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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE PERIOD ENDED DECEMBER 31, 1999
OR
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<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
------------------------
PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2976066
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</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 February 8, 2000, there were 23,406,019 shares of the Registrant's
Common Stock outstanding.
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PROBUSINESS SERVICES, INC.
INDEX
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<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of December 31,
1999 and June 30, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 1999 and 1998..... 4
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended December 31, 1999.................... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 1999 and 1998................... 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..... 17
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.................................................. 21
</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>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 52,131 $ 73,575
Accounts receivable, net of allowances.................... 9,457 4,599
Prepaid expenses and other current assets................. 4,307 3,777
-------- --------
65,895 81,951
Payroll tax funds invested................................ 703,816 580,452
-------- --------
Total current assets........................................ 769,711 662,403
Equipment, furniture and fixtures, net...................... 37,914 31,024
Other assets................................................ 20,042 16,997
-------- --------
Total assets................................................ $827,667 $710,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities, current portion of
capital lease obligations and deferred revenue.......... $ 32,274 $ 29,894
Payroll tax funds collected but unremitted................ 703,816 580,452
-------- --------
Total current liabilities................................... 736,090 610,346
Capital lease obligations, less current portion............. 467 548
Stockholders' equity........................................ 91,110 99,530
-------- --------
Total liabilities and stockholders' equity.................. $827,667 $710,424
======== ========
</TABLE>
See notes to 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................ $23,073 $16,102 $ 44,027 $30,357
Operating expenses:
Cost of providing services........................... 11,938 8,325 23,086 16,036
General and administrative........................... 3,830 2,658 7,225 5,223
Research and development............................. 2,496 2,353 5,849 4,269
Client acquisition costs............................. 11,214 6,659 21,272 13,115
------- ------- -------- -------
Total operating expenses........................... 29,478 19,995 57,432 38,643
Loss from operations................................... (6,405) (3,893) (13,405) (8,286)
Interest expense....................................... (33) (16) (162) (246)
Interest income and other, net......................... 783 804 1,752 990
------- ------- -------- -------
Net loss............................................... $(5,655) $(3,105) $(11,815) $(7,542)
======= ======= ======== =======
Basic and diluted net loss per share................... $ (0.24) $ (0.14) $ (0.51) $ (0.38)
======= ======= ======== =======
Shares used in computing basic and diluted net loss per
share................................................ 23,163 21,491 23,014 19,820
======= ======= ======== =======
</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.......... 209,336 -- 1,370 -- -- 1,370
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.... -- -- -- (11,815) -- (11,815)
---------- --- -------- -------- ----- -------
Balances at December 31, 1999...... 23,379,709 $23 $151,679 $(59,711) $(881) $91,110
========== === ======== ======== ===== =======
</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>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(11,815) $ (7,542)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,256 2,666
Accretion of discount on redeemable convertible
preferred stock....................................... -- 96
Issuance of warrants.................................... -- 93
Changes in operating assets and liabilities:
Accounts receivable, net.............................. (4,858) (1,012)
Prepaid expenses and other current assets............. (530) (898)
Other assets.......................................... (525) 838
Accounts payable, accrued liabilities, current portion
of capital lease obligations and deferred revenue... 2,764 (1,384)
-------- --------
Net cash used in operating activities....................... (9,708) (7,143)
-------- --------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.............. (11,549) (8,667)
Capitalization of software development costs................ (3,117) (2,050)
-------- --------
Net cash used in investing activities....................... (14,666) (10,717)
-------- --------
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............. (465) (579)
Proceeds from issuance of redeemable and convertible
preferred stock........................................... 5,045
Net proceeds from issuance of common stock.................. 3,395 82,791
-------- --------
Net cash provided by financing activities................... 2,930 87,538
-------- --------
Net increase (decrease) in cash and cash equivalents........ (21,444) 69,678
Cash and cash equivalents, beginning of period.............. 73,575 13,946
-------- --------
Cash and cash equivalents, end of period.................... $ 52,131 $ 83,624
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of equipment, furniture and fixtures under
capital leases.......................................... $ -- $ 215
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
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PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ProBusiness Services, Inc., ("ProBusiness" or the "Company") has prepared
its interim condensed 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 December 31, 1999 are not necessarily
indicative of the results that may be expected for the 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 calculation of diluted net
loss per share as their inclusion would be antidilutive. If the Company had
reported net income, the calculation of diluted net income per share would have
included the shares used in the computation of net loss per share as well as an
additional 1,132,000 and 1,442,000 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 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") SFAS
No. 131 "Disclosures about Segments of an Enterprise."
