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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2976066
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(Address of principal executive offices)
(925) 737-3500
(Registrant's telephone number, including area code)
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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 November 2, 1998, there were 20,477,229 shares of the Registrant's
Common Stock outstanding.
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PROBUSINESS SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
---------
ITEM 1. Condensed Financial Statements (Unaudited):
Condensed Balance Sheets
September 30, 1998 and June 30, 1998............................ 3
Condensed Statements of Operations
Three months ended September 30, 1998 and 1997.................. 4
Condensed Statement of Stockholders' Equity
Three months ended September 30, 1998........................... 5
Condensed Statements of Cash Flows
Three months ended September 30, 1998 and 1997.................. 6
Notes to Condensed 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................................................. 19
ITEM 2. Changes in Securities............................................. 19
ITEM 3. Defaults Upon Senior Securities................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders............... 19
ITEM 5. Other Information................................................. 19
ITEM 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 90,010 $ 13,771
Accounts receivable, net of allowance........................................ 3,129 2,612
Prepaid expenses and other current assets.................................... 2,238 2,122
-------- -------------
95,377 18,505
Payroll tax funds invested................................................... 347,899 332,667
-------- -------------
Total current assets....................................................... 443,276 351,172
Equipment, furniture and fixtures, net......................................... 15,055 13,958
Other assets................................................................... 11,018 10,879
-------- -------------
Total assets............................................................... $ 469,349 $ 376,009
-------- -------------
-------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued liabilities, current portion of capital lease
obligations and deferred revenue........................................... $ 15,481 $ 15,182
Payroll tax funds collected but unremitted................................... 347,899 332,667
-------- -------------
Total current liabilities.................................................. 363,380 347,849
Capital lease obligations, less current portion................................ 1,189 1,414
Stockholders' equity........................................................... 104,780 26,746
-------- -------------
Total liabilities and stockholders' equity................................. $ 469,349 $ 376,009
-------- -------------
-------- -------------
See notes to condensed financial statements.
3
PROBUSINESS SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
Revenue................................................................... $ 14,189 $ 9,227
Operating expenses:
Cost of providing services.............................................. 7,668 5,019
General and administrative expenses..................................... 2,400 1,768
Research and development expenses....................................... 1,376 1,110
Client acquisition costs................................................ 6,126 3,978
--------- ---------
Total operating expenses.............................................. 17,570 11,875
Loss from operations.................................................... (3,381) (2,648)
Interest expense........................................................ (305) (255)
Other income............................................................ 255 26
--------- ---------
Net loss.................................................................. $ (3,431) $ (2,877)
--------- ---------
--------- ---------
Basic and diluted net loss per share...................................... $ (0.20) $ (0.72)
--------- ---------
--------- ---------
Shares used in computing basic and diluted net loss per share............. 17,252 3,992
--------- ---------
--------- ---------
Pro forma basic and diluted net loss per share............................ $ (0.23)
---------
---------
Shares used in computing pro forma basic and diluted net loss per share... 12,492
---------
---------
See notes to condensed financial statements.
4
PROBUSINESS SERVICES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
--------------------------------- NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN ACCUMULATED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS EQUITY
--------- ----------- --------- ----------- ----------- -----------
Balances at June 30, 1998...... 17,114,855 $ 17 $ 53,286 $ (25,469) $ (1,088) $ 26,746
Issuance of Common Stock in
connection with Public
Offering, net of offering
costs........................ 3,191,250 3 80,708 -- -- 80,711
Excercise of Warrants.......... 75,000 -- 450 -- -- 450
Excercise of Stock Options..... 84,550 -- 151 -- -- 151
Payment of Notes Receivable
from stockholders............ 153 153
Net loss....................... -- -- -- (3,431) -- (3,431)
--------- --- --------- ----------- ----------- -----------
Balances at September 30,
1998......................... 20,465,655 $ 20 $ 134,595 $ (28,900) $ (935) $ 104,780
--------- --- --------- ----------- ----------- -----------
--------- --- --------- ----------- ----------- -----------
See notes to condensed financial statements.
