UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
(x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (no fee required)
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
PROBUSINESS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2976066
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
4125 HOPYARD ROAD
PLEASANTON, CA 94588
(Address of principal executive offices)
(925) 737-3500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
---------------------- ----------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of June 30, 1998, there were 17,114,855 shares of the Registrant's
Common Stock outstanding. The aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on June 30, 1998) was approximately
$311,293,699. Shares of the Registrant's common stock held by each executive
officer and director and by each entity that owns 5% or more of the
Registrant's outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1998 are incorporated by reference into Parts II and IV. Portions of
the Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders to be
held November 12, 1998 are incorporated by reference into Part III.
PROBUSINESS SERVICES, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . .8
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . .8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . .8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . .9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . .9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . .9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . .9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . .9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 10
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 12
ITEM 12. SECURITY OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . 12
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS . . . . . . . . 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 14
2
PROBUSINESS SERVICES, INC.
PART I.
THE FOLLOWING REPORT 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 IN
THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" ON PAGE 19 OF THE COMPANY'S 1998 ANNUAL REPORT TO
STOCKHOLDERS, WHICH IS INCORPORATED BY REFERENCE INTO PART II, ITEM 7 OF THIS
REPORT.
ITEM 1. BUSINESS
OVERVIEW
ProBusiness is a leading provider of employee administrative services
for large employers. The Company's primary service offerings are payroll
processing, payroll tax filing, benefits administration, including the
enrollment and processing of flexible benefits plans and COBRA programs, and
human resources software. 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. As of June 30, 1998, the Company provided
services to approximately 1,400 clients. As of June 30, 1998, the Company
provided payroll processing services to approximately 510 clients with an
aggregate of approximately 575,000 active employees and an average of
approximately 1,100 employees. For the quarter ended June 30, 1998, the
Company processed 4.3 million checks for the Company's payroll clients. In
addition to providing tax filing services for its payroll clients, as of June
30, 1998 the Company provided national tax filing services to 72 clients with
an aggregate of approximately 1.1 million employees and an average of more
than 15,200 employees.
The Company differentiates itself from its competitors through its
proprietary PC-based technology, high quality, responsive and professional
client service, and focus on the needs of large employers. ProBusiness develops
a business partnership with each client by assessing each client's payroll
processing needs, reengineering and designing the client's payroll systems and
processes and implementing a cost-effective solution. The Company maintains an
ongoing relationship with each client using a strategic team of specialists led
by a personal account manager who proactively manages each client's account and
marshals the resources of the team to meet the client's specific needs.
ProBusiness maintains a low client-to-account manager ratio to offer clients
accessible and responsive account management. The Company believes that its low
client-to-account manager ratio and its focus on client service are key factors
in enabling the Company to achieve a high payroll client retention rate, which
was approximately 92% for fiscal year 1998.
The Company provides large employers with the cost-effective benefits of
outsourcing and high levels of client service, while providing the
flexibility, system control, customization and integration of an in-house
system. The Company combines its PC-based technology and personalized client
service to provide a broad range of service offerings, including payroll
processing, payroll tax filing, benefits administration and human resources
software.
The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy is to
continue providing clients with high levels of personal service and developing a
comprehensive and fully integrated suite of employee administrative services.
The Company also intends to expand its client base and provide additional
services to its existing clients.
The Company was incorporated in California in October 1984 and
reincorporated in Delaware in September 1997. The Company's executive offices
are located at 4125 Hopyard Road, Pleasanton, California 94588, and its
telephone number is (925) 737-3500.
3
SERVICE OFFERINGS
The Company provides a broad range of employee administrative services,
including payroll processing, tax filing, benefits administration and human
resources software. The Company intends to expand its service offerings through
future acquisitions, alliances and investments and to develop enhancements to
its existing services internally.
PAYROLL PROCESSING. The Company processes time and attendance data to calculate
and produce employee paychecks, direct deposits and reports for its clients.
Clients receive paychecks and reports within 24 to 48 hours of the Company's
receipt of the data electronically submitted from the client. The Company's
system is highly configurable to meet the specialized needs of each client yet
maintains the ability to provide high volume processing. The system integrates
easily with the client's general ledger, human resources and time and attendance
systems. In addition, the Company offers many sophisticated features, including
the automatic enrollment and tracking of paid time off, proration of
compensation for new hires and integrated garnishment processing.
