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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 1998
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)
DELAWARE 94-2976066
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation) No.)
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(Address of principal executive offices)
(925) 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 /X/ NO / /
As of May 8, 1998, there were 11,264,242 shares of the Registrant's Common
Stock outstanding.
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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
March 31, 1998 and June 30, 1997......................................................... 3
Condensed Consolidated Statements of Operations
Three and Nine months ended March 31, 1998 and 1997...................................... 4
Condensed Consolidated Statement of Stockholders' Equity
March 31, 1998........................................................................... 5
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 1998 and 1997................................................ 6
Notes to Unaudited Condensed Consolidated Financial Statements............................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................... 20
ITEM 2. CHANGES IN SECURITIES...................................................................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................ 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 20
ITEM 5. OTHER INFORMATION.......................................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 20
SIGNATURES................................................................................. 21
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 15,244 $ 5,047
Accounts receivable, net......................................................... 2,339 2,476
Prepaid expenses and other current assets........................................ 2,869 643
-------------- -------------
20,452 8,166
Payroll tax funds invested....................................................... 405,230 177,626
-------------- -------------
Total current assets........................................................... 425,682 185,792
Equipment, furniture and fixtures, net............................................. 11,602 7,623
Other assets....................................................................... 9,901 7,020
-------------- -------------
Total assets................................................................. $ 447,185 $ 200,435
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable, accrued liabilities, current portion of capital lease
obligations and deferred revenue............................................... 14,700 8,125
Payroll tax funds collected but unremitted....................................... 405,230 177,626
-------------- -------------
Total current liabilities...................................................... 419,930 185,751
Note payable to stockholder........................................................ -- 250
Long-term debt..................................................................... -- 8,667
Capital lease obligations, less current portion.................................... 1,300 1,898
Commitments
Stockholders' equity:
Preferred stock.................................................................. -- 3
Common stock, par value $.001 per share.......................................... 11 1
Additional paid-in capital....................................................... 52,038 23,905
Accumulated deficit.............................................................. (25,006) (18,952)
Notes receivable from stockholders............................................... (1,088) (1,088)
-------------- -------------
Total stockholders' equity..................................................... 25,955 3,869
-------------- -------------
Total liabilities and stockholders' equity................................... $ 447,185 $ 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 AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue........................................................... $ 13,611 $ 8,427 $ 33,163 $ 18,626
Operating expenses:
Cost of providing services...................................... 6,424 3,907 17,215 9,145
General and administrative expenses............................. 1,693 1,441 5,061 2,932
Research and development expenses............................... 1,213 732 3,343 2,040
Client acquisition costs........................................ 5,569 3,664 13,639 8,292
---------- ---------- ---------- ----------
Total operating expenses...................................... 14,899 9,744 39,258 22,409
Loss from operations............................................ (1,288) (1,317) (6,095) (3,783)
Interest expense................................................ (87) (380) (461) (900)
Other income.................................................... 242 2 502 14
---------- ---------- ---------- ----------
Net loss........................................................ $ (1,133) $ (1,695) $ (6,054) $ (4,669)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted net loss per share............................ $ (0.10)
----------
----------
Shares used in computing basic and diluted net loss per share... 11,200
----------
----------
Pro forma net loss per share.................................... $ (0.24) $ (0.59) $ (0.69)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing pro forma net loss per share........... 7,049 10,199 6,719
---------- ---------- ----------
---------- ---------- ----------
</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
---------------------------------- ----------------------------------- NOTES
ADDITIONAL ADDITIONAL RECEIVABLE
PAID-IN PAID-IN ACCUMULATED FROM
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS
--------- ----------- ---------- --------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30,
1997............... 3,228,034 $ 3 $ 22,370 1,530,277 $ 1 $ 1,535 $ (18,952) $ (1,088)
Issuance of Common
Stock in connection
with Initial Public
Offering, net of
offering costs..... -- -- -- 2,875,000 3 27,042 -- --
Conversion of
Preferred Stock
into Common
Stock.............. (3,228,034) (3) (22,370) 6,456,068 7 22,366 -- --
Exercise of
Warrants........... -- -- -- 277,150 -- 923 -- --
Exercise of Stock
Options............ -- -- -- 108,189 -- 123 -- --
Issuance of
Warrants........... -- -- -- -- -- 49 -- --
Net loss............. -- -- -- -- -- -- (6,054) --
--------- --- ---------- --------- --- ----------- ------------ -------------
Balances at March 31,
1997 -- $ -- $ -- 11,246,684 $ 11 $ 52,038 $ (25,006) $ (1,088)
--------- --- ---------- --------- --- ----------- ------------ -------------
--------- --- ---------- --------- --- ----------- ------------ -------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances at June 30,
1997............... $ 3,869
Issuance of Common
Stock in connection
with Initial Public
Offering, net of
offering costs..... 27,045
Conversion of
Preferred Stock
into Common
Stock.............. --
Exercise of
Warrants........... 923
Exercise of Stock
Options............ 123
Issuance of
Warrants........... 49
Net loss............. (6,054)
-------------
Balances at March 31,
1997 $ 25,955
-------------
-------------
</TABLE>
See notes to condensed consolidated financial statements.