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, 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 fiscal 2001 and has not
determined the
7
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PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
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, $3,138,000 was paid
before December 31, 1999. The balance of $362,000 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
<PAGE>
PROBUSINESS SERVICES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 outsourced employee
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 $70.1 million in
fiscal 1999. From December 31, 1997 to December 31, 1999, the client base for
payroll processing services increased from approximately 440 clients to
approximately 585 clients, while the average size of the Company's payroll
clients increased from approximately 1,080 employees to approximately 1,850
employees. The Company's revenue growth is primarily due to continued growth in
its client base, the introduction of its payroll tax service in fiscal 1996, an
increase in the average 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 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
December 31, 1999, the Company had an accumulated deficit of $59.7 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
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................. 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of providing services........................ 51.7 % 51.7 % 52.4 % 52.8 %
General and administrative........................ 16.7 % 16.5 % 16.4 % 17.2 %
Research and development.......................... 10.8 % 14.6 % 13.3 % 14.1 %
Client acquisition costs.......................... 48.6 % 41.4 % 48.3 % 43.2 %
----- ----- ----- -----
Total operating expenses............................ 127.8 % 124.2 % 130.4 % 127.3 %
Loss from operations................................ (27.8)% (24.2)% (30.4)% (27.3)%
Interest expense.................................... (0.1)% (0.1)% (0.4)% (0.8)%
Interest income and other, net...................... 3.4 % 5.0 % 4.0 % 3.3 %
----- ----- ----- -----
Net loss............................................ (24.5)% (19.3)% (26.8)% (24.8)%
===== ===== ===== =====
</TABLE>
The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:
REVENUE. Revenue increased 43.3% in the second quarter and 45.0% in the
first six 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 $6.1 million and $11.4 million for the second quarter and for the first six
months of fiscal 2000, respectively, as compared to $3.8 million and
$6.9 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 43.4% in
the second quarter and 44.0% for the first six months of fiscal 2000 when
compared with the same periods of fiscal 1999 and remained unchanged as a
percentage of revenue at 51.7% for the second quarter of fiscal year 2000 and
fiscal 1999 and decreased as a percentage of revenue to 52.4% in the first six
months of fiscal 2000 from 52.8% in the first six months of fiscal 1999. 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 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
44.1% in the second quarter and 38.3% for the first six months of fiscal 2000
when compared with the same periods of fiscal 1999 and increased as a percentage
of revenue to 16.7% in the second quarter of fiscal 2000 and decreased as a
percentage of revenue to 16.4% in the first six months of fiscal 2000 from 16.5%
and 17.2% in the second quarter and first six months of fiscal 1999. 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 increased 6.1%
in the second quarter and 37.0% for the first six months of fiscal 2000 when
compared with the same periods of fiscal 1999 and decreased as a percentage of
revenue to 10.8% and 13.3% in the second quarter and first six months of fiscal
2000 from 14.6% and 14.1% in the second quarter and first six months of fiscal
1999. The increases in absolute dollars were primarily a result of increases in
personnel costs related to the 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
10
<PAGE>
existing services. Capitalized software development costs were $1.6 and
$3.1million for the second quarter and first six months of fiscal 2000 and
$1.0 million and $2.1 million for the second quarter and first six months of
fiscal 1999. In the second quarter and first six 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 developing new technology and product leadership and expects such
costs to continue to be significant as a percentage of revenue.
CLIENT ACQUISITION COSTS. Client acquisition costs increased 68.4% and
62.2% in the second quarter and first six months of fiscal 2000 when compared
with the same periods of fiscal 1999 and increased as a percentage of revenue to
48.6% and 48.3% in the second quarter and first six months of fiscal 2000 and
from 41.4% and 43.2% in the second quarter and first six months of fiscal 1999.