5
PROBUSINESS SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- ----------
OPERATING ACTIVITIES
Net loss................................................................................... $ (3,431) $ (2,877)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization........................................................ 1,174 1,043
Changes in operating assets and liabilities:
Accounts receivable, net........................................................... (517) 226
Prepaid expenses and other current assets.......................................... (116) 162
Other assets....................................................................... 695 1,417
Accounts payable, accrued liabilities, and deferred revenue........................ 243 1,106
--------- ----------
Net cash provided by (used in) operating activities........................................ (1,952) 1,077
--------- ----------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures............................................. (2,080) (2,819)
Capitalization of software development costs............................................... (1,025) (726)
--------- ----------
Net cash used in investing activities...................................................... (3,105) (3,545)
--------- ----------
FINANCING ACTIVITIES
Borrowings under line of credit agreements................................................. -- 6,874
Repayments of borrowings under line of credit agreements................................... -- (11,632)
Repayments under subordinated debt......................................................... -- (3,384)
Repayments under note payable to stockholder............................................... (100)
Proceeds from notes receivable from stockholder............................................ 153
Principal payments on capital lease obligations............................................ (169) (168)
Proceeds from issuance of common stock..................................................... 81,312 24,288
--------- ----------
Net cash provided by financing activities.................................................. 81,296 15,878
--------- ----------
Net increase in cash and cash equivalents.................................................. 76,239 13,410
Cash and cash equivalents, beginning of period............................................. 13,771 5,047
--------- ----------
Cash and cash equivalents, end of period................................................... $ 90,010 $ 18,457
--------- ----------
--------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................................. $ 305 $ 249
--------- ----------
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See notes to condensed financial statements.
6
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
OPERATIONS
ProBusiness Services, Inc. (the "Company") provides employee administrative
services for large employers. The Company's primary service offerings are
payroll processing, payroll tax filing, benefits administration, including the
enrollment and processing of flexible benefit plans and COBRA programs and human
resources software.
BASIS OF PRESENTATION
The Company has prepared its interim condensed financial statements 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 1998 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited interim condensed
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, 1998 are not necessarily indicative of the
results that may be expected for any future periods.
BASIC AND DILUTED NET LOSS PER SHARE (HISTORICAL AND PRO FORMA)
Historical net loss per share is presented under the requirements of FAS No.
128, "Earnings per Share" ("FAS 128"). FAS 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, convertible securities and shares subject
to repurchase. 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
in the calculation of diluted net loss per share as the effect is anti-dilutive.
All net loss per share amounts for all periods have been presented to conform to
the FAS 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 computations of
shares used in computing net loss per share pursuant to previous staff
accounting bulletins have now been excluded from the computation.
Pro forma net loss per share has been computed as described above and also
gives effect, under SEC guidance, to the conversion of preferred stock to common
stock not included above that automatically converted upon completion of the
Company's initial public offering, using the if-converted method.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting and display of
7
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. Adoption of FAS 130 will be required in fiscal 1999. Adoption of FAS
130 is not expected to have a material effect on the Company's financial
position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 establishes standards for the reporting of information
about operating segments and related disclosures about products and services,
geographic areas, and major customers. Adoption of FAS 131 will be required in
fiscal 1999 and require interim disclosures beginning in fiscal 2000. The
Company has not reached a conclusion as to the appropriate segments, if any, it
will be required to report to comply with the provisions of FAS 131. Adoption of
FAS 131 is not expected to have a material effect on the Company's financial
position, results of operations or cash flows.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company is required to
adopt FAS 133 in fiscal 2000. FAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company has not yet
determined what the effect of FAS 133 will be on the operations and financial
position of the Company.
2. DEBT
LINE OF CREDIT AGREEMENT
At September 30, 1998, the Company has a line of credit agreement with a
financial institution. The agreement provides for borrowings that are limited to
the lesser of $20,000,000, or the sum of five times the Company's average
monthly net collections, as defined in the agreement, plus the lesser of five
times the Company's average monthly collections of the interest on tax
investment funds as defined in the agreement or $5,000,000, plus $1,500,000. At
September 30, 1998, no borrowings were outstanding under the agreement and the
amount available for borrowing under the agreement was approximately
$20,000,000. The agreement expires on December 31, 2000, and is subject to
automatic and continuous renewal unless termination notice is given by either
party in accordance with the agreement.
