD
                              PLEASANTON, CA 94588
                    (Address of principal executive offices)
 
                                 (510) 737-3500
              (Registrant's telephone number, including area code)
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
                 YES ____                                 NO _X_
 
    As of September 30, 1997, there were 10,744,051 shares of the Registrant's
Common Stock outstanding.
 
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<PAGE>
                           PROBUSINESS SERVICES, INC.
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                                           PAGE NO.
                                                                                                         -------------
 
<S>           <C>                                                                                        <C>
                                            PART I. FINANCIAL INFORMATION
 
ITEM 1.       CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
 
              Condensed Consolidated Balance Sheets
                September 30, 1997 and June 30, 1997...................................................            3
 
              Condensed Consolidated Statements of Operations
                Three months ended September 30, 1997 and 1996.........................................            4
 
              Condensed Consolidated Statement of Stockholders' Equity
                Three months ended September 30, 1997..................................................            5
 
              Condensed Consolidated Statements of Cash Flows
                Three months ended September 30, 1997 and 1996.........................................            6
 
              Notes to Condensed Consolidated Financial Statements.....................................            7
 
ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....            9
 
                                              PART II. OTHER INFORMATION
 
ITEM 1.       LEGAL PROCEEDINGS........................................................................           17
 
ITEM 2.       CHANGES IN SECURITIES....................................................................           17
 
ITEM 3.       DEFAULTS UPON SENIOR SECURITIES..........................................................           18
 
ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................           18
 
ITEM 5.       OTHER INFORMATION........................................................................           18
 
ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K.........................................................           18
 
              SIGNATURES...............................................................................           19
</TABLE>
 
                                       2
<PAGE>
                         PART I.  FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                           PROBUSINESS SERVICES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                   UNAUDITED
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30, 1997  JUNE 30, 1997
                                                                                 ------------------  -------------
 
<S>                                                                              <C>                 <C>
                                                      ASSETS
Current Assets:
  Cash and cash equivalents....................................................     $     18,457      $     5,047
  Accounts receivable, net.....................................................            2,250            2,476
  Prepaid expenses.............................................................              481              643
                                                                                        --------     -------------
                                                                                          21,188            8,166
  Payroll tax funds invested...................................................          181,108          177,626
                                                                                        --------     -------------
    Total current assets.......................................................          202,296          185,792
Equipment, furniture and fixtures, net.........................................            9,508            7,623
Other assets...................................................................            6,220            7,020
                                                                                        --------     -------------
      Total assets.............................................................     $    218,024      $   200,435
                                                                                        --------     -------------
                                                                                        --------     -------------
 
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Accounts payable, accrued liabilities, current portion of capital lease
    obligations and deferred revenue...........................................            9,245            8,125
  Long-term debt and note payable to stockholder, current portion..............              675               --
                                                                                        --------     -------------
                                                                                           9,920            8,125
  Payroll tax funds collected but unremitted...................................          181,108          177,626
                                                                                        --------     -------------
      Total current liabilities................................................          191,028          185,751
Note payable to stockholder, non-current.......................................               --              250
Long-term debt, less current portion...........................................               --            8,667
Capital lease obligations, less current portion................................            1,716            1,898
Commitments
Stockholders' equity:
  Preferred stock..............................................................               --                3
  Common stock, par value $.001 per share......................................               11                1
  Additional paid-in capital...................................................           48,186           23,905
  Accumulated deficit..........................................................          (21,829)         (18,952)
  Notes receivable from stockholders...........................................           (1,088)          (1,088)
                                                                                        --------     -------------
    Total stockholders' equity.................................................           25,280            3,869
                                                                                        --------     -------------
      Total liabilities and stockholders' equity...............................     $    218,024      $   200,435
                                                                                        --------     -------------
                                                                                        --------     -------------
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       3
<PAGE>
                           PROBUSINESS SERVICES, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   UNAUDITED
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                                THREE MONTHS ENDED
                                                                                                  SEPTEMBER 30,
                                                                                               --------------------
                                                                                                 1997       1996
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
Revenue......................................................................................  $   9,227  $   4,675
Operating expenses:
  Cost of providing services.................................................................      5,019      2,288
  General and administrative expenses........................................................      1,768        622
  Research and development expenses..........................................................      1,110        625
  Client acquisition costs...................................................................      3,978      2,215
                                                                                               ---------  ---------
    Total operating expenses.................................................................     11,875      5,750
  Loss from operations.......................................................................     (2,648)    (1,075)
  Interest expense and other income, net.....................................................       (229)      (204)
                                                                                               ---------  ---------
  Net loss...................................................................................  $  (2,877) $  (1,279)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
  Net loss per share.........................................................................  $   (1.08)
                                                                                               ---------
                                                                                               ---------
  Shares used in computing net loss per share................................................      2,661
                                                                                               ---------
                                                                                               ---------
  Pro forma net loss per share...............................................................  $   (0.35) $   (0.15)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
  Shares used in computing pro forma net loss per share......................................      8,328      8,451
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       4
<PAGE>
                           PROBUSINESS SERVICES, INC.
 
