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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2976066
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(Address of principal executive offices)
(925) 737-3500
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of May 8, 2000, there were 23,571,422 shares of the Registrant's Common
Stock outstanding.
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PROBUSINESS SERVICES, INC.
INDEX
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<CAPTION>
PAGE NO.
---------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999......................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended March 31, 2000 and 1999....... 4
Condensed Consolidated Statement of Stockholders' Equity for
the nine months ended March 31, 2000...................... 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 2000 and 1999...................... 6
Notes to Condensed Consolidated Financial Statements........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 9
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........................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 19
SIGNATURES.................................................. 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 2000 JUNE 30, 1999
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 49,504 $ 73,575
Accounts receivable, net of allowances.................... 8,110 4,599
Prepaid expenses and other current assets................. 5,409 3,777
---------- --------
63,023 81,951
Payroll tax funds invested................................ 1,252,771 580,452
---------- --------
Total current assets........................................ 1,315,794 662,403
Equipment, furniture and fixtures, net...................... 39,624 31,024
Other assets................................................ 21,292 16,997
---------- --------
Total assets................................................ $1,376,710 $710,424
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities, current portion of
capital lease obligations and deferred revenue.......... $ 32,827 $ 29,894
Payroll tax funds collected but unremitted................ 1,252,771 580,452
---------- --------
Total current liabilities................................... 1,285,598 610,346
Capital lease obligations, less current portion............. 420 548
Stockholders' equity........................................ 90,692 99,530
---------- --------
Total liabilities and stockholders' equity.................. $1,376,710 $710,424
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................ $30,018 $19,959 $ 74,045 $ 50,316
Operating expenses:
Cost of providing services........................... 12,918 9,150 36,004 25,186
General and administrative........................... 4,064 2,745 11,289 7,968
Research and development............................. 3,194 2,981 9,043 7,250
Client acquisition costs............................. 11,560 8,487 32,832 21,602
------- ------- -------- --------
Total operating expenses............................... 31,736 23,363 89,168 62,006
Loss from operations................................... (1,718) (3,404) (15,123) (11,690)
Interest expense....................................... (148) (288) (310) (534)
Interest income and other, net......................... 838 1,076 2,590 2,066
------- ------- -------- --------
Net loss............................................... $(1,028) $(2,616) $(12,843) $(10,158)
======= ======= ======== ========
Basic and diluted net loss per share................... $ (0.04) $ (0.12) $ (0.56) $ (0.50)
======= ======= ======== ========
Shares used in computing basic and diluted net loss per
share................................................ 23,372 21,722 23,113 20,454
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------------- PAID-IN ACCUMULATED FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS EQUITY
---------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999... 22,942,362 $23 $148,284 $(47,896) $(881) $99,530
Exercise of stock options... 284,119 -- 1,980 -- -- 1,980
Issuance of Stock under the
Employee Stock Purchase
Plan...................... 228,011 -- 1,905 -- -- 1,905
Exercise of warrants........ -- -- 120 -- -- 120
Net loss and comprehensive
loss...................... -- -- -- (12,843) -- (12,843)
---------- --- -------- -------- ----- -------
Balances at March 31,
2000...................... 23,454,492 $23 $152,289 $(60,739) $(881) $90,692
========== === ======== ======== ===== =======
</TABLE>
See notes to condensed consolidated financial statements.
