WAGEWORKS, INC. - FORM 8-K/A - EX-99.3

Attached files

file	filename
EX-99.2 - EX-99.2 - WAGEWORKS, INC.	d341908dex992.htm
EX-99.1 - EX-99.1 - WAGEWORKS, INC.	d341908dex991.htm
EX-23.1 - EX-23.1 - WAGEWORKS, INC.	d341908dex231.htm
8-K/A - 8-K/A - WAGEWORKS, INC.	d341908d8ka.htm

Exhibit 99.3

Unaudited Pro Forma Condensed Combined Financial Statements of WageWorks, Inc. and the ADP COBRA/CHSA Business

Pursuant to the terms and conditions of that certain Asset Purchase Agreement, dated as of November 1, 2016 (the “APA”), by and among WageWorks, Inc., a Delaware corporation (the “Company”), on the one hand, and ADP, LLC, a Delaware limited liability company (“ADP LLC”), and ADP Benefit Services KY, Inc., a Kentucky corporation (“ADP Benefit Services” and, together with ADP LLC, “ADP”), on the other hand, the Company has purchased certain of ADP’s assets (excluding client contracts, among other assets), and has assumed certain of ADP’s liabilities, in each case, relating to ADP’s (i) Consumer Health & Spending Accounts (CHSA) business (consisting of the flexible spending accounts (FSA), health reimbursement arrangements (HRA), health spending accounts (HSA), tuition reimbursement, and commuter services businesses) (the “CHSA Business”), and (ii) COBRA business (consisting of the COBRA and direct bill businesses) (the “COBRA Business” and, the COBRA Business together with the CHSA Business, the “Business”), in each case, subject to the terms and conditions of the APA (including, but not limited to, certain exclusions in respect of specific assets and liabilities relating to the Business) (the “Transaction”).

As consideration for the Transaction, ADP received approximately $235 million in cash.

In connection with the closing of the Transaction on November 28, 2016, and as part of the transactions contemplated by the APA, the Company and ADP entered into a Subcontracting Agreement, a Referral Agreement, a Transition Services Agreement, an Intellectual Property Licensing Agreement, and certain other ancillary agreements. Under the Subcontracting Agreement, the Company will service the client contracts of the Business that are retained by ADP, in each case, generally on a pass-through basis. Under the Referral Agreement, the Company and ADP have entered into a strategic relationship under which ADP may introduce new clients to the Company and its services. Under the Transition Services Agreement, ADP will provide the Company with certain services during a transitional period to assist the Company in operating the Business. Under the Intellectual Property Licensing Agreement, the Company will receive licenses to certain intellectual property from ADP.

The unaudited pro forma condensed combined financial statements set forth below have been presented for informational purposes only. The pro forma data is not necessarily indicative of, or intended to represent, what the combined Company’s results of income actually would have been had the acquisition been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future operating results of the combined Company. These unaudited pro forma condensed combined financial statements should be read in conjunction with the Company’s historical consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2015 and the Company’s historical unaudited financial statements included in its Quarterly Report on Form 10-Q for the nine month period ended September 30, 2016, filed with the Securities and Exchange Commission (“the SEC”) and ADP COBRA/CHSA Business’ historical abbreviated financial statements as attached thereto in Exhibit 99.1 and Exhibit 99.2.

WAGEWORKS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2016

(In thousands, except per share amounts)


						Note 5
	Historical									Pro Forma
	WageWorks			COBRA/CHSA Business		Pro Forma Adjustments				Combined

Assets
Current assets:
Cash and cash equivalents		666,634			854		(64,065	)	1, 2, 5		603,423
Restricted cash		332									332
Accounts receivable, net		85,135									85,135
Prepaid expenses and other current assets		21,258			240						21,498

Total current assets		773,359			1,094		(64,065	)			710,388
Property and equipment, net		55,451			7						55,458
Goodwill		157,109					140,300		3		297,409
Acquired intangible assets, net		86,426			2,687		92,013		4		181,126
Deferred tax assets		10,261									10,261
Other assets		4,497									4,497

Total assets		1,087,103			3,788		168,248				1,259,139

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		69,177			1,094		1,035		2		71,306
Customer obligations		549,316			—						549,316
Short-term contingent consideration		—			—						—
Other current liabilities		359			—						359

Total current liabilities		618,852			1,094		1,035				620,981
Long-term debt		78,907			—		169,900		5		248,807
Other non-current liabilities		9,626			—						9,626