PAYROLL TAX FILING. The Company collects contributed employer and employee tax
funds from clients, deposits such funds with tax authorities when due, files all
tax returns and reconciles the client's account. The Company will also represent
the client before tax authorities in disputes or inquiries. Substantially all
existing payroll clients utilize the Company's payroll tax service. In addition,
as of June 30, 1998, the Company provided national tax services to 72 clients
with an aggregate of more than 1.1 million employees and an average of more than
15,200 employees.
BENEFITS ADMINISTRATION. The Company's benefits administration services include
flexible benefits enrollment and processing, COBRA administration and
consolidated billing and eligibility tracking. Employees can enroll in and
choose their flexible spending benefits through traditional paper-based forms or
through Internet-accessible enrollment sites using the Company's Enrollnet-TM-
service.
HUMAN RESOURCES SOFTWARE. The Company's human resources software tracks and
reports general employee information, including compensation, benefits,
skills, performance, training, job titles and medical history. For clients
that also use the Company's payroll service, the human resources data can be
transferred to the payroll services system, thus eliminating the need for
duplicate data entry.
The Company continually evaluates the addition of add-on service
offerings to expand the breadth of its solution through alliances,
acquisitions or internal development. Such additional services include
administrative services related to time and attendance, travel and
entertainment, unemployment insurance and 401(k) plans.
CLIENT SERVICE
The Company believes that its focus and dedication to providing high levels
of client service is a competitive advantage in the large employer market.
ProBusiness develops a business partnership with each client by assessing each
client's payroll processing needs, reengineering and designing the client's
payroll system and process and implementing a value-added solution. The Company
maintains an ongoing relationship with each client using a strategic team that
4
includes a sales representative, a sales analyst, an implementation manager,
an account manager and numerous functional, regulatory and technical support
specialists. The Company intends to continue providing its clients with a
high level of service by hiring professionals who are experienced in their
fields. Most service personnel have experience in payroll, accounting, human
resources or financial services industries, and many hold Certified Public
Accountant or Certified Payroll Professional accreditations.
The Company continually monitors the quality of its service through client
feedback mechanisms. The Company obtains valuable insights into the needs of its
clients through its partnership with each client and from client responses to
surveys, which are conducted semi-annually. The Company uses this information to
help develop, identify and optimize new service offerings provided to existing
clients and improve the level of service provided to clients. The Company also
uses client feedback as a basis for incentive compensation and recognition of
achievements.
SALES. The Company believes that client service begins with the sales process.
A sales representative and a sales analyst work together to assess a potential
client's payroll processing needs. Based on this assessment, the sales team then
identifies opportunities to reengineer the prospective client's payroll
processes and to design a payroll solution that integrates effectively with its
other systems. The payroll sales cycle typically ranges from three to twelve
months or longer.
IMPLEMENTATION. Upon engagement by a client, the Company assigns a team of
technical support specialists, headed by an implementation manager who leads the
transition from the client's former payroll system to the Company's system. The
implementation manager works with the client, the sales analyst and technical
support specialists to integrate the Company's payroll system with the client's
other systems and to customize the system to improve the client's payroll
processes. The Company uses its systems integration expertise to facilitate the
integration of its payroll processing system with the client's existing hardware
and software. The implementation process generally takes three to nine months or
longer, depending on the complexity of the client's payroll processes and
systems and the size of the client.
ACCOUNT MANAGEMENT. An account manager is assigned to each client during the
implementation process and serves as the client's day-to-day contact at the
Company. The account manager coordinates the efforts of the Company's
functional, regulatory and technical support specialists as necessary. The
account manager visits each client regularly and establishes an annual business
plan with the client that details scheduled payroll events such as open
enrollment periods for employee benefits plans or software system changes. This
annual business plan allows the Company to provide clients with uninterrupted
payroll services during these periods. Account managers use the Company's
proprietary CallLog system to record and track all client calls, record client
feedback and help ensure that the client's needs are addressed promptly and
thoroughly. The Company maintains a low client-to-account manager ratio to offer
clients accessible and responsive account management.
SUPPORT SPECIALISTS. The Company supports each client with functional and
regulatory specialists in payroll, payroll tax and employee benefits, as well as
pay data interfaces, general ledger interfaces, paid-time-off, report writing
and system integration. Each of these specialists is available to speak directly
with clients as needed, meet with clients onsite or support clients indirectly
through the account manager.