5
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PROBUSINESS SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(12,843) $(10,158)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 7,792 5,189
Accretion of discount on redeemable convertible
preferred stock....................................... -- 96
Issuance of warrants.................................... -- 93
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (3,511) (144)
Prepaid expenses and other current assets............. (1,632) (2,153)
Other assets.......................................... (383) (1,793)
Accounts payable, accrued liabilities, current portion
of capital lease obligations and deferred revenue... 3,460 5,977
-------- --------
Net cash used in operating activities....................... (7,117) (2,893)
-------- --------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.............. (15,521) (12,665)
Capitalization of software development costs................ (4,783) (3,145)
-------- --------
Net cash used in investing activities....................... (20,304) (15,810)
-------- --------
FINANCING ACTIVITIES
Repayments under long term debt and notes payable........... -- (323)
Proceeds from long-term debt and notes payable.............. -- 451
Proceeds from notes receivable from stockholder............. -- 153
Principal payments on capital lease obligations............. (655) (965)
Proceeds from issuance of redeemable and convertible
preferred stock........................................... -- 5,045
Net proceeds from issuance of common stock.................. 4,005 83,161
-------- --------
Net cash provided by financing activities................... 3,350 87,522
-------- --------
Net increase (decrease) in cash and cash equivalents........ (24,071) 68,819
Cash and cash equivalents, beginning of period.............. 73,575 13,946
-------- --------
Cash and cash equivalents, end of period.................... $ 49,504 $ 82,765
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 310 $ 262
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of equipment, furniture and fixtures under
capital leases........................................ $ -- $ 283
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
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PROBUSINESS SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ProBusiness Services, Inc. ("ProBusiness" or the "Company") has prepared its
interim condensed consolidated financial statements without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
The information included in this report should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 1999 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 March 31, 2000 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
June 30, 2000 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 income (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 Company's calculation of
its 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 1,058,000 and 1,230,000 common equivalent shares related
to outstanding stock options and warrants not included above (using the treasury
stock method) for the first nine months of fiscal 2000 and 1999, respectively.
3. SEGMENT INFORMATION
The Company's Chief Operating Decision Maker, who is the President and Chief
Executive Officer, evaluates performance based on a measure of consolidated
gross margin, 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, 1999. 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. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101. "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on
the recognition, presentation, and disclosure of revenue in financial statements
of all public registrants. Any change in the Company's revenue recognition
policy resulting from the interpretation of SAB 101 would be reported as a
change in accounting principle in the quarter ending September 30, 2000. The
Company has not fully assessed the impact of the adoption of SAB 101.
7
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In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") and in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. SFAS 137 deferred for one year
the effective date of SFAS 133. The Company is required to adopt this statement
in its fiscal 2001 and has not determined the effect, if any, that adoption will
have on its consolidated financial position or consolidated results of
operations.
5. BUSINESS COMBINATIONS
In April 1999, the Company acquired Clemco, Inc. ("Conduit Parent"), the
parent and sole stockholder of Conduit Software, Inc., a provider of employee
relationship management applications. The merger was accounted for using the
pooling of interests method of accounting and as such the Company's historical
financial results for all dates and periods prior to the merger have been
restated to reflect the merger. In connection with the acquisition, the Company
issued 1,714,973 shares of its common stock to Conduit Parent's stockholders in
exchange for all of the outstanding common and preferred stock of Conduit
Parent. All outstanding options and warrants to purchase Conduit Parent's
capital stock were converted into options and warrants to purchase 82,987 shares
of ProBusiness common stock. In connection with the business combination, the
Company incurred direct transaction costs of approximately $3,500,000, which
consisted primarily of fees for investment banking, legal and accounting
services incurred in conjunction with the merger. Of this, $3,342,000 was paid
before March 31, 2000. The balance of $158,000 is included in current
liabilities on the consolidated balance sheet and is anticipated to be paid
within 12 months. The Company's consolidated results of operations include
adjustments to conform the presentation and accounting policies of Conduit
Parent to ProBusiness' accounting policies.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, THOSE SET FORTH UNDER "OVERVIEW" AND
"ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" INCLUDED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. THE FOLLOWING DISCUSSION ALSO SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY
REPORT.
OVERVIEW
ProBusiness Services, Inc. is a leading provider of employee outsourced
administrative services for large employers. The Company's primary service
offerings are payroll processing, payroll tax filing, benefits administration,
human resources software and self-service applications. The Company's
proprietary PC-based payroll system offers the cost-effective benefits of
outsourcing and high levels of client service, while providing the flexibility,
control, customization and integration of an in-house system.