3. STOCKHOLDER'S EQUITY
In September 1998, the Company completed a secondary public offering of
common stock. The offering consisted of 2,775,000 shares of common stock issued
to the public at $27.00 per share. In September 1998, the underwriters exercised
an option to purchase an additional 416,250 shares of common stock at the price
of $27.00 per share to cover over-allotments in connection with the secondary
public offering.
STOCK SPLIT
On July 23, 1998, the Board of Directors approved a three-for-two split of
its $.001 par value common stock in the form of a 50 percent distribution to
stockholders of record as of July 31, 1998. As a result of the stock split,
authorized and outstanding common shares increased 50 percent and capital in
excess of par was reduced by the par value of the additional common shares
issued. The rights of the holders of these securities were not otherwise
modified. All references in the financial statements to number of shares, per
share amounts, stock option data and market prices of the Company's common stock
reflect the effect of the stock split.
8
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, benefits administration,
including the enrollment and processing of flexible benefit plans and COBRA
programs and human resources software. 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.
The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. Since 1994, the Company has
experienced significant growth of its revenue, client base and average client
size. Revenue increased from $13.9 million in fiscal 1996 to $46.3 million in
fiscal 1998. From September 30, 1996 to September 30, 1998, the client base for
payroll processing services increased from approximately 350 to approximately
520 clients, while the average size of the Company's payroll clients increased
from approximately 660 employees to approximately 1,250 employees. As of
September 30, 1998, the Company provided services to approximately 1,450
clients. The Company's revenue growth is primarily due to continued growth in
its client base, the introduction of its payroll tax service in fiscal 1996, an
increase in the average size of its clients, the introduction of new features
and other services, and a high retention rate of existing payroll clients
(approximately 92% for fiscal 1998). The Company does not anticipate it will
sustain this rate of growth in the future.
The establishment of new client relationships involves lengthy and extensive
sales and implementation processes. The sales process generally takes three to
twelve months or longer, and the implementation process generally takes an
additional three to nine months or longer. 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, 1998, the Company had an accumulated deficit of approximately
$28.9 million. There can be no assurance that the Company will achieve or
sustain profitability in the future.
The Company's cost of providing services consists primarily of ongoing
account management, tax and benefits administration operations and production
costs. 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, and to a
lesser extent, amortization of capitalized software development costs. Client
acquisition costs consist of sales and implementation expenses and, to a lesser
extent, marketing expenses.
9
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue................................................................... 100.0% 100.0%
Operating expenses:
Cost of providing services.............................................. 54.0 54.4
General and administrative expenses..................................... 16.9 19.2
Research and development expenses....................................... 9.7 12.0
Client acquisition costs................................................ 43.2 43.1
--------- ---------
Total operating expenses.................................................. 123.8 128.7
Loss from operations...................................................... (23.8) (28.7)
Interest expense.......................................................... (2.1) (2.8)
Other income.............................................................. 1.8 0.3
--------- ---------
Net loss.............................................................. (24.2)% (31.2)%
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--------- ---------
REVENUE. Revenue increased 53.8% in first quarter of fiscal 1999 when
compared with the same period of fiscal 1998, primarily due to increases in the
number and average size of the Company's payroll and tax clients. Interest
income earned on payroll tax funds invested was $3.2 million and $2.0 million
for the first quarter of fiscal 1999 and 1998, respectively. The increases were
primarily the result of higher average daily payroll tax fund balances.
COST OF PROVIDING SERVICES. Cost of providing services increased 52.8% in
first quarter of fiscal 1999 when compared with the same period of fiscal 1998
and decreased as a percentage of revenue to 54.0% from 54.4%. The increase in
absolute dollars was primarily due to increased personnel in operations such as
account management and production resulting from an increase in client base,
production expenses related to an increase in the number of payroll clients, and
to a lesser extent, increases in personnel expenses related to the Company's
payroll tax service.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 35.7% in first quarter of fiscal 1999 when compared with the same
period of fiscal 1998 and decreased as a percentage of revenue to 16.9% from
19.2%. The increase in absolute dollars was primarily due to hiring of
additional management and administrative personnel to support the Company's
growth. The decrease as a percentage of revenue is a result of higher revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 24.0% in first quarter of fiscal 1999 when compared with the same
period of fiscal 1998 and decreased as a percentage of revenue to 9.7% from
12.0%. The increase in absolute dollars was primarily a result of increases in
personnel to develop enhancements and new features to the Company's existing
services. The decrease as a percentage of revenue is a result of higher revenue.
