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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 QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22227
PROBUSINESS SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2976066
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION 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 7, 2001, there were 24,114,721 shares of the Registrant's Common
Stock outstanding.
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PROBUSINESS SERVICES, INC.
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2001
and June 30, 2000......................................... 1
Condensed Consolidated Statements of Operations for the
three months and nine months ended March 31, 2001 and
2000...................................................... 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 2001 and 2000...................... 3
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Item 3. Quantitative and Qualitative Disclosures of Market Risk..... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities....................................... 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures........................................................... 17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
MARCH 31, JUNE 30,
2001 2000
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 40,318 $ 27,585
Short-term investments.................................... 21,724 13,336
---------- ----------
Total cash, cash equivalents and short-term
investments..................................... 62,042 40,921
Restricted cash........................................... -- 4,616
Accounts receivable, net of allowances.................... 11,622 10,769
Prepaid expenses and other current assets................. 10,372 5,304
---------- ----------
84,036 61,610
Payroll tax funds invested................................ 1,872,814 1,054,903
---------- ----------
Total current assets.............................. 1,956,850 1,116,513
Long-term investments....................................... 3,074 1,999
Equipment, furniture and fixtures, net...................... 42,385 40,535
Other assets................................................ 39,546 23,174
---------- ----------
Total assets...................................... $2,041,855 $1,182,221
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities, current portion of
capital lease obligations and deferred revenue......... $ 39,124 $ 21,431
Payroll tax funds collected but unremitted................ 1,872,814 1,054,903
---------- ----------
Total current liabilities......................... 1,911,938 1,076,334
Long-term deferred revenue.................................. 13,061 13,061
Capital lease obligations, less current portion............. 176 376
Redeemable convertible preferred stock...................... 30,708 --
Stockholders' equity........................................ 85,972 92,450
---------- ----------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity........ $2,041,855 $1,182,221
========== ==========
See accompanying notes.
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PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ --------------------
2001 2000 2001 2000
------- ------- -------- --------
Revenue:
Service Fees.................................... $29,094 $20,075 $ 78,572 $ 52,677
Interest income from payroll tax funds
invested..................................... 14,927 9,943 31,340 21,368
------- ------- -------- --------
Total Revenue........................... 44,021 30,018 109,912 74,045
Operating expenses:
Cost of providing services...................... 20,514 12,918 55,484 36,004
General and administrative...................... 6,516 4,064 17,989 11,289
Research and development........................ 4,798 3,194 14,039 9,043
Client acquisition costs........................ 19,765 11,560 51,228 32,832
------- ------- -------- --------
Total operating expenses................ 51,593 31,736 138,740 89,168
Loss from operations.............................. (7,572) (1,718) (28,828) (15,123)
Interest expense.................................. (289) (148) (667) (310)
Interest income and other, net.................... 1,081 838 3,136 2,590
------- ------- -------- --------
Net loss.......................................... $(6,780) $(1,028) $(26,359) $(12,843)
======= ======= ======== ========
Basic and diluted net loss per share.............. $ (0.30) $ (0.04) $ (1.15) $ (0.56)
======= ======= ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 23,952 23,372 23,760 23,133
======= ======= ======== ========
See accompanying notes.