The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. Since 1997, the Company has
experienced significant growth of its revenue, client base and average client
size. Revenue increased from $27.7 million in fiscal 1997 to $74.0 million in
fiscal 1999. From March 31, 1997 to March 31, 2000, the client base for payroll
processing services increased from approximately 320 clients to approximately
580 clients, while the average size of the Company's payroll clients increased
from approximately 900 employees to approximately 1,900 employees. The Company's
revenue growth is primarily due to continued growth in its 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 1999). The Company does not anticipate it
will sustain this rate of revenue growth in the future.
The establishment of new client relationships involves lengthy and extensive
sales and implementation processes. The sales process generally takes six 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 and operations in new geographic regions. As of
March 31, 2000, the Company had an accumulated deficit of $60.7 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 benefits administration operations and production
costs. General and administrative expenses consist primarily of personnel costs,
professional fees, and other overhead costs for finance, human resources,
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.
9
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services................................ 43.0% 45.8% 48.6% 50.1%
General and administrative................................ 13.5% 13.8% 15.2% 15.8%
Research and development.................................. 10.6% 14.9% 12.2% 14.4%
Client acquisition costs.................................. 38.5% 42.5% 44.3% 42.9%
----- ----- ----- -----
Total operating expenses.................................... 105.7% 117.1% 120.4% 123.2%
Loss from operations........................................ (5.7)% (17.1)% (20.4)% (23.2)%
Interest expense............................................ (0.5)% (1.4)% (0.4)% (1.1)%
Interest income and other, net.............................. 2.8% 5.4% 3.5% 4.1%
----- ----- ----- -----
Net loss.................................................... (3.4)% (13.1)% (17.3)% (20.2)%
===== ===== ===== =====
</TABLE>
REVENUE. Revenue increased 50.4% in the third quarter and 47.2% in the
first nine months of fiscal 2000 when compared with the same periods of fiscal
1999, primarily due to increases in the number and average size of the Company's
payroll and tax clients. Interest income earned on payroll tax funds invested
was $9.3 million and $20.7 million for the third quarter and for the first nine
months of fiscal 2000, respectively, as compared to $6.5 million and $13.5
million for the same periods of fiscal 1999. The increases were primarily
attributable to higher average daily payroll tax fund balances.
COST OF PROVIDING SERVICES. Cost of providing services increased by 41.2%
in the third quarter and 42.9% for the first nine months of fiscal 2000 when
compared with the same periods of fiscal 1999. Cost of providing services
decreased as a percentage of revenue to 43.0% and 48.6% for the third quarter
and first nine months of fiscal year 2000, respectively, from 45.8% and 50.1%
for the third quarter and first nine months of fiscal 1999, respectively. The
increases in absolute dollars were primarily due to increased personnel in
operations such as account management, production and payroll tax services
resulting from an increase in the payroll and tax client base, and to a lesser
extent, increases in personnel expenses related to the Company's benefits
administrative services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
48.1% in the third quarter and 41.7% for the first nine months of fiscal 2000
when compared with the same periods of fiscal 1999, and decreased as a
percentage of revenue to 13.5% and 15.2%, respectively, in the third quarter and
first nine months of fiscal 2000 from 13.8% and 15.8% in the third quarter and
first nine months of fiscal 1999, respectively. The increases in absolute
dollars were primarily due to hiring of additional management and administrative
personnel to support the Company's growth.
RESEARCH AND DEVELOPMENT. Research and development expenses ("R&D")
increased 7.1% in the third quarter of fiscal 2000 and 24.7% for the first nine
months of fiscal 2000 when compared with the same periods of fiscal 1999. R&D
decreased as a percentage of revenue to 10.6% and 12.2% in the third quarter and
first nine months of fiscal 2000, respectively, from 14.9% and 14.4% in the
third quarter and first nine months of fiscal 1999, respectively. The increases
in absolute dollars were primarily a result of increases in personnel costs
related to the accelerated development of the web-enabled portion of Golden
Gate, the Company's next-generation, fully-integrated product, and to costs
related to the development of enhancements to and new features for the Company's
existing services. Capitalized software development
10
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costs were $1.7 and $4.8 million for the third quarter and first nine months of
fiscal 2000, respectively, compared to $1.0 million and $3.0 million for the
third quarter and first nine months of fiscal 1999, respectively. In the third
quarter and first nine months of fiscal 2000, capitalized software costs
primarily included costs incurred for the development of Golden Gate. The
Company believes that software development costs are essential to technology and
product leadership and expects such costs to continue to be significant.