Total liabilities		707,385			1,094		170,935				879,414

Stockholders’ Equity:
Common stock, $0.001 par value (authorized 1,000,000 shares; 36,055 shares issued and 36,636 shares outstanding at September 30, 2016)		38			—						38
Additional paid-in capital		380,741			—						380,741
Treasury stock at cost (345 shares at September 30, 2016)		(14,374	)		—						(14,374	)
Retained Earnings/Net Assets		13,313			2,694		(2,687	)	4		13,320

Total stockholders’ equity		379,718			2,694		(2,687	)			379,725

Total liabilities and stockholders’ equity		1,087,103			3,788		168,248				1,259,139

WAGEWORKS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(in thousands, except per share amounts)


						Note 5
	WageWorks			ADP COBRA/CHSA Business		Pro Forma Adjustments				Pro Forma Combined
Revenues:
Healthcare		146,918			66,404		—				213,322
Commuter		52,339			—		—				52,339
COBRA		51,955			28,805		—				80,760
Other		12,439			—		—				12,439

Total revenues		263,651			95,209		—				358,860

Operating expenses:
Cost of revenues (excluding amortization of internal use software)		90,237			53,809		—				144,046
Technology and development		32,656			6,805		—				39,461
Sales, marketing, general and administrative		90,192			9,024		(114	)	B		99,102
Amortization and change in contingent consideration		26,084			563		6,780		A		33,427
Employee termination and other charges		475			—		—				475

Total operating expenses		239,644			70,201		6,666				316,511

Income from operations		24,007			25,008		(6,666	)			42,349
Other income (expense):
Interest income		300			—		—				300
Interest expense		(1,279	)		—		(2,300	)	C		(3,579	)
Other income (expense)		24			—		—				24

Income before income taxes		23,052			25,008		(8,966	)			39,094
Income tax provision		(8,509	)				(5,921	)	D		(14,430	)

Net income		14,543			25,008		(14,887	)			24,664


Net income per share:
Basic		0.40									0.68
Diluted		0.39									0.67
Shares used in computing net income per share:
Basic		36,312									36,312
Diluted		37,078									37,078

WAGEWORKS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2015

(in thousands, except per share amounts)


						Note 5
	Wageworks			ADP COBRA/CHSA Business		Pro Forma Adjustments				Pro Forma Combined
Revenues:
Healthcare		176,573			92,093		—				268,666
Commuter		63,895			—		—				63,895
COBRA		51,299			39,869		—				91,168
Other		42,549			—		—				42,549

Total revenues		334,316			131,962		—				466,278

Operating expenses:
Cost of revenues (excluding amortization of internal use software)		117,170			70,235		—				187,405
Technology and development		43,041			8,706		—				51,747
Sales, marketing, general and administrative		104,633			12,580		—				117,213
Amortization and change in contingent consideration		27,618			833		8,957		A		37,408
Employee termination and other charges		1,913			—		—				1,913

Total operating expenses		294,375			92,354		8,957				395,686

Income from operations		39,941			39,608		(8,957	)			70,592
Other income (expense):							—
Interest income		153					—				153
Interest expense		(1,925	)				(3,075	)	C		(5,000	)
Other income (expense)		(182	)				—				(182	)

Income before income taxes		37,987			39,608		(12,032	)			65,563
Income tax provision		(15,037	)				(10,916	)	D		(25,953	)

Net income		22,950			39,608		(22,948	)			39,610


Net income per share:
Basic		0.64									1.11
Diluted		0.63									1.08
Shares used in computing net income per share:
Basic		35,784									35,784
Diluted		36,595									36,595

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF TRANSACTION

On November 28, 2016, the Company completed its acquisition of the Business with a consideration of approximately $235 million in cash. In connection with the Transaction, the Company borrowed $169.9 million against its $250.0 million revolving credit facility which had a maturity date of June 5, 2020.

NOTE 2 – BASIS OF PRESENTATION

The unaudited pro forma condensed combined statement of income of the Company and the ADP COBRA/CHSA Business for the year ended December 31, 2015 and for the nine months ended September 30, 2016 are presented as if the acquisition had closed on January 1, 2015. The unaudited pro forma condensed combined balance sheet as of September 30, 2016 is presented as if the acquisition had closed as of September 30, 2016. The unaudited pro forma combined statement of income for the year ended December 31, 2015 and the nine month period ended September 30, 2016 and the unaudited pro forma combined balance sheet as of September 30, 2016 were prepared utilizing historical audited abbreviated financial statements of the ADP COBRA/CHSA Business for the three years ended June 30, 2016, and unaudited abbreviated financial statements of the ADP COBRA/CHSA Business for the three months ended September 30, 2016 as well as additional unaudited quarterly information of the ADP COBRA/CHSA Business as discussed below.