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
                                   UNAUDITED
 
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                        PREFERRED STOCK                    COMMON STOCK
                                -------------------------------   -------------------------------
                                                     ADDITIONAL                        ADDITIONAL
                                                      PAID-IN                           PAID-IN
                                  SHARES    AMOUNT    CAPITAL       SHARES    AMOUNT    CAPITAL
                                ----------  ------   ----------   ----------  ------   ----------
<S>                             <C>         <C>      <C>          <C>         <C>      <C>
Balances at June 30, 1997.....   3,228,034   $  3     $ 22,370     1,530,277   $ 1      $ 1,535
Issuance of Common Stock in
 connection with Initial
 Public Offering, net of
 offering costs...............          --     --           --     2,500,000     3       23,307
Conversion of Preferred Stock
 into Common Stock............  (3,228,034)    (3)     (22,370)    6,456,068     7       22,366
Exercise of Warrants..........          --     --           --       244,859    --          923
Exercise of Stock Options.....          --     --           --        12,847    --            6
Issuance of Warrants..........          --     --           --            --    --           49
Net loss......................          --     --           --            --    --           --
                                ----------  ------   ----------   ----------  ------   ----------
Balances at September 30,
 1997.........................          --   $ --     $     --    10,744,051   $11      $48,186
                                ----------  ------   ----------   ----------  ------   ----------
                                ----------  ------   ----------   ----------  ------   ----------
 
<CAPTION>
 
                                                  NOTES
                                               RECEIVABLE         TOTAL
                                ACCUMULATED       FROM        STOCKHOLDERS'
                                  DEFICIT     STOCKHOLDER'S      EQUITY
                                -----------   -------------   -------------
<S>                             <C>           <C>             <C>
Balances at June 30, 1997.....   $(18,952)       $(1,088)        $ 3,869
Issuance of Common Stock in
 connection with Initial
 Public Offering, net of
 offering costs...............         --             --          23,310
Conversion of Preferred Stock
 into Common Stock............         --             --              --
Exercise of Warrants..........         --             --             923
Exercise of Stock Options.....         --             --               6
Issuance of Warrants..........         --             --              49
Net loss......................     (2,877)            --          (2,877)
                                -----------   -------------   -------------
Balances at September 30,
 1997.........................   $(21,829)       $(1,088)        $25,280
                                -----------   -------------   -------------
                                -----------   -------------   -------------
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       5
<PAGE>
                           PROBUSINESS SERVICES, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                   UNAUDITED
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                               THREE MONTHS ENDED
                                                                                                 SEPTEMBER 30,
                                                                                              --------------------
                                                                                                1997       1996
                                                                                              ---------  ---------
<S>                                                                                           <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................................................  $  (2,877) $  (1,279)
  Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
    Depreciation and amortization...........................................................      1,043        425
    Changes in operating assets and liabilities:
      Accounts receivable, net..............................................................        226       (299)
      Prepaid expenses......................................................................        162         57
      Other assets..........................................................................      1,417        (44)
      Accounts payable......................................................................         37       (101)
      Accrued liabilities...................................................................      1,194       (136)
      Deferred revenue......................................................................       (125)        15
                                                                                              ---------  ---------
Net cash provided by (used in) operating activities.........................................      1,077     (1,362)
                                                                                              ---------  ---------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures..............................................     (2,819)      (188)
Capitalization of software development costs................................................       (726)       (71)
                                                                                              ---------  ---------
Net cash used in investing activities.......................................................     (3,545)      (259)
                                                                                              ---------  ---------
FINANCING ACTIVITIES
Borrowings under line of credit agreements..................................................      6,874      4,537
Repayments of borrowings under line of credit agreements....................................    (11,632)    (5,363)
Repayments under subordinated debt..........................................................     (3,384)        --
Repayments under note payable to stockholder................................................       (100)      (116)
Principal payments on capital lease obligations.............................................       (168)       (40)
Proceeds from issuance of common stock......................................................     24,288         57
                                                                                              ---------  ---------
Net cash provided by (used in) financing activities.........................................     15,878       (925)
                                                                                              ---------  ---------
Net increase (decrease) in cash and cash equivalents........................................     13,410     (2,546)
Cash and cash equivalents, beginning of period..............................................      5,047      4,041
                                                                                              ---------  ---------
Cash and cash equivalents, end of period....................................................  $  18,457  $   1,495
                                                                                              ---------  ---------
                                                                                              ---------  ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for interest..................................................  $     249  $     293
                                                                                              ---------  ---------
                                                                                              ---------  ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
  Purchase of equipment, furniture and fixtures under capital leases........................  $      --  $     592
                                                                                              ---------  ---------
                                                                                              ---------  ---------
  Disposal of equipment, furniture and fixtures.............................................  $     484  $      --
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
           See notes to condensed consolidated financial statements.
 
                                       6
<PAGE>
                           PROBUSINESS SERVICES, INC.
                          NOTES TO UNAUDITED CONDENSED
                       CONSOLIDATED FINANCIAL STATEMENTS
 
1. ACCOUNTING POLICIES
 
OPERATIONS
 
    ProBusiness Services, Inc. provides employee administrative services for
large employers. The Company's primary service offerings are payroll processing,
payroll tax filing, human resources software and benefits administration,
including the enrollment and processing of flexible benefit plans and COBRA
programs.
 
BASIS OF PRESENTATION
 
    The interim condensed consolidated financial statements of ProBusiness
Services, Inc. have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
 
    The information included in this report should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (No. 333-23189).
 
    In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods. The results for
the interim period ended September 30, 1997 are not necessarily indicative of
the results that may be expected for any future periods.
 
HISTORICAL NET LOSS AND PRO FORMA NET LOSS PER SHARE
 
    HISTORICAL
 
    Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
convertible preferred stock and from stock options and warrants are excluded
from the computation as their effect is antidilutive. Pursuant to the Securities
and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common
equivalent shares issued at prices below the initial public offering price
during the 12 month period prior to the September 19, 1997 initial public
offering have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method at the initial public
offering price and as if converted method for preferred stock in calculating
equivalent shares).
 
    PRO FORMA
 
    Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from convertible
preferred stock that automatically converted upon the closing of the Company's
initial public offering (using the as if-converted method).
 