CLIENT ACQUISITION COSTS. Client acquisition costs increased 36.2% and
24.7% in the third quarter and first nine months of fiscal 2000, respectively,
when compared with the same periods of fiscal 1999. Client acquisition costs
decreased as a percentage of revenue to 38.5% in the third quarter of fiscal
2000 from 42.5% in the third quarter of fiscal 1999, and increased as a
percentage of revenue to 44.3% in the first nine months of fiscal 2000 from
42.9% in the first nine months of fiscal 1999. The increases in absolute dollars
and as a percentage of revenue for the first nine months of fiscal 2000 were
primarily attributable to additional investments made in an effort to capture
market share by expanding the Company's sales, implementation and marketing
workforce for payroll and national tax services.
INTEREST EXPENSE. Interest expense decreased 48.6% and 41.9% for the third
quarter and first nine months of fiscal 2000, respectively, when compared with
the same periods of fiscal 1999. Interest expense decreased as a percentage of
revenue to 0.5% and 0.4% for the third quarter and first nine months of fiscal
year 2000, respectively, from 1.4% and 1.1% for the third quarter and first nine
months of fiscal 1999, respectively. The decrease in absolute dollars for the
nine-month period was primarily due to a decrease in interest expense
attributable to capital leases.
INTEREST INCOME AND OTHER, NET. Interest income and other, net, decreased
22.1% in the third quarter and increased 25.4% for the first nine months of
fiscal 2000 when compared with the same periods of fiscal 1999. Interest income
and other, net, decreased as a percentage of revenue to 2.8% and 3.5% in the
third quarter and first nine months of fiscal 2000, respectively, from 5.4% and
4.1% in the third quarter and first nine months of fiscal 1999, respectively.
The decreases were primarily due to lower cash and investment balances when
compared to the same period of the previous year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's principal sources of liquidity included
$49.5 million of cash and cash equivalents and a secured $20 million revolving
line of credit which expires in December 2000. There were no outstanding
borrowings under the line of credit as of March 31, 2000.
Net cash used in operating activities was $7.1 million and $2.9 million for
the first nine months of fiscal 2000 and 1999, respectively. The net cash used
in operating activities for the first nine months of fiscal 2000 was primarily
attributable to the net loss for the period and an increase in net accounts
receivable, prepaid expenses and other assets, partially offset by depreciation
and amortization and an increase in accounts payable, accrued liabilities and
deferred revenue.
Net cash used in investing activities was $20.3 million and $15.8 million
for the first nine months of fiscal 2000 and 1999, respectively. The increase in
net cash used in investing activities related primarily to purchases of
equipment, furniture and fixtures and an increase in capitalization of software
development costs.
Net cash provided by financing activities was $3.4 and $87.5 million for the
first nine months of fiscal 2000 and 1999, respectively. Net cash provided by
financing activities for the first nine months of fiscal 1999 consisted of $80.7
million of net proceeds from the Company's follow-on public offering of common
stock in September 1998.
11
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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.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
OPERATING LOSSES; NEED TO COMMIT TO EXPENSE IN ADVANCE OF REVENUES. The
Company has experienced significant operating losses since its inception and
expects to incur significant operating losses in the future due to continued
client acquisition costs, investments in research and development and costs
associated with expanding its sales efforts and operations to new geographic
regions. As of March 31, 2000, the Company had an accumulated deficit of $60.7
million. The establishment of new client relationships involves lengthy and
extensive sales and implementation processes. The sales process generally takes
six to twelve months or longer, and the implementation process generally takes
an additional three to nine months or longer. In connection with the acquisition
of each new client, the Company incurs substantial client acquisition costs,
which consist primarily of sales and implementation expenses and, to a lesser
extent, marketing expenses. The Company's ability to achieve profitability will
depend in part upon its ability to attract and retain new clients, offer new
services and features and achieve market acceptance of new services. There can
be no assurance that the Company will achieve or sustain profitability in the
future. Failure to achieve or sustain profitability in the future could have a
material adverse effect on the Company's business, financial condition and
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 second fiscal
quarters as the Company increases personnel to acquire new clients and to
implement and provide services to such new clients, a large percentage of which
begin services in the third quarter.