The increases in both absolute dollars and percentage of revenue were primarily
attributable to additional investments made to capture market share by expanding
the Company's sales and implementation workforce for payroll and tax services.
INTEREST EXPENSE. Interest expense increased 106.3% for the second quarter
and decreased 34.1% in the first six months of fiscal 2000 when compared with
the same period of fiscal 1999, remained unchanged as a percentage of revenue at
0.1% for the second quarter of fiscal year 2000 and fiscal 1999 and decreased as
a percentage of revenue to 0.4% in the first six months of fiscal 2000 from 0.8%
in the first six months of fiscal 1999. The decrease in absolute dollars for the
six month period was primarily due to a decrease in interest expense
attributable to capital leases.
INTEREST INCOME AND OTHER, NET. Other income decreased 2.6% in the second
quarter and increased 77.0% in the first six months of fiscal 2000 when compared
with the same periods of fiscal 1999 and decreased as a percentage of revenue to
3.4% in the second quarter and increased as a percentage of revenue to 4.0% in
the first six months of fiscal 2000 from 5.0% and 3.3% in the second quarter and
first six months of fiscal 1999. The increases in interest income was primarily
due to higher cash and investment balances resulting from the Company's
follow-on public offering in September 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's principal sources of liquidity included
$52.1 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 December 31, 1999.
Net cash used in operating activities was $9.7 million and $7.1 million for
the first six months of fiscal 2000 and 1999, respectively. The net cash used in
operating activities for the first six 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 $14.7 million and $10.7 million
for the first six 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 $2.9 and $87.5 million for the
first six months of fiscal 2000 and 1999, respectively. The decrease in net cash
provided by financing activities for first six months of fiscal 2000 related
primarily to $80.7 million of net proceeds from the Company's follow-on public
offering of common stock in September 1998.
The Company believes that existing cash 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.
11
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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 December 31, 1999, the Company had an accumulated deficit of
$59.7 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.
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 whom
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 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 leading provider of Employee
Relationship Management applications, in a transaction
12
<PAGE>
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 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 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
13
<PAGE>
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 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
14
<PAGE>
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 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,
15
<PAGE>
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.
YEAR 2000 ISSUES. To date the Company has not experienced any problems with
its Year 2000 ("Y2K") readiness. The Company believes it has achieved Y2K
readiness and that software applications used for providing payroll, tax and HR
services at the Company are Y2K compliant. All clients are processing on the
Company's Y2K compliant applications.
Although the Company believes that it has successfully addressed any
significant disruption from Y2K, it will continue to monitor all mission
critical systems for the appearance of delayed complications or disruptions, as
well as continue to monitor its suppliers and customers.
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
16
<PAGE>
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in the Company's market risk during the
six month period ended December 31, 1999. 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.)
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
17
<PAGE>
identified under "Additional Factors That May Affect Future Results" and
elsewhere in this quarterly report and other risks and uncertainties indicated
from time to time in the Company's filings with the Securities and Exchange
Commission. Actual results could differ materially from these forward-looking
statements. In addition, important factors to consider in evaluating such
forward-looking statements include changes in external market factors, changes
in the Company's business or growth strategy or an inability to execute its
strategy due to changes in its industry or the economy generally, the emergence
of new or growing competitors and various other competitive factors. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this quarterly report will in fact
occur.
18
<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 secondary public offering
(the "Secondary Offering"), which consisted of 3,191,250 shares of its Common
Stock at $27.00 per share pursuant to a registration statement (No. 333-60745)
declared effective by the Securities and Exchange Commission on September 25,
1998. As of September 30, 1999, $61.5 million of the Company's net proceeds from
the offering were invested in short-term financial instruments. During the
period October 1, 1999 to December 31, 1999 approximately $9.4 million of the
proceeds was used for working capital. At January 1, 2000, approximately
$52.1 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
(a) The Company held its Annual Meeting of Stockholders (the "Annual
Meeting") on November 18, 1999.
(b) At the Annual Meeting, the stockholders elected William T. Clifford and
David C. Hodgson as Class II 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 II directors to serve for terms of three years;
2. approval of an amendment to the Company's 1996 Stock Option Plan to
increase the number of shares reserved for issuance thereunder by
1,500,000 shares; and
3. Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending June 30, 2000.