Capitalized software development costs were $1.0 million and $726,000 for the
first quarter of fiscal 1999 and 1998, respectively.
CLIENT ACQUISITION COSTS. Client acquisition costs increased 54.0% in first
quarter of fiscal 1999 when compared with the same period of fiscal 1998 and
increased as a percentage of revenue to 43.2% from 43.1%. The increase in
absolute dollars was primarily due to the expanded sales and implementation
force for payroll and national tax services.
10
INTEREST EXPENSE. Interest expense increased 19.6% in first quarter of
fiscal 1999 when compared with the same period of fiscal 1998 and decreased as a
percentage of revenue to 2.1% from 2.8%. The increase in interest expense was
primarily due to increased bank fees resulting from increased cash balances and
investments.
OTHER INCOME. Other income increased as a percentage of revenue to 1.7% in
first quarter of fiscal 1999 as compared to 0.3% in the same period of fiscal
1998. The increase in other income was due to higher cash and investment
balances resulting from the Company's initial public offering in September 1997
and follow-on public offering in September 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's principal sources of liquidity included
$90.0 million of cash and cash equivalents and a secured $20 million revolving
line of credit which expires December 2000. There were no outstanding borrowings
under the line of credit as of September 30, 1998.
Net cash used in operating activities was $2.0 million for the first three
months of fiscal 1999, compared to net cash provided by operating activities of
$1.1 million for the first three months of fiscal 1998. The net cash used in
operating activities for the first three months of fiscal 1999 was primarily
attributable to the first quarter net loss and an increase in accounts
receivable, partially offset by increases in depreciation and amortization and
current liabilities, and a decrease in other assets.
Net cash used in investing activities was $3.1 million and $3.5 million for
the first three months of fiscal 1999 and 1998, respectively. The decrease in
net cash used in investing activities resulted primarily from a decrease in
purchases of equipment, furniture and fixtures partially offset by an increase
in capitalized software. The Company anticipates that it will continue to expend
funds for software development in the future.
Net cash provided by financing activities was $81.3 million and $15.9
million for the first three months of fiscal 1999 and 1998, respectively. Net
cash provided by financing activities for first three months of fiscal 1999
related primarily to $80.7 million of net proceeds from the Company's follow-on
public offering of common stock in September 1998.
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 for
at least the next 12 months.
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, 1998, the Company had an accumulated deficit of
approximately $28.9 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 an additional 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. Failure to achieve or
sustain profitability in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
11
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 the beginning of the tax year
(the Company's third fiscal quarter) and higher interest income earned on
payroll tax funds invested. Further, the Company's operating expenses are
typically higher as a percentage of revenue in the first and second fiscal
quarters as the Company increases personnel to acquire new clients and to
implement and provide services to such new clients, a large percentage of which
begin services in the third quarter.
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, costs associated
with strategic acquisitions and alliances or investments in technology, the
success of any such strategic acquisition, alliance or investment, costs to
transition to new technologies, expenses incurred for geographic expansion,
risks associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of its clients and general
economic factors. Revenue from new clients typically 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 condition of the economy, client staff
reductions, strikes, acquisitions of its clients by other companies and other
downturns. There can be no assurance that the Company's future revenue and
results of operations will not vary substantially. It is possible that in some
future quarter the Company's results of operations will be below the
expectations of public market analysts and investors. In either case, the market
price of the Company's Common Stock could be materially adversely affected.