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PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(26,359) $(12,843)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 9,939 7,792
Changes in operating assets and liabilities:
Accounts receivable, net............................. (853) (3,511)
Prepaid expenses and other current assets............ (2,180) (1,632)
Other assets......................................... (806) (383)
Accounts payable, accrued liabilities and deferred
revenue............................................. 18,003 3,460
-------- --------
Net cash used in operating activities....................... (2,256) (7,117)
INVESTING ACTIVITIES
Purchase of securities...................................... (9,463) --
Purchases of equipment, furniture and fixtures.............. (11,077) (15,521)
Capitalization of software development costs................ (4,704) (4,783)
-------- --------
Net cash used in investing activities....................... (25,244) (20,304)
FINANCING ACTIVITIES
Decrease in restricted cash................................. 4,616 --
Principal payments on capital lease obligations............. (510) (655)
Proceeds from stockholder notes receivable.................. 201 --
Proceeds from issuance of redeemable convertible preferred
stock..................................................... 29,846 --
Proceeds from issuance of common stock...................... 6,080 4,005
-------- --------
Net cash provided by financing activities................... 40,233 3,350
-------- --------
Net increase/(decrease) in cash and cash equivalents........ 12,733 (24,071)
Cash and cash equivalents, beginning of period.............. 27,585 73,575
-------- --------
Cash and cash equivalents, end of period.................... $ 40,318 $ 49,504
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 256 $ 310
======== ========
Redeemable convertible preferred stock dividend
distributable............................................. $ 862 $ --
======== ========
FAS 133 Other comprehensive income.......................... $ 14,462 $ --
======== ========
See accompanying notes.
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PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ProBusiness Services, Inc., ("ProBusiness" or the "Company") has prepared
its interim condensed unaudited consolidated financial statements, 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 consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 2000 was prepared from the audited
consolidated financial statements of the Company.
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 consolidated
financial position, results of operations and cash flows for such periods. The
results for the interim period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2001 or for any future periods.
2. BASIC AND DILUTED NET LOSS PER SHARE
Shares used in computing basic and diluted net income (loss) per share are
based on the weighted average shares outstanding in each period. Basic and
diluted net income per share includes the 6.9% Senior Convertible Preferred
Stock ("Preferred Stock") dividend distributable of $518,000 for the quarter
ended March 31, 2001 and $862,000 for the nine months ended March 31, 2001.
Basic net income (loss) per share excludes any dilutive effects of stock
options. Diluted net loss per share includes the dilutive effect of the assumed
exercise of stock options using the treasury stock method. However, the effect
of outstanding stock options has been excluded from the calculation of diluted
net loss per share as their inclusion would be antidilutive. If the Company had
reported net income, the calculation of diluted net income per share would have
included the shares used in the computation of net loss per share, as well as an
additional 1,976,000 and 1,058,000 common equivalent shares related to
outstanding stock options, Preferred Stock and warrants not included above
(using the treasury stock method) for the first nine months of fiscal 2001 and
2000, respectively.
3. SEGMENT INFORMATION
The Company's President and Chief Executive Officer is its chief operating
decision maker. He evaluates performance based on a measure of revenue less cost
of providing services, operating profit before client acquisition costs and
profit or loss from operations. The accounting policies of the reportable
segment are the same as those described in the Company's Annual Report on Form
10-K for the year ended June 30, 2000. The Company's condensed consolidated
statements of operations disclose the financial information of its reportable
segment in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 131 "Disclosures about Segments of an Enterprise."
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND ACCOUNTING BULLETINS
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective July 1, 2000. SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Any ineffective portion of a derivative's change in fair value will be
immediately
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PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
recognized in earnings and any derivatives that are not hedges must be adjusted
to fair value through income. Based on the Company's derivative positions at
March 31, 2001, the Company reported a net asset of $14.5 million for the fair
value of its derivative portfolio and a corresponding offset in other