The following unaudited pro forma condensed combined financial statements are presented to give effect to the acquisition of the ADP COBRA/CHSA Business by the Company. The pro forma information was prepared based on the historical financial statements and related notes of the Business and the Company, as adjusted for the pro forma impact of applying the acquisition method of accounting in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition (2) factually supportable, and (3) with respect to the statement of income, expected to have a continuing impact on the combined company.

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the aggregate value of the consideration paid by the Company to complete the acquisition was allocated to the assets acquired and liabilities assumed from the ADP COBRA/CHSA Business based upon their estimated fair values on the closing date of the acquisition. The Company has completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from the ADP COBRA/CHSA Business, based on the actual net tangible and intangible assets and liabilities of the ADP COBRA/CHSA Business that existed as of the closing date, and the related allocations of purchase price.

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma data does not purport to represent what the combined Company’s results of operations actually would have been had the acquisition been completed as of the dates indicated, nor is it indicative of future operating results of the combined Company.

The Company’s year-end is December 31, while the ADP COBRA/CHSA Business’ fiscal year end was June 30. Accordingly, the Company has aligned the ADP COBRA/CHSA Business’ reporting period to the Company’s reporting period. All unaudited pro forma condensed combined financial statements have been aligned to use the Company’s reporting period dates for the year ended December 31, 2015 and the nine months ended September 30, 2016 as follows:

For the Twelve month period ended December 31, 2015:


	ADP COBRA/CHSA BUSINESS ABBREVIATED FINANCIAL STATEMENTS
	(in thousands)
	Audited for the Fiscal Year Ended June 30, 2015		Plus : Three Months Ended September 30, 2015		Plus : Three Months Ended December 31, 2015		Less: Six Months Ended December 31, 2014		Twelve Months Ended December 31, 2015
Revenues:
Total revenues		130,353		31,911		32,899		63,201		131,962

Operating expenses:
Cost of revenues (excluding amortization of internal use software)		68,439		16,576		18,854		33,634		70,235
Technology and development		8,508		2,158		2,194		4,154		8,706
Sales, marketing, general and administrative		11,343		2,240		3,880		4,883		12,580
Amortization and change in contingent consideration		917		188		187		459		833
Employee termination and other charges		—		—		—		—		—

Total operating expenses		89,207		21,162		25,115		43,130		92,354

Income from operations		41,146		10,749		7,784		20,071		39,608
Other income (expense):		—		—		—		—		—
Interest income		—		—		—		—		—
Interest expense		—		—		—		—		—
Other income (expense)		—		—		—		—		—

Income before income taxes		41,146		10,749		7,784		20,071		39,608
Income tax provision		—		—		—		—		—

Net income		41,146		10,749		7,784		20,071		39,608

For the Nine month period ended September 30, 2016:


	ADP COBRA/CHSA ABBREVIATED FINANCIAL STATEMENTS
	(in thousands)
	Unaudited for the Three Months Ended September 30, 2016		Plus: Audited for the Fiscal Year Ended June 30, 2016		Less: Six Months Ended December 31, 2015		Nine Months Ended September 30, 2016
Revenues:
Total revenues		29,444		130,575		64,810		95,209

Operating expenses:
Cost of revenues (excluding amortization of internal use software)		16,181		73,058		35,430		53,809
Technology and development		2,425		8,732		4,352		6,805
Sales, marketing, general and administrative		2,893		12,251		6,120		9,024
Amortization and change in contingent consideration		188		750		375		563
Employee termination and other charges		—		—		—		—

Total operating expenses		21,687		94,791		46,277		70,201

Income from operations		7,757		35,784		18,533		25,008
Other income (expense):
Interest income		—		—		—		—
Interest expense		—		—		—		—
Other income (expense)		—		—		—		—

Income before income taxes		7,757		35,784		18,533		25,008
Income tax provision		—		—		—		—