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND INVESTMENTS. While the
Company has no current agreements or negotiations underway with respect to any
acquisition of, or investment in, businesses that provide complementary services
or technologies to those of the Company, the Company has in the past and intends
in the future to make additional acquisitions of, and investments in, such
businesses. There can be no assurance that any such future acquisition or
investment will be completed or that, if completed, will be effectively
assimilated into the Company's business. In connection with such acquisitions or
investments, the Company has in the past incurred and will likely incur in the
future costs associated with adding personnel, integrating technology,
increasing overhead to support the acquired businesses, acquiring in-process
technology and amortization expenses related to intangible assets. In addition,
future acquisitions could result in the issuance of dilutive equity securities,
the incurrence of debt or contingent liabilities. Furthermore, there can be no
assurance that any strategic acquisition or investment will succeed. Any future
acquisitions or investments could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION
SERVICES. The Company's payroll tax filing 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
transfer to the Company contributed employer and employee tax funds. The Company
processes the data received from
12
the client and remits the funds along with a tax return to the appropriate tax
authorities when due. Tracking, processing and paying such tax liabilities is
complex. Errors and omissions have occurred in the past and may occur in the
future in connection with such service. The Company is subject to large cash
penalties imposed by tax authorities for late filings or underpayment of taxes.
To date, such penalties have not been significant. However, there can be no
assurance that any liabilities associated with such penalties will not have a
material adverse effect on the Company's business, financial condition and
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 filing service is also dependent upon government
regulations, which are subject to continual 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 would have a
material adverse effect on the Company's reputation, which could adversely
affect its relationships with existing clients and its ability to gain new
clients. The Company's benefits administration services are also dependent upon
government regulations which are subject to continuous changes that could reduce
or eliminate the need for benefits administration services.
The Company has access to confidential information and to client funds. As a
result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions insurance will be adequate to cover any such claims. Such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations.
INVESTMENT RISKS. The Company invests funds, including payroll tax funds
transferred to it by clients until the Company remits those funds to tax
authorities when due. The Company typically invests funds in short-term, top
tier, high quality financial instruments such as overnight U.S. government
direct and agency obligation repurchase agreements, commercial paper and
institutional money market funds. 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 the investment of client tax funds represents a
significant portion of the Company's revenues. 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. There can
be no assurance, however, that the Company's swap agreements will protect the
Company from all interest rate risks. Under certain circumstances if interest
rates rise, the Company would have payment obligations under its interest rate
swap agreements which may not be offset by interest earned by the Company on
deposited funds. A payment obligation under the Company's swap agreements could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
13
Company would have sufficient funds to meet any such swap payment obligations. A
default by the Company under its swap agreements could result in acceleration
and setoff 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 four years. This growth has placed, and is
expected to continue to place, 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 attract clients in new geographic regions, increase expenditures
on research and development, and invest in new equipment and 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 intends to open a satellite sales and implementation center in
New Jersey by the end of calendar 1998 and may open additional sales offices in
the future. In addition, the Company intends to move its benefits administration
center from its current location in Bellevue, Washington to another location
there, and the Company has leased additional office space to be built adjacent
to its Pleasanton headquarters. There can be no assurance that the Company will
be able to establish such facilities on a timely basis. Any inability to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
SUBSTANTIAL COMPETITION. The market for the Company's services is intensely
competitive, subject to rapid change and significantly affected by new service
introductions and other market activities of industry participants. The Company
primarily competes with several public and private payroll service providers,
such as Automatic Data Processing, Inc., Ceridian Corporation and Paychex, Inc.,
as well as smaller, regional competitors. Many of these companies have longer
operating histories, greater financial, technical, marketing and other
resources, greater name recognition and a larger number of clients than the
Company. In addition, certain of these companies offer more services or features
than the Company and have processing facilities located throughout the United
States. The Company also competes with in-house employee services departments
and, to a lesser extent, banks and local payroll companies. With respect to
benefits administration services, the Company competes with insurance companies,
benefits consultants and other local benefits outsourcing companies. The Company
may also compete with marketers of related products and services that may offer
payroll or benefits administration services in the future. The Company has
experienced, and expects to continue to experience, competition from new
entrants into its markets. Increased competition, the failure of the Company to
compete successfully, pricing pressures, loss of market share and loss of
clients could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES; 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 or acquire 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
14
may allow them to introduce new services or features before the Company. Even if
the Company is able to develop or acquire new technologies in a timely manner,
it may incur substantial costs in developing or acquiring such technologies and
in deploying new services and features to its clients, including costs
associated with acquiring in-process technology, amortization expenses related
to intangible assets and costs of additional personnel. If the Company is unable
to develop or acquire and successfully 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
pick up or deliver the paychecks from the Company to its clients for a variety
of reasons, including employee strikes, storms or other adverse weather
conditions, earthquakes or other natural disasters, logistical or mechanical
failures or accidents. Failure by the Company to deliver client paychecks on a
timely basis could damage the Company's reputation and have a material adverse
effect on the Company's business, financial condition and results of operations.
DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA. The Company currently
conducts substantially all of its payroll and payroll tax processing at the
Company's headquarters in Pleasanton, California and divides the payroll
printing and finishing between its Pleasanton and Irvine, California facilities.
The Irvine facility serves both as an alternative processing center and a
back-up payroll center. The Company's benefits administration services are
conducted solely in Bellevue, Washington, and no benefits administration back-up
facility exists. The Company establishes for each payroll client a complete set
of payroll data at the Pleasanton processing center, as well as at the client's
site. In the event of a disaster in Pleasanton, clients would have the ability
to process payroll checks based on the data they have on site if necessary.
There can be no assurance that the Company's disaster recovery procedures are
sufficient or that the payroll data recovered at the client site would be
sufficient to allow the client to calculate and produce payroll in a timely
fashion.
The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend on the
performance of the Company's senior management and other key employees. The loss
of the services of any senior management or other key employee could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company generally does not enter into employment or
noncompetition agreements with its employees. If one or more of the Company's
key employees resigns from the Company to join a competitor or to form a
competitor, the loss of such personnel and any resulting loss of existing or
potential clients to any such competitor could have a material adverse effect on
the Company's business, financial condition and results of operations. In the
event of the loss of any key personnel, there
15
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.
NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL. The Company's success
depends to a significant degree on its ability to attract and retain experienced
employees. There is substantial competition for experienced personnel, which the
Company expects to continue. Many of the companies with which the Company
competes for experienced personnel have greater financial and other resources
than the Company. The Company has in the past and may in the future experience
difficulty in recruiting sufficient numbers of qualified personnel. In
particular, the Company's ability to find and train implementation employees is
critical to the Company's ability to achieve its growth objectives. 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.
RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION. A substantial majority of the
Company's revenue historically has been derived from clients located in the
western United States. The Company's ability to achieve significant future
revenue growth will in large part depend on its ability to gain new clients
throughout the United States. Growth and geographic expansion have resulted in
new and increased responsibilities for management personnel and have placed and
continue 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.
IMPACT OF YEAR 2000 COMPLIANCE. Many currently installed computer systems
and software products are coded to accept only two-digit entries in the date
code field. Beginning in 2000, these date code fields will need to accept
four-digit entries in order to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies will
need to be upgraded to comply with "Year 2000" requirements by the end of 1999.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance issues.
The Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to make its systems Year 2000 compliant. Based on this
preliminary review, the Company has discovered certain failures to comply with
Year 2000 requirements. The Company is taking action to correct the noncomplying
features of its systems, and the Company believes that its internal software
systems will be Year 2000 compliant by 2000. There can be no assurance, however,
that the Company's systems will be fully Year 2000 compliant in a timely manner,
and a failure by the Company to make its internal systems Year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has not determined an estimate
of the costs required to correct the noncomplying features, and the Company does
not currently have a contingency plan in the event that it is unable to make its
systems Year 2000 compliant. Additionally, the costs of making such systems Year
2000 compliant could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes that its current products are, and future products will
be, fully Year 2000 compliant. The Company's past software products, many of
which are currently used by clients, are not Year 2000 compliant. The Company
has begun the process of transitioning existing clients to its Year 2000
compliant products; however, there can be no assurance that the Company will be
successful in providing all of its clients with Year 2000 compliant products by
2000. Any failure by the Company to transition its clients to Year 2000
compliant products could have a material adverse effect on the Company's
business,
16
financial condition and results of operations. In addition, there can be no
assurance that Year 2000 errors or defects will not be discovered in the
Company's current and future products. The Company is not assessing the Year
2000 compliance of its clients' systems or the possible effects on its
operations of the Year 2000 compliance of its clients' systems. Due to the
substantial integration between the Company's computer systems and its clients'
systems, the failure by the Company's clients to have Year 2000 compliant
systems could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is assessing the
possible effects on its 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 by such suppliers and subcontractors to address Year 2000