comprehensive income.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Aspects of SAB 101
relevant to the Company primarily concern the timing of the recognition of
revenue and certain expenses related to arrangements that involve the receipt of
nonrefundable, up-front fees. SAB 101 requires that in particular situations the
nonrefundable fees and certain associated costs be recognized over the
contractual term or average life of the underlying arrangement. SAB 101 will be
effective for ProBusiness in the fourth quarter of fiscal year 2001. SAB 101 is
not expected to have a material impact on the Company's historical financial
condition or results of operations.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On August 1, 2000, the Company authorized, issued and sold 1,132,075 shares
of 6.9% Senior Convertible Preferred Stock to certain affiliates of General
Atlantic Partners ("GAP") at $26.50 per share. The Preferred Stock ranks senior
to the Company's common stock. The holders of the Preferred Stock are entitled
to receive cumulative dividends at an annual rate of 6.9% in the form of
additional shares of Preferred Stock. Dividends are payable quarterly on the
first day of October, January, April and July, commencing October 1, 2000. Upon
liquidation of the Company, the holders of the Preferred Stock are entitled to
be paid an amount equal to $26.50 per share. Any holder of Preferred Stock has
the right to convert such holder's shares of Preferred Stock into shares of the
Company's common stock at a rate of one share of Preferred Stock to one share of
the Company's common stock, subject to adjustments, as defined. The Company has
the option to convert all of the Preferred Stock to common stock on August 1,
2005 if the then current market price of the Company's common stock is equal to
or greater than $26.50 per share at a rate of one share of Preferred Stock to
one share of the Company's common stock, subject to adjustments, as defined. If,
as of any date after August 1, 2003, the then current market price of the
Company's common stock is equal to or greater than $39.00 per share (adjusted
for stock splits, dividends, recapitalizations or otherwise), the Company may,
at its option, redeem any or all of the then current outstanding Preferred Stock
at $26.50 per share. In the event of a change in control of the Company, holders
of at least two-thirds of the Preferred Stock can elect to treat the transaction
as a liquidation and for this reason the Preferred Stock is considered to be
"redeemable" by the holders of the Preferred Stock.
The holders of the Preferred Stock vote, as a single class, with the
Company's common stockholders, except that as long as affiliates of GAP own a
majority of the Preferred Stock, the then holders of such Preferred Stock are
entitled to elect one director to the Company's Board of Directors. As of March
31, 2001, a Partner of GAP is a member of the Company's current Board of
Directors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto of ProBusiness appearing
elsewhere in this Quarterly Report. The following discussion contains
forward-looking statements. The Company's actual results may differ
significantly from those projected in the forward-looking statements. Factors
that might cause future results to differ materially from those projected in the
forward-looking statements include, but are not limited to, those discussed in
"Additional Factors that May Affect Future Results" and elsewhere in this
Quarterly Report.
OVERVIEW
ProBusiness is a leading provider of comprehensive outsourced
administrative services for large employers nationwide. The Company's primary
service offerings are payroll processing, payroll tax filing, benefits
administration services, human resources software, Web-based self-service and
Shared Services. Shared Services combines front-office services for payroll,
human resources and benefits administration with the Company's traditional
back-office processing capabilities. 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. The Company has experienced
significant growth of its revenue, client base and average client size. Revenue
increased from $46.5 million in fiscal 1998 to $104.1 million in fiscal 2000. At
March 31, 2001 the client base for payroll and payroll tax processing services
is approximately 628 and 152, respectively, and the average size of the
Company's payroll clients is 2,250 employees. The Company's revenue growth is
primarily due to continued growth in its payroll and payroll tax client base, an
increase in the average number of employees of its clients, the introduction of
new features and other services and a high retention rate of existing payroll
clients (approximately 90% for fiscal 2000). 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 sales efforts, service offerings and operations in new geographic
regions. As of March 31, 2001, the Company had an accumulated deficit of $89.0
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 Shared Services operations and production costs.
General and administrative expenses consist primarily of personnel costs,
professional fees and other overhead costs for finance, corporate services and
information technology. Research and development expenses consist primarily of
personnel costs. Client acquisition costs consist of sales and implementation
expenses and, to a lesser extent, marketing expenses.