5
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PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................................................... $ (6,054) $ (4,669)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................. 3,223 1,763
Changes in operating assets and liabilities:
Accounts receivable, net................................................................ 137 (84)
Prepaid expenses and other current assets............................................... (2,226) (128)
Other assets............................................................................ (622) (1,579)
Accounts payable, accrued liabilities, current portion of capital lease obligations and
deferred revenue...................................................................... 6,543 782
--------- ---------
Net cash provided by (used in) operating activities........................................... 1,001 (3,915)
--------- ---------
INVESTING ACTIVITIES
Acquisition of Benesphere..................................................................... -- (245)
Purchases of equipment, furniture and fixtures................................................ (6,821) (1,022)
Capitalization of software development costs.................................................. (2,640) (921)
--------- ---------
Net cash used in investing activities......................................................... (9,461) (2,188)
--------- ---------
FINANCING ACTIVITIES
Borrowings under line of credit agreements.................................................... 6,874 21,153
Repayments of borrowings under line of credit agreements...................................... (11,632) (22,702)
Repayments under subordinated debt............................................................ (3,909) --
Repayments under note payable................................................................. -- (259)
(Repayments)/borrowings under note payable to stockholder..................................... (250) 275
Principal payments on capital lease obligations............................................... (566) (429)
Proceeds from issuance of preferred stock..................................................... -- 9,851
Proceeds from issuance of common stock........................................................ 28,140 74
--------- ---------
Net cash provided by financing activities..................................................... 18,657 7,963
--------- ---------
Net increase in cash and cash equivalents..................................................... 10,197 1,860
Cash and cash equivalents, beginning of period................................................ 5,047 4,041
--------- ---------
Cash and cash equivalents, end of period...................................................... $ 15,244 $ 5,901
--------- ---------
--------- ---------
</TABLE>
6
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PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................................... $ 456 $ 1,142
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment, furniture and fixtures under capital leases.......................... $ -- $ 2,644
--------- ---------
--------- ---------
Issuance of warrants in connection with debt................................................ $ -- $ 161
--------- ---------
--------- ---------
Note receivable from stockholder issued in connection with stock option exercise............ $ -- $ 1,088
--------- ---------
--------- ---------
Disposal of equipment, furniture and fixtures............................................... $ 484 $ --
--------- ---------
--------- ---------
Conversion of preferred stock to common stock............................................... $ 22,373 $ --
--------- ---------
--------- ---------
ACQUISITION OF BENESPHERE ADMINISTRATORS, INC.:
Issuance of warrants........................................................................ $ -- $ 160
--------- ---------
--------- ---------
Liabilities assumed......................................................................... $ -- $ 2,595
--------- ---------
--------- ---------
Note payable to BeneSphere Administrators, Inc.............................................. $ -- $ 250
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
7
<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 (the "SEC").
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 March 31, 1998 are not necessarily indicative of the
results that may be expected for any future periods.
BASIC AND DILUTED NET LOSS AND PRO FORMA NET LOSS PER SHARE
BASIC AND DILUTED
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"). Statement 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is anti-dilutive. All earnings per share amounts for all periods have
been presented, to conform to the Statement 128 requirements.
In February 1998, Staff Accounting Bulletin No. 98 ("SAB 98") was issued and
amends the existing Securities and Exchange Commission ("SEC") staff guidance
primarily to give effect to FAS 128. Under SAB 98 , certain shares of
convertible preferred stock, options and warrants to purchase shares of common
stock, issued at prices below the per share price of shares sold in the
Company's initial public offering in September 1997 and previously included in
the computation of shares outstanding pursuant to Staff Accounting Bulletins
Nos. 55, 64, and 83 are now excluded from the computation.
