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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 DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22227
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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)
------------------------
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 February 8, 2001, there were 23,937,825 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 December 31,
2000 and June 30, 2000.................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2000 and 1999................... 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK..... 18
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........................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 20
SIGNATURES.................................................. 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 47,199 $ 27,585
Short-term investments.................................... 11,720 13,336
---------- ----------
Total cash, cash equivalents and short-term investments..... 58,919 40,921
Restricted cash........................................... -- 4,616
Accounts receivable, net of allowances.................... 15,997 10,769
Prepaid expenses and other current assets................. 6,744 5,304
---------- ----------
81,660 61,610
Payroll tax funds invested................................ 1,236,990 1,054,903
---------- ----------
Total current assets........................................ 1,318,650 1,116,513
Long-term investments....................................... 3,074 1,999
Equipment, furniture and fixtures, net...................... 42,207 40,535
Other assets................................................ 32,267 23,174
---------- ----------
Total assets................................................ $1,396,198 $1,182,221
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities, current portion of
capital lease obligations and deferred revenue.......... $ 32,621 $ 21,431
Payroll tax funds collected but unremitted................ 1,236,990 1,054,903
---------- ----------
Total current liabilities................................... 1,269,611 1,076,334
Long-term deferred revenue.................................. 13,061 13,061
Capital lease obligations, less current portion............. 215 376
Stockholders' equity........................................ 113,311 92,450
---------- ----------
Total liabilities and stockholders' equity.................. $1,396,198 $1,182,221
========== ==========
See accompanying notes.
3
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
Service Fees........................................ $ 26,597 $16,996 $ 49,478 $ 32,603
Interest income from payroll tax funds invested..... 8,473 6,077 16,413 11,424
-------- ------- -------- --------
Total Revenue..................................... 35,070 23,073 65,891 44,027
Operating expenses:
Cost of providing services.......................... 18,552 11,938 34,970 23,086
General and administrative.......................... 6,067 3,830 11,473 7,225
Research and development............................ 4,279 2,496 9,241 5,849
Client acquisition costs............................ 16,606 11,214 31,463 21,272
-------- ------- -------- --------
Total operating expenses.......................... 45,504 29,478 87,147 57,432
Loss from operations.................................. (10,434) (6,405) (21,256) (13,405)
Interest expense...................................... (194) (33) (378) (162)
Interest income and other, net........................ 1,046 783 2,055 1,752
-------- ------- -------- --------
Net loss.............................................. $ (9,582) $(5,655) $(19,579) $(11,815)
======== ======= ======== ========
Basic and diluted net loss per share.................. $ (0.40) $ (0.24) $ (0.83) $ (0.51)
======== ======= ======== ========
Shares used in computing basic and diluted net loss
per share........................................... 23,739 23,163 23,664 23,014
======== ======= ======== ========
See accompanying notes.
4
PROBUSINESS SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(19,579) $(11,815)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 6,415 5,256
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (5,228) (4,858)
Prepaid expenses and other current assets............. (1,808) (530)
Other assets.......................................... (285) (525)
Accounts payable, accrued liabilities and deferred
revenue............................................. 11,235 2,764
-------- --------
Net cash used in operating activities....................... (9,250) (9,708)
INVESTING ACTIVITIES
Sale of securities.......................................... 541 --
Purchases of equipment, furniture and fixtures.............. (7,541) (11,549)
Capitalization of software development costs................ (3,147) (3,117)
-------- --------
Net cash used in investing activities....................... (10,147) (14,666)
FINANCING ACTIVITIES
Decrease in restricted cash................................. 4,616 --
Principal payments on capital lease obligations............. (471) (465)
Proceeds from issuance of preferred stock................... 29,995 --
Proceeds from issuance of common stock...................... 4,871 3,395
-------- --------
Net cash provided by financing activities................... 39,011 2,930
-------- --------
Net increase/(decrease) in cash and cash equivalents........ 19,614 (21,444)
Cash and cash equivalents, beginning of period.............. 27,585 73,575
-------- --------
Cash and cash equivalents, end of period.................... $ 47,199 $ 52,131
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 162 $ 129
======== ========
Issuance of convertible preferred stock dividend............ $ 346 $ --
======== ========
FAS 133 Other comprehensive income.......................... $ 5,574 $ --
======== ========
See accompanying notes.
5
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 has been 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 December 31, 2000 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 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
852,000 and 1,132,000 common equivalent shares related to outstanding stock
options and warrants not included above (using the treasury stock method) for
the first six 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
6
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND ACCOUNTING BULLETINS
(CONTINUED)
income until the hedged item is recognized in earnings. Any ineffective portion
of a derivative's change in fair value will be immediately 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 December 31,
2000, the Company reported a net asset of $5.6 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. STOCKHOLDER'S EQUITY
On August 1, 2000, the Company authorized, issued and sold 1,132,075 shares
of 6.9% Senior Convertible Preferred Stock ("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.