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RESULTS OF OPERATIONS
The following table sets forth certain items reflected in the consolidated
statements of operations expressed as a percentage of revenue:
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------- --------------
2001 2000 2001 2000
----- ----- ----- -----
Revenue:
Service fees...................................... 66.1% 66.9% 71.5% 71.1%
Interest income from payroll tax funds invested... 33.9% 33.1% 28.5% 28.9%
----- ----- ----- -----
Total revenue....................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services........................ 46.6% 43.0% 50.4% 48.6%
General and administrative........................ 14.8% 13.5% 16.4% 15.2%
Research and development.......................... 10.9% 10.6% 12.8% 12.2%
Client acquisition costs.......................... 44.9% 38.6% 46.6% 44.4%
----- ----- ----- -----
Total operating expenses............................ 117.2% 105.7% 126.2% 120.4%
Loss from operations................................ (17.2)% (5.7)% (26.2)% (20.4)%
Interest expense.................................... (0.7)% (0.5)% (0.6)% (0.4)%
Interest income and other, net...................... 2.5% 2.8% 2.8% 3.5%
----- ----- ----- -----
Net loss............................................ (15.4)% (3.4)% (24.0)% (17.3)%
===== ===== ===== =====
Revenue
Service fee revenue increased 44.9% in the third quarter and 49.2% in the
first nine months of fiscal 2001 when compared with the same periods of fiscal
2000, primarily due to increases in the number and average size of the Company's
payroll and tax clients. Service fee revenue will likely decrease as a result of
the implementation of Staff Accounting Bulletin 101. See "-- New Accounting
Pronouncements." Interest income from payroll tax funds invested increased 50.1%
in the third quarter and 46.7% in the first nine months of fiscal 2001 when
compared with the same periods of fiscal 2000, primarily due to higher average
daily payroll tax funds invested. The Company expects interest income from
payroll tax funds invested to decrease as a result of declining interest rates.
Cost of Providing Services
Cost of providing services increased 58.8% in the third quarter and 54.1%
in the first nine months of fiscal 2001 when compared with the same periods of
fiscal 2000. These expenses increased as a percentage of revenue to 46.6% and
50.4% in the third quarter and first nine months of fiscal 2001 from 43.0% and
48.6% in the third quarter and first nine months of fiscal 2000. The increases
in absolute dollars were primarily due to increased personnel in operations and
account management resulting from an increase in the client base and hiring of
additional personnel to support the Company's new service offering, Shared
Services. The increases as a percentage of revenue were due primarily to
additional expenses incurred as a result of the new service offering.
General and Administrative
General and administrative expenses increased 60.3% in the third quarter
and 59.3% in the first nine months of fiscal 2001 when compared with the same
periods of fiscal 2000. These expenses increased as a percentage of revenue to
14.8% and 16.4% in the third quarter and first nine months of fiscal 2001 from
13.5% and 15.2% in the third quarter and first nine months of fiscal 2000. The
increases in absolute dollars were primarily attributable to investment in the
Company's information technology infrastructure and the hiring of additional
management and administrative personnel to support Shared Services and the
Company's growth. The increases as a percentage of revenue were due primarily to
additional expenses incurred as a result of the new service offering.
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Research and Development
Research and development expenses increased 50.2% in the third quarter and
55.2% in the first nine months of fiscal 2001 when compared with the same
periods of fiscal 2000. These expenses increased as a percentage of revenue to
10.9% and 12.8% in the third quarter and first nine months of fiscal 2001 from
10.6% and 12.2% in the third quarter and first nine months of fiscal 2000. The
increases in absolute dollars were primarily a result of additional personnel
and, to a lesser extent, the development of enhancements and new features to the
Company's existing services. Capitalized software development costs were $1.6
million and $4.7 million for the third quarter and first nine months of fiscal
2001 and $1.7 million and $4.8 million for the same periods of fiscal 2000.
Client Acquisition Costs
Client acquisition costs increased 71.0% in the third quarter and 56.0% in
the first nine months of fiscal 2001 when compared with the same periods of
fiscal 2000. These expenses increased as a percentage of revenue to 44.9% and
46.6% in the third quarter and first nine months of fiscal 2001 from 38.6% and
44.4% in the third quarter and first nine months of fiscal 2000. The increases
in absolute dollars and as a percentage of revenue in fiscal 2001 were primarily
due to the additional personnel costs associated with new product and services
implementation, the additional investments made to expand the sales and services
implementation capabilities for Shared Services and, to a lesser extent,
expenses related to marketing.
Interest Expense
Interest expense increased as a percentage of revenue to 0.7% in the third
quarter and 0.6% in the first nine months of fiscal 2001 from 0.5% and 0.4% in
the third quarter and first nine months of fiscal 2000.