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).
8
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal year 1999.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is not expected to
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.
RECLASSIFICATIONS
The Company has reclassified certain prior-year balances to conform with
current-year presentation.
2. DEBT
At March 31, 1998, the Company had 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.
The Company used proceeds from the initial public offering to repay the
remaining balance of the original $4.0 million in subordinated debt.
3. STOCKHOLDER'S EQUITY
On September 19, 1997, the Company completed its initial 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 the 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 initial 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 shares of Series E convertible
preferred stock at $7.94 per share, exercised such warrants. The Series E
convertible preferred stock was converted into 260,938 shares of common stock.
The Company received total consideration of approximately $923,000 related to
the exercise of these warrants. On November 21, 1997 and February 19, 1998, the
Company issued 16,079 and 16,212 shares of Common Stock, respectively, upon the
exercise of warrants pursuant to a net exercise provision at a price of $3.97
per share. The issuance of these shares of Common Stock pursuant to exercise of
the warrants were exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act. The shares of Common Stock issued
pursuant to exercise of the warrants are restricted securities.
4. INTEREST RATE SWAP AGREEMENTS
The Company has entered into various interest rate swap agreements
("Agreements") with a financial institution with fixed interest rates between
5.736% and 5.905% each having a term of two years, one of
9
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PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INTEREST RATE SWAP AGREEMENTS (CONTINUED)
which having a cancellation option after one year, and require the Company to
maintain certain notional balances. The purpose of the Agreements is to convert
a portion of the interest the Company earns from collected but unremitted
payroll tax funds from a floating to a fixed rate basis. The actual notional
balances vary on a monthly basis due to fluctuations in projected investments
relating to payroll tax funds. The average monthly notional balance for the
remaining term of the Agreements is $215 million. The Agreements require
collateral if interest rates increase and certain other conditions are met as
defined in the Agreements. At March 31, 1998 no collateral was required.
10
<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 March 31, 1996 to March 31,
1998, the Company's client base for payroll processing services increased from
309 to 499 clients, while the average size of the Company's payroll clients
increased from approximately 704 employees to approximately 1,064 employees. As
of March 31, 1998, the Company serviced approximately 1,400 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 at the end of each fiscal year). 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 $7.8 million and $3.8 million for the
first nine months of fiscal year 1998 and 1997, 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. 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 new customer implementation expenses and, to a lesser extent
marketing expenses and systems integration costs.
11
<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
NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services........................................ 47.2% 46.4% 51.9% 49.1%
General and administrative expenses............................... 12.5% 17.1% 15.3% 15.7%
Research and development expenses................................. 8.9% 8.6% 10.1% 11.0%
Client acquisition costs.......................................... 40.9% 43.5% 41.1% 44.5%
--------- --------- --------- ---------
Total operating expenses........................................ 109.5% 115.6% 118.4% 120.3%
Loss from operations................................................ (9.5)% (15.6)% (18.4)% (20.3)%
Interest Expense.................................................... (0.6)% (4.5)% (1.4)% (4.8)%
Other Income........................................................ 1.8% 0.0% 1.5% (0.0)%
--------- --------- --------- ---------
Net loss............................................................ (8.3)% (20.1)% (18.3)% (25.1)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
REVENUE. Revenue for the third fiscal quarter and first nine months of
fiscal 1998 increased 61.5% and 78.0%, respectively, when compared with the same
periods of fiscal 1997. The increases are primarily due to an increase in the
number and average size of the Company's payroll and tax clients. Interest
income earned on payroll tax funds invested was $3.9 million and $7.8 million
for the third quarter and first nine months of fiscal 1998, respectively, and
$2.1 and $3.8 million for the comparable periods of fiscal 1997.