issues could 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 to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock is likely to be highly volatile following this Offering 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, 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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. Forward-looking statements
contained in this Quarterly Report are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995 and are highly dependent upon a
variety of important factors that could cause actual results to differ
materially from those reflected in such forward-looking statements. When used in
this document and documents referenced herein, the words "intend," "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company are included to identify such forward-looking statements. These
forward-looking statements include statements regarding the demand for
outsourcing employee administrative services; the Company's expansion of its
client base; the Company's intention to increase its direct sales force; the
development of a comprehensive and fully integrated suite of employee
administrative services; the Company's ability to offer additional services; the
initiation or completion of any strategic acquisition, investment or alliance;
the Company's ability to extend its technology leadership; the Company's ability
to attract and retain new clients; market acceptance of any new services offered
by the Company; the Company's ability to minimize the impact of interest rate
fluctuations; the Company's ability to develop its financial and managerial
controls and systems; the opening of additional facilities; the
17
sufficiency of the Company's back-up facilities and disaster recovery
procedures; the Company's ability to develop or acquire new technologies; the
Company's ability to attract and retain experienced employees; the ability of
the Company to make its internal system Year 2000 compliant and to transition
its clients to a Year 2000 compliant system; the Company's ability to maintain a
high payroll client retention rate and the Company's ability to increase its
national presence. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties, including without limitation, those identified under "Additional
Factors That May Affect Future Results" and elsewhere in this Quarterly Report
and other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission. Actual results could differ
materially from these forward-looking statements. In addition, important factors
to consider in evaluating such forward-looking statements include changes in
external market factors, changes in the Company's business or growth strategy or
an inability to execute its strategy due to changes in its industry or the
economy generally, the emergence of new or growing competitors and various other
competitive factors. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this Quarterly Report
will in fact occur.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
(c) On July 13, 1998, the Company issued 37,500 shares of Common Stock to
Ben Reppond and 37,500 shares of Common Stock to Louis Baransky upon the
exercise of warrants pursuant to an exercise price of $6.00 per share. The
issuance of the shares of Common Stock pursuant to exercise of the warrants was
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.
(d) On September 19, 1997, the Company commenced an initial public offering,
which consisted of 4,312,500 shares of its Common Stock (the "Offering") at
$7.33 per share pursuant to a registration statement (No. 333-23189) declared
effective by the Securities and Exchange Commission on September 19, 1997. As of
July 1, 1998, approximately $13.8 million of the net proceeds from the Offering
were invested in short-term financial instruments. From July 1, 1998 to
September 30, 1998, the Company used approximately $5.1 million of these
proceeds from the short-term financial instruments for working capital.
On September 25, 1998, the Company commenced a secondary public offering
(the "Secondary Offering"), which consisted of 3,191,250 shares of its Common
Stock at $27.00 per share pursuant to a registration statement (No. 333-60745)
declared effective by the Securities and Exchange Commission on September 30,
1998. The Secondary Offering has been terminated and all shares have been sold.
The managing underwriters for the Secondary Offering were William Blair &
Company, L.L.C., BancBoston Robertson Stephens Inc. and SG Cowen Securities
Corporation. Aggregate proceeds from the Secondary Offering were
$86,163,750,which includes $11,238,750 paid to the Company on September 30, 1998
upon the underwriters' exercise of an option to purchase shares to cover
over-allotments.
The Company incurred the following expenses in connection with the Secondary
Offering: underwriters' discounts and commissions of $4,515,619 and
approximately $936,831 in other expenses, for a total expense of $5,452,450. 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.
After deducting expenses of the Secondary Offering, the net offering
proceeds to the Company were $80,711,300. As of September 30, 1998, all net
offering proceeds from the Secondary Offering were invested in short-term
financial instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, for the quarter ended September 30, 1998.
ITEM 5. OTHER INFORMATION
None
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
See exhibit list following signature page.
(c) Reports on Form 8-K.
On August 5, 1998, the Company filed a Report on Form 8-K for the purpose of
disclosing restatement of selected data previously reported by the Company as it
relates to the adoption of FAS 128.
20
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 16, 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
21
INDEX TO EXHIBITS
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- --------- --------- ---------------------------------------------------------------------------------------------
(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension
Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997 between Registrant and BeneSphere
Administrators, Inc.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of Registrant.