Interest Income and Other, Net
Interest and other income increased 29.0% in the third quarter and 21.1% in
the first nine months of fiscal 2001 when compared with the same periods of
fiscal 2000 and decreased as a percentage of revenue to 2.5% and 2.8% in the
third quarter and first nine months of fiscal 2001 from 2.8% and 3.5% in the
third quarter and first nine months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
a combination of sales of equity and mezzanine securities, private debt and bank
borrowings. The Company raised approximately $27.0 million from its initial
public offering in September 1997 and approximately $80.7 million from its
secondary public offering in September 1998. On August 1, 2000, the Company
authorized, issued and sold 1,132,075 shares of 6.9% Preferred Stock at $26.50
per share, raising approximately $30 million.
At March 31, 2001, the Company had approximately $40.3 million of cash and
cash equivalents, $21.7 million of short-term investments and $3.1 million of
long-term investments, as well as a $20.0 million secured revolving line of
credit, which expires in June 2001. At March 31, 2001, the Company had no
outstanding borrowings under the line of credit.
Net cash used in operating activities decreased $4.9 million for the first
nine months of fiscal 2001 when compared to the same period of fiscal 2000. The
decrease in net cash used in operating activities for the first nine months of
fiscal 2001 was primarily attributable to increases in accounts payable, accrued
liabilities, deferred revenue and depreciation and amortization and decreases in
accounts receivable, partially offset by an increase in net loss and increases
in prepaid expenses and other current assets.
Net cash used in investing activities increased $4.9 million for the first
nine months of fiscal 2001 when compared to the same period of fiscal 2000. The
increase in net cash used in investing activities related primarily to the
purchase of securities, partially offset by decreases in the purchase of
equipment, furniture and fixtures.
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Net cash provided by financing activities increased $36.9 million for the
first nine months of fiscal 2001 when compared to the same period of fiscal
2000. Net cash provided by financing activities for fiscal 2001 related
primarily to $30.0 million of proceeds from the issuance of Preferred Stock and
$6.1 million of proceeds from the issuance of common stock upon the exercise of
stock options.
The Company believes that its existing cash and cash equivalent 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. The Company may also
utilize cash to acquire or invest in complementary businesses or to obtain the
right to use complementary technologies, although the Company does not have any
pending plans to do so. The Company may also sell additional equity or debt
securities or obtain additional credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Aspects of SAB 101 relevant to the Company primarily
concern the timing of the recognition of revenue and certain expenses related to
arrangements that involve the receipt of nonrefundable, up-front fees. SAB 101
requires that in particular situations, the nonrefundable fees and certain
associated costs be recognized over the contractual term or average life of the
underlying arrangement. SAB 101 will be effective for ProBusiness in the fourth
quarter of fiscal year 2001. The Company will restate its financial statements
for the prior quarters of fiscal year 2001 and the Company believes that
implementation of SAB 101 will not have a material impact on the Company's
previous financial results. However, the Company expects that implementation of
SAB 101 will likely adversely affect the Company's revenue and may adversely
affect the results of operations in the current and future periods. However, the
Company does not expect SAB 101 to have an impact on cash flow.
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, service offerings and operations to
new geographic regions. As of March 31, 2001, the Company had an accumulated
deficit of $89.0 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 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. In connection with the expansion of
new service offerings, the Company incurs substantial operating costs associated
with hiring the management and operational infrastructure. These costs are
incurred in advance of revenues and the Company may not be able to recoup the
costs. 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 consolidated 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 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 third 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
9
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begin services in the third quarter. The Company's quarterly operating results
have in the past varied 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, benefits
administration and Shared 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, are relatively fixed in advance of any particular quarter. As a result,
the Company may not be able to timely cut costs in response to any decrease in
revenue. The Company's agreements with its clients generally contain penalties
for cancellation. However, 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 quarters. As the Company secures
larger clients, the time and expense 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. Interest rates have recently declined and the declines will adversely
effect the Company's future results. 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. The United States is currently experiencing an economic slowdown. As
a result, the number of employees of the Company's clients may decrease and the
length of the Company's sales process is likely to increase. 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.