COST OF PROVIDING SERVICES. Cost of providing services as a percentage of
revenue was 47.2% and 51.9% for the third fiscal quarter and first nine months
of fiscal 1998, respectively, compared with 46.4% and 49.1% for the same periods
of fiscal 1997. The increases were primarily due to building management
infrastructure in the Company's production and account management operations,
and production expenses related to an increase in the number of payroll clients.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of revenue was 12.5% and 15.3% for the third fiscal quarter and
first nine months of fiscal 1998, respectively, compared with 17.1% and 15.7%
for the same periods of fiscal 1997. The increases in absolute dollars 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 as a
percentage of revenue was 8.9% and 10.1% for the third fiscal quarter and first
nine months of fiscal 1998, respectively, compared with 8.6% and 11.0% for the
same periods of fiscal 1997. Research and development expenses decreased as a
percentage of revenue in the nine months ended March 31, 1998 due in part to
higher revenue and an increase in the amount of expenses capitalized in the
first nine months of fiscal 1998. Capitalized software development costs were
$938,000 and $518,000 for the third quarter of fiscal 1998 and 1997,
respectively, and $2.6 million and $921,000 for the first nine months of fiscal
1998 and 1997, respectively.
CLIENT ACQUISITION COSTS. Client acquisition costs as a percentage of
revenue were 40.9% and 41.1% for the third fiscal quarter and first nine months
of fiscal 1998, respectively, compared with 43.5% and
12
<PAGE>
44.5% for the same periods of fiscal 1997. The increases in absolute dollars
were primarily due to the expanded sales and implementation force for payroll
and stand-alone tax services, and expenses related to the Company's benefits
administration services introduced in January 1997.
INTEREST EXPENSE. Interest expense as a percentage of revenue was .6% and
1.4% for the third fiscal quarter and first nine months of fiscal 1998,
respectively, compared with 4.5% and 4.8% for the same periods of fiscal 1997.
The decreases in interest expense were primarily due to the repayment of
subordinated debt and repayment of borrowings under the Company's secured
revolving line of credit with proceeds from the Company's initial public
offering in September 1997.
OTHER INCOME. Other income as a percentage of revenue was 1.8% and 1.5% for
the third fiscal quarter and first nine months of fiscal 1998, respectively. The
increases as a percentage of revenue are due to higher cash and investment
balances resulting from the Company's initial public offering in September 1997
when compared to the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's principal sources of liquidity included
$15.2 million of cash and cash equivalents and a secured $10 million revolving
line of credit which expires December 31, 1998. There were no outstanding
borrowings under the line of credit as of March 31, 1998.
Net cash provided by operating activities was $1.0 million for the first
nine months of fiscal 1998, compared to net cash used in operating activities of
$4.2 million for the first nine months of fiscal 1997. The increase in cash
flows from operating activities for the first nine months of 1998 was primarily
attributable to an increase in accrued liabilities, depreciation and deferred
revenue partially offset by an increase in prepaid expenses and other current
assets and net losses.
Net cash used in investing activities was $9.5 million and $1.9 million for
the first nine months of fiscal 1998 and 1997, respectively. The increase in net
cash used in investing activities resulted primarily from (i) capital
expenditures for equipment, furniture and fixtures to support the Company's
increased personnel, (ii) the move of the Company's corporate headquarters,
(iii) the Company's new production facility in Southern California. In addition,
the Company capitalized software development costs of $2.6 million and $921,000
in the first nine months of fiscal 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 $18.7 million and $8.0 million
for the first nine months of fiscal 1998 and 1997, respectively. Net cash
provided by financing activities for first nine months of fiscal 1998 related
primarily to $27.1 million of net proceeds from the Company's initial public
offering of common stock and $923,000 from the exercise of warrants in
conjunction with the initial public offering in September 1997. The increase was
partially offset by the payment of $4.0 million of outstanding subordinated debt
and the repayment of $4.8 million of borrowings under the Company's secured
revolving line of credit. Net cash provided by financing activities for the
first nine months of fiscal 1997 was primarily a result of $9.9 million of net
proceeds from the issuance of preferred stock in March 1997.
The Company believes that existing cash balances, amounts available under
its current credit facility and anticipated cash flows from operations will be
sufficient to meet its working capital and capital expenditure requirements
through fiscal year 1999.
13
<PAGE>
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 March 31, 1998, the Company had an accumulated deficit of
approximately $25.0 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process 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 third 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.