                                       7
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
 
    February 1997, the Financial Accounting Standards Board Issued Statement No.
128, "Earnings Per Share" (FAS 128), which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of FAS 128 on the
calculation of primary and fully diluted earnings per share is not expected to
be material.
 
RECLASSIFICATIONS
 
    The Company has reclassified certain prior-year balances to conform with
current-year presentation.
 
2. DEBT
 
    At September 30, 1997, the Company has a $10 million line of credit
available for borrowing. In September 1997, the Company repaid outstanding
borrowings of $4.8 million under the line-of-credit with proceeds from the
Company's initial public offering. Borrowings outstanding under the line of
credit bear interest at the bank's prime rate plus 1% and interest is payable
monthly.
 
    In September 1997 the Company used proceeds from the initial public offering
to pay $3.4 million of $4.0 million outstanding in subordinated debt.
 
3. STOCKHOLDER'S EQUITY
 
    On September 19, 1997, the Company completed its Public Offering of Common
Stock. The offering consisted of 2,500,000 shares of common Stock issued to the
public at $11.00 per share. Upon closing of the initial public offering, all
outstanding shares of Series A, B, C, D, E, and F convertible preferred stock
were converted into Common Stock.
 
    In October, the underwriters exercised an option to purchase an additional
375,000 shares of common Stock at the Public Offering price of $11.00 per share
to cover over-allotments in connection with the initial public offering.
 
    In conjunction with the initial public offering, certain preferred
stockholders holding warrants to purchase an aggregate number of 251,852 shares
of Series E convertible preferred stock at $3.97 per share, exercised such
warrants. The Company received total consideration of approximately $923,000
related to the exercise of these warrants.
 
                                       8
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements. Potential risks and
uncertainties include, among others, those set forth under "Overview" and
"Additional Factors that May Affect Future Results" included in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The following discussion also should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Quarterly
Report.
 
OVERVIEW
 
    ProBusiness Services, Inc. ("the Company") is a leading provider of employee
administrative services for large employers. The Company's primary service
offerings are payroll processing, payroll tax filing, human resources software
and benefits administration, including the enrollment and processing of flexible
benefit plans and COBRA programs. The Company's proprietary PC-based payroll
system offers the cost-effective benefits of outsourcing and high levels of
client service, while providing the flexibility, control, customization and
integration of an in-house system.
 
    Since 1994, the Company has experienced significant growth of its revenue,
client base and average client size. Revenue increased from $4.1 million in
fiscal 1994 to $27.4 million in fiscal 1997. From September 30, 1995 to
September 30, 1997, the Company's client base for payroll processing services
increased from 289 to 447 clients, while the average size of the Company's
payroll clients increased from approximately 570 employees to approximately
1,000 employees. As of September 30, 1997, the Company serviced approximately
1,200 clients. The Company's revenue growth is primarily due to continued growth
in its client base, the introduction of its payroll tax service in fiscal 1996,
an increase in the average size of its clients, the introduction of new features
and other services, the introduction of benefits administration services and a
high retention rate of existing clients (approximately 92% for fiscal year
1997--measured only on an annual basis). The Company does not anticipate it will
sustain this rate of growth in the future.
 
    The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. The Company typically
invests payroll tax funds collected from clients and their employees in
federally insured or investment-grade securities, which are subject to credit
risks and interest rate fluctuations. See "Additional Factors that May Affect
Future Results--Investment Risks" The Company generally recognizes revenue from
services when such services are performed and recognizes income from investments
when earned. Payroll and payroll tax clients generally are subject to contracts
with an initial term of 36 months. Interest income earned on collected, but
unremitted, payroll tax funds amounted to $2.0 million and $778,000, for the
quarters ended September 30, 1997 and 1996, respectively. Benefits
administration and human resources software clients generally are subject to
contracts with an initial term of 12 months. The Company's contracts generally
do not have significant penalties for cancellation.
 
    The Company's cost of providing services consists primarily of ongoing
account management, tax and benefits administration operations and production
costs and, to a lesser extent, amortization of capitalized software development
costs. The Company capitalizes software development costs after technological
feasibility of the software relating to a service has been established and
amortizes such costs using the greater of (i) the straight-line basis over the
estimated useful life of the software, which is generally 36 months, or (ii) the
ratio of current revenue to the total of current revenue and anticipated future
revenue over the life of the related product. General and administrative
expenses consist primarily of personnel costs, professional fees and other
overhead costs for finance and corporate services. Research and development
expenses consist primarily of personnel costs. Client acquisition costs consist
of all sales and implementation expenses and, to a lesser extent marketing
expenses and systems integration costs.
 
                                       9
<PAGE>
RESULTS OF OPERATIONS
 
    The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:
 
<TABLE>
<CAPTION>
                                                      THREE MONTHS
                                                          ENDED
                                                      SEPTEMBER 30,
                                                    -----------------
                                                     1997       1996
                                                    ------     ------
<S>                                                 <C>        <C>
STATEMENTS OF OPERATIONS DATA:
Revenue...........................................   100.0%     100.0%
Operating expenses:
  Cost of providing services......................    54.4       48.9
  General and administrative expenses.............    19.2       13.3
  Research and development expenses...............    12.0       13.4
  Client acquisition costs........................    43.1       47.4
                                                    ------     ------
      Total operating expenses....................   128.7      123.0
Loss from operations..............................   (28.7)     (23.0)
Interest expense and other income, net............    (2.5)      (4.4)
                                                    ------     ------
Net loss..........................................   (31.2)%    (27.4)%
                                                    ------     ------
                                                    ------     ------
</TABLE>
 
    REVENUE.  Revenue increased 97.4% to $9.2 million in the first quarter of
fiscal 1998 from $4.7 million in the first quarter of fiscal 1997 primarily due
to an increase in the number and average size of the Company's payroll and tax
clients, and to a lesser extent, the introduction of the Company's benefits
administration services in January 1997. Interest income earned on payroll tax
funds invested was $2.0 million and $778,000 in the first quarters of fiscal
1998 and 1997, respectively.
 