The holders of the Preferred Stock vote, as a single class, with the
Company's common shareholders, 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
December 31, 2000, a Partner of GAP is a member of the Company's current Board
of Directors.
7
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, which
includes front-office administration for payroll, human resources and benefits
administration and a comprehensive employee service center. 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
December 31, 2000 the client base for payroll and payroll tax processing
services is approximately 628 and 154, respectively, and the average size of the
Company's payroll clients is 2,200 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 December 31, 2000, the Company had an accumulated deficit of
$81.7 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.
8
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
ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
Service fees...................................... 75.8% 73.7% 75.1% 74.1%
Interest income from payroll tax funds invested... 24.2% 26.3% 24.9% 25.9%
----- ----- ----- -----
Total revenue....................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services........................ 52.9% 51.7% 53.1% 52.4%
General and administrative........................ 17.3% 16.7% 17.4% 16.4%
Research and development.......................... 12.2% 10.8% 14.0% 13.3%
Client acquisition costs.......................... 47.4% 48.6% 47.7% 48.3%
----- ----- ----- -----
Total operating expenses............................ 129.8% 127.8% 132.2% 130.4%
Loss from operations................................ (29.8)% (27.8)% (32.2)% (30.4)%
Interest expense.................................... (0.5)% (0.1)% (0.6)% (0.4)%
Interest income and other, net...................... 3.0% 3.4% 3.1% 4.0%
----- ----- ----- -----
Net loss............................................ (27.3)% (24.5)% (29.7)% (26.8)%
===== ===== ===== =====
REVENUE
Service fee revenue increased 56.5% in the second quarter and 51.8% in the
first six 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. Interest income from payroll tax funds invested
increased 39.4% in the second quarter and 43.7% in the first six months of
fiscal 2001 when compared with the same periods of fiscal 2000, primarily due to
higher average daily payroll tax funds invested.
COST OF PROVIDING SERVICES
Cost of providing services increased 55.4% in the second quarter and 51.5%
in the first six months of fiscal 2001 when compared with the same periods of
fiscal 2000. These expenses increased as a percentage of revenue to 52.9% and
53.1% in the second quarter and first six months of fiscal 2001 from 51.7% and
52.4% in the second quarter and first six months of fiscal 2000. The increase in
absolute dollars was 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 are due primarily to
additional expenses incurred as a result of the new service offering.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 58.4% in the second quarter
and 58.8% in the first six months of fiscal 2001 when compared with the same
periods of fiscal 2000. These expenses increased as a percentage of revenue to
17.3% and 17.4% in the second quarter and first six months of fiscal 2001 from
16.7% and 16.4% in the second quarter and first six months of fiscal 2000. The
increases in absolute dollars and percentage of revenue were primarily
attributable to the hiring of
9
additional management and administrative personnel to support the new service
offering and the Company's growth.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 71.4% in the second quarter and
58.0% in the first six months of fiscal 2001 when compared with the same periods
of fiscal 2000. These expenses increased as a percentage of revenue to 12.2% and
14.0% in the second quarter and first six months of fiscal 2001 from 10.8% and
13.3% in the second quarter and first six months of fiscal 2000. The increase in
absolute dollars was 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 $1.9 million and
$3.1 million for the second quarter and first six months of fiscal 2001 and
$1.6 million and $3.1 million for the same periods of fiscal 2000.
CLIENT ACQUISITION COSTS
Client acquisition costs increased 48.1% in the second quarter and 47.9% in
the first six months of fiscal 2001 when compared with the same periods of
fiscal 2000. These expenses decreased as a percentage of revenue to 47.4% and
47.7% in the second quarter and first six months of fiscal 2001 from 48.6% and
48.3% in the second quarter and first six months of fiscal 2000. The increases
in absolute dollars in fiscal 2001 were primarily due to the additional
personnel costs associated with new product and services implementation, and to
a lesser extent, to expenses related to marketing.
INTEREST EXPENSE
Interest expense increased as a percentage of revenue to 0.5% in the second
quarter and 0.6% in the first six months of fiscal 2001 from 0.1% and 0.4% in
the second quarter and first six months of fiscal 2000.
INTEREST INCOME AND OTHER, NET
Interest and other income increased 33.6% in the second quarter and 17.3% in
the first six months of fiscal 2001 when compared with the same periods of
fiscal 2000 and decreased as a percentage of revenue to 3.0% and 3.1% in the
second quarter and first six months of fiscal 2001 from 3.4% and 4.0% in the
second quarter and first six months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of sales of equity 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% Senior Convertible Preferred Stock at $26.50
per share, raising approximately $30 million.
At December 31, 2000, the Company had approximately $47.2 million of cash
and cash equivalents, $11.7 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 April 2001. At December 31, 2000, the Company had no
outstanding borrowings under the line of credit.