TECHNOLOGY
The Company's proprietary PC-based technology for its payroll services
provides a platform for delivering high levels of service together with the
flexibility and control of an in-house system. The Company creates a mirrored
version of each client's system, which allows the Company's account managers to
access client information using the same data, programs and screens as the
client uses on its PC network. This enables the Company to quickly and easily
identify client problems or modify application programs in response to client
requests. The client maintains control by having direct access to all
calculation programs and all historical and transactional data, which also
provides the client with flexibility to respond quickly to employee and
third-party inquiries, to fully analyze payroll data and to generate management
reports. The Company's intuitive Windows-based interface makes navigation simple
and allows new users to be trained quickly. The Company is developing a new
suite of online self-service administrative services applications accessible
5
through the Internet that enable clients' employees to view paychecks and other
compensation and benefits data.
The Company's system architecture is designed to distribute payroll
processing tasks to multiple low cost, high performance PCs, which enables the
Company to scale its system continually to handle increasing transaction
volumes. The Company's PC-based application software supports the development of
customized solutions for each client that can be easily upgraded and integrated
with a client's other systems. In addition, multiple networked PCs facilitate
exception processing and rapid response that large employers require.
CLIENTS
The Company targets large companies with complex and changing business
needs in diverse industries. As of June 30, 1998, the Company provided
services to approximately 1,400 clients. Of these clients, approximately 510
were payroll processing clients, with an aggregate of approximately 575,000
active employees and an average of approximately 1,100 employees. For the
quarter ended June 30, 1998, the Company processed 4.3 million payroll checks
for the Company's payroll clients. The Company began providing national tax
filing services to clients in 1996 and, as of June 30, 1998, provided these
services to 72 clients with an aggregate of more than 1.1 million employees
and an average of more than 15,000 employees. Substantially all existing
payroll clients utilize the Company's payroll tax filing service. For fiscal
1998, no client accounted for more than 4% of the Company's revenue
The Company believes that its low client-to-account manager ratio and its
focus on client service are key factors in enabling the Company to achieve a
high payroll client retention rate, which was approximately 92% for fiscal 1998.
Historically, the Company's client retention rates have been negatively impacted
primarily due to clients ceasing to use the Company's services following a
merger or sale of the client. The Company does not have long-term contracts with
its clients, and the Company's existing contracts do not have significant
penalties for cancellation.
SALES AND MARKETING
The Company employs a direct sales force to gain new payroll and payroll
tax clients and increase the number of services provided to existing clients.
The Company currently targets large employers through direct marketing, trade
shows and active participation in local chapters of the American Payroll
Association. The Company uses a team selling approach, whereby sales analysts
and sales representatives collaborate to assess a potential client's needs and
develop a cost-effective solution. The payroll sales cycle typically ranges from
three to twelve months or longer. The Company primarily utilizes insurance
brokers to attract new benefits administration clients.
The Company seeks to attract and retain experienced industry sales
representatives. The Company believes that its long-term competitiveness depends
on increasing further its national presence. The Company believes that
continuing to add direct sales representatives in major metropolitan areas
throughout the United States is the most effective means of increasing its
national client base. Over the past two years, the Company has added sales and
implementation representatives covering major metropolitan areas, including
Atlanta, Chicago, Dallas, New York and Seattle. To support its sales growth in
the eastern United States, the Company intends to open a satellite sales and
implementation center in New Jersey during the fourth quarter of calendar 1998.
The Company's marketing department provides support materials and marketing
communications to sales representatives, promotes public relations, conducts
direct mail campaigns, manages trade show participation, and develops and
manages corporate Web sites.
As part of its strategy to provide a comprehensive suite of employee
administrative services, the Company has recently entered into strategic
alliances with two industry leaders. The Company has formed an alliance with SAP
AG, a leading provider of enterprise business solutions, to offer customers high
levels of flexibility in managing payroll and payroll tax processes by linking
the Company's payroll and tax solution to SAP's HR System. The Company has also
formed an alliance to provide services to clients jointly with Sheakly
UniService, a leading provider of unemployment cost control services.
6
RESEARCH AND DEVELOPMENT
The Company intends to continue investing substantial resources to further
develop a comprehensive and fully integrated suite of employee administrative
services and extend the functionality of its proprietary payroll processing
systems. For example, the Company is developing a new suite of online
self-service administrative services applications accessible through the
Internet that enable clients' employees to view paychecks as well as other
compensation and benefits data. In addition, the Company expects to introduce an
integrated payroll and human resources system utilizing client/server technology
that will run on Windows 95 and Windows NT.