Implementation of Staff Accounting Bulletin No. 101. The Company is
required to implement Staff Accounting Bulletin No. 101 in the fourth quarter of
fiscal year 2001. The implementation of SAB 101 will affect the timing of the
recognition of revenue and certain expenses related to arrangements that involve
the receipt of nonrefundable, up-front fees. As a result of the implementation
of SAB 101, the amount of upfront implementation revenue that the Company will
be able to recognize will materially decrease. The Company cannot be certain
that it will be able to accurately predict the impact of SAB 101 on the current
and future quarters, however, the Company expects that SAB 101 will likely have
a adverse effect on its revenue recognition and may have an adverse effect on
its results of operations. However, the Company does not expect SAB 101 to have
an impact on cash flow.
Risks Associated with Strategic Acquisitions and Investments. The Company
has no current agreements or negotiations under way 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. Any 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, Benefits Administration Service
and Shared Services. The Company's payroll tax filing service is subject to
various risks resulting from errors and omissions in filing client payroll 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
payroll tax funds. The Company processes the data received from the client and
remits the funds along with a payroll tax return to the appropriate tax
authorities when due. Tracking, processing and paying such payroll tax
liabilities is complex. Errors and omissions have occurred in the past and may
occur in the future in connection with such service.
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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 payroll
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 exiting clients and its ability to gain new clients. The Company's 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 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 federal government
is currently contemplating tax cuts proposed by President Bush. These tax cuts,
if approved and enacted, would reduce the amount of collected but unremitted
payroll tax funds and, correspondingly, the interest the Company could earn on
these funds. 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 continual changes that could reduce
or eliminate the need for benefits administration services. The Company's Shared
Services offering is subject to various risks resulting from errors and
omissions in processing the data for a client's payroll. The Company processes
data received from employees and employers. Failure by the Company to process
this data accurately could result in errors or omissions in filing the client's
payroll tax returns and paying tax liabilities owed to tax authorities on behalf
of clients.
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 damage client relations and 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 in short-term, top-tier, high-quality financial
instruments such as overnight U.S. government direct and agency obligations,
commercial paper and institutional money market funds, which are subject to
credit risks and interest rate fluctuations. 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 payroll tax funds
represents a significant portion of the Company's revenue. 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. However, the Company's swap agreements do not protect the Company
from all interest rate risks and the Company's future results will be adversely
affected as a result of recent declines in interest rates. Under certain
circumstances, if interest rates rise, the Company would have payment
obligations under its interest rate swap agreements, that may not be offset by
interest earned by the Company on deposited funds. Any 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. 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.
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Management of Growth. The Company's business has grown significantly in
size and complexity over the past five 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.
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. and Ceridian Corporation, 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. Additionally, a significant portion of the Company's
historic revenue growth has resulted from new client acquisition, and a majority
of the Company's new clients historically have come from the Company's
competitors. If the Company does not have the same success in winning clients
from its competitors in the future, the Company would have to rely more on
clients that are moving from in-house operations to outsourcing. This could
increase the Company's sales cycle and its client acquisition costs.
Risk Associated with the Development and Introduction of New or Enhanced
Services. 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 in a short period of time. 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 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. The Company has
spent and will continue to spend significant time and money in the development
of its integrated service delivery platform, Golden Gate(TM) and in the
development and staffing of its outsourced employee administrative services
offering, Shared Services. The Company cannot be certain that these services
will be successfully developed. Even if they are successfully developed, the
Company cannot be certain that they will be accepted by new or existing clients.
In addition, prior to the rollout of Golden Gate(TM), new clients may postpone
their purchase of the Company's
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existing products and services in anticipation of the new service delivery
platform. In addition, some of the Company's existing clients have requested to
switch to the new platform. If the Company is unable to timely and successfully
introduce, market and deploy the Golden Gate(TM) application platform or its
Shared Services offering, the Company's business, financial condition and
results of operations could be materially adversely affected.