    COST OF PROVIDING SERVICES.  Cost of providing services increased 119.4% to
$5.0 million in the first quarter of fiscal 1998 from $2.3 million in the first
quarter of fiscal 1997 and increased as a percentage of revenue to 54.4% from
48.9%. The increases were primarily due to operations expense related to the
Company's benefits administration services introduced in January 1997,
production expenses related to an increase in the number of payroll clients,
building a management infrastructure in the Company's production and account
management operations, and to a lesser extent increased personnel expenses
related to the Company's payroll tax service.
 
    GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 184.2% to $1.8 million in the first quarter of fiscal 1998 from
$622,000 in the first quarter of fiscal 1997 and increased as a percentage of
revenue to 19.2% from 13.3%. The increases were primarily due to operations
expense related to the Company's benefits administration services introduced in
January 1997, the hiring of additional management and administrative personnel
to support the Company's growth and a one-time charge of $315,000 for a real
estate transaction.
 
    RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses
increased 77.6% to $1.1 million in the first quarter of fiscal 1998 from
$625,000 in the first quarter of fiscal 1997 and decreased as a percentage of
revenue to 12.0% from 13.4%. The increase in absolute dollars was primarily a
result of additional personnel and equipment to develop enhancements and new
features to the Company's existing services. Research and development expenses
decreased as a percentage of revenue due in part to higher revenue and an
increase in the amount of expenses capitalized in the first quarter of fiscal
1998. Capitalized software development costs were $726,000 and $71,000 in the
first quarters of fiscal 1998 and 1997, respectively.
 
    CLIENT ACQUISITION COSTS.  Client acquisition costs increased 79.6% to $4.0
million in first quarter of fiscal 1998 from $2.2 million in first quarter of
fiscal 1997 and decreased as a percentage of revenue to
 
                                       10
<PAGE>
43.1% from 47.4%. The increase in absolute dollars was primarily due to an
increase in expenses related to the expanded sales force for payroll and
stand-alone tax services, expenses related to the Company's benefits
administration services introduced in January 1997, and, to a lesser extent,
implementation expenses related to an increased number of new clients. Client
acquisition costs decreased as a percentage of revenue due to higher revenue.
 
    INTEREST EXPENSE AND OTHER INCOME, NET.  Interest expense and other income,
net increased 12.3% to $229,000 in the first quarter of fiscal 1998 from
$204,000 in the first quarter of fiscal 1997, primarily due to an increase in
capitalized equipment leases.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    At September 30, 1997 the Company's principal sources of liquidity included
$18.5 million of cash and cash equivalents, and a secured $10 million revolving
line of credit which expires in April 1998. There were no outstanding borrowings
under the line of credit as of September 30, 1997.
 
    Net cash provided by operating activities was $1.1 million for the first
fiscal quarter of 1998, and net cash used in operating activities was $1.4
million for the first fiscal quarter of 1997. The increase in cash provided in
operating activities in the first fiscal quarter of 1998 compared to the
comparable quarter in 1997 was primarily the result of a decrease in other
assets and an increase in depreciation and accrued liabilities partially offset
by an increase in the loss from operations.
 
    Net cash used in investing activities was $3.5 million and $259,000 for the
first fiscal quarters of 1998 and 1997, respectively. The increases in net cash
used in investing activities during the first fiscal quarter of 1998 resulted
primarily from capital expenditures for equipment, furniture and fixtures in
connection with the Company's new production facility in Southern California and
the move of the Company's corporate headquarters. In addition, the Company
capitalized software development costs of $726,000 and $71,000 in the first
fiscal quarters of 1998 and 1997, respectively. The Company expects to make
additional capital expenditures for furniture, equipment and fixtures to support
the continued growth of its operations. In addition, the Company anticipates
that it will continue to expend funds for software development in the future.
 
    Net cash provided by financing activities was $15.9 million for the first
fiscal quarter of 1998 and net cash used in financing activities was $925,000
for the first fiscal quarter of 1997. Net cash provided by financing activities
for the first fiscal quarter of 1998 related primarily to $23.3 million of net
proceeds from the initial public offering of common stock and $923,000 from the
exercise of warrants in conjunction with the initial public offering in
September 1997 partially offset by the payment of $3.4 million of outstanding
subordinated debt and repayment of $4.8 million of borrowings under the
Company's secured revolving line of credit. Net cash used in financing
activities for the first quarter of fiscal 1997 was primarily a result of
payments in excess of borrowings under the Company's credit agreements.
 
    The Company believes that existing cash balances and anticipated cash flows
from operations, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. The Company may also
utilize cash to acquire or invest in complementary businesses or to obtain the
right to use complementary technologies, although the Company does not have any
pending plans to do so.
 
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
 
    OPERATING LOSSES; NEED TO COMMIT TO EXPENSE IN ADVANCE OF REVENUES.  The
Company has experienced significant operating losses since its inception and
expects to incur significant operating losses in the future due to continued
client acquisition costs, investments in research and development and costs
associated with expanding its sales efforts and operations to new geographic
regions. As of September 30, 1997, the Company had an accumulated deficit of
approximately $21.8 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process
 
                                       11
<PAGE>
generally takes three to twelve months or longer, and the implementation process
generally takes three to nine months or longer. In connection with the
acquisition of each new client, the Company incurs substantial client
acquisition costs, which consist primarily of sales and implementation expenses
and, to a lesser extent, marketing expenses. The Company's ability to achieve
profitability will depend in part upon its ability to attract and retain new
clients, offer new services and features and achieve market acceptance of new
services. There can be no assurance that the Company will achieve or sustain
profitability in the future. The Company has made acquisitions in the past and
intends to pursue acquisitions in the future. In connection with acquisitions,
the Company has in the past incurred and will likely incur in the future costs
associated with adding personnel, integrating technology and increasing overhead
to support the acquired business, acquiring in-process technology and
amortization expenses related to goodwill. As a result, such acquisitions have
had and any future acquisition could have an adverse effect on the Company's
results of operations.
 