The Company's quarterly operating results have in the past 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 and benefits
administrative services, price competition, a reduction in the number of
employees of its clients and general economic factors. Revenue from new clients
typically represents a significant portion of quarterly revenue in the third and
fourth fiscal quarters. A substantial majority of the Company's operating
expenses, particularly personnel and related costs, depreciation and rent, is
relatively fixed in advance of any particular quarter. The Company's agreements
with its clients generally do not have significant penalties for cancellation.
As a result, any decision by a client to delay or cancel implementation of the
Company's services or the Company's underutilization of personnel may cause
significant variations in operating results in a particular quarter and could
result in losses for such quarter. As the Company secures larger clients, the
time required for implementing the Company's services increases, which could
contribute to larger fluctuations in revenue. Interest income earned from
investing payroll tax funds, which is a significant portion of the Company's
revenue, is vulnerable to fluctuations in interest rates. In addition, the
Company's business may be affected by shifts in the general condition of the
economy, client staff reductions, strikes, acquisitions of its clients by other
companies and other downturns. There can be no assurance that the Company's
future revenue and results of operations will not vary substantially. It is
possible that in some future quarter the Company's results of operations will be
below the expectations of
12
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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. In
April 1999, the Company acquired Conduit Parent, a provider of Employee
Relationship Management applications, in a transaction accounted for using the
pooling of interests method of accounting. There can be no assurance that this
acquisition will be effectively assimilated into the Company's business. The
integration of Conduit Parent will place a burden on the Company's management.
Such integration is subject to risks commonly encountered in making such
acquisitions, including, among others, loss of key personnel of the acquired
company, the difficulty associated with assimilating the personnel and
operations of the acquired company, the potential disruption of the Company's
ongoing business, the maintenance of uniform standards, controls, procedures and
policies, and the impairment of the Company's reputation and relationships with
employees and clients. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with its acquisition of Conduit Parent.
The Company has no other 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 consolidated results of operations.
RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATIVE
SERVICES. The Company's payroll tax filing service is subject to various risks
resulting from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
transfer to the Company contributed employer and employee tax funds. The Company
processes the data received from the client and remits the funds along with a
tax return to the appropriate tax authorities when due. Tracking, processing and
paying such tax liabilities is complex. Errors and omissions have occurred in
the past and may occur in the future in connection with such service. The
Company is subject to large cash penalties imposed by tax authorities for late
filings or underpayment of taxes. To date, such penalties have not been
significant. However, there can be no assurance that any liabilities associated
with such penalties will not have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company's reserves or insurance for such penalties will be
adequate. In addition, failure by the Company to make timely or accurate tax
return filings or pay tax liabilities when due on behalf of clients may damage
the Company's reputation and could adversely affect its relationships with
existing clients and its ability to gain new clients.
The Company's payroll tax filing service is also dependent upon government
regulations, which are subject to continual changes. Failure by the Company to
implement these changes into its services and technology in a timely manner
would have a material adverse effect on the Company's business, financial
condition and consolidated results of operations. In addition, since a
significant portion of the Company's revenue is derived from interest earned
from investing on collected but unremitted payroll tax funds, changes in
policies relating to withholding federal or state income taxes or reduction in
the time allowed for taxpayers to remit payment for taxes owed to government
authorities would have a material adverse effect on the Company's business,
financial condition and consolidated results of operations.
The Company's benefits administrative 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
13
<PAGE>
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 administrative services are also dependent
upon government regulations, which are subject to continuous changes that could
reduce or eliminate the need for benefits administrative services. The Company
has access to confidential information and to client funds. As a result, the
Company is subject to potential claims by its clients for the actions of the
Company's employees arising from damages to the client's business or otherwise.