Net cash used in operating activities decreased $0.5 million for the first
six 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 six months of
fiscal 2001 was primarily attributable to increases in accounts payable,
10
accrued liabilities, deferred revenue and depreciation and amortization,
partially offset by an increase in net loss and increases in prepaid expenses
and other current assets.
Net cash used in investing activities decreased $4.5 million for the first
six months of fiscal 2001 when compared to the same period of fiscal 2000. The
decrease in net cash used in investing activities related primarily to decreases
in the purchase of equipment, furniture and fixtures and to a lesser extent, the
sale of securities.
Net cash provided by financing activities increased $36.1 million for the
first six 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 senior convertible preferred
stock and a decrease in restricted cash.
The Company believes that 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 believes that SAB 101 will not have a
material impact on the Company's historical financial condition or results of
operations; however, there can be no assurance that SAB 101 would not have a
material impact on revenue recognition or results of operations in the future.
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 December 31, 2000, the Company had an accumulated
deficit of $81.7 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 are not scalable until the growth of clients
utilizing such services. 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
11
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
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. 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 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. The Company
has no current agreements or negotiations under way other than those described
above 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. 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, 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
12
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 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 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 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 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, that 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. A default by
13
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 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.
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. 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
14
time and expense in the development of its next generation 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,
new clients may postpone their purchase of the Company's existing products and
services in anticipation of the new technology platform. If the Company is
unable to timely and successfully introduce, market and deploy the GOLDEN GATE
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 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. In the event these blackouts continue or increase in severity, they could
disrupt the operations of the Company's affected facilities. 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 or other loss 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
15
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. 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 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 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.
RISK ASSOCIATED WITH CONTROL BY PRINCIPAL STOCKHOLDERS. As of December 31,
2000, 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
16
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 CONVERTIBLE PREFERRED STOCK. In August 2000 the
Company sold 1,132,075 shares of 6.9% Senior Convertible Preferred Stock. The
holders of the Convertible 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 Convertible Preferred Stock are entitled to receive cumulative dividends at
an annual rate of 6.9% in the form of additional shares of Convertible Preferred
Stock. Therefore, the longer the Convertible 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; 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; delays in or unsuccessful development of the
GOLDEN GATE integrated platform and the Shared Services product offering; the
extent and timing of market acceptance of these new products; 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 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; the Company's ability to minimize
the future impact of SAB 101 on the Company's financial condition or results of
operations; 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
17
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 various interest rate swap agreements are limited by interest rate caps held
by the Company. As of December 31, 2000, 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 December 31,
2000 was $176,500.
18
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
Convertible Preferred Stock ("Convertible 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 Convertible Preferred
Stock ranks senior to ProBusiness common stock. The holders of the
Convertible Preferred Stock are entitled to receive cumulative dividends at
an annual rate of 6.9% in the form of additional shares of Convertible
Preferred Stock. Dividends are payable quarterly on the first day of
October, January, April and July, commencing October 1, 2000. The holders of
the Convertible 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 Convertible Preferred Stock may be converted at any time by the
holder into shares of ProBusiness common stock at a rate of one share of
common stock for each share of Convertible Preferred Stock, subject to
adjustment. The Company has the option to convert all of the Convertible
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 Convertible 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 Convertible Preferred Stock at $26.50 per
share. The conversion rates and dollar amounts in the Convertible Preferred
Stock terms are subject to adjustment for ProBusiness stock splits, stock
dividends and recapitalizations, among other things, after the issue date of
the Convertible Preferred Stock. The holders of the Convertible 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 Convertible Preferred Stock, the holders of Convertible
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
(a) The Company held its Annual Meeting of Stockholders (the "Annual Meeting")
on November 16, 2000.
(b) At the Annual Meeting, the stockholders elected Ronald W. Readmond and
Thomas P. Roddy as Class III Directors to serve for terms of three years.
(c) The stockholders of the Company voted on the following matters at the Annual
Meeting:
1. the election of Class III directors to serve for terms of three years;
and
2. ratification of the appointment of Ernst & Young LLP as independent
accountants of the Company for the fiscal year ending June 30, 2001.
19
Votes were cast for the election of Ronald W. Readmond and Thomas P. Roddy
as Class III directors as follows:
VOTES FOR VOTES WITHHELD
---------- --------------
Ronald W. Readmond 20,216,164 56,430
Thomas P. Roddy 20,199,199 73,395
The appointment of Ernst & Young LLP as auditors for fiscal year ending
June 30, 2001 was approved as follows:
20,242,054 votes for approval;
30,281 votes against; and
259 abstentions.
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 December 31,
2000.
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: February 14, 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
21
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.
(6) 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.
- ------------------------
(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.
(6) Incorporated by reference from the Registrant's report on Form 10-K filed
with the Securities and Exchange Commission on September 28, 2000.