    SEASONALITY; FLUCTUATION IN QUARTERLY RESULTS.  The Company's business is
characterized by significant seasonality. As a result, the Company's revenue has
been subject to significant seasonal fluctuations, with the largest percentage
of annual revenue being realized in the third and fourth fiscal quarters,
primarily due to new clients beginning services in January (the beginning of the
tax year and the Company's third fiscal quarter) and higher interest income
earned on tax funds. Further, the Company's operating expenses are typically
higher as a percentage of revenue in the first and second fiscal quarters as the
Company increases personnel to acquire new clients and to implement and provide
services to such new clients.
 
    The Company's quarterly operating results have in the past and will in the
future vary significantly depending on a variety of factors, including the
number and size of new clients starting services, the decision of one or more
clients to delay or cancel implementation or ongoing services, interest rates,
seasonality, the ability of the Company to design, develop and introduce new
services and features for existing services on a timely basis, transition costs
to new technologies, expenses incurred for geographic expansion, risks
associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of the Company's clients,
and general economic factors. Revenue from new clients represents a significant
portion of quarterly revenue in the third and fourth fiscal quarters. A
substantial majority of the Company's operating expenses, particularly personnel
and related costs, depreciation and rent, is relatively fixed in advance of any
particular quarter. The Company's agreements with its clients generally do not
have significant penalties for cancellation. As a result, any decision by a
client to delay or cancel implementation of the Company's services or the
Company's underutilization of personnel may cause significant variations in
operating results in a particular quarter and could result in losses for such
quarter. As the Company secures larger clients, the time required for
implementing the Company's services increases, which could contribute to larger
fluctuations in revenue. Interest income earned from investing payroll tax
funds, which is a significant portion of the Company's revenue, is vulnerable to
fluctuations in interest rates. In addition, the Company's business may be
affected by shifts in the general health of the economy, strikes and
acquisitions of its client by other companies. There can be no assurance that
the Company's future revenue and results of operations will not vary
substantially. It is possible that in some future quarter the Company's results
of operations will be below the expectations of public market analysts and
investors. In either case, the market price of the Company's Common Stock could
be materially adversely affected.
 
    RISKS ASSOCIATED WITH ACQUISITIONS.  In January 1997, the Company acquired
BeneSphere Administrators, Inc. ("BeneSphere"), a provider of benefits
administration services. The integration of BeneSphere's business with the
Company's business has placed and will continue to place a significant burden on
the Company's management. Such integration is subject to risks commonly
encountered in making such acquisitions, including, among others, loss of key
personnel of the acquired company, the difficulty associated with assimilating
the personnel and operations of the acquired company, the potential disruption
of the Company's ongoing business, the maintenance of uniform standards,
controls, procedures and policies, and the impairment of the Company's
reputation and relationships with employees and clients.
 
                                       12
<PAGE>
There can be no assurance that the Company will be successful in overcoming
these risks or any other problems encountered in connection with its acquisition
of BeneSphere.
 
    While the Company has no current agreements or negotiations underway with
respect to any acquisition, the Company intends to make additional acquisitions
of complementary services, technologies or businesses. There can be no assurance
that any future acquisition will be completed or that, if completed, will be
effectively assimilated into the Company's business. In addition, future
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations or on the market price of the Company's Common Stock.
 
    RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION
SERVICES.  The Company's payroll tax service is subject to various risks
resulting from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
calculate and transfer to the Company contributed employer and employee tax
funds. The Company processes the data received from the client and remits the
funds along with a tax return to the appropriate tax authorities when due.
Tracking, processing and paying such tax liabilities is complex. Errors and
omissions have occurred in the past and may occur in the future in connection
with such service. The Company is subject to large cash penalties imposed by tax
authorities for late filings or underpayment of taxes. To date, such penalties
have not been material. However, there can be no assurance that any liabilities
associated with such penalties will not have a material adverse effect on the
Company's business, financial condition or results of operations. There can be
no assurance that the Company's reserves or insurance for such penalties will be
adequate. In addition, failure by the Company to make timely or accurate tax
return filings or pay tax liabilities when due on behalf of clients may damage
the Company's reputation and could adversely affect its relationships with
existing clients and its ability to gain new clients.
 
    The Company's payroll tax service is also dependent upon government
regulations, which are subject to continuous changes. Failure by the Company to
implement these changes into its services and technology in a timely manner
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, since a significant portion of
the Company's revenue is derived from interest earned from investing on
collected but unremitted payroll tax funds, changes in policies relating to
withholding federal or state income taxes or reduction in the time allowed for
taxpayers to remit payment for taxes owed to government authorities would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
    The Company's benefits administration services are subject to various risks
resulting from errors and omissions in processing and filing COBRA or other
benefit plan forms in accordance with governmental regulations and the
respective plans. The Company processes data received from employees and
employers and is subject to penalties for any late or misfiled plan forms. There
can be no assurance the Company's reserves or insurance for such penalties will
be adequate. In addition, failure to properly file plan forms may damage the
Company's reputation, which could adversely affect its relationships with
existing clients and its ability to gain new clients. The Company's benefits
administration services are also dependent upon government regulations which are
subject to continuous changes that could reduce or eliminate the need for
benefits administration services.
 