The foregoing information contains forward-looking statements that involve
risks and uncertainties. Actual events could differ materially from those
anticipated in these forward-looking statements, as a result of certain factors
including those discussed in the paragraph below.
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
administration services, the Company competes with insurance companies, benefits
consultants and other local benefits outsourcing companies. The Company may also
compete with marketers of related products and services that may offer payroll
or benefits administration services in the future. The Company has experienced,
and expects to continue to experience, competition from new entrants into its
markets. Increased competition could result in pricing pressures, loss of market
share and loss of clients, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company believes that the principal competitive factors affecting its
market include client service, system functionality and performance, system
scalability, reputation, system cost and geographic location. The failure of the
Company to compete successfully would have a material adverse effect on the
Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS
The Company's success is dependent in part upon its proprietary software
technology. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company has
no patents, patent applications or registered copyrights. 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 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
7
and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 500 full-time employees. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's headquarters are located in Pleasanton, California and
consist of approximately 130,000 square feet of office space leased through
September 2008. The Company has signed a lease for a building to be built
adjacent to its headquarters which will consist of approximately 70,000
square feet, of which approximately 35,000 square feet is expected to be
available in mid-1999, and the remaining is expected to be available mid-2000.
The Company also has a sales, implementation and production facility and
a back-up payroll facility in Irvine, California, where it leases
approximately 14,000 square feet under a lease which terminates May 2002. In
addition, the Company has a sales office in Kettering, Ohio pursuant to a
lease which terminates in July 1999. The Company intends to open a satellite
sales and implementation center in New Jersey.
The Company's benefits administration processing operations are located in
Bellevue, Washington, where the Company leases approximately 6,500 square feet
under a lease that will terminate in June 2003. The Company is currently
negotiating a lease for a new building in Bellevue to house the Company's
benefits administration processing operations. Such lease is expected to
commence in early 1999.
The Company believes that its existing facilities are adequate for its
current needs and that additional facilities can be leased to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 1998.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "PRBZ." The following table sets forth, for the fiscal
periods indicated, the high and low sales prices of the Common Stock as
reported by the Nasdaq National Market since the Company's initial public
offering of Common Stock at $7.33 per share on September 19, 1997 (after
giving effect to the stock split effected on August 7, 1998). Prior to
September 19, 1997, there was no public trading market for the Common Stock.
High Low
------ -----
FISCAL 1998:
First Quarter (from September 19, 1997)............... $12.92 $7.67
Second Quarter........................................ 15.33 12.08
Third Quarter......................................... 20.00 14.00
Fourth Quarter........................................ 32.58 17.33
On July 31, 1998, there were 372 holders of record of the Company's Common
Stock. The Company believes that the number of beneficial owners of the Common
Stock is substantially greater than the number of record owners because a large
portion of the Common Stock is held of record in broker "street names." The last
reported sale price per share of the Common Stock on September 21, 1998 on the
Nasdaq National Market was $28.0625.
(b) On September 19, 1997, the Company commenced an initial public
offering, which consisted of 4,312,500 shares of its Common Stock (the
"Offering") at $7.33 per share pursuant to a registration statement (No.
333-23189) declared effective by the Securities and Exchange Commission on
September 19, 1997. As of April 1, 1998, approximately $15.2 million of the
net proceeds from the Offering were invested in short-term financial
instruments. From April 1, 1998 to June 30, 1998, the Company used
approximately $1.4 million of these proceeds from the short-term financial
instruments, using approximately $1.1 million to repay indebtedness incurred
in connection with the acquisition of BeneSphere Administrators, Inc. and
approximately $300,000 for working capital.
ITEM 6. SELECTED FINANCIAL DATA
The information required is set forth in the Company's Annual Report under
the heading "Financial Highlights" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required is set forth in the Company's Annual Report under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required are identified in Item 14(a) and are set
forth in the Company's Annual Report and incorporated herein by reference.
Supplementary data required is set forth in the Company's Annual Report under
"Quarterly Financial Data (Unaudited)" and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in accountants or reported disagreements on
accounting principles or practices or financial statement disclosures.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 1, 1998.