Votes were cast for the election of William T. Clifford and David C. Hodgson
as Class II directors as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
---------- --------------
<S> <C> <C>
William T. Clifford......................................... 18,432,253 66,144
David C. Hodgson............................................ 18,432,298 66,099
</TABLE>
The amendment to the Company's 1996 Stock Option Plan to increase the number
of shares reserved for issuance thereunder was approved as follows:
11,882,231 votes for approval;
3,395,614 votes against;
21,295 abstentions; and
3,199,257 broker non-votes.
19
<PAGE>
The appointment of Ernst & Young LLP as auditors for fiscal year ending
June 30, 2000 was approved as follows:
18,486,162 votes for approval;
11,837 votes against; and
398 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
See exhibit list following signature page.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
1999.
20
<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.
Dated: February 14, 2000
<TABLE>
<S> <C> <C>
PROBUSINESS SERVICES, INC.
(Registrant)
/s/ THOMAS H. SINTON
---------------------------------------------
President and Chief Executive Officer
/s/ STEVEN E. KLEI
---------------------------------------------
Senior Vice President, Finance and Chief
Financial Officer
</TABLE>
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
FOOTNOTE NUMBER EXHIBIT DESCRIPTION
- - --------------------- -------- ------------------------------------------------------------
<C> <C> <S>
(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.
(3) 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.
(1) 4.3 Warrant to Purchase Stock, dated January 13, 1995, between
Registrant and Silicon Valley Bank and related
Antidilution and Registration Rights Agreements.
(1) 4.4(a) Warrant to Purchase Stock, dated April 30, 1996, between
Registrant and Coast Business Credit and related
Antidilution and Registration Rights Agreement.
(1) 4.4(b) Warrant to Purchase Stock, dated October 25, 1996, between
Registrant and Coast Business Credit and related
Antidilution and Registration Rights Agreement.
(1) 4.5 Warrant to Purchase Series E Preferred Stock, dated
July 31, 1996, between Registrant and LINC Capital
Management.
(1) 4.6(a) Warrant Purchase Agreement, dated November 14, 1996, between
Registrant and certain purchasers.
(1) 4.6(b) Warrant to Purchase Series E Preferred Stock, dated
November 14, 1996, between Registrant and T.J. Bristow and
Elizabeth S. Bristow.
(1) 4.6(c) Warrant to Purchase Series E Preferred Stock, dated
November 14, 1996, between Registrant and
SDK Incorporated.
(1) 4.6(d) Warrant to Purchase Series E Preferred Stock, dated
November 14, 1996, between Registrant and Laurence Shushan
and Magdalena Shushan.
(1) 4.7(a) Warrant to Purchase Common Stock, dated January 7, 1997,
between Registrant and Louis R. Baransky.
(1) 4.7(b) Warrant to Purchase Common Stock, dated January 7, 1997,
between Registrant and Ben W. Reppond.
(1) 4.8 Form of Note issued by Registrant on October 20, 1995 and
December 12, 1995.
(3) 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
stockholder.
(3) 4.10 Registration Rights Agreement dated as of April 27, 1999,
between ProBusiness Services, Inc. and certain
stockholders.
27.1 Financial Data Schedule.
</TABLE>
- - ------------------------
(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 8-K filed
with the Securities and Exchange Commission on May 12, 1999.
<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 DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 52,131
<SECURITIES> 0
<RECEIVABLES> 11,245
<ALLOWANCES> 1,788
<INVENTORY> 0
<CURRENT-ASSETS> 769,711
<PP&E> 55,726
<DEPRECIATION> 17,812
<TOTAL-ASSETS> 827,667
<CURRENT-LIABILITIES> 736,090
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 91,087
<TOTAL-LIABILITY-AND-EQUITY> 827,667
<SALES> 0
<TOTAL-REVENUES> 44,027
<CGS> 0
<TOTAL-COSTS> 23,086
<OTHER-EXPENSES> 34,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> (11,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,815)
<EPS-BASIC> (.51)
<EPS-DILUTED> (.51)
</TABLE>