14
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS. In January 1997, the Company acquired
BeneSphere Administrators, Inc. ("BeneSphere"), a provider of benefits
administration services. The integration of BeneSphere's business with the
Company's business has placed and will continue to place a significant burden on
the Company's management. Such integration is subject to risks commonly
encountered in making such acquisitions, including, among others, loss of key
personnel of the acquired company, the difficulty associated with assimilating
the personnel and operations of the acquired company, the potential disruption
of the Company's ongoing business, the maintenance of uniform standards,
controls, procedures and policies, and the impairment of the Company's
reputation and relationships with employees and clients. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with its acquisition of BeneSphere.
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.
15
<PAGE>
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 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 a new sales office on the east coast. In
September 1997, the Company moved to a larger facility to house its operations
in Pleasanton, California and entered into a lease for additional space to be
occupied in fiscal year 1999. There can be no assurance that the Company will be
able to 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
16
<PAGE>
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
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,
17
<PAGE>
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.
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 eleven sales representatives focused on sales outside
of California, and the Company intends to locate additional sales
representatives in major metropolitan areas throughout the United States.
Substantially all production for the Company's clients has been maintained at
the Company's headquarters in Pleasanton, California, including all client
calculations. The Company moved substantially all of the printing and
distribution services for its Southern California clients 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,
18
<PAGE>
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 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.
IMPACT OF YEAR 2000 ISSUE. The Company is assessing the possible effects on
the Company's operations of the year 2000 readiness of key suppliers and
subcontractors. The Company's reliance on suppliers and subcontractors, and,
therefore, on the proper functioning of their information systems and software,
means that failure to address year 2000 issues could have a material impact on
the Company's operations and financial results; however, the potential impact
and related costs are not known at this time.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
(c) On February 19, 1998, the Company issued 16,212 shares of Common Stock
to Silicon Valley Bank upon the exercise of a warrant pursuant to a net exercise
provision at a price of $3.97 per share. The issuance of the shares of Common
Stock pursuant to exercise of the warrant were exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act.
(d) On September 19, 1997, the Company commenced an initial public offering,
which consisted of 2,875,000 shares of its Common Stock (the "Offering") at
$11.00 per share pursuant to a registration statement (No. 333-23189) declared
effective by the Securities and Exchange Commission on September 19, 1997. As of
January 1, 1998, approximately $17.0 million of the net proceeds from the
Offering were invested in short-term financial instruments. From January 1, 1998
to March 31, 1998, the Company used approximately $1.9 million of these proceeds
from the short-term financial instruments, using approximately $100,000 to repay
in full indebtedness incurred in connection with the acquisition of Dimension
Solutions, Inc., and approximately $1.8 million for working capital.
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
Exhibit 27 Financial Data Schedule
20
<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.
<TABLE>
<S> <C> <C>
Dated: May 15, 1998 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
</TABLE>
21
<PAGE>
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Loss............................................................... $ (1,133) $ (1,695) $ (6,054) $ (4,669)
Shares used in the basic and diluted net loss per share computation:
Weighted average shares of common stock outstanding.................. 11,200 1,360 8,310 1,285
--------- --------- --------- ---------
Shares used in basic and diluted net loss per share
computation.......................................................... 11,200 1,360 8,310 1,285
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss loss per share.............................. $ (0.10) $ (1.25) $ (0.73) $ (3.63)
--------- --------- --------- ---------
--------- --------- --------- ---------
Calculation of shares outstanding for computing pro forma net loss per
share:
Shares used in computing historical net loss per share (from
above)............................................................. 11,200 1,360 8,310 1,285
Adjustments to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance.............. -- 5,689 1,889 5,434
--------- --------- --------- ---------
Shares used in computing pro foma net loss per share................... 11,200 7,049 10,199 6,719
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net loss per share........................................... $ (0.10) $ (0.24) $ (0.59) $ (0.69)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(b) Exhibit 27 Financial Data Schedule
(c) No reports on Form 8-K were filed during the quarter ended March 31,
1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PROBUSINESS SERVICES, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,244
<SECURITIES> 0
<RECEIVABLES> 2,339
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 425,682
<PP&E> 18,292
<DEPRECIATION> 6,690
<TOTAL-ASSETS> 447,185
<CURRENT-LIABILITIES> 419,930
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 25,944
<TOTAL-LIABILITY-AND-EQUITY> 447,185
<SALES> 0
<TOTAL-REVENUES> 33,163
<CGS> 0
<TOTAL-COSTS> 17,215
<OTHER-EXPENSES> 22,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> (6,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,054)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