NAME AGE POSITION
- ------------------------------------------------------ --- ------------------------------------------------
Thomas H. Sinton...................................... 50 Chairman of the Board, President, Chief
Executive Officer, Director
Jeffrey M. Bizzack.................................... 38 Senior Vice President, Sales
Leslie A. Johnson..................................... 49 Senior Vice President, Client Services and Chief
Service Officer
Steven E. Klei........................................ 38 Senior Vice President, Finance, Chief Financial
Officer and Secretary
Robert E. Schneider................................... 40 Senior Vice President, Product Development and
Chief Technical Officer
William T. Clifford(1)................................ 52 Director
David C. Hodgson(2)................................... 41 Director
Ronald W. Readmond(1)(2).............................. 55 Director
Thomas P. Roddy(1).................................... 63 Director
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
MR. SINTON, founder of the Company, has served as a Director of the Company
since the Company's incorporation in October 1984, and from March 1993 to
present, Mr. Sinton has served as the President and Chief Executive Officer of
the Company. Since December 1996 and for a period between September 1989 and
February 1993, Mr. Sinton served as Chairman of the Board. Mr. Sinton holds a
B.A. degree in English Literature, MAGNA CUM LAUDE, from Harvard University, an
M.S. degree in Food Science from the University of California at Davis and an
M.B.A. degree from Stanford University. Mr. Sinton received a Fulbright
Fellowship to study at the University of Vienna in Vienna, Austria.
MR. BIZZACK has served as Senior Vice President, Sales of the Company since
July 1993. From October 1992 to July 1993, Mr. Bizzack served as Vice President,
Sales of the Company. From October 1988 to October 1992, Mr. Bizzack served as a
District Sales Manager of the Company. Mr. Bizzack attended Saint Mary's
College.
MS. JOHNSON has served as Senior Vice President, Client Services and Chief
Service Officer of the Company since August 1997 and served as Vice President,
Client Services of the Company from September 1993 to August 1997. From May 1992
to September 1993, Ms. Johnson was Director, National Accounts for Automatic
Data Processing. From January 1976 until her division was acquired by Automatic
Data Processing in May 1992, Ms. Johnson held several positions at BankAmerica
Corporation, most recently as Vice President, Northern California National
Accounts. Ms. Johnson holds a B.A. degree in Communications from the University
of Colorado.
MR. KLEI has served as Senior Vice President, Finance of the Company since
August 1997, as Chief Financial Officer of the Company since July 1995 and as
Secretary of the Company since August 1996. Mr. Klei served as Vice President,
Finance from July 1995 to August 1997. From April 1993 to July 1995, Mr. Klei
was Corporate Controller for Esprit de Corp, an apparel company. Mr. Klei holds
a B.S. degree in Accounting from Central Michigan University and is a Certified
Public Accountant.
MR. SCHNEIDER has served as Senior Vice President, Product Development and
Chief Technical Officer of the Company since August 1997 and served as Vice
President, Research and Development and Chief
10
Technical Officer of the Company from November 1996 to August 1997. From April
1995 to July 1996, Mr. Schneider served as Senior Vice President of Product
Development at Premenos Technology Corporation, an electronic commerce software
company. From February 1989 to March 1995, Mr. Schneider held several positions
at Sybase Inc., most recently as Vice President and Business Unit Manager of the
Server Products Group. Mr. Schneider holds a B.S. degree in Computer Science
from the University of San Francisco.
MR. CLIFFORD has served as a Director of the Company since August 1997. Mr.
Clifford has been the President of Gartner Group Research and the Chief
Operating Officer of Gartner Group, Inc. since April 1995 and Executive Vice
President, Operations of Gartner Group, Inc. since October 1993. From December
1988 to October 1993 Mr. Clifford held various positions at Automatic Data
Processing, Inc., including President of National Accounts and Corporate Vice
President, Information Services. Mr. Clifford holds a B.A. degree in Economics
from the University of Connecticut.
MR. HODGSON has served as a Director of the Company since March 1997. Mr.
Hodgson is a Managing Member of General Atlantic Partners LLC ("GAP LLC") and
has been with GAP LLC since 1982. Mr. Hodgson is also a director of Baan
Company, N.V., a publicly-traded software company, Atlantic Data Services, Inc.,
a publicly-traded information technology consulting company, and several other
privately-held software companies, in which GAP LLC or one of its affiliates is
an investor. Mr. Hodgson holds an A.B. degree in Mathematics from Dartmouth
College and an M.B.A. degree from Stanford University.
MR. READMOND has served as a Director of the Company since February 1997.