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 pick
up or deliver the paychecks from the Company to its clients in a timely manner
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 in a timely manner 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; Electric Power Interruptions; 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 backup payroll center. The Company's Shared Services
operations are conducted solely in Bothell, 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. In addition, the Company has developed business
continuity plans for each of the Company's mission-critical business units.
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. The Company's facilities in the
State of California are currently subject to electrical blackouts as a
consequence of a shortage of available electrical power. These blackouts are
expected to increase in frequency and severity, and they could disrupt the
operations of the Company's affected facilities. The Company has already
experienced a blackout at one of its facilities and expects to experience
additional blackouts in the future. The Company cannot be certain the
precautions it 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, including a
loss of data, that 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 depends 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. If one or more of the Company's key employees resigns
from the Company to join a competitor or to form a competitor, the loss of such
personnel and any resulting loss of existing or potential clients to any such
competitor could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event of the loss of any
key personnel, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of its technical knowledge,
practices, procedures or client lists by a former employee or that such
disclosure or use would not have a material adverse effect on the Company's
business, financial condition and results of operations.
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
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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. 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 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.
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, management attention may be
diverted 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 has been and is likely to continue 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, general market conditions, 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.
Risk Associated with Control by Principal Stockholders. As of March 31,
2001, the Company's directors and executive officers, and its principal
stockholders, together controlled approximately 32.0% of the Company's voting
stock. If these stockholders acted or voted together, they would have the power
to exercise a significant influence over the election of the Company's directors
and other matters requiring stockholder approval, including the approval of
significant corporate transactions. In addition, this concentration of ownership
may delay or prevent a change in control of the Company, even when a change may
be in the best interests of its stockholders. In addition, the interests of
these stockholders may not always coincide with the interest of the Company or
the interests of other stockholders.
Risk Associated with Redeemable Convertible Preferred Stock. In August 2000
the Company sold 1,132,075 shares of 6.9% Senior Convertible Preferred Stock.
The holders of the Preferred Stock are entitled to be paid $26.50 per share
before any amounts may be paid to holders of ProBusiness Common Stock in the
event of a merger, acquisition or liquidation of the Company. The holders of the
Preferred Stock are entitled to receive cumulative dividends at an annual rate
of 6.9% in the form of additional shares of Preferred Stock.
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Therefore, the longer the Preferred Stock is outstanding, the more dilution will
be experienced by holders of the Company's common stock.
Risk Associated with Charter Documents and Delaware Law. Provisions of the
Company's certificate of incorporation, bylaws and Delaware law could make it
more difficult for a third party to acquire the Company, even if doing so would
be of benefit to its stockholders. In particular, the Company's certificate of
incorporation provides for three classes of directors. Each director in each
class is elected for a three-year term, and a different class is elected each
year. These provisions make it difficult for a third party to gain control of
the Company's board of directors.
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; delays in or unsuccessful development of the Golden Gate(TM)
service delivery platform and the Shared Services product offering; the extent
and timing of market acceptance of these new products; the decline of interest
rates; the Company's ability to minimize the impact of interest rate
fluctuations; the Company's ability to predict the impact of SAB 101 and
minimize the impact of SAB 101 on the Company's financial condition or results
of operations; continued client acquisition costs incurred in advance of
revenues; 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; the Company's ability to develop its
financial and managerial controls and systems; the opening of additional
facilities; the sufficiency of the Company's back-up facilities and disaster and
electric power interruptions recovery procedures; the Company's ability to
develop or acquire new technologies; the Company's ability to attract and retain
experienced employees; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 2001, the Company held certain derivative based products to
mitigate interest rate fluctuation risk. The collateral exposure associated with
the Company's various interest rate swap agreements are limited by interest rate
caps held by the Company. As of March 31, 2001, the Company held two interest
rate cap agreements with expiration dates of April 2002 and January 2003, both
with cap rates of 8.0%. The aggregate fair value of these cap agreements at
March 31, 2001 was $78,754.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES
(b) On August 1, 2000, the Company sold 1,132,075 shares of 6.9% Senior
Redeemable Convertible Preferred Stock ("Preferred Stock") for an aggregate
purchase price of $30 million to affiliates of General Atlantic Partners, LLC at
$26.50 per share. The investors consisted of General Atlantic Partners, 70,
L.P., GAP Coinvestment Partners II, L.P. and GapStar, LLC (together, "GAP").