(1) 4.1 Specimen Common Stock Certificate of Registrant.
(1) 4.2 Amended and Restated Registration Rights Agreement, dated March 12, 1997, between Registrant,
General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and certain
stockholders of Registrant.
(1) 4.3 Warrant to Purchase Stock, dated January 13, 1995, between Registrant and Silicon Valley Bank
and related Antidilution and Registration Rights Agreements.
(1) 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between Registrant and Coast Business Credit
and related Antidilution and Registration Rights Agreement.
(1) 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between Registrant and Coast Business
Credit and related Antidilution and Registration Rights Agreement.
(1) 4.5 Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and
LINC Capital Management.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain
purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and
T.J. Bristow and Elizabeth S. Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and
SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and
Laurence Shushan and Magdalena Shushan.
(1) 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Louis R.
Baransky.
(1) 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997, between Registrant and Ben W.
Reppond.
(1) 4.8 Form of Note issued by Registrant on October 20, 1995 and December 12, 1995.
(1) 10.1 Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23, 1994,
Second Amendment to Lease, dated December 9, 1994, and Third Amendment to Lease, dated
March 16, 1995, between Registrant and Hacienda Park Associates.
(3) 10.2 Sublease, dated April 14, 1998, between the Registrant and Documentum, Inc.
(1) 10.3 Lease Agreement and Addendum Number One, dated August 26, 1993, and First Amendment to Lease,
dated March 23, 1994, between Registrant and Hacienda Park Associates.
22
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- --------- --------- ---------------------------------------------------------------------------------------------
(1) 10.3 Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994, and Second
Amendment, dated October 5, 1994 between Registrant and Hacienda Park Associates.
(1) 10.5 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23,
1996, between Registrant and Hacienda Park Associates.
(3) 10.6 Built-to-Suit Lease, dated September 27, 1996, and First Amendment, dated January 27, 1998,
between Registrant and Britannia Hacienda V Limited Partnership.
(1) 10.7 Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc. and the
Trustees under the Will and of the Estate of James Campbell, Deceased and related Guaranty
of Lease.
(3) 10.8 Sublease, dated October 10, 1997, between Registrant and Drake Mortgage Corporation.
(3) 10.9 Build-to-Suit lease, dated January 27, 1998, between Registrant and Britannia Hacienda V
Limited Partnership.
(1) 10.10 1996 Stock Option Plan and related Form of Stock Option Agreement.
(1) 10.11 1996 Employee Stock Purchase Plan.
(1) 10.12 Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight
L. Jackson.
(1) 10.13 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC Capital
Management and related Equipment Schedule.
(1) 10.14 Form of Indemnification Agreement between Registrant and executive officers and directors.
(1) 10.15 Loan Agreement, dated October 20, 1995, between Registrant and certain investors, and First
Amendment to Loan Agreement, dated December 12, 1995, between Registrant and certain
investors.
(3) 10.16 Amended and Restated Loan and Security Agreement, dated June 30, 1998, between Registrant and
Coast Business Credit.
(1) 10.17 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
(1) 10.18 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
(1) 10.19 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
(1) 10.20 Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November 7,
1994, and Amendments Nos. 1 and 2 thereto.
(1) 10.21 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and
Registrant, assigned to Registrant on February 29, 1996.
(1) 10.22 Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and Alison
Elder.
(1) 10.23 Series F Stock Purchase Agreement, dated March 12, 1997, between Registrant, General Atlantic
Partners 39, L.P. and GAP Coinvestment Partners, L.P.
23
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- --------- --------- ---------------------------------------------------------------------------------------------
(1) 10.24 Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners
39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein).
(1) 10.25 Standard Office Lease--Gross, dated March 27, 1997, between Registrant and Westwood Holdings,
Inc.
(1) 10.26 ISDA Master Agreement, dated June 10, 1997, between Registrant and First Union National Bank.
(3) 10.27 ASAP Office Services Lease, dated June 25, 1998, between Registrant and ASAP Office Services.
27.1 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-23189), declared effective on September 18,
1997.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange
Commission on October 3, 1998.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60745) filed with the Securities and
Exchange Commission on September 25, 1998.
24