Since June 1998, Mr. Readmond has been President and Chief Operating Officer of
Wit Capital Group Incorporated and has been an advisor of Barbour Griffith &
Rogers, a lobbying firm, and Chairman of International Equity Partners, L.P., a
private equity and project development company since January, 1997. From August
1989 to December 1996, Mr. Readmond held various positions at Charles Schwab &
Co. Inc., most recently serving as Vice Chairman. Mr. Readmond holds a B.A.
degree in Economics from Western Maryland College.
MR. RODDY has served as a Director of the Company since 1992. Since 1988,
Mr. Roddy has served as President and Chief Executive Officer of Lafayette
Investments Inc., an investment banking and investment advisory company. Mr.
Roddy holds a B.S. degree in Biochemistry from Villanova University.
Mr. Hodgson was nominated and elected as a Director of the Company pursuant
to an agreement entered into between the Company, GAP LLC and Thomas H. Sinton
and his affiliates, in connection with the sale of Preferred Stock by the
Company to GAP LLC. Under such agreement, GAP LLC and Mr. Sinton and his
affiliates agreed to vote their shares to elect one director to the Board of
Directors designated by GAP LLC until the third annual meeting of stockholders
after the Company's initial public offering.
The Board of Directors presently consists of five members who hold office
until the annual meeting of stockholders or until a successor is duly elected
and qualified. The Board of Directors is divided into three classes. One class
of directors is elected annually and its members hold office for a three-year
term or until their successors are duly elected and qualified, or until their
earlier removal or resignation. The number of directors may be changed by a
resolution of the Board of Directors. Executive officers are elected by the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the engagement of
auditors and reviews the results and scope of the audit and other services
provided by the Company's independent auditors, reviews and evaluates the
Company's control functions and reviews the Company's investment policy. The
Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees and consultants
of the Company. The Compensation Committee also administers the Company's
1996 Stock Option Plan and 1997 Employee Stock Purchase Plan.
11
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than 10% of a registered class of the Company's equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Executive officers, directors and greater than
10% stockholders are required by SEC rules to furnish the Company with copies
of all forms they file. Based solely on its review of the copies of such
forms received by the Company and written representations from certain
reporting persons, the Company believes that, during fiscal 1998, all Section
16(a) filing requirements applicable to its executive officers, directors and
10% stockholders were satisfied, except that the Forms 4 for Leslie Johnson,
the Senior Vice President, Client Services and Chief Service Officer, for
September 1997 and for Mitchell Everton, the Senior Vice President, Tax and
Operations of the Company, for April 1998 were filed late.
ITEM 11. EXECUTIVE COMPENSATION
The information required is set forth in the Company's definitive Proxy
Statement in the sections entitled "Executive Officer Compensation" and
"Election of Class I Director" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP
The information required is set forth in the Company's definitive Proxy
Statement in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between May 1994 and September 1995, Thomas H. Sinton, a Director and
officer of the Company, and his immediate family loaned an aggregate of
$1,040,000 to the Company at interest rates of 10.0% per year. The Company has
paid all such loans in full.
On December 5, 1996, the Company loaned $544,000 under a full recourse note
agreement at an interest rate of 6.31% per year to Robert E. Schneider, an
officer of the Company, to permit Mr. Schneider to exercise options to purchase
Common Stock of the Company. All principal and interest is due December 5, 2000.
As of June 30, 1998, Mr. Schneider had not paid any amount on the note.
On January 31, 1997, the Company loaned $250,000 under a full recourse note
agreement at an interest rate of 6.1% per year to Jeffrey M. Bizzack, an officer
of the Company, to permit Mr. Bizzack to purchase a residence. Accrued interest
must be paid on a monthly basis beginning two years from the date of the note.
All principal and accrued but unpaid interest is due January 31, 2001 unless
Mr. Bizzack's employment with the Company terminates, in which case, the note
may become due earlier. As of June 30, 1998, Mr. Bizzack had not paid any amount
on the note.
Thomas H. Sinton and certain affiliates of GAP LLC are the sole
stockholders of InterPro Expense Systems, Inc., a Delaware corporation
("InterPro"), which in April 1998 purchased rights to certain early-stage travel
and entertainment expense processing software. Mr. Sinton is the President,
Chief Executive Officer and Chairman of the Board of the Company. David C.