There can be no assurance that the Company's fidelity bond and errors and
omissions insurance will be adequate to cover any such claims. Such claims could
have a material adverse effect on the Company's business, financial condition
and consolidated results of operations.
INVESTMENT RISKS. The Company invests funds, including payroll tax funds
transferred to it by clients in short-term financial instruments such as
overnight repurchase agreements, commercial paper and 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 tax funds represents a
significant portion of the Company's revenues. As a result, the Company's
business, financial condition and results of operations are significantly
impacted by interest rate fluctuations. The Company enters into interest rate
swap agreements to minimize the impact of interest rate fluctuations. There can
be no assurance, however, that the Company's swap agreements will protect the
Company from all interest rate risks. Under certain circumstances, if interest
rates rise, the Company would have payment obligations under its interest rate
swap agreements, which may not be offset by interest earned by the Company on
deposited funds. A payment obligation under the Company's swap agreements could
have a material adverse effect on the Company's business, financial condition
and results of operations. 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 consolidated 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, invest in new equipment and make other capital
expenditures. In addition, the Company expects that it will need to develop
further its financial and managerial controls and reporting systems and
procedures to accommodate any future growth. Failure to expand any of the
foregoing areas in an efficient manner could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company established facilities for sales and implementation in New Jersey and in
Georgia and moved their administrative services center from Bellevue to Bothell,
Washington during fiscal 1999. Any inability to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and consolidated results of operations.
SUBSTANTIAL COMPETITION. The market for the Company's services is intensely
competitive, subject to rapid change and significantly affected by new service
introductions and other market activities of industry participants. The Company
primarily competes with several public and private payroll service providers,
such as Automatic Data Processing, Inc., Ceridian Corporation and
Paychex, Inc., as well as smaller, regional competitors. Many of these companies
have longer operating histories, greater financial, technical, marketing and
other resources, greater name recognition and a larger number of clients than
the Company. In addition, certain of these companies offer more services or
features than the Company and have processing facilities located throughout the
United States. The Company also competes with in-house employee services
departments and, to a lesser extent, banks and local payroll companies. With
respect to
14
<PAGE>
benefits administrative 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 administrative 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 consolidated results of operations.
RISKS ASSOCIATED WITH THE DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES; RISKS OF SOFTWARE DEFECTS. The technologies in which the Company has
invested to date are rapidly evolving and have short life cycles, which requires
the Company to anticipate and rapidly adapt to technological changes. In
addition, the Company's industry is characterized by increasingly sophisticated
and varied needs of clients, frequent new service and feature introductions and
emerging industry standards. The introduction of services embodying new
technologies and the emergence of new industry standards and practices can
render existing services obsolete and unmarketable. The Company's future success
will depend, in part, on its ability to develop or acquire advanced
technologies, enhance its existing services with new features, add new services
that address the changing needs of its clients, and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. Several of the Company's competitors invest substantially
greater amounts in research and development than the Company, which may allow
them to introduce new services or features before the Company. Even if the
Company is able to develop or acquire new technologies in a timely manner, it
may incur substantial costs in developing or acquiring such technologies and in
deploying new services and features to its clients, including costs associated
with acquiring in-process technology, amortization expenses related to
intangible assets and costs of additional personnel. If the Company is unable to
develop or acquire and successfully introduce new services and new features of
existing services in a timely or cost-effective manner, the Company's business,
financial condition and results of operations could be materially adversely
affected. Application software used by the Company may contain defects or
failures when introduced or when new versions or enhancements are released. The
Company has in the past discovered software defects in certain of its
applications, in some cases only after clients have used its systems. There can
be no assurance that future defects will not be discovered in existing or new
applications or releases. Any such occurrence could have a material adverse
effect upon the Company's business, financial condition and consolidated results
of operations.
DEPENDENCE ON THIRD-PARTY PROVIDERS. The Company depends on third-party
courier services to deliver paychecks to clients. The Company does not have any
formal written agreements with any of the courier services that it uses. Such
courier services have been in the past and may be in the future unable to 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
consolidated results of operations.
DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA. The Company currently
conducts substantially all of its payroll and payroll tax processing at the
Company's headquarters in Pleasanton, California, and divides the payroll
printing and finishing between its Pleasanton and Irvine, California,
facilities. The Irvine facility serves both as an alternative processing center
and a back-up payroll center. The Company's benefits administrative 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
15
<PAGE>
or that the payroll data recovered at the client site would be sufficient to
allow the client to calculate and produce payroll in a timely fashion.
The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss 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 consolidated results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend on the
performance of the Company's senior management and other key employees. The loss
of the services of any senior management or other key employee could have a
material adverse effect on the Company's business, financial condition and
consolidated results of operations. The Company generally does not enter into
employment or noncompetition agreements with its employees. If one or more of
the Company's key employees resigns from the Company to join a competitor or to
form a competitor, the loss of such personnel and any resulting loss of existing
or potential clients to any such competitor could have a material adverse effect
on the Company's business, financial condition and results of operations. In the
event of the loss of any key personnel, there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use of its
technical knowledge, 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 consolidated 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
consolidated results of operations.
RISK ASSOCIATED WITH GEOGRAPHIC EXPANSION. A substantial majority of the
Company's revenue historically has been derived from clients located in the
western United States. The Company's ability to achieve significant future
revenue growth will in large part depend on its ability to gain new clients
throughout the United States. Growth and geographic expansion have resulted in
new and increased responsibilities for management personnel and have placed and
continue to place a 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 consolidated 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
16
<PAGE>
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 consolidated 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.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. Forward-looking statements
contained in this quarterly report are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995 and are highly dependent upon a
variety of important factors that could cause actual results to differ
materially from those reflected in such forward-looking statements. When used in
this document and documents referenced herein, the words "intend," "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they relate to the
Company are included to identify such forward-looking statements. These
forward-looking statements include statements regarding the demand for
outsourcing employee administrative services; the Company's expansion of its
client base; the Company's intention to increase its direct sales force; the
development of a comprehensive and fully integrated suite of employee
administrative services; the Company's ability to offer additional services; the
initiation or completion of any strategic acquisition, investment or alliance;
the Company's ability to extend its technology leadership; the Company's ability
to attract and retain new clients; market acceptance of any new services offered
by the Company; the Company's ability to minimize the impact of interest rate
fluctuations; the Company's ability to develop its financial and managerial
controls and systems; the opening of additional facilities; the sufficiency of
the Company's back-up facilities and disaster recovery procedures; the Company's
ability to develop or acquire new technologies; the Company's ability to attract
and retain experienced employees; the 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.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in the Company's market risk during the
nine month period ended March 31, 2000. For additional information on market
risk see "Additional Factors That May Affect Future Results--Investment Risks"
contained on page 14 of this Quarterly Report and page 7 of the Company's 1999
Annual Report to Stockholders under the heading "Additional Factors That
May Affect Future Results--Investment Risks" (which is incorporated by reference
into Part II, Item 7A of the Company's Annual Report on Form 10-K for the year
ended June 30, 1999.)
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES
(b) On September 25, 1998, the Company commenced a follow-on public offering
(the "Secondary Offering"), which consisted of 3,191,250 shares of its
Common Stock at $27.00 per share pursuant to a registration statement (No.
333-60745) declared effective by the Securities and Exchange Commission on
September 25, 1998. As of December 31, 1999, $52.1 million of the Company's
net proceeds from the offering were invested in short-term financial
instruments. During the period January 1, 2000 to March 31, 2000,
approximately $2.6 million of the proceeds was used for working capital. At
April 1, 2000, approximately $49.5 million of the net offering proceeds from
the Secondary Offering were invested in short-term financial instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
None.
(c) No reports on Form 8-K were filed during the quarter ended March 31, 2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
PROBUSINESS SERVICES, INC.
Dated: May 15, 2000 (Registrant)
/s/ THOMAS H. SINTON
------------------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ STEVEN E. KLEI
------------------------------------------------
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PROBUSINESS SERVICES, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001028751
<NAME> PROBUSINESS SERVICES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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