Net income		7,757		35,784		18,533		25,008

NOTE 3 – PURCHASE PRICE CONSIDERATION AND ALLOCATION

In accordance with Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”), the acquisition was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total purchase consideration, assets acquired and the liabilities assumed are measured at fair value as of the date of acquisition when control is obtained. The fair value of the consideration transferred and the assets acquired and liabilities assumed was determined by the Company and in doing so relied in part upon a third-party valuation report to estimate the fair value of the identifiable intangible assets acquired. The following table summarizes the fair value of total consideration transferred for the acquisition, the total fair value of net identifiable assets acquired and the goodwill recorded (in thousands):


Cash consideration	$	235,000
Less: Fair value of net identifiable assets acquired		(94,700	)

Goodwill	$	140,300

Goodwill represents the excess of the purchase consideration over the fair value of the underlying net assets acquired and liabilities assumed.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. The estimated fair value of the identifiable assets acquired and liabilities assumed in the acquisition is based on management’s best estimates and valuation assumptions.

Estimate of the fair value of assets acquired and liabilities assumed as of November 28, 2016 (in thousands):


	Estimated Useful Life (in years)
Cash			$	1,035
Accounts payable and accrued expenses				(1,035	)
Intangible assets subject to amortization:
Customer relationships		10		93,900
Existing technology – CHSA		2		500
Existing technology – COBRA		2		300

Total estimated fair value of net identifiable assets acquired			$	94,700

NOTE 4 – RECLASSIFICATIONS TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 2016

The following reclassifications have been made in the presentation of the ADP COBRA/CHSA Business unaudited abbreviated balance sheet to conform to the condensed combined presentation of the Company:

•

$240 thousand from “Pension Assets” as of September 30, 2016 was reclassified to “Prepaid expenses and other current assets”.

•

$240 thousand from “Pension Liability” as of September 30, 2016 was reclassified to “Accounts payable and accrued expenses”.

NOTE 5 – PRO FORMA ADJUSTMENTS

The following is a description of the unaudited pro forma adjustments reflected in the unaudited pro forma condensed combined financial statements (in thousands except per share amount):

Adjustments to the pro forma condensed combined balance sheet as of September 30, 2016:

(1)	Pro forma adjustments to reflect a reduction in cash and cash equivalents paid for the acquisition:


Cash consideration paid	$	235,000

(2)	Pro forma adjustments to Net tangible assets:


Cash acquired	$	1,035
Accounts payable and accrued expenses		(1,035	)

Net tangible assets	$	0

(3)	Pro forma adjustment to Goodwill:


Addition of acquired Goodwill	$	140,300

(4)	Pro forma adjustments to Intangible assets, net:


Elimination of historical Intangible assets amount	$	(2,687	)
Addition of estimated fair value of acquired Intangible assets (see Note 3)		94,700

Intangible assets, net	$	92,013

(5)	Pro forma adjustment to increase cash and cash equivalents and long-term debt:


Cash and cash equivalents and long-term debt	$	169,900

Adjustments to the pro forma condensed statements of income:

(A) Pro forma adjustments to adjust the amortization of acquired intangible assets:


	Nine Months Ended			Year Ended
	September 30, 2016			December 31, 2015

Elimination of historical amortization of intangible assets	$	(563	)	$	(833	)
Addition of the Company’s acquired amortization of intangible asset		7,343			9,790

Total pro forma adjustments for amortization of acquired intangible assets	$	6,780		$	8,957

(B) Pro forma adjustment to eliminate non-recurring acquisition-related expenses:


	Nine Months Ended		Year Ended
	September 30, 2016		December 31, 2015
Non-recurring acquisition-related expenses	$	114	$	—


	Nine Months Ended		Year Ended
	September 30, 2016		December 31, 2015
Interest expense	$	2,300	$	3,075

(D) Pro forma adjustments to record the income tax provision impact of the pro forma adjustments (A) to (C) which have been calculated based on the statutory rate in effect during the periods for which the pro forma statements of income were presented (in thousands):


	Nine Months Ended		Year Ended
	September 30, 2016		December 31, 2015
Total pro forma adjustments for income tax provision impact	$	5,921	$	10,916

(E) Pro forma net income per share for basic and diluted based on combined statements of income:


	Nine Months Ended		Year Ended
	September 30, 2016		December 31, 2015

Basic	$	0.68	$	1.11
Diluted	$	0.67	$	1.08

The pro forma condensed combined statements of income include revenues from a specific customer of ADP which exceed the level of revenues that the Company anticipates will be realized in the statement of income on a prospective basis.

WAGEWORKS, INC. - FORM 8-K/A - EX-99.3 - February 3, 2017

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