Hodgson, a Director of the Company, is a managing member of GAP LLC, affiliates
of which hold more than 5% of the Company's outstanding stock. Because Mr.
Sinton and Mr. Hodgson are officers and Directors of the Company, their
investment in InterPro was required to be, and was, approved by the
disinterested directors of the Company. Any future transaction or relationship
between the Company and InterPro would be entered into on an arms-length basis
and would be approved by the Company's disinterested directors.
12
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS: The following Consolidated Financial
Statements of ProBusiness, Services, Inc. and Report of Ernst &
Young LLP, Independent Auditors, are Incorporated by reference to
page 27 through 42 of the Registrant's 1998 Annual Report to
Stockholders:
Balance Sheets as of June 30, 1998, 1997
Statements of Operations for the
years ended June 30, 1998, 1997, 1996
Statements of Stockholders' Equity
for the years ended June 30, 1998, 1997, 1996
Statements of Cash Flows for the
years ended June 30, 1998, 1997, 1996
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. FINANCIAL STATEMENT SCHEDULE: The following financial statement
schedule of ProBusiness Services, Inc. for the fiscal years ended
June 30, 1998, 1997, 1996 is filed as part of this Report and
should beread in conjunction with the consolidated Financial
Statements of ProBusiness Services, Inc.
Schedule II Valuation Allowance Schedule..................S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. EXHIBITS: The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedule
are filed as part of, or incorporated by reference into, this
Report.
(b) REPORTS OF FORM 8-K: No reports on Form 8-K were filed by the Company
during the fiscal year ended June 30, 1998.
(c) EXHIBITS: See Item (a) above.
(d) FINANCIAL STATEMENT SCHEDULES: See Item (a) above.
13
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, IN THE CITY OF
PLEASANTON, STATE OF CALIFORNIA, ON THIS 28 DAY OF SEPTEMBER, 1998.
PROBUSINESS SERVICES, INC.
By: /s/ Thomas H. Sinton
----------------------------
Thomas H. Sinton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
----------- ------- -------
/s/ Thomas H. Sinton President, Chief Executive Officer and September 28, 1998
--------------------- Director (Principal Executive Officer)
Thomas H. Sinton
/s/ Steven E. Klei Senior Vice President, Finance, Chief September 28, 1998
--------------------- Financial Officer and Secretary (Principal
Steven E. Klei Financial and Accounting Officer)
/s/ William T. Clifford
--------------------- Director September 28, 1998
William T. Clifford
/s/ David C. Hodgson
--------------------- Director September 28, 1998
David C. Hodgson
/s/ Ronald W. Readmond
--------------------- Director September 28, 1998
Ronald W. Readmond
/s/ Thomas P. Roddy
--------------------- Director September 28, 1998
Thomas P. Roddy
14
CONSENT AND REPORT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of ProBusiness Services, Inc. of our report dated July 23, 1998 included
in the 1998 Annual Report to Stockholders of ProBusiness Services, Inc.
Our audits also included the financial statement schedule of ProBusiness
Services, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Walnut Creek, California
September 28, 1998
15
SCHEDULE II
PROBUSINESS SERVICES, INC.
(DOLLARS IN THOUSANDS)
VALUATION ALLOWANCE
YEAR ENDED JUNE 30,
-------------------
1996 1997 1998
------ ------ ------
DEFERRED TAX ASSETS
Balance at beginning of year . . . . . . . . . . . . . $ 2,988 $ 3,597 $ 5,988
Additions. . . . . . . . . . . . . . . . . . . . . . . 609 2,391 3,236
Reductions . . . . . . . . . . . . . . . . . . . . . . _ _ _
Balance at end of year . . . . . . . . . . . . . . . . $ 3,597 $ 5,988 $ 9,224
YEAR ENDED JUNE 30,
---------------------
1996 1997 1998
------- ------ ------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year . . . . . . . . . . . . . $ _ $ _ $ 365
Additions. . . . . . . . . . . . . . . . . . . . . . . _ 365 84
Reductions . . . . . . . . . . . . . . . . . . . . . . _ _ 29
Balance at end of year . . . . . . . . . . . . . . . . $ _ $ 365 $ 420
S-1
Index to Exhibits
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
(1) 2.1 Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension
Solutions.
(1) 2.2 Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere
Administrators, Inc.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(1) 3.2 Bylaws of the 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 (see also
Exhibit 10.12).