David Hodgson, a managing member of General Atlantic Partners, LLC, is a member
of the Company's Board of Directors. The Preferred Stock ranks senior to
ProBusiness common stock. The holders of the Preferred Stock are entitled to
receive cumulative dividends at an annual rate of 6.9% in the form of additional
shares of Preferred Stock. Dividends are payable quarterly on the first day of
October, January, April and July, commencing October 1, 2000. The holders of the
Preferred Stock are entitled to be paid an amount equal to $26.50 per share
before any amounts are paid to holders of ProBusiness common stock in the event
of a merger, acquisition or liquidation of the Company. The Preferred Stock may
be converted at any time by the holders into shares of ProBusiness common stock
at a rate of one share of common stock for each share of Preferred Stock,
subject to adjustment. The Company has the option to convert all of the
Preferred Stock to common stock on August 1, 2005, if the then current market
price of ProBusiness common stock is $26.50 or more per share, at a rate of one
share of common stock for each share of Preferred Stock. If, after August 1,
2003, the market price of ProBusiness common stock is $39.00 or more per share,
the Company may, at its option, redeem any or all of the outstanding Preferred
Stock at $26.50 per share. The conversion rates and dollar amounts in the
Preferred Stock terms are subject to adjustment for ProBusiness stock splits,
stock dividends and recapitalizations, among other things, after the issue date
of the Preferred Stock. The holders of the Preferred Stock vote with the
Company's common shareholders as a single class, except that as long as GAP or
other affiliates of General Atlantic Partners, LLC own a majority of the
Preferred Stock, the holders of Preferred Stock are entitled to elect one
director to the Company's Board of Directors.
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) Exhibits.
See exhibit list following signature page.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
2001.
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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: May 15, 2001
PROBUSINESS SERVICES, INC.
(Registrant)
/s/ THOMAS H. SINTON
--------------------------------------
President and Chief Executive Officer
/s/ STEVEN E. KLEI
--------------------------------------
Executive Vice President, Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
FOOTNOTE NUMBER EXHIBIT 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.
(4) 2.3 Agreement and Plan of Reorganization, dated as of April 27,
1999, among ProBusiness Services, Inc., Runway Acquisition
Corp., Clemco, Inc. and certain other parties.
(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.
4.2(a) Amendment to Amended and Restated Registration Rights
Agreement, dated August 1, 2000, between Registrant, General
Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P.,
General Atlantic Partners 70, L.P., GAP Coinvestment
Partners II, L.P. and GapStar, LLC.
(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 July 31,
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.
(4) 4.9 Waiver and Amendment dated as of April 27, 1999, among
ProBusiness Services, Inc., General Atlantic Partners 39,
L.P., GAP Coinvestment Partners, L.P. and certain
stockholders.
(4) 4.10 Registration Rights Agreement dated as of April 27, 1999,
between ProBusiness Services, Inc. and certain stockholders.
(5) 4.11 Certificate of Designation of 6.9% Senior Convertible
Preferred Stock dated August 1, 2000.
(5) 10.1 6.9% Senior Convertible Preferred Stock Purchase Agreement
dated as of August 1, 2000 between ProBusiness Services,
Inc. and General Atlantic Partners 70, L.P., GAP
Coinvestment Partners II, L.P. and GapStar, LLC.
(3) 10.28 Sublease agreement, dated December 9, 1998, between
Registrant and Maritz, Inc.
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(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, 1997.
(3) Incorporated by reference from the Registrant's report on Form 10-Q for the
period ended December 31, 1998.
(4) Incorporated by reference from the Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on May 12, 1999.
(5) Incorporated by reference from the Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on August 16, 2000.