    The Company has access to confidential information and to client funds. As a
result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions insurance will be adequate to cover any such claims. Such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
    INVESTMENT RISKS.  The Company invests funds, including payroll tax funds
transferred to it by clients until the Company remits the funds to tax
authorities when due. The Company typically invests these funds
 
                                       13
<PAGE>
in short-term financial instruments such as overnight U.S. government direct and
agency obligations repurchase agreements, commercial paper rated A-1 and/or P-1
and money market funds with underlying credit quality of AA or better. These
investments are exposed to several risks, including credit risks from the
possible inability of the borrowers to meet the terms of their obligations under
the financial instruments. The Company would be liable for any losses on such
investments.
 
    Interest income earned from investing these funds represents a significant
portion of the Company's results of operations. As a result, the Company's
business, financial condition and results of operations are significantly
impacted by interest rate fluctuations. The Company enters into interest rate
swap agreements to minimize the impact of interest rate fluctuations. In the
event the dollar amount of the Company's invested funds falls below a specified
threshold and earned interest rates are above the swap rate, the Company would
have swap payment obligations, which could have a material adverse effect on the
Company's results of operations. There can be no assurance that the Company
would have sufficient funds to meet any such swap payment obligations. A default
by the Company under a swap agreement could result in acceleration and set-off
by the bank of all outstanding contracts under the swap agreement, and could
result in cross-defaults of other debt agreements of the Company, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
    MANAGEMENT OF GROWTH.  The Company's business has grown significantly in
size and complexity over the past three years, which has placed significant
demands on the Company's management, systems, internal controls, and financial
and physical resources. In order to meet such demands, the Company intends to
continue to hire new employees, open new offices to gain clients in new
geographic regions and invest in new equipment or make other capital
expenditures. In addition, the Company expects that it will need to develop
further its financial and managerial controls and reporting systems and
procedures to accommodate any future growth. Failure to expand any of the
foregoing areas in an efficient manner could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company is currently in the process of integrating BeneSphere's business with
the Company's business. The Company has established a processing center in
Irvine, California and intends to open new sales offices. In addition, the
Company has moved to a larger facility to house its operations in Pleasanton,
California. There can be no assurance that the Company will be able to
effectively integrate BeneSphere's business or establish such facilities on a
timely basis. In addition, the Company's growth may depend to some extent on its
ability to successfully complete strategic acquisitions to expand or complement
its existing business. There can be no assurance that suitable acquisitions can
be identified, consummated or successfully integrated into the Company's
operations. Any inability to manage growth effectively could have a material
adverse effect on the Company's business, financial condition or results of
operations.
 
    SUBSTANTIAL COMPETITION.  The market for the Company's services is intensely
competitive, subject to rapid change and significantly affected by new service
introductions and other market activities of industry participants. The Company
primarily competes with several public and private payroll service providers
such as Automatic Data Processing, Inc., Ceridian Corporation and Paychex, Inc.,
as well as smaller, regional competitors. Many of these companies have longer
operating histories, greater financial, technical, marketing and other
resources, greater name recognition and a larger number of clients than the
Company. In addition, many of these companies offer more services or features
than the Company and have processing facilities located throughout the United
States. The Company also competes with in-house employee services departments
and, to a lesser extent, banks and local payroll companies. With respect to
benefits administration services, the Company competes with insurance companies,
benefits consultants and other local benefits outsourcing companies. The Company
may also compete with marketers of related products and services that may offer
payroll or benefits administration services in the future. The failure of the
Company to compete successfully would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has experienced, and expects to continue to experience, competition from new
entrants into its markets. Increased competition could result in pricing
 
                                       14
<PAGE>
pressures, loss of market share and loss of clients, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
 
    RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; RISKS OF SOFTWARE DEFECTS.  The
technologies in which the Company has invested to date are rapidly evolving and
have short life cycles, which requires the Company to anticipate and rapidly
adapt to technological changes. In addition, the Company's industry is
characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The introduction of services embodying new technologies and the emergence of new
industry standards and practices can render existing services obsolete and
unmarketable. The Company's future success will depend, in part, on its ability
to develop advanced technologies, enhance its existing services with new
features, add new services that address the changing needs of its clients, and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. Several of the Company's competitors
invest substantially greater amounts in research and development than the
Company, which may allow them to introduce new services or features before the
Company. Even if the Company is able to develop new technologies in a timely
manner, it may incur substantial costs in deploying new services and features to
its clients, including costs of additional personnel. If the Company is unable
to develop and introduce new services and new features of existing services in a
timely or cost-effective manner, the Company's business, financial condition and
results of operations could be materially adversely affected.
 
    Application software used by the Company may contain defects or failures
when introduced or when new versions or enhancements are released. The Company
has in the past discovered software defects in certain of its applications, in
some cases only after its systems have been used by clients. There can be no
assurance that future defects will not be discovered in existing or new
applications or releases. Any such occurrence could have a material adverse
effect upon the Company's business, financial condition and results of
operations
 
    DEPENDENCE ON THIRD-PARTY PROVIDERS.  The Company depends on third-party
courier services to deliver paychecks to clients. The Company does not have any
formal written agreements with any of the courier services that it uses. Such
courier services have been in the past and may be in the future unable to timely
deliver the paychecks from the Company to its clients for a variety of reasons,
including employee strikes, storms or other adverse weather conditions,
earthquakes or other natural disasters, logistical or mechanical failures or
accidents. Failure by the Company to deliver client paychecks on a timely basis
would have a material adverse effect on the Company's business, financial
condition and results of operations and could damage the Company's reputation
and adversely affect its relationships with existing clients and its ability to
gain new clients.
 
    DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA.  The Company currently
conducts substantially all of its payroll and payroll tax processing and
production at the Company's headquarters located in Pleasanton, California. The
Company has recently established an alternative processing center in Irvine,
California and is in the process of establishing a back-up facility at that
site. There can be no assurance that the Company's disaster recovery procedures
are sufficient.
 
    The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
                                       15
<PAGE>
    RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION.  A substantial majority of the
Company's revenue has been derived from clients located in the western United
States. The Company's ability to achieve significant future revenue growth will
in part depend on its ability to gain new clients throughout the United States.
Currently, the Company has eight sales representatives located outside of
California, and the Company intends to locate additional sales representatives
in major metropolitan areas throughout the United States. The Company opened a
sales office in Irvine, California in February 1995. Substantially all
production for the Company's clients has been maintained at the Company's
headquarters in Pleasanton, California. The Company recently moved a portion of
the production services to its facility in Irvine, California. The Company also
expects to open additional sales offices in the future. This growth has resulted
in new and increased responsibilities for management personnel and has placed
and continues to place a significant strain on the Company's management and
operating and financial systems. The Company will be required to continue to
implement and improve its systems on a timely basis and in such a manner as is
necessary to accommodate the increased number of transactions and clients and
the increased size of the Company's operations. Any failure to implement and
improve the Company's systems or to hire and retain the appropriate personnel to
manage its operations would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, an
increase in the Company's operating expenses from its planned expansion will
have a material adverse effect on the Company's business, financial condition
and results of operations if revenue does not increase to support such
expansion.
 
    RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW SERVICES FEATURES.  The
Company's future business, financial condition and results of operations will
continue to depend upon the Company's ability to add new services or
enhancements to existing services that address the needs of the market. Failure
by the Company to successfully design, develop and introduce new services or
enhancements on a timely basis could prevent the Company from maintaining
existing client relationships, gaining new clients or expanding its markets and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
    DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN EXPERIENCED
PERSONNEL.  The Company's success will depend on the performance of the
Company's senior management and other key employees. The Company's senior
management team does not have prior executive management experience in publicly
traded companies. In addition, there is substantial competition for experienced
personnel, which the Company expects to continue. Many of the companies with
which the Company competes for experienced personnel have greater financial and
other resources than the Company. The Company may in the future experience
difficulty in recruiting sufficient numbers of qualified personnel. The loss of
the services of any senior manager or the inability to attract and retain
experienced personnel as required could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
    The Company generally does not enter into employment or noncompetition
agreements with its employees. If one or more of the Company's key employees
resigns from the Company to join a competitor or to form a competitor, the loss
of such personnel and any resulting loss of existing or potential clients to any
such competitor could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event of the loss of any
key personnel, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of its technical knowledge,
practices, procedures or client lists by a former employee or that such
disclosure or use would not have a material adverse effect on the Company's
business, financial condition and results of operations.
 
    LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.  The Company's success is dependent in part upon its proprietary
software technology. The Company has no patents, patent applications or
registered copyrights. The Company relies on a combination of contract,
copyright and trade secret laws to establish and protect its proprietary
technology. The Company distributes its services
 
                                       16
<PAGE>
under software license agreements that grant clients licenses to use the
Company's services and contain various provisions protecting the Company's
ownership and the confidentiality of the underlying technology. The Company
generally enters into confidentiality and/or license agreements with its
employees and existing and potential clients, and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation or independent third-party
development of the Company's technology. There can be no assurance that the
Company's services and technology do not infringe any existing patents,
copyrights or other proprietary rights of others, or that third parties will not
assert infringement claims in the future. If any such claims are asserted and
upheld, the costs of defense could be substantial and any resulting liability of
the Company could have a material adverse effect on the Company's business,
financial condition or results of operations.
 
    POSSIBLE VOLATILITY OF STOCK PRICE.  The market price of the Company's
Common Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new services by the Company or its
competitors, market conditions in the information services industry, quarterly
fluctuations in the Company's operating results, changes in financial estimates
by securities analysts or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced significant
price and volume fluctuations that have particularly affected the market prices
of equity securities of many technology and services companies and that often
have been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
 
    SHARES ELIGIBLE FOR FUTURE SALE.  Sales of substantial numbers of shares of
Common Stock of the Company in the public market could adversely affect the
market price of the Common Stock. The Company has outstanding approximately 11
million shares of Common Stock. Currently, approximately 2,875,000 shares are
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless such shares
are purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"). The remaining approximately
8,150,000 shares (the "Restricted Shares") are "restricted securities," as that
term is defined in Rule 144 under the Securities Act. Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or Rule 701 promulgated under the Securities
Act. Substantially all of the Restricted Shares will be eligible for sale upon
expiration of certain contractual lock-up agreements in March 1998.
 
                          PART II.  OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
    None
 
ITEM 2.  CHANGES IN SECURITIES
 
    (c) Pursuant to its 1989 Stock Option Plan and Executive Stock Option Plan,
on July 1, 1997, the Company granted options to purchase 22,500 shares of the
Company's Common Stock; on August 12, 1997, the Company granted options to
purchase 225,500 shares of the Company's Common Stock; and on September 2, 1997,
the Company granted options to purchase 79,000 shares of the Company's Common
Stock. The options were granted at an exercise price of $9.00 per share. From
July 15, 1997 to September 25, 1997, the Company issued and sold 13,785 shares
of Common Stock at prices ranging from $.295 to $1.25 per share upon the
exercise of stock options granted pursuant to the Company's 1989 Stock Option
Plan. The option grants and the stock issuances were exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), in reliance
on Rule 701 of the Securities Act. The options granted and shares of Common
Stock acquired pursuant to exercise of options are restricted securities.
 