(1) 10.1 Lease Agreement, dated August 12, 1992, First Amendment to Lease, dated March 23, 1994,
Second Amendment to Lease, dated December 9, 1994, and Third Amendment to Lease, dated
March 16, 1995, between Registrant and Hacienda Park Associates.
(3) 10.2 Sublease, dated April 14, 1998, between the Registrant and Documentum, Inc.
(1) 10.3 Lease Agreement and Addendum Number One, dated August 26, 1993, and First Amendment to
Lease, dated March 23, 1994, between Registrant and Hacienda Park Associates.
(1) 10.4 Lease Agreement, dated March 23, 1994, First Amendment, dated May 25, 1994, and Second
Amendment, dated October 5, 1994 between Registrant and Hacienda Park Associates.
(1) 10.5 Lease Agreement, dated November 13, 1995, and First Amendment to Lease, dated February 23,
1996, between Registrant and Hacienda Park Associates.
(3) 10.6 Built-to-Suit Lease, dated September 27, 1996, and First Amendment, dated January 27, 1998,
between Registrant and Britannia Hacienda V Limited Partnership.
(1) 10.7 Office Lease, dated March 22, 1996, between Benefits-Plus Administrators, Inc. and the
Trustees under the Will and of the Estate of James Campbell, Deceased and related Guaranty
of Lease.
(3) 10.8 Sublease, dated October 10, 1997, between Registrant and Drake Mortgage Corporation.
(3) 10.9 Build-to-Suit lease, dated January 27, 1998, between Registrant and Britannia Hacienda V
Limited Partnership.
(1) 10.10 1996 Stock Option Plan and related Form of Stock Option Agreement.
(1) 10.11 1996 Employee Stock Purchase Plan.
(1) 10.12 Employment and Non-competition Agreement, dated May 23, 1996, between Registrant and Dwight
L. Jackson.
(1) 10.13 Equipment Lease and Addendum No. 1, dated July 31, 1996, between Registrant and LINC
Capital Management and related Equipment Schedule.
(1) 10.14 Form of Indemnification Agreement between Registrant and executive officers and directors.
(1) 10.15 Loan Agreement, dated October 20, 1995, between Registrant and certain investors, and First
Amendment to Loan Agreement, dated December 12, 1995, between Registrant and certain
investors.
(3) 10.16 Amended and Restated Loan and Security Agreement, dated June 30, 1998, between Registrant
and Coast Business Credit.
(1) 10.17 Promissory Note, dated December 5, 1996, between Registrant and Robert Schneider.
(1) 10.18 Promissory Note, dated January 7, 1997, between Registrant and Alison Elder.
(1) 10.19 Promissory Note, dated January 31, 1997, between Registrant and Jeffrey Bizzack.
(1) 10.20 Office Building Lease between Koll Center Irvine Number Two and Registrant, dated November
7, 1994, and Amendments Nos. 1 and 2 thereto.
(1) 10.21 Lease (Full Service Office Lease), as amended by and between Callahan Pentz Properties and
Registrant, assigned to Registrant on February 29, 1996.
(1) 10.22 Promissory Note, dated December 31, 1996, between BeneSphere Administrators, Inc. and
Alison Elder.
(1) 10.23 Series F Stock Purchase Agreement, dated March 12, 1997, between Registrant, General
Atlantic Partners 39, L.P. and GAP Coinvestment Partners, L.P.
(1) 10.24 Stockholders Agreement, dated March 12, 1997, between Registrant, General Atlantic Partners
39, L.P., GAP Coinvestment Partners, L.P. and Sinton (as defined therein).
(1) 10.25 Standard Office Lease -- Gross, dated March 27, 1997, between Registrant and Westwood
Holdings, Inc.
(1) 10.26 ISDA Master Agreement, dated June 10, 1997, between Registrant and First Union National
Bank.
(3) 10.27 ASAP Office Services Lease, dated June 25, 1998, between Registrant and ASAP Office
Services.
13.1 Certain sections of the Annual Report to Stockholders for the fiscal year ended June 30,
1998, expressly incorporated herein by reference.
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
- ----------- ----------- -------------------------------------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 15).
- ------------------------
(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, 1998.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60745), declared effective on
September 24, 1998.
With the exception of the information incorporated by reference to the Annual
Report to Stockholders in Items 6, 7 & 8 of Part II and Item 14 of Part IV of
this 10-K, the Company's 1998 Annual Report to Stockholders is not to be deemed
filed as a part of this Report.