                                       17
<PAGE>
    On July 1, 1997, the Company issued a warrant to purchase 20,000 shares of
Common Stock. From September 9, 1997 to September 22, 1997, upon the exercise of
warrants, the Company issued and sold Preferred Stock which automatically
converted upon the closing of the initial public offering of the Company's
Common Stock (the "Offering") into the following shares of Common Stock: 12,376
shares of Common Stock at a price of $3.97 per share pursuant to net exercise
provisions and 232,486 shares of Common Stock at a price of $3.97 per share. The
issuances of the warrant and shares of Common Stock pursuant to exercise of
warrants were exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act. The warrant and shares of Common Stock
issued pursuant to exercise of the warrants are restricted securities.
 
    (d) On September 19, 1997, the Company commenced the Offering, which
consisted of 2,875,000 shares of its Common Stock at $11.00 per share pursuant
to a registration statement (No. 333-23189) (the "Registration Statement")
declared effective by the Securities and Exchange Commission on September 19,
1997. The Offering has been terminated and all shares have been sold. The
managing underwriters for the Offering were Robertson, Stephens & Company LLC
and William Blair & Company, LLC. Aggregate proceeds from the Offering were
$31,625,000,which includes $3,836,250 paid to the Company in October 1997 upon
the underwriters' exercise of an option to purchase shares to cover
over-allotments.
 
    The Company incurred the following expenses in connection with the Offering:
underwriters' discounts and commissions of $2,213,750 and approximately
$2,253,000 in other expenses, for a total expense of $4,466,750.
 
    After deducting expenses of the Offering, the net offering proceeds to the
Company were $27,158,250. From September 19, 1997, the effective date of the
Registration Statement, to September 30, 1997, the ending date of the reporting
period, the approximate amount of net offering proceeds used were $3.4 million
to repay outstanding subordinated debt, $4.8 million to repay in full borrowings
under the Company's secured revolving line of credit (including $1.7 million of
additional draws required for operations in excess of the use of proceeds
projected for this purpose in the Registration Statement) and $100,000 to repay
indebtedness incurred in connection with the acquisition of Dimension Solutions,
Inc. The remaining net proceeds were invested in short-term financial
instruments.
 
    No payments constituted direct or indirect payments to directors, officers
or general partners of the Company or their associates, to persons owning 10% or
more of any class of equity securities of the Company, or to any affiliates of
the Company.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
    None
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None
 
ITEM 5.  OTHER INFORMATION
 
    None
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
(a) Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
 
(b) Exhibit 27 Financial Data Schedule
 
(c) No reports on Form 8-K were filed during the quarter ended September 30,
    1997.
 
                                       18
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
    Dated: November 14, 1997
 
                                          PROBUSINESS SERVICES, INC.
                                          (Registrant)
 
                                                   /s/ THOMAS H. SINTON
 
                                          --------------------------------------
                                          PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
                                                    /s/ STEVEN E. KLEI
 
                                          --------------------------------------
                                            SENIOR VICE PRESIDENT, FINANCE AND
                                                 CHIEF FINANCIAL OFFICER
 
                                       19

<PAGE>
                                                                    EXHIBIT 11.1
 
                           PROBUSINESS SERVICES, INC.
 
                STATEMENT REGARDING THE COMPUTATION OF NET LOSS
                        AND PRO FORMA NET LOSS PER SHARE
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                THREE MONTHS ENDED
                                                                                                  SEPTEMBER 30,
                                                                                               --------------------
                                                                                                 1997       1996
                                                                                               ---------  ---------
<S>                                                                                            <C>        <C>
Net loss.....................................................................................  $  (2,877) $  (1,279)
 
Shares used in the net loss per share computation:
  Weighted average shares of common stock outstanding........................................      2,661        212
  Shares related to Staff Accounting Bulletin Topic 4D
    Cheap stock..............................................................................     --          1,318
    Common stock options.....................................................................     --            386
    Preferred stock..........................................................................     --          1,229
    Warrants.................................................................................     --             79
                                                                                               ---------  ---------
Shares used in net loss per share computation................................................      2,661      3,224
                                                                                               ---------  ---------
                                                                                               ---------  ---------
Net Loss per Share...........................................................................  $   (1.08) $   (0.40)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
Calculation of shares outstanding for computing pro forma net loss per share:
    Shares used in computing historical net loss per share (from above)......................      2,661      3,224
    Adjustments to reflect the effect of the assumed conversion of convertible preferred
      stock from the date of issuance........................................................      5,667      5,227
                                                                                               ---------  ---------
Shares used in computing pro forma net loss per share........................................      8,328      8,451
                                                                                               ---------  ---------
                                                                                               ---------  ---------
Pro forma net loss per share.................................................................  $   (0.35) $   (0.15)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE PRO
BUSINESS SERVICES, INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          JUN-30-1998
<PERIOD-START>                             JUL-01-1997
<PERIOD-END>                               SEP-30-1997
<CASH>                                          18,457
<SECURITIES>                                         0
<RECEIVABLES>                                    2,250
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                               202,296
<PP&E>                                          14,289
<DEPRECIATION>                                   4,781
<TOTAL-ASSETS>                                 218,024
<CURRENT-LIABILITIES>                          191,028
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            11
<OTHER-SE>                                      25,269
<TOTAL-LIABILITY-AND-EQUITY>                   218,024
<SALES>                                              0
<TOTAL-REVENUES>                                 9,227
<CGS>                                                0
<TOTAL-COSTS>                                    5,019
<OTHER-EXPENSES>                                 6,856
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 229
<INCOME-PRETAX>                                (2,877)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (2,877)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (2,877)
<EPS-PRIMARY>                                   (1.08)
<EPS-DILUTED>                                        0
        

</TABLE>


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